Retail Opportunity Investments Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Retail Opportunity (ROIC)

Retail Opportunity Investments (NASDAQ:ROIC)

Q3 2013 Earnings Call

October 31, 2013 12:00 pm ET

Executives

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

Analysts

Paul E. Adornato - BMO Capital Markets U.S.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

R.J. Milligan - Raymond James & Associates, Inc., Research Division

Jason White - Green Street Advisors, Inc., Research Division

Michael P. Gorman - Janney Montgomery Scott LLC, Research Division

Operator

Welcome to Retail Investments Third Quarter 2013 Conference Call. [Operator Instructions]

Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of the 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 risks and factors as well as more information regarding the Company’s financial and operational results. The Company’s filings can be found on its website.

I would now like to introduce Stuart Tanz, the Company's Chief Executive Officer. Please go ahead.

Stuart A. Tanz

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

We are pleased report that the company posted another very strong quarter. We continue to broaden our portfolio through off-market acquisitions, enhance value through our management and leasing initiatives and strengthen our financial position.

Starting with acquisitions. 2013 is shaping up to be a record year for the company. Thus far, we've acquired 10 grocery-anchored shopping centers, totaling $368 million, including $154 million acquired in the third quarter. Our most notable acquisition in the third quarter was Crossroads Shopping Center in Seattle, which without a doubt, is considered to be one of the best and one of the most dominant shopping centers in the Pacific Northwest.

You may recall that back in 2010, we made our initial investment in Crossroads, acquiring a 49% interest. While a long-standing strategy is not to pursue joint ventures, we made an exception with Crossroads for several key reasons. First, it's truly a one-of-a-kind shopping center. Second, we had a long-standing relationship with the owner, dating back to our days at Pan Pacific. So we were very comfortable of being able to work well together as partners. And third, our initial investment came with the right to acquire the remaining 51% interest.

When we made our initial investment in 2010, we immediately began to proactively manage and lease the property in conjunction with our partner. In only 3-years time, we have significantly enhanced the underlying value through a number of remerchandising and retenanting initiatives, along with increasing the occupancy from 87% in 2010 to over 99% today. Needless to say, we are very pleased to now own Crossroads 100%.

Looking ahead, we believe the shopping center has tremendous upside potential through not only continuing to remerchandise and retenant expiring space, much of which is significantly below market, but also by capitalizing our additional development opportunities at the property. We consider this asset, given its long-standing prominence in the marketplace and its growth potential going forward, to be the flagship of our Pacific Northwest portfolio, which now totals over 2 million square feet. Based on the relationship that we have successfully established with our partner at Crossroads, we recently acquired from our partner, another truly exceptional shopping center, Five Points Plaza, which is a beautiful irreplaceable shopping center located in Huntington Beach, California. It is considered one of the key dominant shopping centers in the heart of Orange County and features Trader Joe's as the primary anchor tenant. This location is among Trader Joe's best performing high-volume stores in their portfolio. Like Crossroads, the Five Points center is fully leased. And just like Crossroads, much of the existing leases are well below market, so there's excellent upside potential going forward.

In connection with the Crossroads and Five Points acquisitions, our partner, Ron Sher, elected to take the majority of his consideration not in cash, but instead, Mr. Sher chose to take common equity in the company in the form of operating partnership units. In total, Mr. Sher received approximately $46 million in units based on a valuation of $14.11 per share on average. Needless to say, we valued Mr. Sher as a real estate partner, and we are now very pleased and value having him as a shareholder in the company.

Along with acquiring Five Points, we just recently acquired another exceptional prominent grocery-anchored shopping center in Huntington Beach, Peninsula Marketplace. This property was part of the portfolio transaction that we secured in December last year and represents the fifth shopping center that we've acquired stemming from that one transaction. And by owning Peninsula Marketplace together with Five Points Plaza, we now own 2 of the primary grocery-anchored shopping centers that serve the Huntington Beach community.

In addition to broadening our portfolio in Seattle and California markets, we also added another exceptional grocery-anchored shopping center to our Portland portfolio, where we now own upwards of 1 million square feet. Our latest acquisition in Portland is specifically in West Linn, where we already own one of the dominant grocery-anchored shopping centers in that market. Our latest acquisition features a new Walmart neighborhood market. And similar to Huntington Beach, we now have a strong presence in West Linn owning 2 out of the 4 primary grocery-anchored shopping centers that serve the community.

Our third quarter acquisitions exemplify our ability to capitalize on our market knowledge and long-standing relationships to cultivate rare, off-market, direct-to-owner opportunities to acquire exceptional, dominant, grocery-anchored shopping centers and deepen our presence in among the strongest, most sought-after markets on the West Coast.

Turning to property operations in our balance sheet, as Michael and Rich will discuss, we continue to advance our business during the third quarter, increasing occupancy, achieving solid growth in terms of same-store net operating income and releasing spreads, and we significantly enhanced our debt facilities and lowered our borrowing costs.

With that, I'll turn the call over to Michael to discuss the company's financial results. Mike?

Michael B. Haines

Thanks, Stuart. Starting with our income statement for the third quarter of 2013, the company had $27.1 million in total revenues and operating income of $6.5 million, as compared to $18.9 million in total revenues and operating income of $3.1 million for the third quarter of 2012.

In terms of same-centered net operating income for the seventh consecutive quarter, same-centered NOI again increased specifically by a solid 5.6% for the third quarter on a cash basis.

With respect to net income and funds from operations, during the third quarter of 2013, the company had net income of $25.3 million, equating to $0.34 per diluted share, as compared to $2.6 million or $0.05 per diluted share for the third quarter of 2012.

FFO for the third quarter of 2013 was $35.4 million or $0.48 per diluted share, as compared to $10.2 million or $0.19 per diluted share for the third quarter of 2012. The substantial increase in net income and FFO was largely attributable to the GAAP accounting treatment of the Crossroads acquisition. Given that we had previously owned a 49% interest in Crossroads, our interest was reflected in our historical financial statements as an unconsolidated joint venture. In connection with acquiring the remaining 51% interest in the third quarter in accordance with GAAP, the company recorded a onetime noncash gain on consolidation of $20.4 million.

Turning to our balance sheet at September 30, the company had a total market cap of approximately $1.5 billion and $502 million of debt outstanding, equating to a conservative debt to total market cap ratio of 33%.

Of the $502 million of debt, approximately 75% of that is unsecured debt, including $175 million outstanding on our unsecured credit facility.

In terms of debt maturities, we do not have any debt maturing through the end of 2013. Looking out further, of the $502 million of debt outstanding, only about 20% of that matures during the next 3 years.

Additionally, for the third quarter, the company's interest coverage was a strong 4.5x. As Stuart mentioned, during the third quarter, we expanded our unsecured debt facilities. Specifically, we increased the borrowing capacity on our unsecured credit facility from $200 million to $350 million. We also expanded the accordion feature on the line, whereby the capacity can now be increased up to $700 million. Equally important in light of the company being awarded investment grade ratings from both Moody's and S&P, the borrowing spread on the credit line was reduced to a new low for the company of 110 basis points. Since the credit line was first put in place 3 years ago, we have successfully lowered the borrowing spread by approximately 40%. Additionally, the maturity date on the credit line now extends out 4 years to September 2017. And lastly, taking into account the accordion features on both the credit facility and on our existing unsecured term loan, the combined capacity is now $1 billion.

With respect to the company's warrants, as it stands today, approximately 87% of the warrants have now been retired. Thus far, the company has received a total of $223 million in equity proceeds from warrants that have been exercised to date, including $2.4 million received during the third quarter. And as we've discussed in previous calls to help balance from near-term impacts from the warrants being exercised, we repurchased a portion of the warrants as various opportunities arose.

In total, we repurchased approximately 16.6 million warrants including approximately 700,000 warrants repurchased in the third quarter and 4.4 million repurchased in October. Looking ahead, we do not anticipate repurchasing additional warrants. There are only 6.3 million warrants that remain outstanding, which will expire in less than a year from now. In terms of our FFO guidance for 2013, having achieved $0.85 through the first 9 months, we currently expect FFO per diluted share to be between $1.03 to $1.05 for the full year. In other words, we expect FFO in the fourth quarter to be between $0.18 and $0.20 per diluted share, which takes into account anticipated debt refinancing costs, as well as all the warrants that have been exercised thus far.

That said, as we have stated in the previous calls, our guidance does not make any assumption as to additional warrants being exercised going forward.

As I mentioned, there are approximately 6.3 million warrants outstanding, which expire in October 2014.

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

Richard K. Schoebel

Thanks, Michael. At September 30, our portfolio totaled 51 shopping centers encompassing approximately 5.5 million square feet of gross leasable area geographically diversified across the West Coast.

Specifically, 20 of our shopping centers are located in Southern California, representing 37% of our total GLA; 12 properties, or 23% of our total GLA, are located in our Northern California region; 9 properties, representing 22% of our GLA, are located in the Seattle market and 18% of our total GLA is in the Portland, Oregon market where we currently own 10 shopping centers.

As we discussed in our last call, we have seen a considerable increase in retailer demand across each of our core markets this year, coming from a broad range of large national retailers, as well as regional and local tenants. Needless to say, we have been working very hard to capitalize on the increased demand and as a result, our overall portfolio occupancy has risen to 95.3% as of September 30.

Just to highlight a few examples of how we are making the most of the increased demand, at our Canyon Crossing property in Seattle, which we acquired just this past April, we have already substantially increased the occupancy from 70% at the time we acquired the newly developed center to 84% as of September 30, to over 90% today. And with pending leases we currently have in hand, the property could surpass 95% by year end. Similarly, at our Bay Plaza Shopping Center in San Diego, which we acquired in the fourth quarter of last year, we have significantly increased the occupancy there as well, from 86.9% at the time we acquired the property to 97.4% as of September 30.

Additionally, as part of capitalizing under demand, we have also remerchandised certain shop spaces to improve the tenant mix and enhance the underlying value. A good example of this is our Heritage Market Shopping Center in Portland. We recently relocated a number of shop tenants at the property in order to make way for combining those spaces with the remaining adjacent available space to accommodate a new larger national tenant. As a result, not only did we improve the tenant mix of the shopping center, which in turn will generate greater consumer and retailer interest at the property going forward, we also increased the occupancy from 91% to 100%.

Turning to our specific leasing stats. Thus far in 2013, we have executed 138 leases, totaling 417,000 square feet, including executing 58 leases during the third quarter totaling 164,000 square feet.

Breaking down our third quarter leasing activity between new and renewed leases. During the third quarter, we executed 33 new leases, totaling 70,000 square feet and renewed 25 leases, totaling 94,000 square feet.

In terms of same-space comparative numbers, cash rents increased by approximately 8% on average for the third quarter.

Lastly, as Stuart indicated, we're very excited to now fully own Crossroads Shopping Center. As the former head of the Pacific Northwest region for Pan Pacific, I lived and worked in the region for many years and know the market extremely well. As Stuart noted, Crossroads is truly a one-of-a-kind irreplaceable property. It is located in the heart of the Seattle market, specifically in the densely populated affluent community of Bellevue, which is home to Microsoft. In fact, Crossroads is located just down the street from Microsoft's headquarters. The shopping center totals 464,000 square feet and features Kroger Supermarket operating under their QFC flag, Bed, Bath & Beyond, Sports Authority, Joanne's Fabric and Michaels, along with many other national and regional retailers.

As Stuart mentioned, since we first invested in the property 3 years ago, we have worked hard at enhancing this unique shopping center, capitalizing on our long-standing relationships with key retailers. In the past 3 years, we have introduced upwards of 100,000 square feet of new retailers to Crossroads, including a broad mix of daily necessity tenants, restaurants and specialty retailers, all with an eye towards enhancing the center's long-standing draw as a family destination.

As a result of our efforts, we have substantially increased the occupancy to over 99% today and through the combination of increasing the occupancy together with implementing more efficient operating initiatives, net operating income has increased by over 50% in the past 3 years, and we believe there's a lot of growth and value still to cultivate at Crossroads.

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

Stuart A. Tanz

Thanks, Rich. With our accomplishments thus far in 2013, we are fully on track to have a record year. In terms of acquisitions, we've already acquired $368 million and anticipate finishing the year at around $400 million. With respect to property operations, we are on track to finish the year at or above 95% occupied and anticipate same-store NOI growth will be in the 6% range for the full year, if not a bit better surpassing our initial estimate. What's also important to point out in terms of our property operations and leasing accomplishments is that we continue to enhance our tenant diversity. As an example, our largest tenant, Safeway, now accounts for less than 6% of our total base rent. In fact, they are now down to just 5.4%. And our top 10 tenants, the majority of which are daily necessity retailers, now only account for 20% of our total base rent. Additionally, under the 1,100 tenants in our portfolio today, over 1,000 of our tenants account for less than 1% of our total base rent individually.

Maintaining a diverse tenant base, which in turn provides the company with a strong and reliable revenue stream, continues to be the cornerstone of our business. And lastly, as Michael addressed, we have significantly enhanced our financial position this year, including achieving investment grade ratings, investing well over $200 million in equity proceeds from the warrants, and acquiring exceptional shopping centers in each of our core markets and significantly lowering our borrowing costs through our newly expanded debt facilities.

Looking ahead, we are excited about finishing the year strong and believe that we are well-positioned to head into 2014 with great momentum to keep building on our accomplishments today and taking the company to new heights.

Now, we will open up the call for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Paul Adornato from BMO Capital Markets.

Paul E. Adornato - BMO Capital Markets U.S.

Maybe I'll start off on the Crossroads. You've accomplished some lease up on the retail side. But in the past, you've also talked about adding density to the site, and I was wondering if you could perhaps update us on those activities?

Stuart A. Tanz

Sure. Well, we're currently working on a number of opportunities. While there's no immediate plans to talk about the long-term, the property can support another 200,000 square feet very quickly including retail, office and multifamily. Over time, we intend to capitalize on this, particularly with regards to the additional retail space. As it relates to office and multifamily, given it's not our expertise, our goal ultimately would be to sell the parcels to office and multifamily developers and redeploy the proceeds into new shopping center acquisitions.

Paul E. Adornato - BMO Capital Markets U.S.

Okay. And the Five Points in Huntington Beach was acquired from the same seller. And so, I was wondering, is that property of the same vintage? Maybe you could tell us what's the value-add? Is there also intensification opportunities on that property?

Stuart A. Tanz

So the Five Points is an asset that Ron Sher and his family developed 50 years ago, and has never traded in the marketplace. In terms of upside, Rich, do you want to touch on the couple of leases there where --

Richard K. Schoebel

I mean, we don't currently have any plans but, obviously, with all of our properties, we're always looking for the opportunity to add more. But it's certainly not on the scale that we see at Crossroads.

Paul E. Adornato - BMO Capital Markets U.S.

Okay. And so Stuart, I was wondering if you -- maybe you could just lay out for us, at this point in the company's evolution, there's certainly been great accretion from acquisitions and lease-up of the existing portfolio. But how should we think about the components of growth from here? Specifically, if you could talk about perhaps the different components, lease rollovers, redevelopment potential and acquisition opportunities from here?

Stuart A. Tanz

Sure. Well, look, we're going to continue to do what we have done over the last 4 years. We will continue to grow the company and acquiring exceptional grocery-anchored shopping centers on the West Coast. We and our pipeline today is very strong. We intend to -- as we move into '14, again, probably, as we've looked at the market today, I think we can do as well next year as we've done this year, which has been a record year for us. With that growth, we will continue to redevelop Crossroads as we've talked about. We also have another 83,000 square feet, may even a bit more with some of the more recent acquisitions, of either pad space or some opportunity to develop out some land, which is primarily on our books at no cost. So that's sort of the way we look at the company going forward. We'll continue to do exactly what we've done. And we believe we can continue to produce the outstanding results as we move forward as we have in the past.

Operator

Our next question comes from Todd Thomas from KeyBanc.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

I'm here with Jordan Sadler as well. Just first question, what were the cap rates in the initial yields on the 3 third-party acquisitions that you completed, so outside of Crossroads, just the 2 in the quarter and then Peninsula Marketplace, which closed earlier this month?

Stuart A. Tanz

The going-in cap rate excluding Crossroads, was 6.2%, but looking ahead, there is very strong upside as we've talked about with these assets that we identified during our underwriting process. We believe we can increase that yield about 150 basis points over the next 12 to 24 months.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

Okay. That's helpful. And then, just regarding the acquisition environment. A little more broadly, it sounds like, you're fairly optimistic about continuing to find deals here, your comments sort of suggest maybe another $400 million would be reasonable to look for -- maybe next year. Just wondering if you could give a little more color on the pipeline that you're seeing today? And whether or not the increase in interest rates or some of the volatility we've seen in the markets is causing any changes in buyer or seller expectations at all? Or anything that you're doing on the underwriting process at ROIC?

Stuart A. Tanz

Sure. I mean, look, the type of assets we're acquiring, there hasn't not been much changed at all. So very high quality assets in the sought-after markets on the West Coast. We really haven't seen much change yet in cap rates given the volatility in interest rates. Looking into next year, we're very excited in terms of what we see ahead. I mean currently, we have another $30 million under contract, which we intend to close over the next several weeks. And behind that, there is probably another $60 million to $100 million that we could do in the first quarter of next year. So we're very excited looking at where this company is going right now in terms of growth. I can't tell you whether we'll hit $400 million or not. But I can tell you that the team here is very, very excited in terms of looking into 2014 on all fronts.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

Okay. And then, thinking about the acquisitions. I mean, how should we be thinking about financing new investments here? You have some capacity under the line, and a lot more flexibility with the -- if you exercise the accordion. You also have some equity inflows from the warrants. Are you trying to match fund new investments with the capital that's coming in from the warrants? Or, I mean, how should we sort of think about that going forward and in terms of funding new acquisitions here?

Stuart A. Tanz

Well look, we don't need any equity for a period of time. That's for sure. So Mike, in terms of capacity?

Michael B. Haines

As of today, we've still got $127 million available on the main commitments on the credit line. Yes, the $350 million in the accordion feature that if we needed it. There's about $75 million warrant proceeds due to come in. As we're not really anticipating buying anymore warrants back, but we don't know when that's going to come in. But I don't think we are going need, as Stuart mentioned, to raise equity until sometime well after next year. So it's a function of using the available debt capacity on -- with the banking group. And still maintaining a fairly low leverage ratio.

Stuart A. Tanz

And we will look at selling a couple of assets, that was one thing I missed in Paul's question, but we have earmarked 3 or 4 assets to sell. And that will help fund our growth as well next year without having to think about equity.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

Okay. Great. And then just last question, the impact associated with the Crossroads transaction. I see that the remeasurement gain on the income statement. But was there any impact to equity and income from unconsolidated properties in the quarter as well? The $2.1 million, what's in that number in the quarter?

Michael B. Haines

Yes, there's a piece in that, that relates to the consolidation. We closed the Crossroads at the end of the third quarter. So that income -- that line item includes our 49% portion of the cash flow through the quarter, but it also includes a preferred return on the property that was recognized as part of acquiring that 51% interest. We had a preferred return rate when we first acquired our 49% interest that we weren't able to recognize until we consolidated the entity. So that's in there too.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

So most of that will go away. Next quarter, we won't see much in that line at all, is that correct?

Michael B. Haines

You won't see anything in that line because we have no JVs at this point.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

Right. Okay. And then so, I guess -- I'm just trying to reconcile the guidance increase and you increased guidance $0.22 on October 1 with the transaction activity update and another $0.025 at the midpoint now. So that's $0.245 total. But the gain on the remeasurement was $0.28 and it sounds like there's a couple of pennies in the joint venture line as well, and acquisitions are running ahead of the target you laid out. So I'm just wondering if you can kind of walk through what some of the primary offsets are. Help reconcile that a bit.

Stuart A. Tanz

Well. We are anticipating doing some financing before year end, in terms of our balance sheet, some long-term financing. So we've put that into the -- those assumptions along with any other dilution that may come from the warrants. So it's really the moving points in terms of financing. It would be the warrants and anything else -- [indiscernible]

Michael B. Haines

You're also going to have a full quarter of the operating partnership units that will be outstanding, that's like 3.3 million warrants. Or sorry, operating units it will be outstanding in that share count which is bringing it down.

Stuart A. Tanz

Got it. The other thing, Todd, I wanted to point out with the Crossroads, which I think, is a very important item. To me a very important point is when you look at the overall blended cash yield on that asset in terms of consolidation, with the large increase that which Rich articulated during his presentation, the going-in yield today on that transaction given where we acquired 3 years ago is just under 8%. So there's a lot of value that's been created, which is our job for shareholders, we've created a lot of value in that asset, with a lot more to come.

Operator

Our next question comes from R.J. Milligan from Raymond James.

R.J. Milligan - Raymond James & Associates, Inc., Research Division

A question on the guidance for same-store NOI growth. You guys had previously guided for 4% to 6%. You're saying that you expect that at the top end of that range and that might be conservative, which would still imply a pretty decent slowdown at least from the first half of the year in the fourth quarter? Is that being more conservative, or is there something that might drive down that same-store NOI?

Stuart A. Tanz

The -- can you repeat your question, RJ?

R.J. Milligan - Raymond James & Associates, Inc., Research Division

Sure. The same-store NOI increased for, let's see, it was up 9.5% in the second quarter; 7.9% in the first quarter, 5.6% in this quarter. So to get for an annual rate of 6% would imply a pretty good slowdown in the fourth quarter, and I was wondering, if there is anything that was driving that in particular? Or if that was being more on the conservative end of just in terms of guidance?

Stuart A. Tanz

Well, it's conservative. Fourth quarter will -- I can't tell you that second and what the fourth quarter is, but I can certainly feel comfortable to tell you it's going be better than 5%, 6% depending on lease-up and deliveries and everything else.

Michael B. Haines

Also the year-over-year is a different set of property pools than the quarter-over-quarter one too. So that's -- there's a difference there as well.

Stuart A. Tanz

Right. I think more importantly, we still -- Rich, what are the numbers between leased and occupied?

Richard K. Schoebel

There's still about a spread of 5%.

Stuart A. Tanz

So there's still a 5% spread in terms of what's been leased.

Richard K. Schoebel

And what's paying rent.

Stuart A. Tanz

And what's paying rent. So that will translate into a very strong, in my view, very strong NOI growth into '14 at this point, given what the amount of leasing that we've been able to accomplish over the last several quarters.

R.J. Milligan - Raymond James & Associates, Inc., Research Division

Okay. That's very helpful. And I was curious if there was an -- you had provided this last quarter, I didn't see in the press release this quarter, an average price for the warrants repurchased.

Richard K. Schoebel

It was about...

Stuart A. Tanz

81?

Michael B. Haines

All told, it's is about $1.98 for all -- everything all in.

Stuart A. Tanz

About $1.98.

Operator

Our next question comes from Jason White from Green Street Advisors.

Jason White - Green Street Advisors, Inc., Research Division

Just a quick question on your small shop occupancy. I know you guys haven't broken that out that in the past. Do you guys have that metric this time around?

Richard K. Schoebel

We don't have it specifically by small shop. We don't really have -- we only have 1 anchor space that we classify as over 15,000 square feet available right now. So, primarily it's made up of small shop.

Jason White - Green Street Advisors, Inc., Research Division

Okay. And then as you look towards leasing that small shop space up with the departure of the "Mom and Pop" tenants prior to the downturn, what kind of demand do you think you need to see to get that up to maybe previous peak number, and what do you think that is?

Stuart A. Tanz

Well nothing is, I mean -- the objective we set is 100% occupancy or more. They are more is challenging.

Richard K. Schoebel

No, we're still seeing some really good demand for the shop space. I think you see that in the decrease in the vacancy rate, and we continue to acquire properties that have significant demand out there, as I think is demonstrated by the Canyon Crossing up in Seattle.

Jason White - Green Street Advisors, Inc., Research Division

Okay. And then also on the occupancy front. Do you -- I mean, it was quite a hefty occupancy raise, but you did also acquire fully leased properties. Do you have an idea what was actual organic kind of leasing occupancy gains rather than just adding newer properties to the pool?

Richard K. Schoebel

May -- I could follow-up with you after the call to give you that specific number. But I -- definitely during the quarter, we acquired 2 highly occupied assets that brought that number up. And -- but again, we've seen a lot of absorption just from the general portfolio.

Jason White - Green Street Advisors, Inc., Research Division

Okay. And then just a last question, in terms of your acquisition activity. Do you have kind of a sense of -- is it market related? Or is it some kind of ideal size of portfolio that eventually get you to the point where acquisitions decelerate and maybe become less of the story?

Stuart A. Tanz

We've been operating, Jason, out here for 25 years doing what we do. We are pretty -- we have a pretty good idea where the portfolios lie on the West Coast in terms of ownership. Those opportunities, we continue to pursue. But we're very selective in terms of acquiring portfolios as it relates to the impact to our balance sheet and other items. I don't -- I can't sit here today and tell you that we're going to be able to do a larger transaction, but what I can tell you is we're going to keep doing in what we have been doing. And so we do continue to see the runway very strong in terms of off-market, one-off transactions.

Jason White - Green Street Advisors, Inc., Research Division

Okay. And I was looking more for an ideal size of your own portfolio. So as your acquisitions have crept up near $400 million this year, is there a portfolio sizes that you think where acquisitions becomes less of your story and it's more of an operational story?

Stuart A. Tanz

No. No.

Jason White - Green Street Advisors, Inc., Research Division

Okay. So there's no -- $2 billion is not going to slow down the pace of your acquisitions or $3 billion, there's not really a portfolio size -- the [indiscernible] ?

Stuart A. Tanz

No, our goal is to keep growing the company smartly. And to keep it as transparent and straightforward as possible.

Operator

Our next question comes from Michael Gorman from Janney Capital.

Michael P. Gorman - Janney Montgomery Scott LLC, Research Division

Just staying with the transactions for a minute. I'm curious, does Mr. Sher have any additional properties in his own portfolio?

Stuart A. Tanz

Great question. He does. And we do have a first right of refusal on everything he owns on the West Coast. He's got another property in Huntington Beach. He's got a property in Santa Rosa, which is in the Bay Area. What am I missing here, Rich?

Richard K. Schoebel

He's got some smaller properties throughout the San Francisco area.

Stuart A. Tanz

And in the San Francisco Bay Area as well. So that pipeline could continue or those properties can continue to feed our pipeline going forward.

Michael P. Gorman - Janney Montgomery Scott LLC, Research Division

Okay, great. And then going back to the funding sources. I'm curious as your kind of looking at the off-market transactions and talking to people. How are OP units playing into it going forward? Obviously, Mr. Sher choose to take some and I'm kind of curious what the reception is to other sellers towards taking OP units as a source of funding?

Stuart A. Tanz

The reception is extremely strong and especially with the announcement of the Crossroads. We have been approached by a series of sellers with tax issues on some of the highest quality assets on the West Coast, to begin conversations to use our currency. However, our currency is the most precious resource we have, and it's cheap today as far as I'm concerned.

Michael P. Gorman - Janney Montgomery Scott LLC, Research Division

We agree.

Stuart A. Tanz

So going forward, we'll continue to pursue doing those type of transactions. There are more of them on the table right now. But we're not selling our equity cheap. We're going to, hopefully, if we do these transactions, like Ron, I think the sellers will appreciate that they're taking a strong currency, and that they'll be paying a premium to wherever the stock trades.

Michael P. Gorman - Janney Montgomery Scott LLC, Research Division

Okay, great. And then, sir, can you just put a little bit of color around the 3 or 4 assets that have been earmarked? Are these core assets that don't have the growth characteristics, and so we should we be talking about cap rates in line with which you're buying, or are these more non-core assets and we should be thinking about sort of a higher cap rate when you look to exit those?

Stuart A. Tanz

I'd say a bit of both. A number of these assets were debt deals that we did very early on that were really lease-up stories, and we're getting to the point over the next 9 to 12 months where those assets will be stabilized and will be sold. They just don't fit our portfolio today in terms of quality. Although they will deliver very strong returns to shareholders. So that's one segment, and I can tell you exactly what properties they are. But those are going to be 3 or 4 assets. On the other hand, there will be 1 or 2 assets that we've -- that has very little juice left, or very little internal growth left, like Pleasant Hill and -- up in Northern California, and those types of assets or will be earmarked as well. So it will be a combination of both.

Michael P. Gorman - Janney Montgomery Scott LLC, Research Division

Okay, great. And then, maybe, just one last one for Michael. I just wanted to make sure I understood on the fourth quarter guidance, talked about some financing assumptions in there. I just want to make sure, are there any onetime financing costs assumed in there like a prepayment or diffusion's penalty?

Michael B. Haines

No, we haven't earmarked any diffusions for repayment. We're really looking at some kind long-term debt financing cost associated with that. So, no it's just looking at potentially doing some kind of a on-deal.

Michael P. Gorman - Janney Montgomery Scott LLC, Research Division

Okay. So the $0.18 to $0.20 is a reasonable run rate, so there's nothing onetime in there?

Michael B. Haines

Right. Correct.

Operator

Our next question is a follow-up from Paul Adornato from BMO Capital Markets.

Paul E. Adornato - BMO Capital Markets U.S.

My question has been answered.

Operator

I show no further questions and would like to turn the conference back to Stuart Tanz for closing remarks.

Stuart A. Tanz

In closing, I'd like to thank all of you for joining us today. If you have any additional questions, please feel free to contact Mike, Rich or myself. And for those who are attending NAREIT Annual Convention in San Francisco in a couple of weeks, we hope to see you there. Thanks again and have a great day, everyone.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect at this time.

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