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Edited Transcript of ROIC earnings conference call or presentation 27-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Retail Opportunity Investments Corp Earnings Call

PURCHASE May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Retail Opportunity Investments Corp earnings conference call or presentation Thursday, April 27, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael B. Haines

Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary

* Richard K. Schoebel

Retail Opportunity Investments Corp. - COO

* Stuart A. Tanz

Retail Opportunity Investments Corp. - CEO, President and Director

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Conference Call Participants

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* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Collin Philip Mings

Raymond James & Associates, Inc., Research Division - Analyst

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* George Andrew Hoglund

Jefferies LLC, Research Division - Equity Associate

* Michael Patrick Gorman

BTIG, LLC, Research Division - MD

* Paul Burton Morgan

Canaccord Genuity Limited, Research Division - MD and Senior Research Analyst

* Paul Edward Adornato

BMO Capital Markets Equity Research - MD and Senior Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Wes Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Welcome to Retail Opportunity Investments 2017 First 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 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 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.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [2]

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Good morning, everyone. Here with me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer.

As 2017 gets fully underway, we are pleased to report that the company is off to another strong start. The leading story for us in 2017 thus far is on the acquisition front, where we continue to have great success in acquiring well-established, grocery-anchored shopping centers that are situated in truly irreplaceable locations in the heart of the West Coast's most sought-after, thriving markets. Many of these acquisitions are shopping centers that have been privately owned, closely held by families for years, some of which have never traded before. In other words, next to impossible for the market to get their hands on. We were sourcing these unique acquisition opportunities to our network of relationships with private owners, some being relationships from whom we've previously acquired shopping centers; some being relationships that we've diligently working on and pursuing for a number of years and are now coming to fruition; and some being situations where the owners have sought us out given our market presence, reputation and ability to underwrite and close quickly. Additionally, another contributing factor was that several of the private owners were keenly interested in taking ROIC common equity in lieu of cash.

In short, the relationships that we've worked hard at cultivating over the past 25 years continue to be a defining difference in our ability to gain unique access to acquire truly exceptional properties.

To take you through the specifics, year-to-date, we've lined up $268 million of acquisitions, which includes 7 shopping centers encompassing upwards of 1 million square feet, diversified across our core West Coast metropolitan markets, including: a terrific grocery-anchored shopping center in the heart of Orange County; another great center in the Los Angeles market as well as one just north of San Francisco; and 4 grocery-anchored shopping centers in the Pacific Northwest, including 2 great centers in the Seattle market and 2 in the Portland market.

With these acquisitions, we continue to enhance our West Coast portfolio and market presence in a geographically diverse and balanced manner. All of 7 properties are well-established shopping centers that are situated in densely-populated, affluent communities that are supply constrained and highly protected. The properties are typically the dominant daily necessities shopping center serving the surrounding community and feature prominent supermarkets ranging from grocers like Safeway, Kroger and Trader Joe's to the leading organic grocer in this Pacific Northwest, PCC Natural Markets.

What the supermarkets all have in common is that they have all been operating highly productive and successful stores at these centers for years and all have very strong established customer bases. The blended going-in cap rate for the $268 million is approximately 5.5%. Given that the shopping centers, by and large, have been privately owned and managed for years, there is a multiple of opportunities for our skilled hands-on team to enhance value. In fact, we already have a number of initiatives in the works that we think could increase our yield by as much as 50 to 100 basis points just in the next year or so. Beyond that, there are a number of interesting recapturing, repositioning opportunities that we have our sights on that could significantly increase our yields down the road.

In summary, it safe to say that we are very excited about these acquisitions. In addition to getting off to a terrific start in 2017 with acquisitions, we are also off to another solid start on the property operations and leasing front. In fact, for the 11th consecutive quarter now, we've again achieved a portfolio lease rate at or above 97%, and we have again achieved strong rent growth, posting a 24% increase on new leases executed in the first quarter.

Additionally, for the 21st consecutive quarter, we grew same center net operating income. As you will hear from Mike and Rich, we expect our NOI growth to accelerate as we move through the year, as the recapturing and re-leasing initiatives that we successfully completed over the past year begin to flow through our numbers in earnest.

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

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [3]

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Thanks, Stuart. For the 3 months ended March 31, 2017, the company had $65.9 million in total revenues and $22.9 million in GAAP operating income, as compared to $56.1 million in total revenues and $18.4 million in GAAP operating income for the first quarter of 2016. GAAP net attributable to common shareholders for the first quarter of 2017 was $10.2 million equating to $0.09 per diluted share, as compared to GAAP net income of $8 million or $0.08 per diluted share for the first quarter of 2016. In terms of funds from operations, for the first quarter of 2017, FFO totaled $34.3 million as compared to FFO of $29.9 million for the first quarter of 2016. On a per-share basis, FFO increased to $0.28 per diluted share for the first quarter of 2017.

With respect to property level and net operating income, on a same-center comparative basis, which includes all of the shopping centers that we have owned since the beginning of 2016, totaling 73 properties, cash NOI increased by 2% for the first quarter of 2017 as compared to the first quarter last year. As Stuart mentioned and as we discussed on our year-end earnings call, we expect the same-center NOI will increase as we move through the year as new tenants that we leased space to during the past year take occupancy and commence paying rent. With that in mind, as it relates to the 73 properties in our year-over-year comparative analysis, we continue to expect the same-center NOI growth will be approximate 4% for the full year 2017. Bear in mind that the quarterly same-center NOI number will likely fluctuate as the pool of comparative properties on a quarterly basis will increase as we move through the year.

Turning to the company's balance sheet. At March 31, the company had a total market cap of approximately $3.8 million, with approximately $1.3 billion of debt outstanding, equating to a debt to total market cap ratio of 33%. And for the first quarter, the company's interest coverage was a strong 4x. With respect to the $1.3 billion of debt, the vast majority of that is unsecured. Additionally, approximately 95% of our portfolio continues to be unencumbered.

Lastly, in terms of FFO guidance, thus far, we are on track with our previously stated guidance of achieving FFO between $1.10 and $1.14 per diluted share for the full year 2017. With respect to our acquisitions year-to-date, notwithstanding being ahead of plan, so to speak, in terms of already having lined up $268 million of acquisitions only 4 months into the year, a good portion of that may not close until the second half of the year, which our guidance takes into account.

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

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [4]

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Thanks, Mike. Demand for space across our portfolio continues to be strong and we continue to make the most of it. As Stuart noted, we continue to maintain our portfolio at over 97% leased, ending the first quarter specifically at 97.2%. Breaking that down between anchor and non-anchor space, you may recall that back at year end, we had one anchor space available in our portfolio. During the first quarter, we signed a new tenant for that space, achieving a 129% increase in base rent, and we are now in discussions with that new tenant about leasing a second space at one of the shopping center that we recently acquired. With that one remaining anchor space now spoken for, at March 31, our anchor space was 100% leased. And in terms of shop space, at quarter end, our shop space stood at 94% leased.

In terms of the economic spread between build and lease space, at year-end, the spread was 4.7%, representing roughly $8 million in additional annual rent on a cash basis. Given that the bulk of the $8 million was attributable to new leases that we signed in the latter half of 2016, we expect the majority will take occupancy and commence paying rent later this year.

Accordingly, during the first quarter, tenants representing about $1.5 million of that incremental $8 million started paying rent, of which only $238,000 of the $1.5 million was received in the first quarter. Taking the $1.5 million into account, together with our leasing activity during the first quarter, as of March 31, the spread was 4.3%, representing approximately $8.2 million.

As Stuart noted, we continue to achieve strong rent increases across our portfolio with our leasing activity. Specifically, during the first quarter, we achieved a 24% increase in cash rents on new leases executed on a same-space comparative basis and a 9.1% increase on renewed leases.

Looking ahead, we have about 0.5 million square feet of space scheduled to roll during the next 9 months across our portfolio, the bulk of which is shop space which we expect to continue achieving solid rent growth as we re-lease and renew the space.

Additionally, we continue to actively pursue recapturing below-market space well ahead of scheduled lease expirations. Lastly, we continue to make good progress with our various pad expansion projects currently underway and remain on track to complete the bulk of them later this year. And with one of our recent acquisitions, we have added another 3,000 square-foot pad to our pipeline, which we just broke ground on and expect to complete by year-end as well. All totaled, our pad expansion projects will add over $2 million of additional annual rent.

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

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [5]

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Thanks, Rich. Our solid results not only are indicative of the ongoing strong fundamentals across our portfolio and markets, but they are also a direct result of how we manage our tenant base and properties. Along with being focused on capitalizing on every opportunity to increase rents and enhance the value of our shopping centers, we are equally focused on maintaining a very diverse and reliable revenue stream. We accomplish this by pursuing 2 distinct core strategies: First, as we grow our portfolio, we are keenly focused on maintaining tenant diversity; in fact, 80% of our base rent today is derived from over 1,200 different retailers and businesses, the vast majority of which only account for less than 0.5% of our base rent individually. As it relates to the remaining 20%, that too is well diversified. Our largest tenant, which only accounts for 6% of our base rent, is derived from leases at 19 different shopping centers, spanning across 6 of our 7 metropolitan markets.

Additionally, our next largest tenant only accounts for less than 3% of our base rent and the remainder of our top 10 tenants each account for less than 2% individually. This tenant diversity is not by accident, it's by design and something we look carefully at with each acquisition. In fact, once we close on all $268 million of acquisitions that we've lined up so far this year, our top tenant will drop below 6%.

Our second core strategy is the type of retailers that we focused on, that being daily necessity. Out of our top 10 tenants, 7 of those are supermarkets and pharmacies. Additionally, beyond our top 10 tenants, the majority of our revenue is derived from a broad range of retailers including additional supermarkets and pharmacies as well as other retailers providing basic consumer goods and services that are always in demand. Focusing on leasing to daily necessity retailers, together with maintaining a broad and diverse tenant base, translates into a very reliable cash flow stream year after year as our team has consistently demonstrated over the past 25 years through all kinds of market conditions. While the retail industry today is experiencing considerable turmoil, which in turn, is adversely impacting an increasing number of properties, that is not the case with our portfolio. We continue to fire on all cylinders and remain excited and confident about the future prospects of growing our business and enhancing value.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Paul Adornato with BMO Capital Markets.

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Paul Edward Adornato, BMO Capital Markets Equity Research - MD and Senior Analyst [2]

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Stuart, I was wondering if you could give us your take on the supermarket business. You mentioned you have a lot of high-end supermarkets; we saw some of those moving out to Portland last year. What kind of competition do you see and what kind of headwinds are your supermarkets facing?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [3]

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Well, we continue to see grocers looking to expand on the West Coast, ranging from national players like Safeway to an increasing number of more regional, specialty-type organic grocers looking to broaden their reach up and down the coast. The only other thing to mention, Paul, of course, is that the barriers to entry in our markets are so high that what we're finding today in terms of grocers expanding into these markets is that there is very few -- there's very little space available.

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Paul Edward Adornato, BMO Capital Markets Equity Research - MD and Senior Analyst [4]

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Okay, great. And then if you were to look at leasing spreads, they've been quite healthy for quite a while. I was wondering what we could expect over the longer term. Are a lot of these gains, I think, kind of one-time in so far as it's the first time you've leased or recaptured an anchor. So I was wondering if you could kind of give us some indication of what we might expect over the longer term, let's say, 2 or 3 years out?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [5]

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Paul, let Rich answer the question. So Rich?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [6]

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Yes. Generally speaking, Paul, our asking rents are up notably across all of our markets. The drivers that are impacting those rents are so different in each market and each property sub market. And very -- for every lease or available space, so it's always difficult to kind of come up with a specific percent change to be looking for. But we would expect that it will be consistent with what we've seen before.

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Paul Edward Adornato, BMO Capital Markets Equity Research - MD and Senior Analyst [7]

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Okay, great. And thanks, just to clarify one point. In a press release, you mentioned that one seller was taking common stock. Is that in the form of OP units or was it tradable common stock?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [8]

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Mike, do you want to...

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [9]

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Just to give that -- for the part we were referring to in the press release, so that would be OP units, yes, Paul.

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Paul Edward Adornato, BMO Capital Markets Equity Research - MD and Senior Analyst [10]

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OP units. So it was an estate situation?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [11]

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I'm sorry, couldn't hear that.

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Paul Edward Adornato, BMO Capital Markets Equity Research - MD and Senior Analyst [12]

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It was in a estate planning decision?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [13]

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Very much so.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [14]

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Yes, it is estate planning for estate planning purposes.

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Operator [15]

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Our next question is from Christine McElroy with Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [16]

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So with acquisitions you're running ahead of the full year pace, but you did mention that some may close in the second half. Does that -- should I take that to mean that you're maintaining guidance here for transactions? Or could we actually see some upward pressure on guidance as we go through the year, just given what you're seeing in the pipeline?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [17]

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We're having a great year in terms of external growth, as we've articulated today. Obviously, it's tough to determine the flow of transactions and when they will occur. So we're going to keep things sort of where they are right now in terms of guidance and probably we'll give you a much clearer update in our next call.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [18]

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Okay. And then as you look at new properties to buy, you talked about a little bit about the exposure, not a lot of exposure to some of the bankruptcies and bigger store closing programs out there. As you're looking at new properties which -- that may have some of these at-risk retailers, is that something that you're trying to avoid or do you -- can you see that as an opportunity?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [19]

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We look at it in many different aspects in terms of the risk. It's tough to really tell you. I mean, we certainly look at those risks and analyze them long-term as it relates to our revenue stream. Once in a while, if we see a tenant, primarily an anchor tenant that has some risk but the rent is substantially less in terms of the market, then we will take that into consideration in our underwriting as it relates to the yields that we can achieve with our platform. But more importantly, we tend to not buy assets that hold the risk of anchors that potentially are going to go bankrupt; we stay away from those transactions.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [20]

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Okay. And then just lastly, I think I asked this last quarter but just maybe an update on how you’re thinking about equity issuance. You did -- obviously, are doing the OP units through some of the deals that you're doing, but how you think about equity raise through the balance of the year?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [21]

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Christy, it's Mike. So we think about our guidance for 2017, and then in the pipeline and what we've got, our guidance is always based on consistent with how we've always pursued in the past. And the meaning, raising new equity from a balance of sources both done in equity and keeping an careful eye towards maintaining our credit metrics, primarily.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [22]

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Okay, so no further plans or just really just a little bit...

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [23]

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No, further plans right after (inaudible) .

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [24]

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Nothing definitive today.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [25]

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Yes.

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Operator [26]

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Our next question comes from Paul Morgan with Canaccord.

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Paul Burton Morgan, Canaccord Genuity Limited, Research Division - MD and Senior Research Analyst [27]

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Just on the same-store NOI, maybe you could just kind of help bridge the gap from kind of where you started the year 2%, your target, which, I guess, is still 4%, And kind of how we should think of kind of the cadence over that over the course of the year. I know a couple of the -- Fallbrook and Crossroads, the closings there are already re-leased but they're not opening until late in the year. So I mean, could you give sort of a little breakdown. How much of the impact was due to those 2 bankruptcies last year? And then how we might think of things ramping to get to the [blinker] target?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [28]

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Well, if we included those in our same-store this quarter, our same-store would have been close to -- approximately close to 3.5%. With them out of that equation, when you look at the gap in terms of what we've leased and when the rent is coming in, we anticipate most of that flowing in third quarter and with the full impact in the fourth quarter. So...

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [29]

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Certainly in '18.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [30]

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And then '18, assuming nothing out there happens of any significance, that's when you get a full run rate of everything and that should be an extremely strong year for us on a same-store basis. That's really the way things are going to flow, correct me Mike, if I'm wrong, and Rich?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [31]

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I would agree with that. First half, we expected it to be lower than our normal run rate but it's not -- that's not an indication of our run rate.

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Paul Burton Morgan, Canaccord Genuity Limited, Research Division - MD and Senior Research Analyst [32]

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Yes, okay. So that's 150 basis points, I guess. Once that anniversary kind of flips to the positive side, you could see yourselves kind of in the 5% territory. I guess that would start to get you kind of closer to this.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [33]

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Exactly.

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Paul Burton Morgan, Canaccord Genuity Limited, Research Division - MD and Senior Research Analyst [34]

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I mean the bad debt was up year-over-year a decent amount in the quarter. Was there anything specifics there?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [35]

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Our increase in bad debt was primarily due to some recapturing initiatives involving short-term cotenancy revisions debt as we re-leased the recaptured space. There was also a small portion of bad debt expense that was tied to the one Sport Authority store in our portfolio, which has, as you know, has been re-leased.

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Paul Burton Morgan, Canaccord Genuity Limited, Research Division - MD and Senior Research Analyst [36]

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Yeah, okay. And then -- that's helpful. And then one other line just kind of stood out in the same-store numbers for your property taxes, were up 8% on a same-store basis, which given the California side, I wouldn't have expected that kind of jump. Is there anything one-off there that caused that?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [37]

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It's more of an increase was partly due to the properties that have expanded in the past year and properties that we (inaudible) , causing the assessed value to go up, and partly to some of our acquisitions in 2015 that have been privately held for many years and were recently reassessed. Keeping in mind that those increases will start to recapture through recoveries. There's always a bit of a time lag there.

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Paul Burton Morgan, Canaccord Genuity Limited, Research Division - MD and Senior Research Analyst [38]

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Yes, okay. And then just lastly on the new deals that you've announced today. A number of them have pretty high occupancy, up to even 100%. And I was wondering what you normally buy assets that have some type of kind of no juice in them first couple of years. And I'm wondering if there's any color you have on kind of what you see as the opportunity kind of beyond the kind of sort of going in cap rate on some of those deals?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [39]

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The mark-to-markets on those deals is very strong for us right out of the box in terms of closing these transactions. So that to me is a great opportunity just sitting still as we would say. Then if you even dive a bit further, there's a couple of spaces in these assets that are well under market that we believe we're going to be able to recapture very quickly. And that is -- that could be as big as 150% to 300%. So it's a combination of rollover, combination of a bit of lease-up, but primarily the aggressiveness that our platform has in terms of the -- like we have done with these initiatives where we play offense instead of defense.

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Operator [40]

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Our next question comes from Michael Gorman with BTIG.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD [41]

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Mike, if I could just start quickly going back on the same-store here and I was just curious, I appreciate the color on the expenses. The recovery ratio at least on our numbers was down year-over-year as well. Is that just a timing issue? Or was something up, because occupancy was relatively flat?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [42]

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Yes, I would say definitely it's true, a little more of a timing issue. Absolutely.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD [43]

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Okay, so we should expect that to go back up over the course of the year?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [44]

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Yes, it would.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD [45]

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Yes, okay. And then Rich, just to clarify the [pod] expansions -- or the out parcel expansions that you're working on this year, the $2 million of incremental rent. What's kind of the dollar investment that we should think about to get to that $2 million of rent at the end of the year?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [46]

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I don't have the specific number right here. I can have somebody follow up with you after the call. But obviously, we look at that in terms of the market rent we can achieve and looking for double-digit returns on those investments.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [47]

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When we ran the analysis recently, Mike, the analysis showed about a 17% on levered cash returns. So -- but the number -- the exact number in terms of cost isn't in front of us, but we can get back to if you would like.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD [48]

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Yes, that would be great. And then Stuart, I guess on big picture, you mentioned about obviously the relationships and the desire of some of the sellers to take ROIC units back. Can you maybe walk through -- the 5.5% cap is pretty strong. What kind of pricing advantage do you think you'd get based on those relationships and that ability to offer units? I mean, so if these were marketed deals, where do you think some of these assets would have traded?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [49]

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I would tell you maybe 25 basis points. But it's -- maybe -- I don't know 25, maybe up to 50. But I mean, price is just one part of the story here. The real part of the story is the mark-to-market on these transactions. We have found over the years that the families that we've done these transactions with have been so focused on cash flow that they really don't -- they don't really capture the true mark-to-market. In a number of cases, we haven't seen rents go up in years. So the real opportunity here, Mike, is really the mark-to-market on the rollover of these leases. It's not so much pricing, it's just the amazing amount of cash flow -- increase in cash flow on a mark-to-market basis and then on a re-merchandising or re-candidating basis. That's really where we are able to create a lot of juice very quickly.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD [50]

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Got it. Great. And then one last one, do any of the families that you're working on with these acquisitions have additional properties that could be future opportunities, or?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [51]

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Currently, the ones we've announced, no. But there is more out there that we are pursuing and those families do have portfolios. Some are 2 properties and more and some are a bit more than that. And it comes and goes depending on the negotiations and the time that we're spending together. This process is long and tedious because of these relationships that go back many -- in some cases, decades. So it will vary from seller to seller. But the answer is yes. Those opportunities do exist.

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Operator [52]

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Our next question comes from Collin Mings with Raymond James.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [53]

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Couple of questions. I think first, going back as far as Mike just to Christy's question on capital market assumptions and guidance. Can you maybe update us how you are thinking about the debt market today, just given what's outstanding on the line and what you finished the quarter with on the line?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [54]

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Well, like I mentioned earlier to Christy, we keep a careful eye and look at all the different levers that we can pull for financing, both debt and equity. We will look at all of those different options, just a variety of ways we can make it any combination of those as well, doing some debt, some equity. There's just a lot of different things we could do. We're just kind of watching the market to see how it develops.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [55]

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Got you. Along those lines, how do you think about potential 10-year debt, financing cost of it currently?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [56]

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Right now, we're -- the pricing is, there is still difference between private and public. But in the long run I think we could probably price a new 10-year deal in the high 3% to low 4% range.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [57]

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Okay. All right. And switching gears, Rich, just curious across your markets. Can you re-drill down a little bit and highlight on a relative basis just where you're seeing the strongest tenant demand and the most pricing power right now?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [58]

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Yes, I would say the -- Portland is, the demand there, we're essentially full in that market right now and that is a change from where we started. Seattle continues to be a very strong market and along with LA and Orange. The reality is that across all of our markets there's still very good tenant demand. Probably the only place where there is any -- anything that wouldn't fall in that category would be the Sacramento market.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [59]

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Okay. And then I guess, Rich -- or specifically Stuart, just thinking through the broader headlines out there right now for retail. I'm just curious while tenant demand is strong and you have these mark-to-market opportunities, just curious as far as the app from some of the tenants that you're dealing with. Has there been any shift there in terms of shorter-term, less aggressive escalators, smaller box sizes? Has there been any kind of trade off for that pricing power that you guys are demonstrating?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [60]

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No, I mean, I don't think in terms of the tenants apps that they've changed all that much. I mean, I think you do see the trend of the grocers not always wanting the biggest -- the big 50,000 square-foot boxes, depending on the operator, as they used to have, but in many situations, it gives us an opportunity like this remainder space that we leased this quarter, that smaller footprint is going to demand a higher rent per square foot. So that was the remainder space from an Albertson's that we have downsized previously.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [61]

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And then, of course, the other thing is we have no anchor space available. So it's tough to answer your question when you don't have...

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [62]

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I imagine he's talking about leases in general.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [63]

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Right.

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Operator [64]

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Our next question comes from George Hoglund with Jefferies.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [65]

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I just want to go back to the operating expense growth, and we touched on the property taxes. But on the property operating expenses line, that was up 10.3%. Just give a little bit more color there.

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [66]

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Yes, that increase was a bit higher than usual. And really, they're mostly to properties that we acquired in 2015 that had been previously under managed. Some expense and capital on that. But bear in mind that a lot of that increase will start to come back to us through recapture and recoveries, again to the timing effect, the lag of timing.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [67]

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Okay. And then you touched upon the bad debt expense. But further, could you give a little bit more color on in terms of, I think you said was due to recapture of something that has to do with cotenancy?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [68]

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Yes, I mean in certain circumstances, we've had a little bit of cotenancy. It's primarily at Fallbrook, but that will go the other way as those spaces get occupied. So while we're in the sit-out period, there's a little bit of impact. It's really not material in the overall big picture.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [69]

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Okay. And just in terms of the overall acquisition pipeline, is the overall interest rate environment or just macro environment having any impact on kind of seller desire to sell properties or hold things?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [70]

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Well, in terms of cap rates for quality grocery-anchored centers in top markets or certainly in the primary markets on the West Coast, we've yet to see any shift in cap rates. So I mean, I just don't see, given the fact that there's really -- there's been a bit of a slowdown on widely marketed deals, and given the fact that looking at the entire retail landscape today, the grocery-anchored format or segment has become the most sought-after segment in terms of the market. That's why I think cap rates just aren't going to move this year, especially in the top markets in the U.S.

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Operator [71]

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Our next question comes from Craig Schmidt with Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [72]

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I was wondering on the acquisitions going forward, will you -- do you think the Western non-California markets are more attractive? Or are the California markets more attractive?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [73]

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Well, we're in -- as you probably know, Craig, we're in more than just California. But no, we are not leaving our backyard under any circumstances at this point. The pipeline of transactions look great. So know we are sticking to what we know best and where we have operated in for many decades, as you've heard. So at this point, we've no intention of moving outside of the primary markets on the West Coast.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [74]

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And Portland and Seattle still seem very attractive to you?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [75]

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Very attractive. Tough markets to buy in because this is -- there's not as many opportunities, obviously, given that they are much smaller markets. But we like those markets as much as we like the -- with the coastal markets on the -- in California.

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Operator [76]

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Our next question comes from Wes Golladay with RBC Capital Markets.

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [77]

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Looking at the relationship-oriented deals, what is the opportunity set here long term? Is it 10 centers, 50 centers? Can you give us some commentary on that?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [78]

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I can give you some commentary on the entire market in terms of the opportunities, but then we'll try to drill down to sellers that have estate or tax issues. It's a bit more difficult to get specific. But what I can tell you is if you look at our pipeline right now, there is probably 8 to 12 centers in our pipeline that we're working on in that category.

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [79]

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Okay. And then looking at your grocers and your centers. Are they typically the top groceries in the chain, top third, or how are the grocers performing on a same-store basis?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [80]

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Yes, the groceries are all doing quite well. I mean, the year-over-year increase in sales, in many cases they are double-digit. And they're all performing in the top percentage of their chains.

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Operator [81]

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Our next question comes from Todd Thomas with KeyBanc.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [82]

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Stuart, maybe Rich, also. Just back to leasing demand and the retail environment today overall. How deep is the list of tenants that you're talking to today for both small shop space and say junior anchor spaces? And how might that compared to what you've seen in prior years? Have you seen any changes?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [83]

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I don't think we're seeing any changes. Our demand for space continues to come from a pretty broad range of retailers. It varies depending on the markets. So, for example, like in the Pacific Northwest, it's highly sought after by retailers looking to expand, and grocers are at the top of that list. Many new grocers try to move into the market for the first time as well as the existing grocers looking to improve their market share. And then just across the board, we're still seeing a lot of good interest from new restaurant concepts and health and beauty and fitness and medical. They're all continuing to expand across the -- all of our markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [84]

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In terms of some of the retailers, whether it's some restaurants or other categories, who are some of those retailers, perhaps, that are first expanding in your markets that could be a meaningful source of demand as they roll out stores on the West Coast?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [85]

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Many of our regional players that, in the restaurant category, that are backfilling the prior retail type of space. And it's everything from an individual who's opening 1 unit to guys who have 5 to 10 units.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [86]

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Okay. And then Fallbrook's come up a couple of times here on the call. It is 100% leased; it was basically 100% leased last quarter. And I know there was some movement there. But can you just drill down and sort of talk about the tenant rotation there that you've seen at that asset and sort of what changes are in motion there?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [87]

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Sure. I mean for the moment -- you mentioned it's been very stable property for us. There was a former automotive pad that we've redeveloped right after acquiring the property. That pad is now 100% leased. And again, it's a medical user, a couple of restaurants, a bagel store. And then we also had the one Sports Chalet in the portfolio there and I think as we've talked on previous calls, we're bringing an East Coast retailer to the West Coast with one of their first locations. That space is currently being fitted out. And in terms of landlord work, we expect to deliver very shortly here and have them commence their work. You know it's a bit of work there because you're converting sporting goods to another use, and there was a very large swimming pool involved that had to be filled in, et cetera. The other moving part there is -- that is the one Kohl's in our portfolio. That space is dark at the present time but the present update from Kohl's is that they are -- have a subtenant to fill the space.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [88]

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Entertainment use too, which is something we don't have at Fallbrook and something that will certainly bring a nice sort of flavor to the shopping center. So it's not actually -- it's a retailer but it's a different type of retailer, which is going to be very strong for the asset long-term.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [89]

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Okay, got it. That's helpful. And then just last question for Mike. In terms of same-store NOI growth, you talk about that accelerating throughout the year here. But you also mentioned that -- and every quarter, the pool changes a little bit. And I'm just curious how much of a lift does the change in the same-store pool for the full year represent as we think about the 4% in total? Are you able to break that out?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [90]

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No, the 4% would just be for the 73 properties that constitute the pool that will be for the entire year. So that's what we're measuring on that. So as properties are added to the pool during the year because they've run for the entirety of both comparative quarters, those don't affect the year-over-year pool.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [91]

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Right. But if we think about all of the properties that are going to be in the full year pool, that will roll in throughout the year essentially? When we think about that, what's the -- if we were to look at last year's same-store pool, what would the same-store growth look like for last year's pool essentially?

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Michael B. Haines, Retail Opportunity Investments Corp. - CFO, EVP, Treasurer and Secretary [92]

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So this year's full year pool are all the properties that we owned at the beginning of 2016. So we have to look back at the ones that we added in '15 that were being added to the '16 pool side. So I don't have that breakdown in front of me. I can get back to you; we can talk offline on that.

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Operator [93]

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Our next question comes from [Nikita Bailey] with JPMorgan.

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Unidentified Analyst, [94]

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A bit of a quick question, more high level, I guess. When you talk about buying these great, irreplaceable location centers, what would be the metrics that you would look and decide actually to not buy an asset? Even if it is in a great location, what would stop you from doing that?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [95]

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This is going to be a number of metrics. I mean, there's a lot of metrics we look at when we buy properties. I think the most important metric is the tenant and the covenant behind this tenant. And so I think the revenue stream is the most important thing to begin with. And how -- it's the downside risk; that's what we look at first. But it's tenant demand; it's the marketplace from a competitive viewpoint; it is environmental; it is changes in terms of rollover or the leases that are rolling over. There's really a number of metrics that we look at. So it's just hard to identify what metric is the most important as it relates to rejecting a transaction. But let me try to put it in this context. Every week, we probably look at about 100 deals and when I say 100, I'm talking about all over the markets on the West Coast. We probably chase 1 out of that 100 on a weekly basis in terms of trying to get through all of these metrics and something that we really want to pursue and buy. So there's -- there's a lot of, again, ton of metrics to look at here but we're extremely selective when it comes to what we're buying. I think that's the bottom line. And then more importantly watch the downside risk as it relates to tenant diversity and the things we've spoken about them today on our call, as it relates to diversification and the actual revenue stream itself.

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Unidentified Analyst, [96]

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And those 100 that you mentioned, are those all in prime irreplaceable locations that you speak of?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [97]

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No, no. This would be all over the market. So we get a lot of real estate on a daily basis just comes from different places because of our reputation and because we've been doing this so long. We have a lot off-market people that just send us stuff that we just -- it doesn't fit.

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Operator [98]

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I'm showing no further questions at this time. I would like to turn the conference back over to Stuart Tanz, Chief Executive Officer, for closing remarks.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - CEO, President and Director [99]

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Thank you. In closing, I'd like to thank all of you for joining us today and if you have additional questions, please feel free to contact Mike, Rich, or myself. You can also find additional information in the company's quarterly supplemental package, which is posted on our website. And lastly, for those are attending ICSC, the convention in Vegas -- Las Vegas, next month starting on May 21, please stop by our booth, which will be in the South Hall at the corner of N Street and 50th Avenue, and we hope to see you all there. Thanks again, and have a great day, everyone.

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Operator [100]

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