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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello and welcome to Retail Opportunity Investments 2018 second quarter conference call. Participants are currently in a listen-only mode. 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 the federal securities law. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the company can give no 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 risk 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 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. You may begin.
Good morning everyone. Here with me today is Michael Haynes, our Chief Financial Officer and Rick Schoebel, our Chief Operating Officer.
We are pleased to report that the company had another solid productive quarter. Building on our record leasing activity in the first quarter, during the second quarter, we continued to make the most of the strong demand for space across our portfolio. While in the first quarter, our activity largely centered around re-leasing and renewing anchor spaces, our activity in the second quarter was predominantly focused on re-leasing a number of in-line spaces where we not only achieved strong rent growth through our re-leasing initiatives but we also importantly continued to broaden our necessity-based tenancies.
With respect to acquisitions, we continue to take a cautious and patient approach. Accordingly, we have only acquired two shopping centers thus far in 2018, one of which we acquired in the first quarter and the other we acquired during the second quarter. Both are located in the Pacific Northwest, one specifically in the Seattle market and one in the Portland market. Both markets being among the very best sought after fastest growing markets in the country. Both acquisitions fit our portfolio perfectly. Both are stable, well leased properties. In fact, both are currently 100% leased. Both feature well-established supermarkets that are among the most highly productive stores in each operators' chain. Additionally, both properties offer opportunities for our team to enhance value going forward.
During the second quarter, we also acquired a freestanding prominent pad at one of our existing grocery anchored shopping centers. The pad features Starbucks along with Union Bank and several other spaces that we are already in the works to re-lease. Beyond these acquisitions, we continue to keep a close eye on the market. While during the first half of 2018, there was considerable hesitation among buyers and sellers across our markets, we are now starting to see more favorable conditions again for attractive off market acquisition opportunities. In fact, we are starting to look more closely at several interesting opportunities. However, we continue to take a cautious approach with our outlook and guidance and continue to assume that we will remain on the sidelines for the time being.
Now I will turn the call over to Michael Haines to take you through our financial results for the second quarter. Mike?
Thanks Stuart. For the three months ended June 30, 2018, the company had $72.3 million in total revenues and $23.8 million in operating income. GAAP net income attributable to common shareholders for the second quarter of 2018 was $7.3 million, equating to $0.06 per diluted share. In terms of funds from operations, the second quarter of 2018 FFO totaled $33.4 million equating to $0.27 per diluted share. Affecting FFO in the second quarter was the delayed timing of new tenants' rent commencements, driven in large part by the ongoing slow permitting process, particularly as it relates to our properties in the Pacific Northwest. We are taking six to eight months in some cases to get new lease permits fold as the local municipalities continue to be inundated with applications.
With respect to property level net operating income, on a same center comparative basis which includes all of the shopping centers that we have owned since April 2017, encompassing over 90% of our total portfolio GLA today, cash NOI increased by 2.8% for the second quarter of 2018, as compared to the second quarter of last year. In terms of our guidance for the full year, we remain on track both in terms of FFO and same center NOI to achieve our previously stated range. Where in the range we will end up is difficult to say at this point as the biggest driver is when new leases commence paying rent.
As Rich will discuss in a minute, we currently have about $7 million in annual rent relating to new leases signed but the rent hasn't commenced yet as we await the completion of the permitting process. If a good portion of that $7 million were to commence in Q3, then we could end up more towards the higher end of our range for the full year. However, if the bulk of it does not commence until the fourth quarter, then we could be more towards the lower end.
Turning to the company's balance sheet. At June 30, the company had a total market cap of approximately $3.9 billion with about $1.5 billion of debt outstanding, equating to a debt to total market cap ratio of 39%. With respect to the $1.5 billion of debt, the vast majority of that was unsecured. In fact, only $96 million was mortgage debt at June 30. Accordingly 94% of our portfolio today is unencumbered, which will increase further, as we will be retiring $9 million mortgage that matures at the end of the third quarter. And looking out further, in terms of our overall debt maturities, we continue to maintain a stable, well laddered schedule. Beyond the one small mortgage maturing at the end of the third quarter, we have virtually no fixed rate debt maturing for the next four years. And beyond that, our maturity schedule is balanced with only about 16% to 18% of our fixed rate debt maturing each year from 2023 through 2027.
In terms of our floating rate debt, our exposure is limited today to our credit line which had a balance of $192 million at June 30, equating to only 12.5% of our total debt outstanding. Our credit line maturity currently extends out for another three years from now with the ability to extend it additionally to 2022 to be coterminous with our term loan. With respect to equity, as we have vindicated previously, our goal is to issue between $25 million and $50 million of equity during 2018 with the proceeds going towards paying down debt. To-date, thus far we have issued roughly $2.6 million of equity through our ATM program.
Now I will turn the call over to Rich Schoebel, our COO, to discuss property operations. Rich?
Thanks Mike. As both Stuart and Mike highlighted, our portfolio continues to perform very well. Our key operating metrics, occupancy, same center NOI and same space rents, all continue to be strong. In fact, dating back to 2012, when we commenced reporting operating metrics with a portfolio of 34 shopping centers at that time, in the six years since during which time we have grown our portfolio substantially nearly threefold, we have achieved same center NOI and same space rent growth each and every quarter, 26 consecutive quarters and counting.
To take you through our specific results for the second quarter, starting with occupancy. We continue to maintain our portfolio lease rate above 97%, ending the second quarter at a very strong 97.5% leased, including having a record 41 shopping centers at 100% leased. Breaking the 97.5% lease rate down between anchor and non-anchor space, at June 30, our anchor space was a full 100% leased and our shop space stood at 94.5% leased. During the second quarter, we executed 42 new leases, all of them being non-anchor space, totaling 99,000 square feet, achieving a 20.4% increase in same space cash rents on average. And as Stuart alluded to, demand for in-line my space continues to be driven more and more by service-oriented retailers as well as organic health oriented restaurants.
And just to give a sense of the demand, in our Seattle market, we are seeing something that we have never seen before in our 20-plus years of operating the Pacific Northwest. Potential new tenants are coming to us and submitting unsolicited standing offers to lease space at our property that are currently 100% leased and don't have any space rolling for a long, over a year-plus in some cases. Needless to say, this works to our advantage and enhances our ability to negotiate new leases as well as our ability to proactively replace underperforming tenant base.
Turning to renewals. Just like we experienced during the first quarter, tenants continue to come to us early to renew their leases. During the second quarter, we executed 55 renewals totaling 167,000 square feet and just as with our new leasing activity, the bulk of our renewals centered around in-line shop spaces. Overall, we achieved a solid 7.6% increase in renewal cash base rent on average, which includes one anchor renewal where a longtime tenant simply exercised the renewal options that had a predetermined contractual renewal rent that was only a nominal increase and is well below the current market.
In terms of the economic spread between build and lease space, at the start of the second quarter, the spread was about 3% representing approximately $6.8 million in additional annual rent on a cash basis. During the second quarter, tenants representing about $1.7 million of that incremental $6.8 million started paying rent, of which $290,000 of the $1.7 million was received in the second quarter. Taking the remaining $5.1 million together with our leasing activity during the second quarter, as of June 30, the spread was 3% representing approximately $7.1 million, the bulk of which we expect will come online as we move through the second half of 2018.
Finally, looking ahead, based on the ongoing demand for space together with our portfolio of strong location attributes and necessity focused tenant roster, we are confident in our ability to continue delivering strong portfolio results.
Now I will turn the call back over to Stuart.
Thanks Rich. In addition to proactively managing our portfolio and tenancies, as we have always done and has always been the foundation of our success, during this past quarter, we have begun to explore densification opportunities across our portfolio. The long-term goal being threefold, to capitalize on our strong highly sought after infill locations, to enhance the long-term competitive position of our shopping centers and to drive the underlying intrinsic value of our portfolio. A growing number of the various municipalities that we interact with regularly through operating our portfolio are being increasingly proactive with us in exploring the feasibility of adding multifamily to a number of our properties to address the growing demand for quality housing at prime locations such as ours.
With that as a backdrop, we are in the process of carefully examining each of our properties in the specific community profile and needs in which they are situated to determine the properties and communities that are best suited for adding a multifamily component and what the resulting potential financial impact could be. Thus far, our preliminary analysis has identified 20 of our properties where the demand, the ease of execution and the economics all look favorable. In fact, by our estimation, it could possibly increase the intrinsic value by as much as $400 million potentially, just on these 20 properties alone. Going forward, we will begin to carefully examine how to best go about potentially realizing this value as well as exploring other mixed-use densification opportunities across our portfolio.
Now we will open up the call for your questions. Operator?
[Operator Instructions]. Our first question comes from the line of Jeff Donnelly from Wells Fargo. Your line is now open.
Good morning Jeff.
Good morning Stuart. Maybe just jumping in on the diversification point that you had just made, just I want to clarify. Concerning those 20 properties and the $400 million, is that $400 million of investment opportunity? Or are you saying that's value that can be created over and above whatever the base of investment is?
It's the value over and above.
And I guess how significant of an investment would that be?
Well, we are in the early stages of exploring. A lot of the analysis that has been done and then how fast we pursue it, our strategy could be very well different for each opportunity depending on the specifics. The process and the plan will take a bit of time, Jeff. So I would rather wait and provide some more detail as we move into the next quarter.
That's okay. And on the capital front, I think it was back at ICSC, you were expressing maybe interest or saying maybe there was some interest in issuing equity maybe to explore acquisitions at some point. Your share price is higher since that time period. I wasn't sure if your interest in issuing has intensified and is it fair to say that if you did, the use of proceeds would be acquisition?
The answer is yes. We are monitoring the market and we certainly are looking to, over time, put some equity into the balance sheet. But we will also going to probably sell some assets as we go forward. So it's really a combination of doing both. And as we move forward, depending on the velocity on both sides of that equation, then we will look at the opportunity to keep growing the company as well as looking at market conditions.
And maybe one last one, maybe for Rich is, just looking at the shop space deals, like the non-anchored deals that you guys have signed year-to-date, I think it's about $28 per square feet and change, which is pretty much in line with the expirations that are coming up in the rest of 2018 and 2019. I guess, one, I am just wondering if you think that the deals that you signed are representative of market for where the expirations are that's coming up? I know there's a little bit of a mix issue there. I am just curious, especially since the non-anchor rents you signed this year are a little lower than what was signed at the same time last year? I know it's apples-and-oranges, but if you could sort of point to maybe a deceleration in shop rents? I was just curious if I am reading that right?
No. We don't think so. I think that the leases that we see coming up over the next 12, 18 or 24 months are all still, on average, below market and we still expect to have good same center rents in terms of that.
Okay. Great, guys. Thank you.
Thank you.
And our next question comes from the line of Christy McElroy from Citi. Your line is now open.
Good morning Christy.
Good morning all. I just wanted to follow up on Jeff's question on the densification analysis. You mentioned next quarter maybe providing a little bit more detail. I am just trying to get a sense for how much additional detail would you expect to provide to us, to the investment community? You threw out the $400 million number. Wondering, how long we should wait to get more details on that to be able to do our own analysis? And are you still thinking about this as sort of land contribution or outright sales to JV partners with little incremental capital invested on your part?
We are exploring all of those in the coming quarter. We are very excited in terms of what we see. There are opportunities to certainly begin entitlements on a number of some vacant land as well as some assets that we have in terms of the process. It's a bit difficult at this point to tell when we are going to provide all of this color, but we certainly will have more to talk about as we move through the next quarter. And more importantly, we feel that the amount of detail that's gone into this analysis makes us pretty comfortable in terms of what we can achieve.
Okay. And then just with regard to same store NOI guidance, thanks for the color on the commencement timing in the second half. But how should we be thinking about any other major drivers as we think about same store NOI growth? And based on where you are today and where we are in the quarter, I think you mentioned that if the leases were commenced this quarter, that you would be towards the high end, but I would think that you would have a little bit more visibility on that at this point. So should we expect, are you saying like you are guiding more towards the mid-point at this point with a chance towards the lower end based on where we are in the quarter?
Well, we just started the quarter. And really the anchors that we took offline late last year, we have made good progress in terms of construction. So right now, it does look like those anchors will open during the quarter and start paying rent.
I don't know if you want to add anything to that in terms of our same store NOI guidance?
Well, I was going to just add that our Q1 and Q2 same store actually came in stronger than we had actually predicted in our own internal modeling. And our modeling actually showed the second half of the year being stronger than the first half of the year. So we are still expecting them to ramp-up in Q3 and Q4 to bring that up well into that range.
Okay. So even if these leases come online in August, September, you are still looking at the potential for the upper end?
Yes.
Okay. Thank you.
Thank you.
Thanks Christy.
And our next question comes from the line of Todd Thomas from KeyBanc. Your line is now open.
Good morning Todd.
Hi. Good morning. Just following up there on the same-store NOI growth and your comments, Mike. So the guidance was 2.5% to 3.5% for the year. You are saying that you did a little bit better so far in the first half relative to your expectations, but there were delays in permitting and commencements, I guess, that you talked about. So are you saying that you are seeing a larger acceleration than you previously expected now as a result as you think about the full year? Or are you tracking sort of inline with expectations?
I would say we are tracking more inline. You have to remember, in our case, because we have been really acquisitive over the last few years, our year-over-year pool is a slightly smaller pool than the quarter-over-quarter pool. So I am thinking that one of the centers that we have that we got the anchor repositioning, I am not sure that won't be missed in the year-over-year pool. So I think we still feel pretty comfortable with the range we have set out.
Okay. And then thinking about 2018 in general, right, growth has slowed somewhat, just particularly I guess relative to the company's growth over the last six or seven years or so during the cycle here. Do you expect that to sort of re-accelerate on a full-year basis going forward into 2019 when you look at the commencements in the signed but not yet occupied space and all of that re-anchoring and so forth? Is that sort of what the model is showing here?
Well, it's hard to predict because you are talking about the acquisition market. It's certainly also we are very commensurate of the balance sheet and the levering of that balance sheet is important to us, both in terms of issuing a bit of equity and selling some assets and paying debt down our balance sheet. So it really is a situation where we are going to continue to monitor the markets, monitor our balance sheet and if the right opportunity comes along, we could be inquisitive in terms of the second half.
Okay. And Stuart, along those lines actually, so you mentioned that you are seeing some interesting acquisition opportunities starting to surface. Can you just you elaborate on that comment? Describe what you are seeing out there?
We are seeing we continue to work on potentially some more OP transactions. Those seem to be moving now at an accelerated pace along with some interesting off market opportunities in primarily both North and Southern California. These are things that, as you know, take a lot of time and obviously a lot of this through relationship. So it looks like the second half could have a couple of exciting sort of situations out there that hopefully will come to fruition. But nothing I can articulate in detail at this time.
So from a product standpoint, nothing outside of what you have historically looked to invest in, right? So of grocery anchored, necessity-based, this isn't something, when you say interesting, that's more high-yielding or big box or anything like that?
No. This is dominant grocery anchored properties in affluent dense markets in the primary markets on the West Coast.
Got it. Thank you.
Thanks Todd.
Thanks Todd.
And our next question comes from the line of George Hoglund from Jefferies. Your line is now open.
Hi. Good morning guys.
Hi George. How are you?
Just two questions for me. One, just what's your updated view of the drug store sector and your exposure there? And then two, are there any notable changes to the tenant watchlist?
Sure. This is Rich. I think you are probably focused primarily on the Albertsons and Rite Aid transaction. As we have previously discussed, we think that that merger is going to be a positive as the combined company's credit is going to be, profile is going to be much stronger. We currently have 20 shopping centers that either have an Albertsons' Safeway or Vons in them and those only accounts for approximately 5.7% of our base rent. And we have 14 shopping centers with Rite Aid in them and that accounts for 1.6% of our base rent.
Of the 20 shopping centers that have the Albertsons or Vons in them, only five of those currently have drug stores in them. So we see this as an opportunity where potentially Albertsons could bring Rite Aid to the shopping center, either within the existing footprint or as an additional space in the center. Our other drug stores continue to perform very well.
And in terms of a watchlist, they are the names that you see out there but primarily we don't have a lot of exposure to anyone that is in those categories.
Okay. Thanks for the color.
Thank you.
And our next question comes from the line of Wes Golladay from RBC Capital Markets. Your line is now open.
Good morning Wes.
Hi Stuart. I want to go back to that densification, that $40 million is a very large number. So how do you balance the street having a full understanding and appreciation of that opportunity versus maybe doing some OP unit deals or equity later on?
Well, the two are totally separate things, right. Obviously, issuing OPs is more in line with our traditional business of acquiring assets. The densification that we spent a lot of time on has several interesting elements. One of them is, we do have some vacant land. Vacant land gives us the ability to move through the entitlements and start building quite quickly. And that's probably a third of the valuation or about 25% of the valuation. So that could come very quickly. But more importantly, it's tough to really give much color yet on each individual properties. But the densification is totally stuck from our ongoing business. And more importantly, we will be looking at various structures that relates to that densification because at the end of the day, it isn't our business and the risk profile does changes if we decide to go obviously build the multifamily out, which is not our expertise. So there is some great opportunities here for the company in terms of realizing value and we will see how things progress. We are working very diligently on this right now. And again, we will have more to talk about next quarter.
Okay. Maybe I can clarify the question a little for you. Just saying that if you were to do an OP deal with someone you want to buy an asset from and you have this embedded value that might not be reflected in your stock today that may get realized may be over the next few quarters as you lay out your densification plans, so maybe you get some appreciation in your stocks. If you were to do an OP deal today, do you think the buyers would have an appreciation for that densification opportunity that the Wall Street might not appreciate at the moment and would you still look to do an above market OP deal?
Yes. The answer is yes.
Okay. And then maybe going down to, I guess maybe some bigger moving parts for guidance, maybe not so much for this year, but looking out for next year. Given that $7 million of income to roll through the NOI growth line, is there any major recaptures that you see coming up?
Not so much recapture, but we do have a couple of anchor renewals coming up that have very large mark-to-market that aren't yet finished but should get finished shortly. So that will continue to drive our cash spreads, either at the levels they are at or actually move a bit higher.
I don't know if you want to add to that?
There are other recapture opportunities that we start working on that are hard to predict in terms of timing because we typically like to have our replacements lined up before we are taking back the space. So there are things we are working on that have some really nice lifts, but nothing that we see happening imminently but there are definitely some opportunities out there.
And we have identified another 11 pads to build in our shopping centers and we are on our way on a number of those right now. So that's some incremental NOI that will be coming that we haven't accounted for yet.
Okay. And then looking at $4 million pad acquisition this quarter, did that do anything or activate anything else at the property? Or is it just more of an opportunistic play?
That was really the --
We are reassembling the property. The prior owner had sold off a key pad in the shopping center. We like to control the windows to our shopping center. We don't like to be competing against some other owner within our shopping center for shop rents. This space has a very prominent location. And some space that was really being underutilized, we are currently cleaning the space up and have a lot of interest in it and getting substantially more rent than they were prior.
Okay. Thanks a lot for all the questions.
Thank you.
Thanks.
And our next question comes from the line of Vince Tibone from Green Street Advisors. Your line is now open.
Good morning Vince. Or Early morning.
Can you provide a little bit more color on deleveraging plans? Is there a leverage level that you are targeting? And can you discuss or provide more detail on any plans to sell assets this year?
Hi Vince, this is Mike. So as I mentioned in my prepared remarks, our plan is to issue $50 million of equity on year-end and use those for paying down debt. We hopefully expect to generate $10 million to $15 million of free cash flow during the second half of the year which we will also use to reduce that. Importantly, our balance sheet is pretty solid. Those proceeds will obviously help move our net debt to EBITDA level down.
As far as asset sales, I will let Rich on that.
Sure. We are progressing on asset sales. So I think as we move into the balance of the year, I think we will have some nice things to talk about there. And I think that will help along with what Mike is articulating to delever the balance.
Okay. So there is no debt to EBITDA level you are targeting or trying to reach by year-end? It seems like it's a more fluid on approach then?
I wouldn't say there is a specific target number. I would like to [indiscernible] for sure. We will work towards that.
Okay. Great. Thanks. And then one more for me on the acquisition side. Is that current patience you are showing on acquisitions more driven by your current public cost of capital or just cap rates still being very aggressive in your markets?
It's a combination of product. There is some product on the market, but it's really some of the product we have seen over the couple of years is being recycled back into the market, nothing too exciting. As I would tell you the first half, but we are starting to see some interesting off-market acquisitions come our way very recently along that our cost to capital. It's really both.
All right. It makes sense. Thank you. That's all I have.
Thank you.
And our next question comes from the line of Michael Mueller from JPMorgan. Your line is now open.
Good morning Mike.
A question on the OP units. I think you largely touched on that. I guess, Mike, was there anything abnormal in the quarter in terms of the epical run rate, maybe something that was one-time in nature?
Not in this quarter and looking back to Q1 we had a large termination fee from our properties. And in addition to that, we had a couple of nonrecurring, FAS 141 additive adjustments that were in Q1 that didn't repeat obviously in Q2. That's the big driver.
Okay. But nothing really in Q2. Okay. That was it. Thank you.
Thank you Mike.
And our next question comes from the line of Chris Lucas from Capital One. Your line is now open.
Hi Chris. How are you?
Good morning guys. Just a couple of quick questions. I guess, Stuart, just on the asset sales that you described. Would you be looking at anything to sell in any of your core markets? You had conversations about selling stuff in Sacramento for a couple of years now as well as I think Tahoe? Just curious as to is there is anything in the core markets that you would be looking to potentially sell?
Yes. It's a combination. Right now we are moving forward, both in Sacramento and Tahoe as well as in some of our core markets as well.
Okay. And then I guess I am curious about the permitting comment that was made. I guess I am just trying to understand, is that the permitting getting worse? Or was it always been tough? So I guess I am just curious as to, is this more recent phenomenon or just consistency that's been in place for the last several years?
It's Rich. I think it's got a touch worse. The municipalities are just inundated with permit requests. The city of Seattle, you can't even bring in a permit. You have to request an appointment six to eight months out. So we have been very proactive by requesting those appointments ahead of time, even when we don't necessarily have a project in hand because we know we are going to have a project. So it's about being very proactive. We employ expediters when that would help the process. The cities are just shortstaffed in terms of moving these things through the process.
And is the expediters helping it any more? Or does that process sort of also been exploited as fully as it possibly can?
They are very effective in certain municipalities. They are not so effective in others. And that's why we employ them selectively where they can add value.
Okay. And then, Rich, while I have you, I guess just as it relates to the mix of the lease to commence spread in terms of the revenue, is the mix mostly in the shop space arena? Or is there any large sort of anchor revenue that could swing, sort of be more important in terms of the timing than the rest of the bucket?
The majority of it's going to be shop like a lot of what our leasing is recently, but there are couple of anchor deals within there that have some pretty big rents attached to it.
Okay. And I guess just on that spread, you guys have been sort of running at this rate for a little while. Is it possible to bring that down? Or is it just sort of, again all these factors that come into play that sort of create this consistent sort of $7 million lease to commence rent spread?
Yes. I think it's down a touch going into 2018 here. We are always going to be adding to the bucket but we do see that it will come down, although I don't know it will ever be zero.
Look, we are continuing to play offense, Chris. And as you probably know, when you have got such a highly occupied portfolio, you can aggressively stay ahead of those renewals. So that's the advantage of having an operating platform that again is playing offense or still playing offense. That's what will continue to just drive our cash spreads probably higher as we move through the year, the fact that we stay so far ahead of our tenant base.
Okay. And then what my last question, Stuart, just on the 11 pad sites. I guess I am just curious as to what the total rent opportunity is there? And how much of that is already signed up? Where are you in terms of the process for whether it's the permitting, the construction, the delivery commencement on those 11?
We are making good progress on a number of them. Unlevered yield between 11% and 12%, $21 million spent in capital in terms of the numbers. But those titles do take time. As Rich said, you have still got to get them entitled.
About half of them are entitled and ready, basically about putting shovels in the ground as some are under construction, some are a touch further out. But this is real and there is leases on the ones that are ready to go. And so we feel very good about it.
Okay. Great. Thanks for taking my questions this morning.
Thank you.
Thanks Chris
And our next question comes from the line of Craig Schmidt from Bank of America. Your line is now open.
Good morning Craig.
Good morning Craig.
Good morning. On your densification review, you mentioned ease of execution. I was wondering if this would include a community that had strong, nimby perspective or maybe a slow-moving municipality that might be giving it low priority making that execution a little different? Or is it just physical that you are talking about?
Well, there is a huge housing shortage in our markets. That I think is helping this process in a big way. As I mentioned in my prepared remarks, we have actually had these some of the municipalities we operate in reach out to us.
Yes. I think to your question about the adjacent property owners having some pushback about this, we are already talking about commercial property. So there, at some levels, it's considered to be an upgrade from having a shopping center with deliveries at three in the morning, having residential building next to them, is actually considered better. So are you always going to have a gadfly out there who is going to show up in every city council meeting? Probably. But that's that part of the process of working through to get those entitlements.
Okay. So it really isn't a factor then? I guess what you meant more by ease of execution is like they can land where you could move more quickly.
Correct.
Okay. Thanks. Thank you.
Thanks Craig.
And our next question comes from the line of Christy McElroy from Citi. Your line is now open.
Hi. It's actually Michael Bilerman.
Hi Mike. How are you?
Fantastic. So let's come back on the $400 million. So it sounds like you said 25% or $100 million is pure land sales where ROIC would get the immediate $100 million of proceeds. So what does the $300 million remaining represent? And I assume this is all on an undiscounted basis in terms of timing, but just can you give a little bit more color surrounding the $400 million? Your entire portfolios is only worth $3 billion to $5 billion. So it's not an inconsequential number and so can you give a little bit more color around that?
You know what, Mike, I would love to give you kind of more detail, but the best thing for me to do is to probably get a bit more articulate this is a bit more and give the detail a bit more as we move through some of this process. Some of the entitlement process has already started. And in fact, one of the properties is senior housing that we have listed among the 20. That part is actually under construction and will be done and open and in our numbers at the beginning of 2019. So I mean, the good news is that some of these properties are actually in process right now as we are sitting here. Others are going to require a lot more work. I would love to break down this detail for you, but what I would prefer to do is give you a lot more color on this as we move through the next several quarters. And at that point I will have some real things to talk about it.
And I guess I am not looking exactly for the details on 20 different projects. What I am looking for is, you have thrown out a $400 million number which is not a small number, right? It's a few dollars share. How is that value creation on projects? Is that pure land sales? Thinking of that $400 million, is that all ROIC share? Is it the total value created, some of which obviously has to go to a partner? There is a lot of different variables. I think if you are go throw out a number like that, you have got to be able to at least put some guardrail in terms of what it is, right. So out of the $400 million, $100 million represents land on these projects, another $100 million represents potential residential projects that could be started in three years and we are valuating, contributing our basis at least from this and the other developers is going to spend $200 million. Based on that, we think the value creation is $50 million in that piece. So just trying to give us the different components of the $400 million so that the street can think about to value that or how to treat that, I think, is thoughtful, if you are going to throw something out that large?
Sure. Well, let me try to get very generic here and then I think this is basically I think at this time all we would like to say, in doing the analysis, obviously we looked at what we are removing in the centers that we are removing some in-line space. We took that NOI off-line and the value associated with it. Then we looked at what we are building in terms of the component of multifamily. And we did very detailed performance in terms of building that multifamily. And in doing so, we looked at the NOI associated with that. We took affordable housing into consideration in terms of the performance and other things. And then applied a value to what that would be worth once it was done. We then came up with a value after we stripped out the value that we are taking out and the value that we are creating and that's how we get to what the net value creation. Hopefully, this is helping you.
In terms of cost and other things, the one thing that, the reason why I don't want get into so much detail is because over the next several months, we will be visiting structure on a number of these opportunities and a structure can be many different things, as you know. And that's why we would prefer to wait to give you some very concise details because I think over the next several quarters, whether we create a joint venture and bring in a developer to do this with us, whether we move forward and sell the entitlements and end up doing nothing, there is all kinds of opportunities here in terms of finding and hopefully getting to that value. But I would prefer to give you these details as we move through the process because over the next couple of quarters, we will be hopefully sort of bringing a lot of this forward in terms of structure. And then I can give you those details with a lot more clarity.
Right. But arguably, value creation is all about risk and return depending on where you are, right. If you are doing something on yourself and you are going to be able to build it to a better yield and get that value creation, if you are selling that to a third-party, that third party who is taking on the risk of development is going to want a higher return, ergo you have reduced your risky because you are selling off the entitlement, you are selling off the project. Your value creation to ROIC is less. So that's the scope of the $400 million, if in fact it's the way you described it is the potential full value, assuming all of your risk profile taking on all the developments, the end result may be something very different if you end up contributing effectively the land to a third-party. And so that's where I was trying to get at in terms of really trying to grasp what this $400 million represented?
You are right in terms of how you are describing that. But again I will prefer to give you more of those details as we move forward because, again, as we move through and discuss structure with the operators and move the entitlement process forward on a number of these locations that will give us the flexibility and give us the ability to really fine-tune what that end value creation is going to end up looking like.
Maybe if I could just add to that. I think as Stuart was articulating, we are in the early stages of this process. We have taken a very high level look at the entire portfolio, identifying the properties that have the attributes that would allow for densification. Some of places, it's going to be direct land sales because it's raw land, that's very straightforward. In other cases, it's going to be selling the air rights similar to what we are working on in Phase 2 up at the Crossroads. And in other cases, we may be taking some retail off-line. And so I think it's just premature for us to get into those specifics. We are highlighting the broad opportunity and more specifics to come.
How do you think Costa-Hawkins in California could play into some of the value that you would want to create given the large majority of some of these projects are in California?
Some of them are in Seattle. Some are in Portland. And yes, they are both in Northern and Southern California. We are watching, obviously, that very closely, Mike. And because this is a brand-new product, I don't know whether that impact will be that dramatic.
When typically rent control is enacted, it typically stymies new development because you can't push through rent increases going forward.
You are right.
But obviously that could impact some of the value and the timing of achieving some of this.
Yes. Go ahead.
So last question. Just in terms of, you made a comment in your opening remarks, something you have seen in your history on the West Coast was retailers coming to your sites and coming to you to lease space. Maybe if you could give a little bit more color around that? Is that the anchor? Is it in-line? Is it national, regional, local? Are they coming to you with lease terms? What are the rents that they are suggesting relative to in-place? Just a little bit more meat behind the bones on that.
Sure. This is Rich again. I think it's primarily regional and national tenants. Obviously, we have always been very proactive in keeping in front of the tenant base about pending opportunities and the rest. I think the difference here and the nuance here is where people are coming to us and telling us the center that they want to be in and what they are willing to pay and the tenants being much more proactive in terms of trying to secure the locations and the spots they want to be. While we have always had the proactive conversations with these tenants, this is unsolicited people coming to us, making offers where we don't even necessarily see an opportunity yet but it gives us that ability then to engage with our tenant base to see where we can fit these people in.
Great. Thanks.
Thank you.
And at this time, I am showing no further questions. I would like to turn the call back to Stuart Tanz for any closing remarks.
In closing, I would like to thank all of you for joining us today. If you have 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. Thanks again and have a great day everyone.
Ladies and gentlemen, thank you for this participation in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.