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Edited Transcript of ROIC earnings conference call or presentation 29-Oct-19 1:00pm GMT

Q3 2019 Retail Opportunity Investments Corp Earnings Call

PURCHASE Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Retail Opportunity Investments Corp earnings conference call or presentation Tuesday, October 29, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael B. Haines

Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary

* Richard K. Schoebel

Retail Opportunity Investments Corp. - COO

* Stuart A. Tanz

Retail Opportunity Investments Corp. - President, CEO & Director

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Conference Call Participants

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* Barry Paul Oxford

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director & Senior Analyst

* Collin Philip Mings

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

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* Michael Patrick Gorman

BTIG, LLC, Research Division - MD & REIT Analyst

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Todd Michael Thomas

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

* Vince Tibone

Green Street Advisors, Inc. - Analyst of Retail

* Wesley Keith Golladay

RBC Capital Markets, Research Division - VP & Equity Research Analyst

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Presentation

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Operator [1]

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Welcome to Retail Opportunity Investments' 2019 Third Quarter conference call. (Operator Instructions) Following the company's prepared comments, the call will be opened up for questions.

Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of federal securities laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the company can give no assurance that these expectations will be achieved. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements and expectations. Information regarding such risks and factors is described in the company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K.

Participants are encouraged to refer to the company's filings with the SEC regarding such risks and factors as well as for more information 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. - President, CEO & Director [2]

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

Before getting started, I would like to briefly address the California wildfires. While the situation is very serious, fortunately, it has not impacted our portfolio or business, nor do we expect it to at this time. Needless to say, we continue to monitor the situation closely.

Now turning to our third quarter results. The company posted another active and productive quarter, led again by another very strong quarter on the property operations front.

We continue to maintain our portfolio at well over 97% leased and again achieved solid same-center NOI growth, along with very strong same space re-leasing spreads. In fact, our team achieved a 36% increase on new leases executed during the third quarter.

Given our strong performance year-to-date, we are on track to potentially have one of the best years on record for the company in terms of re-leasing spreads and overall leasing activity. Safe to say that demand across our portfolio continues to be strong, and we continue to have good success in making the most of it. Along with continuing to deliver strong property operating results, we also continued to execute our strategy of disposing certain noncore properties primarily focused on exiting the Sacramento market.

During the third quarter, we sold another property for $30 million, bringing our year-to-date total to $60.5 million. We also have another property under contract to sell for about $13 million, which we expect to close by year-end. Beyond that, with respect to the final 2 remaining properties in Sacramento, we just listed one of the properties. And with respect to the last Sacramento property, we are in the process of re-leasing an anchor space at the center, that once we have completed the leasing, we will bring that property to market as well. We expect these last 2 Sacramento properties will together generate around $40 million in total sale proceeds once completed.

Turning to our densification initiatives. We are pleased to report that we are making good progress on a number of fronts. At our Crossroads Shopping Center, we are currently finalizing our development agreement with the city of Bellevue on Phase 2. The agreement will enable us to build 220 apartments, along with 14,000 square feet of retail space, which is terrific from our perspective, as the amount of apartments and retail space is greater than what we had originally thought this city would allow.

Additionally, we are finalizing the development agreement with the city. We are also close to finishing a detailed value engineering review of our planned design, which we think could reduce our initial cost projections by approximately 15%. Assuming everything continues to progress on the current track, we should be in a position to move forward in preparing working drawings starting in the first quarter.

With respect to the 2 densification opportunities that we're currently pursuing at several of our shopping centers in the San Francisco Bay Area, both are progressing as well. At our Nevada shopping center, we continue to have productive meetings with the city regarding potentially building 140 to 150 apartments, along with 14,000 to 16,000 square feet of retail space. We are in the process of preparing design drawings to be submitted to the city at our next scheduled meeting a few weeks from now.

At our Pinole Shopping Center, the longtime city planner that we had worked with for many years, recently retired, so we are now in the process of engaging the new planner, who, thankfully, is also very supportive of our densification plans of adding multifamily to our site, potentially around 200 apartments.

Additionally, recently, a prominent international hotel group approached us with the support of the city about ground leasing a portion of our densification site. So we are now in the process of exploring the idea of potentially incorporating the hotel along with multifamily as part of our densification plan, which we will be discussing in greater detail with the city next month.

Beyond these 3 densification projects, we are also in the beginning stages of pursuing 2 additional densification opportunities, both in the Pacific Northwest, one in the Seattle market and one in Portland. At our Seattle property, we've started working with the local municipality, together with an adjacent property on developing a comprehensive densification strategy for both properties. The city is highly interested in having a coordinated plan that could potentially include 1,000 apartments in total, along with more retail space.

Additionally, at one of our shopping centers in the Portland market, we recently approached the local municipality there about adding a multifamily component, which the city has embraced. In fact, they are now in the process of developing a new downtown core densification master plan with our property as the focal point. While these 2 densification opportunities are just in the early stages of discussion, we are very encouraged by the city and civic support thus far.

Lastly, in terms of acquisitions, we are pleased to report that we currently have 3 interesting off-market opportunities that we are pursuing, which together total around $85 million. One of the property is located in the Pacific Northwest and the other 2 are located in Southern California. All 3 are grocery-anchored shopping centers that are well situated in excellent locations, and all 3 have considerable amount of opportunities for our team to increase cash flow and enhance value going forward.

Additionally, at one of the properties, the seller is interested in taking ROIC units, potentially about $30 million or so. Thus far, valuation discussions have been encouraging, and we are currently in the process of conducting our due diligence with the goal of having all 3 properties under contract soon.

Now I'll turn the call over to Mike to take you through our financial results. Mike?

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [3]

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Thanks, Stuart. For the 3 months ended September 30, 2019, the company had $72.4 million in total revenues and $35 million in operating income. In terms of the first 9 months, the company had $221.4 million in total revenues and $89.2 million in operating income. On a same-center cash basis, net operating income for the third quarter increased by 3% to $48.7 million and increased by 3.6% for the first 9 months of 2019.

Turning to net income. For the third quarter of 2019, GAAP net income attributable to common shareholders was $17.9 million, equating to $0.16 per diluted share. And for the first 9 months, GAAP net income was $38.7 million or $0.34 per diluted share.

In terms of funds from operations for the third quarter of 2019, FFO totaled $33.4 million, equating to $0.27 per diluted share, which brings our FFO for the first 9 months to $0.82 per share.

With respect to the company's balance sheet and capital raising activities, during the third quarter, we utilized the proceeds from the property sale, as Stuart mentioned, to reduce debt.

Additionally, over the past couple of months, we raised about $26 million of equity through our ATM program, being careful to utilize the program in a series of modest trades as market conditions permitted and at pricing that was within roughly 1% of the stock's 52-week high. As the property sale, we utilized the ATM proceeds to further reduce debt. As a result, during the third quarter, we lowered our net debt-to-EBITDA ratio down to 7.0.

Looking ahead, we would like to issue some additional equity, market conditions permitting, between now and year-end, with the goal of lowering our debt further, such that our net debt-to-EBITDA ratio is below 7% as we head into 2020.

Taking into account the asset sale, equity issuance and pay down of debt. At September 30, the company had a total market cap of approximately $3.7 billion, with roughly $1.4 billion of debt outstanding, equating to adjust the total market cap ratio of 38%.

With respect to the $1.4 billion of debt, 94% of that is effectively fixed rate. In fact, the only floating rate that we currently have is our credit line, which had a balance of $92 million at September 30, representing just 6% of our total debt outstanding. Furthermore, we have no debt maturing for the next 2 years, when our credit line comes up for renewal. And beyond that, our maturities are well laddered. Additionally, our interest coverage continues to be solid. Specifically, it was 3.2x for the third quarter.

Lastly, in terms of FFO guidance in light of the asset sales, equity issuance and debt pay down and the fact that we've remained on the sidelines thus far this year in terms of new acquisitions, we have adjusted our FFO guidance range accordingly to now be a $1.10 to $1.12 per share for the full year 2019. The low end of that range assumes we do issue more equity between now and year-end, while the high end of the range assumes we do not, and also assumes that the pending disposition, that Stuart mentioned, doesn't close until the first quarter.

Now I'll turn the call over to Rich to discuss property operations. Rich?

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

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Thanks, Mike. As Stuart highlighted, we are on track to post another very strong year on the leasing front, possibly one of the best years on record for the company. Year-to-date, we have already leased 1 million square feet of space, which speaks to the success of our hands-on proactive approach of seeking out opportunities to re-lease space well ahead of scheduled expirations.

Additionally, our strong leasing volume is especially noteworthy given that our portfolio has been essentially full for over 5 years now as we continue to maintain our portfolio leased rate at well over 97%, as Stuart touched on, including finishing the third quarter at a very strong 97.7%, with our anchor space again at 100% leased and our shop space at 95% leased. While the 97.7% is slightly below the record high, 97.9% leased rate that we posted last quarter. The slight drop is simply a function of timing between leases in connection with our efforts to capitalize on the strong demand for space.

In today's leasing environment, demand, in many cases, continues to outpace supply, particularly for highly sought after locations where retailers are submitting letters of intent for any space that may become available. As we continue to work creatively at capturing this demand, our portfolio lease rate is going to fluctuate modestly from one quarter to the next as we move tenants in and out.

Importantly, the demand is increasingly being driven by 3 emerging factors, all within the in-line space segment. First, we are seeing a growing number of traditional bricks-and-mortar retailers seeking to expand their market presence on the West Coast with new format right-sized stores, tailored specifically to the surrounding community's demographic profile.

Second, more and more e-commerce retailers are starting to introduce new physical store concepts to complement their online activity as well as grow their overall business and strengthen their competitive position. They too are seeking locations in well-located grocery-anchored shopping centers.

And third, we continue to see increasing demand from traditional mall retailers branching out and seeking in-line space at grocery-anchored centers. Needless to say, these emerging factors all bode well for our business, especially as it relates to our ability to continue to diversify our tenant base and enhance the retailer mix at our shopping centers.

These demand trends and focus on in-line space are clearly evident in our continued strong leasing results. Specifically, during the third quarter, we executed 96 leases in total, of which 91 were for in line space. In total, we leased 376,000 square feet of space, achieving a 35.7% cash increase on same space new leases and an 8.7% increase on renewals.

Year-to-date, through the first 9 months, we executed 288 leases, of which 275 were for in-line space. In total, we have leased 1 million square feet year-to-date, achieving a blended 32% increase in same space new leases and an 11% blended increase in terms of our renewal activity.

In summary, we continue to excel on the leasing front and are poised for a strong finish to 2019.

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

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

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Thanks, Rich. As some of you may know, we just celebrated our 10th anniversary as a shopping center REIT. When we commenced operations a decade ago, our objective was to carefully build a portfolio comprised of grocery-anchored shopping centers that would serve as a strong foundation and provide the company with a balance of long-term stable cash flow and good growth. Opportunities for years to come.

Starting with zero properties back in October of 2009, over the years, we've built a portfolio that today stands at 88 shopping centers, totaling over 10 million square feet. With ROIC recognized as the largest grocery-anchored shopping center REIT, focused exclusively on the West Coast. We have built our portfolio not by chasing widely marketed deals, but instead by carefully seeking out off-market opportunities, focusing on unique shopping centers situated in irreplaceable locations with identifiable opportunities for our team to enhance value over time, which is precisely what we have done, as evident by our consistently strong portfolio results.

For example, for 31 consecutive quarters now, dating back to 2012 when we began reporting property statistics, we have grown same-center NOI each and every quarter. Additionally, we've increased same space re-leasing cash rents every single quarter as well, and we have maintained a portfolio lease rate at or above a very strong 97% for 21 consecutive quarters now.

Our consistently strong performance is indicative of our disciplined, focused strategy and unparalleled West Coast market knowledge and experience. Needless to say, we are proud of our accomplishments over the past 10 years, and we look forward to the future as we embark on our second decade of operation at ROIC.

Now we'll open up 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 Collin Mings with Raymond James.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [2]

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Couple of questions for me. Just first -- just Mike, going back to the guidance. Can you just elaborate on the changes just given, prior guidance had already incorporated some disposition and ATM activity?

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [3]

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Well, it was kind of a function of a couple of things. The change in guidance is really being driven partly by -- our asset sales are a little bit slower than we had originally thought. We also issued equity a little bit earlier than we thought we would. And those are the 2 primary drivers that caused the change.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [4]

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And that does include, Collin, another $30 million of equity. If the market's there for us in the fourth quarter.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [5]

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Got it. Okay. Helpful there. I guess maybe just along those lines, Stuart, just can you, maybe, just discuss the decision to utilize the ATM here, again, modestly below kind of consensus NAV estimates versus just bringing more assets to the market to reduce leverage?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [6]

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We felt it was important to tap the equity markets. As Michael articulated, it was just off of our high for the year, 52-week high, we felt it was important to really continue to finish the dispositions that we laid out, as well as to get some equity into the balance sheet to prepare us for 2020 as it relates to growing the company and growing our FFO.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [7]

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Understood. And maybe, just last one for me, and I'll turn it over. Stuart, just in context of the $85 million of off-market opportunities that you're pursuing that you highlighted in the prepared remarks. Can you, maybe, just expand on that a little bit more? How did some of those opportunities come together? How quickly could some of these deals get across the finish line, especially just in context of, again, guidance for this year, only suggesting $25 million at the upper end on the acquisition front?

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

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Sure. A number of -- 2 out of the 3 deals were from very long-term relationships in the markets that we've had for the last couple of decades. In discussions with sellers, they're finally warming up to actually selling us these off-market deals. And the third one is really coming through a relationship we've got up in Seattle, which is an OP transaction on a property that we've had our eye on for many years that the seller now is at a point where he's willing to look at transacting. So 2 in Southern California, 1 in the Pacific Northwest, we do expect to probably, subject to due diligence, close these transactions towards the end of the year and the first part of next year.

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Operator [9]

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And our next question comes from Christine McElroy with Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director & Senior Analyst [10]

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Just to follow-up on Collin's question on the acquisitions. So the $85 million you discussed, sounds like it'll be -- they'll close, sort of, towards the end of the year and into next year. But how are you thinking about the funding of those aside from the OP units you discussed. So you've mentioned additional equity issuance, but it sounds like that's earmarked more for debt reduction? And I guess, how are you thinking about the pricing of the OP units? Because historically, you've been able to get a price that's a little bit higher than where your stock trades. So kind of, 2-parter there.

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [11]

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Sure. I'll have Mike address the first part of the question. But in terms of the OP units, the discussion right now is around a price of $19.50 or a bit higher.

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [12]

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As far as the funding sources, I mean it's going to be a combination of proceeds from asset sales and equity issuance, assuming the market conditions permit that. We're very sensitive about keeping our leverage in check and, in fact, reducing our net debt-to-EBITDA ratio, which has been a focus of ours for a while now. So keeping all that in mind, it's going to be a combination of asset sales and equity issuance to the ATM, likely.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director & Senior Analyst [13]

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Okay. Great. And then Rich, just to follow-up on your comments about occupancy. With the lease commencements you have teed up. I would have expected build occupancy to move a little bit higher quarter-over-quarter instead of declining. Maybe you could give a little bit more detail on some of the offsets there in terms of space recaptured during the quarter? And it sounds like you're still positive on the demand front. So where would you expect that build occupancy rate to end the year?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [14]

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We would expect it to be relatively consistent as it has been each quarter this year, meaning that we'd expect about another $2 million of that $6.4 million will commence in the fourth quarter. I think it's all driven by the opportunistic re-leasing that we're doing, in many cases, well ahead of lease expirations, where a tenant may be coming off-line, a touch earlier than we would have anticipated, while we're waiting for the new rent to come in.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director & Senior Analyst [15]

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Okay. So if you're expecting more lease commencement that another $2 million. Should we expect that to be incremental? Or is that -- is there other space coming off-line that's sort of offsetting that, right? Because there's a disconnect, right? You have space that's commencing, but there's also that offset in terms of space recaptured or fallout that you have, that's, kind of -- that results in that occupancy moving lower rather than higher?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [16]

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Yes. No, I agree. I think that it's really just a function of timing and being it's a little bit hard to predict. We're constantly working with tenants that are in place and needing to be repositioned, and the timing of the replacement leases. It's just very hard to predict. But there's always going to be some variability into it quarter-to-quarter.

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

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In other words, we're still playing offense on the West Coast, Christie. We're still aggressively out there, which is obviously noted in the nice re-leasing spreads that we're getting, but we're constantly at our -- working with our tenant base to really capture that mark-to-market as quick as we can as it relates to the real estate that we own. But we're still playing offense in terms of the tenant base and that's why you're going to get some of this inconsistency going forward.

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Operator [18]

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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 & REIT Analyst [19]

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Maybe if we could just stick with the equity for a minute. Can you guys, maybe, talk about -- you've got the $85 million in potential deals, some equity marked for some debt reduction. Can you just talk about -- as you think about the ATM versus the secondary market, obviously the ATM is a lot more efficient, but what's kind of the capacity as you think about it on a quarterly basis in terms of what you can do under the ATM before you have to start thinking about looking at the secondary market based on your deal flow?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [20]

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Well, I think you hit it on the button when you said deal flow. I mean it all depends on how our deal flow is looking. If we were to accelerate our deal flow as we move into 2020, then we would consider obviously secondary versus using the ATM. But right now, the ATM is certainly the most efficient way to raise equity for us.

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [21]

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I would agree with that, yes. If we're doing it like a one-off acquisition, it's not difficult to raise enough to fund that in any given quarter. If you have a larger portfolio transaction coming down the road, that means obviously a stronger candidate for a marketed deal.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD & REIT Analyst [22]

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Okay. And...

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

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Again, we are sensitive, Mike, as to where that equity is being issued because we don't know.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD & REIT Analyst [24]

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Sure. And Mike, can you just remind us how much you have left under the current ATM?

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [25]

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The original plan was a $250 million program. I think we've got at least $200 million still left on it.

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Michael Patrick Gorman, BTIG, LLC, Research Division - MD & REIT Analyst [26]

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Okay. Got it. And then maybe, just one for Rich. Can you, maybe, talk about some of the leases that you pulled forwards from this quarter? I think maybe about $200,000 came out of the 2020 expiration. Are these early options? Were they negotiated renewals? And kind of, what are your conversations with tenants that are looking to renew their leases early? What kind of conversations are you having there in terms of term or renewal spreads?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [27]

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Sure. Yes, some continue to be early exercise of options. In those cases, there's really not a lot of discussion. The tenants just exercising earlier than they're required to. And then there's other circumstances where a tenant may come to us and be willing to give us the space back, but we keep them in place. So while we're out re-tenanting, and then we pull the trigger once we have a replacement tenant in place, which brings that forward in terms of the timing.

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Operator [28]

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Our next question comes from Barry Oxford with D.A. Davidson.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [29]

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Great. Not to talk about cap rates, but not on the $85 million, because I know you don't want to kind of tick your hand in any way. But when you're out there in the marketplace, what is the range of cap rates that you're looking at given the kind of stronger retail environment we have?

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

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So valuations for grocery -- dominant grocery and drug-anchored shopping centers on the West Coast have actually begun to go up and cap rates have begun to creep downwards. For 2 reasons, number one, widely marketed deals that supply -- widely marketed deals in the market have contracted. There's not a lot on the market.

And number two is capital today as it relates to deploying into the retail sector, what we're seeing out there is really the focus is nothing but grocery, drug-anchored product or segment of the retail sector. It's a combination of both of those that is continuing to drive cap rates down. In fact, we believe that we've seen some cap rate compression over the last 90 to 120 days.

And as we move into 2020, we don't -- we believe that valuations for what we own in the markets that we're in are going to continue to potentially head downwards, and that's why we're a bit more active right now in building the pipeline. But more importantly, for us, it's really finding off-market transactions that will deliver a very strong NOI growth over a short period of time after buying these assets.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [31]

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Given that cap rates might be compressing a little bit, why not push on your development more -- more so versus...

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [32]

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Well, we are working a bit of...

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [33]

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The acquisition deal pipeline?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [34]

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Sure. We are working a bit on that aspect through densification. However, we are not in the development business for a number of reasons. And without spending a lot of time going through the answer, why we are not in the development business? The reality is, through our experience in terms of developing in these high barrier markets on the West Coast, the entitlement process takes a lot longer than most other markets. Costs are a lot higher and from an income perspective, we're in the development business, you typically need at least 3 or 4 years to really stabilize your NOI.

It's a combination of all 3 of those that really keeps us on the sideline in terms of development. And what we also thought is that we can find a dominant grocery-anchored center in our backyard. Our management platform or our operating platform has the ability to really drive those yields to take away the risk of doing development. So it's all of that as to why we're not in the development business. And more importantly, through all the years of operating on the West Coast, the formula that we continue to work at ROIC has really proved out to be a very successful formula in terms of building shareholder value.

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Operator [35]

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Our next question comes from Jeremy Metz with BMO Capital Markets.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [36]

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Stuart, in terms of the acquisitions, just going back to that. It seems like you've been right around the hoop here a number of times, and nothing has really ultimately come to fruition quite yet. I know you've been sensitive to your cost of capital and monitoring leverage. It again, sounds like you're pretty close here. You mentioned the $85 million. I guess how confident are you at this point that all of that -- all $85 million gets across the goal line? And maybe, what has held up some stuff in the past here in the past 12 to 18 months? Is it just sellers retrading? You're getting less comfortable as you've dug in more? Just trying to gauge this next bucket here and getting them to the goal line?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [37]

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Well, certainly, we've been cognizant of the leverage side, really, the net debt-to-EBITDA in terms of the balance sheet. We have obviously been very cognizant of our equity and the cost of that equity. But more importantly, it's really been -- and we've had some opportunities to do OP deals, but with our stock price the way it's been not performing recently but, certainly, earlier in the year, we were reluctant to, certainly, move those transactions forward, just given the discussions around the stock price itself.

The way acquisitions or our pipeline works is that sometimes we can sit for a number of months and work on a series of deals, and then all of a sudden they don't come to fruition because of issues relative to the changes in either the retail sector or the overall income or tenant base at the assets, but more importantly, it was really being -- having some patience, keeping the eye on the balance sheet.

And then more importantly, really getting to a point where we're comfortable enough to pull that trigger and move a number of these deals that we've had our eye on forward, and that's where we're at right now. 2020, we're excited for 2020 at this point looking at ROIC because the fundamentals are holding up so well. We're playing offense -- continue to play offense. And more importantly, we believe if we can hit the stride in terms of acquisitions, we will actually start growing our earnings versus having our earnings stay flat as they've done this year.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [38]

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Yes, that's fair. And you mentioned 2020. And in that context, just from the densification side. Obviously, you talked about Crossroads getting close to starting here early next year, just -- and then you detailed out the 2 others in San Francisco and the 2 in the Pacific Northwest, so it sounds a little earlier phase, but how realistic is it to get any of those started out of the ground next year? Or is it just too early to tell on that front?

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

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Well, we do have a couple of pads that will come online, and that will certainly help us in terms of NOI growth next year. But in terms of densification, the Crossroads realistically will not come online until '21. Because you've got to go through working drawings, you've got to build the project, and you've got to stabilize it. And that process alone is going to take at least 1 year to 2 years. So I wouldn't look at 2020 as it relates to densification, but I would look at '21, '22 is when you'll begin to see the real impact in terms of all the hard work that we've been doing all year as it relates to our densification.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [40]

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Yes. And sorry, I guess I was more focused on just not delivering next year but starting, getting one of those or both those San Francisco ones started out of the ground next year. Is that same...

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [41]

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Yes, I mean the Crossroads, it looks like will come out of the ground, hopefully, next year. And the other 2 should follow shortly thereafter. So if it's not right at the end of the year, it could be right at the beginning of 2021.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [42]

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Got it. And then Mike, just one quick one back to some comments you made on the guidance. I guess just thinking through the slower asset sales should be a benefit. I get that the equity issuance was a little early and you have a little more in the fourth quarter, but it would feel like those, maybe, offset each other here a little bit. So is there anything else that we need to think about here that could be impacting the move in the guide?

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [43]

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No, I would say, it's primarily just the change in timing of the dispositions and the equity raises, yes, ATM. That's the primary drivers.

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Operator [44]

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

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Wesley Keith Golladay, RBC Capital Markets, Research Division - VP & Equity Research Analyst [45]

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Stuart, looking at your anchor expirations over the, I guess, through 2020, you have 10 of them coming due. Is there any large mark-to-markets? And do you expect to recapture any of that space?

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

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Yes. Certainly some -- this is Rich. Some we expect to recapture and we're currently in the process of working on those. And in terms of the mark-to-market, a lot of that's going to depend on tenants that have options remaining, where there could be -- it could be flat. So there's very little control we have over those. But there are some that are coming up that are out of options and are significantly below market rents, where we expect to have some really good lifts.

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Wesley Keith Golladay, RBC Capital Markets, Research Division - VP & Equity Research Analyst [47]

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Okay. And then going back to the densification in Seattle. Did I hear you correctly where you said the cost has been reduced by 15%? And if so can you elaborate on what happened there?

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Richard K. Schoebel, Retail Opportunity Investments Corp. - COO [48]

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Sure. Again, we're in the early stages right now of what we call design engineering, where you're really getting into the, what I would call, the details of what you're building. And in doing so we have embarked with a partner who is one of the largest construction companies in the country. And we are talking with them on a joint venture as well as overseeing the project from a construction standpoint.

And currently, they've got close to $17 billion of construction currently undergoing on. And one of the things they do bring to the table, either as a partner or certainly in doing the actual project is that they are basically having the ability to deliver a lot of that cost less than because of the amount of volume they're doing, at less than what normally -- would normally be under doing just one project. So that's where a lot of this savings is coming from. And we're digging into those details very deeply right now.

But the good news is that given how much construction they have ongoing, they believe with -- and they've done a lot of business and built a lot in Seattle, that, that will deliver cost savings to us, and that's what they're communicating to us at the present time. I don't know if you want to add anything to that?

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

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Yes, I mean I think the other part of that is that we look at this very conservatively when we start down this path. So what we're saying is that our original underwriting, we try to be realistic about it. And -- but now as we're getting closer to moving forward, we're fine-tuning the pro forma and utilizing this -- everything we can to keep the costs as low as possible.

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Operator [50]

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And our next question comes from Todd Thomas with KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [51]

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So just a couple of questions following up on the investments. Just curious, what's your appetite like for incremental investments beyond the $85 million that's in the pipeline today? And then once the 2 other Sacramento assets are sold, are there additional assets being teed up for sale beyond those 2? And does your investment activity, your acquisition efforts, does that cause you to think differently about dispositions going forward?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [52]

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Well, in terms of dispositions, I mean nothing specific at the present time. However, each year, we take a hard objective look at our entire portfolio as it relates to each properties sort of near and long-term growth potentials versus downside risk profiles. And we determine at that point whether we will sell those properties. So -- and we're going through that right now, Todd, in terms of 2020. So as it sits right now, there's nothing yet teed up. But again, we may tee up a bit more on the disposition side.

On the acquisition side, the focus there and the criteria there is really to be buying only grocery drug. If there's a third anchor, that's got to be primarily one of your value tenants out there, like, either a Jim or a Ross, T.J. or outside of that, we're really staying away for -- to be buying anything more than having those 3 elements. And that's what's changed in terms of our criteria. So we're excited about 2020, and we'll continue to look at both sides of that equation. But from a -- again, from an acquisition disposition side, you'll probably see on a net basis, more on the acquisition than on the disposition side.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [53]

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Okay. And then in terms of pricing, you commented that you're expecting to see potential cap rate compression here. Have you changed your underwriting or your return hurdles at all as you're looking at these assets today? Or is there a little more value-add or sort of growth embedded in the assets that you're underwriting today?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [54]

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It's growth. I mean that's the bottom line. The fact is that if we're paying a 5% cap or a 4.8% cap or a 5.3% cap or -- Todd, it's all about what the operating platform can do after we've bought the asset. And how -- typically, what we like to see is about a 100 basis point increase within an 18-month period of time of ownership. That's part of our underwriting criteria. Sometimes we meet that and sometimes we don't. But in most cases, it's really finding high-quality assets that really offer the ability for long-term value creation and growth in NOI.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [55]

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Okay. And then just moving over to the same-store. Mike, maybe, Rich can comment also. So the same-store NOI growth in the quarter was -- consisted of base rental income growth of 3.3%. You're running at 3.9% year-to-date for minimum rents. And that's being dragged down by net recoveries and other property income below the minimum rent line. Can you just talk about that and what's happening a little bit there and the expectation heading into 4Q and also 2020?

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [56]

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Well, I don't think we've -- we haven't really...

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [57]

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Sorry. Primarily around potential volatility in some of those other lines below sort of the minimum rent line.

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [58]

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All those line items factor into the NOI overall calculation for the pool, same-center cash on it. It's always a challenging number to precisely predict from one quarter to the next. The biggest driver is the timing of new tenants taking occupancy, which Rich had talked about, which is more often than not we really don't know how it's going to play out. During the second quarter, it was better than we had thought. During the third quarter, it was conversely slower than we thought it would be based on budgets. We're still tracking a solid 3% for this quarter, and we're still very comfortable with the range of 3% to 4% for the year. But it's really dependent upon how the tenant base kind of moves around based on our proactive re-leasing initiatives.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [59]

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Okay. Would you expect to see minimum rents accelerate into the fourth quarter? I think that was part of the forecast earlier in the year?

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [60]

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I would think so yes. I think there's a couple of large anchor tenants that are supposed to start cash-paying rent in Q4, which should bring that number back up.

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Operator [61]

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And our next question comes from Vince Tibone with Green Street Advisors.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [62]

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I have a few more on the densification side. I'm just curious, how many of these projects would you be comfortable developing at one time? And do you have any risk parameters in place, such as a threshold and the total dollar amount of total active pipeline? Just trying to get a sense of how many of these you could put to work at one time?

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

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Well, there are -- I mean in terms of how many of these could be happening at one time. I mean you could, at some point, as you look into the next '21, late '22, have 2 or 3 of these going at one time. However, we're not in the business of building multifamily. We're obviously going to partner up on every one of them, we're still -- that piece is still moving around. But in most cases, we will have a partner come in and oversee the project from start to finish, because it's just not our business. So you can expect more of a sort of a joint venture structure. Obviously, that's much less capital from our perspective. But that's sort of the program right now, as it relates to moving these 3 forward and potentially the other 2 now that are on the drawing board. From a capital perspective, Mike, if you want to comment on that?

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Michael B. Haines, Retail Opportunity Investments Corp. - Executive VP, CFO, Treasurer & Secretary [64]

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Vince, any development is going to be incremental to our business, but it's also incidental to our business because it's not our core competency. So any development -- developments that we undertake, it's not going to be a material number to our overall balance sheet. So that's -- it's incremental, but it's also incidental.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [65]

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Okay. No, that makes sense. And I'm just curious, would you consider selling entitled land in any of these sites just to lock in the value today versus developing over a few years. Is that potentially on the table?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [66]

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Yes.

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Operator [67]

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And our next question comes from Craig Schmidt with Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [68]

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On the 3 emerging factors impacting nonanchor space. I wonder, what percent of nonanchor leases in 2020, maybe, impacted by those emerging factors?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [69]

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Well, I think it's hard to predict, but that is where the tenant demand is coming from. So I think that you'll see a -- probably, a large percentage that are coming from those categories.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [70]

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Okay. And then the 1 anchor new lease, was that a grocery anchor or a general merchandise anchor?

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Stuart A. Tanz, Retail Opportunity Investments Corp. - President, CEO & Director [71]

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It was a fitness. Very strong fitness operator, Craig.

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Operator [72]

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Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Stuart Tanz.

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

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Thank you. In closing, I would like to thank all of you for joining us today. If you have any additional questions, please contact Mike, Rich or me directly. Also you can find additional information in the company's quarterly supplemental package, which is posted on our website. Lastly, for those of you attending NAREIT's Annual Conference in Los Angeles in a few weeks, we look forward to seeing you there. Thanks again and have a great day, everyone.

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Operator [74]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.