Stuart A. Tanz - Chief Executive Officer, President and Director Michael B. Haines - Chief Financial Officer, Executive Vice President, Treasurer and Secretary Richard K. Schoebel - Chief Operating Officer.

Paul E. Adornato - BMO Capital Markets U.S. Paul Morgan - MLV & Co LLC, Research Division R.J. Milligan - Raymond James & Associates, Inc., Research Division Jason White - Green Street Advisors, Inc., Research Division Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division Craig R. Schmidt - BofA Merrill Lynch, Research Division Michael P.

Gorman - Janney Montgomery Scott LLC, Research Division.

Welcome to Retail Opportunity Investments 2014 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 Laws.

Although the company believes 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..

Thank you. Here with me today is Michael Haines, our Chief Financial Officer; and Rick Schoebel, our Chief Operating Officer. We are pleased to report that the company is off to a very solid start in 2014.

We are continuing to execute our business plan of broadening our portfolio through acquiring shopping centers in our core West Coast markets and quickly enhancing value through our leasing and management initiatives.

Specifically, thus far, through the first 4 months, we have committed $112 million in shopping center acquisitions, which include 2 grocery-anchored shopping centers that we acquired during the first quarter totaling $69 million; 1 grocery-anchored shopping center that we just acquired yesterday for approximately $28 million; and 1 property that we currently have under contract and expect to close soon totaling just over $15 million.

Importantly, we continue to focus on unique opportunities where we can fully capitalize on our market knowledge and presence, as well as our ability to quickly enhance value.

As an example, with respect to the grocery-anchored shopping center in our Portland market that we acquired during the first quarter, in only a few short months' time, our leasing team has already lined up tenants for the available space that will take the property from 90% leased at the time we acquired the center to 99%.

Additionally, by owning over 1.1 million square feet in the Portland market, we are able to capitalize on offering synergies to reduce expenses that, combined with the additional leasing, will increase the annualized NOI by about 15% with more growth to come through re-leasing below-market existing space as those leases expire.

Turning to our Northern California portfolio. Capitalizing on our growing market presence and relationships in the Bay Area, we were recently contacted about acquiring an exceptional grocery-anchored shopping center where the private owner was needing a quick and efficient closing.

Given our knowledge of the market and the shopping center specifically, we were able to underwrite the property within a couple of weeks' time, securing a transaction at a very attractive valuation and adding another great shopping center to our Bay Area portfolio, which now includes 9 grocery-anchored shopping centers totaling over 800,000 square feet.

One other good example of our ability to capitalize on our market presence and relationships would be the shopping center we currently have under contract in Seattle. The property is right next door to our grocery-anchored shopping center that we acquired in 2012. In fact, the 2 properties were originally designed and developed as 1 center.

We've had a long-standing relationship with the owner of the adjacent property going back nearly 20 years and have acquired other properties from him, including a shopping center where our offices are located in San Diego. Our history of working well with this owner was instrumental in securing the latest acquisition on attractive off-market terms.

Beyond the $112 million of acquisitions committed year-to-date, our pipeline of off-market opportunities continues to be active. As it relates to the broader marketplace, we are seeing a shift in the acquisition environment with potential buyers becoming more aggressive, and as a result, pricing becoming tighter.

We are looking to capitalize on this by selling certain non-core assets. We are currently considering marketing several non-core properties that in total, could generate roughly $50 million in proceeds to redeploy in new core acquisitions. Now, I'll turn the call over to Michael Haines, the company's Chief Financial Officer.

Mike?.

Thanks, Stuart. For the 3 months ended March 31, 2014, the company had $36.4 million in total revenues and $10.1 million in net operating income as compared to $24.4 million in total revenues and $5.9 million in net operating income for the first quarter of 2013.

The significant increase in revenues and net operating income reflects the growth in the company's portfolio from acquisitions during the past year as well as the company's leasing activity.

With respect to net income, for the first quarter of 2014, the company had net income of $3.3 million, equating to $0.04 per diluted share, as compared to net income of $2.3 million or $0.04 per diluted share for the first quarter of 2013.

In terms of funds from operations for the first quarter of 2014, FFO totaled $16.5 million as compared to FFO of $11.5 million for the first quarter of 2013. FFO on a per-share basis also increased, notwithstanding a sizable increase in the shares outstanding due to over 21 million warrants being exercised since the beginning of 2013.

Specifically, FFO per diluted share for the first quarter of 2014 was $0.21, representing a 10.5% increase over FFO per diluted share for the first quarter of 2013.

In terms of same-center net operating income, based on the shopping centers that the company has owned since the beginning of 2013, which represents over 70% of our total GLA today, same-center NOI increased by 4.3% on a cash basis. Turning to the company's balance sheet.

At March 31, 2014, the company had a total market cap of approximately $1.8 billion with $686 million of total debt outstanding, equating to a debt-to-total market cap ratio of 38%. With respect to the $686 million of debt, approximately $118 million is secured debt and $568 million is unsecured.

At March 31, we had approximately $122 million outstanding on our unsecured credit facility. On square-footage basis, 85% of our portfolio was unencumbered at March 31.

And for the first quarter of 2014, the company's interest coverage was a solid 3.4x, which takes fully into account the interest expense from the 250 million of bonds we issued at the end of last year to term out our line.

With respect to the warrants, during the first quarter, 639,000 warrants were exercised, generating approximately $7.7 million of proceeds to the company. To date, in the second quarter, an additional 1.5 million of warrants have been exercised, generating another $18.4 million of proceeds to the company.

So year-to-date, approximately 2.2 million warrants have been exercised in total, generating $26.1 million in proceeds thus far this year. Looking ahead, there's approximately 3.8 million warrants still outstanding that expire in October representing another $45.2 million in proceeds.

Assuming the remaining warrants are all exercised, it would bring the total proceeds for 2014 to just over $71 million. Combining the proceeds from the warrants with proceeds from selling some non-core properties, as Stuart mentioned, could generate as much as $120 million in total equity proceeds to this year to put towards funding new acquisitions.

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

Rich?.

Thanks, Mike. Along with posting another solid quarter in terms of acquisitions and financial results, we also had another very good quarter on the leasing front.

Demand for space continues to be very strong across our portfolio, and we're continuing to work hard at making the most of it, in terms of securing higher rents as well as improving our tenant mix. At March 31, our portfolio, which totaled 56 shopping centers, encompassing 6 million square feet, was 95.9% leased, up nicely from a year ago.

Breaking that down between anchor versus non-anchor occupancy, at March 31, anchor occupancy was 99.2% and non-anchor occupancy was 92.3%. And the leasing momentum continues to ramp up during the second quarter. In fact, we recently secured a new tenant for the 1 available anchor space that we had, which will bring our anchor portfolio up to 100%.

And we have secured a number of in-line spaces, like at our new acquisition in Portland that Stuart discussed. As a result, with all this second quarter activity to date factored in, our overall portfolio occupancy will soon reach 96.5%, which will be a new record high for the company.

With respect to specific leasing activity during the first quarter, we executed a record 58 leases totaling over 123,000 square feet, achieving a same-space comparative rent increase of 5.3% on a cash basis.

Breaking that down between new and renewed leases, we executed 21 new leases totaling 46,000 square feet, achieving a same-space comparative rent increase of 8.5% on a cash basis. Additionally, during the first quarter, we executed 37 renewals totaling approximately 77,000 square feet achieving a same-space cash increase of 5%.

Looking ahead on our scheduled lease expirations between now and year end, we have 1 anchor lease expiring, which we are already in the process of re-leasing. In terms of non-anchored space, we currently have 127 leases scheduled to expire totaling 241,000 square feet.

Given the strong demand for space that we continue to see across our portfolio, we anticipate that we will release this space achieving positive rent growth consistent with our first quarter results, possibly better. Now, I'll turn the call back over to Stuart..

Thanks, Rich.

Underscoring our strong results for the quarter and what drives our ability to deliver consistently strong results quarter after quarter is the strong fundamentals across our core markets, including the broader economic trends, the demographic trends, and perhaps most important, the supply and demand fundamentals, specifically as it relates to our sector.

Since 2007, new supply has been very limited in the shopping center sector across our core metropolitan markets. Additionally, the barriers to entry are significant, so our markets are very protected. All of these fundamentals together are what's driving the strong demand for space from retailers.

We've been operating in these markets for over 25 years, and the demand for space that we are seeing today across our portfolio is among the strongest that we have ever experienced. Our biggest challenge today is meeting that demand, given that we only have a limited amount of available space in our portfolio.

Additionally, the lack of new supply, the barriers to entry, the retailer demand and an abundance of available capital is what's fueling the broader acquisition market. We've seen this before. Over the past 25 years, we have successfully bought and sold shopping centers to all acquisition cycles.

The key to our success is staying focused on our core strategy of carefully seeking out only the best off-market opportunities that often have unique circumstances, such as a seller in need of a quick transaction, like the great shopping center we just acquired in the Bay Area; or properties where we have a distinct competitive advantage given our market position and long-standing relationships, like the center we have under contract in Seattle,; or properties that have perceived near-term challenges that, based on our market knowledge, skill set and long-standing relationships, we see embedded value.

In short, we remain confident in our ability to continue broadening our portfolio, enhancing value and achieving our stated growth objectives. Now we will open up the call for your questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Paul Adornato with BMO Capital Markets..

Was wondering if you could, perhaps, put some numbers around your acquisitions this quarter.

I appreciate the discussion about how you add value, but what's the starting point?.

Well, with respect to the $112 million of acquisitions, which would be the acquisitions to date, the going in cap rate was about 6.2%. Looking ahead, there's good upside through a number of opportunities that we've identified during our underwriting process, which should increase our yield by about 100 basis points over the next 12 to 24 months..

Okay, great. And looking at the small shop rollovers in '15 and '16, you have nearly 20% of GLA rolling. Was wondering if you could provide an outlook.

Do you expect those rolls to be similar to recent experience?.

Paul, yes, it's Rich. We would expect that, that's going to be in line with what we're seeing right now..

And what's the reason? Is it a very, very strong market, or are your properties -- the properties that you're acquiring, do they have below-market leases in place?.

I think when you look particularly at the shop tenants, a typical lease is around 5 years. And if you look back about 5 years, those are definitely under-market rents that were being signed at that time. So yes, I believe it's primarily under market..

Okay. And finally, last question for me, do you have any update on Crossroads? I think last time we checked, you were in the process of getting entitlements..

Sure. Yes, I mean, in terms of Crossroads, we continue to pursue all the opportunities we have out there. The property currently can support a significant amount of additional retail office and multi-family. So over the next several years, we intend to capitalize on this, particularly as it relates to the retail component..

Okay.

Is there any -- do you think we'll hear more definitively this year on any big announcements?.

I think probably by the end of the year, there will be more information about what's going to come first, yes..

Our next question comes from line of Paul Morgan with MLV..

You mentioned how tight the markets are. And now that you're at 96.5% occupancy, I'm wondering, are there opportunities within the portfolio where you can add GLA? Obviously, Crossroads is one of them, but the tendency to take advantage of how tight the markets are getting in your markets..

Well, I mean certainly, there are -- we'll continue to look at building out pads with what we currently have and what we are going to be acquiring. We do have a project on the drawing boards up in Nevada, which could add another 80,000 to 150,000 square feet.

But outside of that, it's really the embedded value in terms of rollover with the tenant base or re-leasing any vacancies. But more importantly, staying ahead of that tenant base day in, day out..

And I mean, how is the -- I mean could you characterize any of that kind -- what your pipeline looks like going forward? You mentioned some off-market opportunities.

Are there any of your markets where you're seeing the most activity? We had one of your peers earlier this morning mentioned how low cap rate, sub-5 cap rates for a lot of the core products, but what your pipeline looks like?.

Sure. Pipeline is strong. Opportunities are across all our markets. And that in terms of cap rates, certainly, we are seeing a strong grocery-drug anchored assets trade in the low 5s, in some cases, even below that. However, that's not where we're buying.

So as I sit here today or as we sit here today, we're very excited about looking forward in terms of the growth aspects given what we see in our pipeline..

Okay, great. And then just lastly, on same-store NOI, that was up a little over 4%. Next quarter, you kind of hopped again to a tough comp year-over-year from what you posted in 2Q '13. And then it eases up again as you look into the latter half of the year.

I mean do I think that's -- should I expect that to affect kind of the way the quarterly same-store numbers appear over the year and kind of how you think you're going to end the year?.

I think on the last call, we indicated that same-center NOI growth was, for the year, would be in the 5% range. And we're on track to achieve that. In the first quarter, we had a couple of anchor spaces that were released that were -- there was a short window of downtime, and so that's likely impacted the rental revenue for the quarter.

So we feel we're on track with that 5% number..

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

Question for you guys. It sounds like it's going -- you're going to accelerate, or at least, get a little bit more aggressive with looking at dispositions.

And I was wondering, if there was anything, in particular, that those assets that you've earmarked as potential dispositions have anything in common, whether you just don't think there's any upside, they're in a market that you don't want to be in? What sort of commonality that this -- these assets in this bucket have?.

Very little internal growth. I mean we're still in the process of determining the non-core properties to market, but it's a bit early to talk specifics. But primarily it's just assets that don't have much internal growth, which aren't a lot, and assets that are non-core in nature. That's what we're targeting..

Non-core....

As Michael Haines articulated, we believe with what we're selling. And the warrants, the key here is that we won't be issuing any equity as we move through the year given our growth objectives..

Okay.

And can you give us an idea of what kind of cap rates you expect on the dispositions?.

We are estimating right now between 5.8 and 6.3..

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

Just a follow-up on RJ's question. What transition these properties? Because obviously, you guys create your own portfolio in the last few years.

What transitioned these from kind of acquisition targets to non-core in the short period of time? It's just filling up the space and nothing else, or is there something else special going on there?.

Well again, as I think I articulated, it's really assets that are non--- we have a couple that are non-core from the standpoint that they don't have a grocer.

This was probably some of the debt that we bought early on that we've created the value on now, as well as maybe 1 or 2 assets that when we look at the nature of the asset in terms of not much rollover in the short term, there isn't a lot of internal growth to grab because of a very high occupied assets..

Okay.

So there was quite early low-hanging fruit, but that's been plot to that kind of a theme?.

Correct, or we may have acquired it as part of a portfolio. So it wouldn't have been an asset we would have acquired at a single asset, but there was some growth there that we could capture..

And then as far as the development horizon, I mean I know in your guys' markets or kind of adjacent to some of your markets, is there any idea when development might start to make any sense again? Because it seems like we just don't even hear any sniffs of it. And it's just odd, the long horizon for potential development.

Can you speak to that a little bit?.

Sure. I mean, historically, development in our markets has been extremely difficult. And today, it may even be more difficult. But I mean I don't see any supply on the horizon right now in any of our markets. When I say our markets, I'm talking the high dense, high income metropolitan markets.

So I don't think development may ramp up, but it's going to take a long time. Even if it ramps up today in terms of entitlements, it could be 5, 7, maybe 10 years before this product actually comes to the market in terms of new supply. So I don't see development right now as any issue whatsoever in terms of impacting our markets..

Okay, that's helpful. Then one last question.

As you've been doing a lot of leasing and a lot of it in the small shop space, has there been any themes with types of uses or franchisees that you noticed that can help us understand who's taking a lot of the space?.

Sure. I mean we still see a lot of activity from the discounters in the mid-box space. And in terms of the shop space, it's still primarily restaurants and service type of operators that are filling that space..

Is that accelerating, or is it just kind of flat demand?.

I think it's definitely -- we're definitely seeing an increase..

Our next question comes from the line of Todd Thomas with KeyBanc..

Just following-up on the dispositions.

Can you just talk about the timing that we might expect? And then also, just to be clear, are there any asset sales in guidance?.

No asset sales in guidance, 1 closing in the quarter we're in right now, probably a bit later in the quarter. Then after that, I can't give you specifics. But that's what's on tap right now..

Okay. And then, Rich, thanks for the detail on the leasing spreads.

I was just wondering though given the lack of new supply and the demand that you're seeing in your markets, are you able to get better lease terms today, such as higher annual rent bumps or maybe shorter initial lease terms or anything else that you can point to?.

Definitely. I mean I think you can definitely start seeing the shift from a tenant market to a more traditional landlord market in terms of those concessions..

Okay.

So can you kind of quantify maybe with like rent escalators, for example, or what you're penciling in to new leases today versus what's sort of in the leases generally that you have in place today?.

Sure. I mean typically, on a shop lease, we're going to see anywhere from a 3% to a 6% annual increase on those rents. And a lot of the leases that are rolling are actually coming off of a flat rent. So in terms of rent increases, that's where we're at..

Okay.

And then I may have missed it, but did you mention at all what hit the other income bucket in the quarter?.

Yes, it's Mike. Other income that popped up this quarter for a couple of items. One was a lease termination fee as well as the loan repayment related to our Wilsonville development that we had completed back in 2012. I'd like to add that both of those were excluded from our same-center NOI analysis..

Okay. And then just lastly, a question for Stuart. Regarding the Vornado strip-center portfolio that the Newswire reported, ROIC was looking at, I was just curious if you could comment on that generally. And maybe how hard of a look the company took at that.

And then as a follow-up to that, I guess, having just moved the headquarters to the West Coast not that long ago, I was just wondering if ROIC would be interested in investing on the East Coast as the company was initially intended to?.

Well, I mean look, in terms of Vornado, we're well aware of the talk in the marketplace. Our company policy is such that we don't comment on market rumors. And in terms of new markets, no, we're focused in our backyard as we've been for the last 25 years.

But notwithstanding the acquisition market getting tighter out west, we are -- we're staying out west. We continue to find off-market, one-off transactions, and we're constantly looking at potential portfolios. So real estate's a local business, we're staying local..

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

Yes, the $250 million acquisition target, is that still in that number, or is it a gross number at this point? I mean....

It's in that number..

So you would acquire $300 million and then dispose the $50 million, and that would get you to $250 million?.

That is correct..

Okay.

And then I'm just curious, have you had any conversation with Cerberus-Albertson units on your Safeway locations?.

Yes. When I say yes, I have had some preliminary conversations. But nothing that I could really specifically identify in this call for you. I mean these are just ongoing, but I don't -- but nothing has transpired because the transaction has not closed..

Our next question is a follow-up question from the line of Jason White with Green Street Advisors..

Just 1 follow-up question on the 3% to 6% annual rent bumps that you mentioned before. Is that -- I mean is that typically at the 3% end, and there might 1 outlier in the 6% side? It's just a little higher than I've heard elsewhere....

Yes. I mean you're going to see the majority of them in the 3% range. You're not seeing them up, into that upper range as well. But you're right, absolutely, 3% is more of a typical run rate..

Okay. That's primarily just small shops, anchors have their own....

Yes, you're going to see maybe a lift every 5 years in the 10% range..

Right. Those anchors usually range, Jason, 1% to 2% per year..

Our next question comes from the line of Michael Gorman with Janney Capital..

Just a quick clarification, I'm sorry if I missed it, especially with the leasing activity in the second quarter, can you talk about the spread between leased and rent paying in the portfolio right now?.

Sure. The gap between leased and occupied as of March 31, the spread was approximately 3%. The economic spread between what was leased as of March 31 and what was billed was about 4.4%..

Great. And then on the warrants side, just a quick question.

Do you have any sense, or is there any way to tell the ones that have been exercised, are they shareholders now? Or have they exercised and sold the stock?.

Tough to tell. I mean there's no current reporting requirement from their position. If they've taken the position and hold it, that wouldn't be reported yet to our knowledge. But we expect it may be occurring..

And I'm not showing any further questions at this time. I'd like to turn the call back over to Stuart Tanz for closing remarks..

In closing, I'd like to thank all of you for joining us today. If you have any additional questions, please contact Mike, Rich or me directly. Also you can find additional information on the company's quarterly supplemental package, which is posted on our website.

And lastly, for those who are attending ICSC Convention in Las Vegas starting May 18, be sure to look us up. Our booth is in the same location as last year's, specifically in the South Hall at S490 N Street. We hope to see you there. Thanks again, and have a great day, everyone..

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