Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Stuart A. Tanz – Chief Executive Officer

Michael B. Haines – Chief Financial Officer

Richard K. Schoebel – Chief Operating Officer

Analysts

Todd Thomas – KeyBanc Capital Markets

Paul Adornato – BMO Capital Markets

Jason Adam White – Green Street Advisors

Retail Opportunity Investments Corp (ROIC) Q1 2013 Earnings Call May 2, 2013 12:00 PM ET

Operator

Welcome to Retail Opportunity Investments First Quarter 2013 Conference Call. (Operator Instructions) Following the company’s prepared comments, the call will be opened up for questions.

Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of federal securities laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the company can give no assurance that these expectations will be achieved.

Factors that could cause actual results to differ materially from current expectations include, but are not limited to, changes in economic conditions and the demand for retail space in the markets where the company operates, the financial success of its tenants, the availability of properties for acquisition, the company’s ability to successfully integrate newly-acquired properties and other risks, which are more fully described in the company’s filings with the Securities and Exchange Commission.

Participants are encouraged refer to the Company’s filings with the SEC. For more information regarding the company’s financial and operating 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.

Stuart A. Tanz

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

We are pleased to report that the company is off to a strong start in 2013. We are continuing to successfully execute our business plan of broadening our portfolio through acquiring quality, grocery-anchored shopping centers and quickly enhancing value through our proactive hands on management. Additionally, we are continuing to enhance our strong financial position. Specifically in terms of acquisitions, we are well on our way to achieving our goal for the year. Thus far, year-to-date we’ve acquired $123 million of grocery-anchored shopping centers, plus we have another $100 million currently tied-up and are midway through our due diligence process. Beyond that, our pipeline of acquisition opportunities continues to be active.

Importantly, we continue to focus on opportunities to acquire exceptional irreplaceable shopping centers in our core select markets with an eye towards furthering our presence in each market and our ability to enhance value through capitalizing on greater economies of scale and greater leasing opportunities and flexibility.

As an example we recently acquired two centers in separate off-market transactions in the Los Angeles area. Specifically in the city of Diamond Bar which is a well-established community located east of Los Angeles with an average household income of $95,000. With these acquisitions, we now owned primary grocery-anchored shopping centers that serve the Diamond Bar community. By controlling both centers we have considerable leasing power and flexibility in the market, which we will enhance our ability to quickly add value to improving the tenant mix of each property and by driving lengths higher going forward.

Another example in our Seattle market, we just acquired a recently developed grocery-anchored shopping center, it's a beautiful 120,000 square foot property that was completed just a few years ago by a local developer to serve a newly planned large residential community. Unfortunately for the developer the project was completed a bit ahead of its time, so we struggled with the initial leasing of the center became capital constrain that unable to complete the leasing.

As a result, the property is currently 73% leased notwithstanding the market being very strong today being driven by all of the surrounding residential development that’s underway. Needless to say this is an ideal opportunity for our Seattle team to capitalize on our strong presence in the marketplace, where our existing Seattle portfolios 100% leased to quickly enhance the value of this new acquisition. These acquisitions are good examples of the types of attractive opportunities that we continue to source by capitalizing our long-standing relationships and in-depth knowledge across our core markets.

In addition to our strong start in 2013 with acquisitions, we continue to capitalize on the demand for space across our portfolio, posting another strong quarter on the Property Management and leasing fund. We have increased our overall occupancy by 110 basis points from a year ago. We also achieved positive rent spreads in our leasing activity and posted a strong 7.9% increase in same property net operating income. Rich will go through the details in a minute.

With respect to our balance sheet, as we previously announced, a considerable number of the company’s existing warrants have been retired specifically over 58% over the warrants have been retired today. We consider that to be a positive step forward for the company. The public warrants were issued back in 2006 by our predecessor company. In 2009, when the predecessor company was reorganized, and Rich and I were brought into transform the company into a shopping center REIT, our hope was that we could execute our stated business plan and build a strong portfolio of shopping centers and operating platform, that over time warrant holders would want to convert to being shareholders, thereby providing the company with additional equity capital to continue growing the business.

We view the recent warrant activity as an important endorsement of the company’s accomplishments to date and future prospects. With the warrants that have been exercised thus far, we have received approximately 157 million of proceeds. While we are excited to have the additional equity capital to invest, the timing of receiving the capital will have an impact on our near term per share financial results.

With that in mind, I will turn the call over to Mike to take you through our financial results for the first quarter and our outlook for the rest of 2013. Mike?

Michael B. Haines

Thanks, Stuart. Starting with our income statement, for the first quarter of 2013, the company had $24.4 million in total revenues, as compared to $16.6 million in total revenues for the first quarter of 2012. Additionally, the company had net income of $2.3 million for the first quarter of 2013 as compared to net income of $1.1 million for the first quarter of 2012. And with respect to funds from operations, FFO for the first quarter was $11.5 million as compared to $8.4 million in FFO a year ago.

Notwithstanding a significant 22% increase in our weighted average shares outstanding as a result of the warrants being exercised during the first quarter, the company’s per share results increased. Specifically, net income for the first quarter of 2013 was $0.04 per diluted share, as compared to $0.02 per diluted share for the first quarter of 2012. And FFO increased to $0.19 per diluted share, up from $0.17 per diluted share a year ago.

Turning to the company’s balance sheet, taking into account the warrants that were exercised during the first quarter and utilizing the proceeds to pay down borrowings outstanding on the company’s credit facility, at March 31, 2013 the company had a total market capital of approximately $1.3 billion, including $300 million of total debt outstanding, equating to a debt to total market cap ratio of just 24%.

As a point of reference, just a few months ago, at year end 2012, our debt to total market cap ratio was 35%. With respect to the $300 million of debt outstanding at March 31, approximately $82 million were secured debt and $218 million was unsecured, of which only $18 million was outstanding on out our unsecured credit facility. And for the first quarter of 2013, the company's interest coverage was four times. In addition to having very strong interest coverage, 40 of our shopping centers representing 89% of our portfolio based on square footage are currently unencumbered.

In terms of our FFO guidance for 2013 taking into account actual results for the first quarter and the warrants that have been retired to date, we now expect funds from operations to be within the range of $0.77 to $0.82 per diluted share for the full-year 2013. In terms of the key underlying assumptions, we continued to expect to achieve same property NOI growth in the 4% to 6% range for the full-year and we expect to acquire approximately $275 million of shopping centers in total for the year. As Stuart indicated through the first four months thus far we have acquired approximately $123 million.

Lastly, our per share guidance is based only on the warrants that have been exercised thus far. Our current guidance for $0.77 to $0.82 per diluted share does not make any assumption going forward as through additional warrants being exercised. As additional warrants are exercised, we will adjust our guidance accordingly. There are currently 20.6 million warrants outstanding which expired in October 2014.

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

Richard K. Schoebel

Thanks, Mike. At March 31 our portfolio totaled 47 shopping centers encompassing approximately 5 million square feet of gross leasable areas diversified across the West Coast. 18 of our 47 properties or 35% of our total GLA is located in Southern California. 12 of our shopping centers are located in our Northern California region representing 25% of our total GLA. Nine properties representing 18% of our total GLA are located in the Portland, Oregon and 22% of our GLAs in the Seattle market where we own eight shopping centers.

As Stuart indicated, we increased our overall portfolio occupancy from where we were at this time last year by 110 basis points to 93.4% as of March 31. The increase was driven by another solid quarter of leasing. Specifically, during the first quarter, we executed 34 leases totaling approximately 171,000 square feet.

Breaking that down between new and renewed leases, during the first quarter, we executed 22 new leases totaling 141,000 square feet including two key anchor leases. One of the anchor leases signed is at our Division Crossing shopping centre in Portland, where we now have a very strong national retailer taking a significant portion of the previously available space at a much higher market rent than what the previous tenant had been paying. We’re now in the process of reconfiguring the remaining available space and are in discussions with several retailers.

Additionally, with the new anchor retailer, we now have the ability to build an additional 6000 square-foot pad at the property, which we just broke ground on last week. The other key anchor lease signed during the first quarter is at one of our recently acquired properties, Harbor Place, which was part of the Southern California portfolio that we acquired at the end of 2012.

As we discussed on our last call, the prior anchor tenant lease was scheduled to expire later this year. We’re pleased to report that we now have a new high-volume grocer taking the entire 80,000 square feet space. Having now replaced the anchor tenant lease, we currently have no other anchor leases expiring in 2013. In addition to these two anchor leases, we executed 20 leases with new in-line retailers totaling 35,000 square feet. With respect to releasing spreads on new leases, rents increased by approximately 5% on average on a cash basis. In terms of renewals, we renewed 12 leases totaling just over 30,000 square feet during the first quarter, all of which was in-line retailers with same-space comparative base rents remaining level for the quarter.

Now I will turn the call back over to Stuart.

Stuart A. Tanz

Thanks, Rich. As I mentioned, we are excited about having additional capital from the warrants to put to work and continuing to grow our portfolio and business. That said, we remain focused on investing the capital wisely and we remain committed to our longstanding prudent strategy of carefully seeking out only the most attractive opportunities to acquire irreplaceable shopping centers that provide the company with a balance of long term stable cash flow and good growth opportunities for years to come.

Since 2009, we have carefully invested over a $1 billion of capital on acquiring 5 million square feet of quality shopping centers, all focused on our core West Coast markets. As Mike discussed, our financial position today is very strong. Taking into consideration our conservative debt ratio together with the remaining warrants, looking ahead we have the ability to continue growing our portfolio potentially by as much as another 500 million without requiring outside equity capital.

In summary, we are pleased with our accomplishments thus far in 2013 having advanced our business notably across each key discipline. We are excited about the future prospects of our business and look forward to continuing to build on our successes to-date and taking the company to new highs.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Todd Thomas from KeyBanc Capital Markets.

Stuart A. Tanz

Good morning, Todd.

Todd Thomas – KeyBanc Capital Markets

Good morning. Thanks. I am on with Jordan Sadler as well. First question, in terms of acquisitions, I was just wondering how you are thinking about pricing today, whether or not return thresholds have changed a little bit, given your cost of capital overall is decreasing, and that you have seen an inflow of capital from the warrants?

Stuart A. Tanz

Our philosophy has not changed. Currently there are a number of properties on the markets and as you probably know, these trophy properties are currently trading in low five cap range. But this isn’t our focus, this type of deal. Our focus is really acquiring off-market unique opportunities, where we can acquire exceptional shopping centers at more reasonable terms and quickly add value. So we’re going to keep to our philosophy and our knitting, in terms of how we’ve acquired as we’ve done in the past.

Todd M. Thomas – KeyBanc Capital Markets

Okay. Can you speak to the pricing a bit on, particularly I guess the properties that were acquired in the quarter, and the $100 million that you have tied up under contract?

Stuart A. Tanz

Sure, with respect to the stabilized acquisitions, the going-in cap rate was about 6.5%. Going forward there’s good outside through a number of opportunities that we’ve identified in our underwriting which should increase yield by about 100 basis points over the next 12 to 24 months. In terms of what we have in the pipeline, we can’t quote specifics, but they are in primarily the same range.

Todd Thomas - KeyBanc Capital Markets

Okay. And then just a question about the dividend here at $0.15 per share per quarter here, you’ve established a nice track record of increasing the dividend. I was just wondering though, should we expect the pace of increases here to pause until there is a little more clarity and the warrants worked through at this point? I mean, how is the Board thinking about the dividend today?

Michael B. Haines

This is Mike. The Board does arrive it to do in each quarter based on number of important factors one of which is clearly the warrants. And as the warrants are exercised in connection with our acquisition phase, we look at all of those factors each quarter determining what we're going to do with the dividend.

Todd Thomas – KeyBanc Capital Markets

Okay, great. Thank you.

Stuart A. Tanz

Thank you.

Operator

Thank you. And our next question comes from the line of Paul Adornato from BMO Capital Markets.

Stuart A. Tanz

Good morning, Paul.

Paul Adornato – BMO Capital Markets

Good morning, good afternoon. I was wondering if you could tell us, Stuart, are you engaged in any conversations with warrant holders with respect to either buying back the warrants or just getting a feel for when they might execute.

Stuart A. Tanz

We are always looking for we're always speaking with both equity shareholders and warrant holders in terms of the opportunities out there as it relates to dilution and which means potentially buying back the warrants. So the answer is yes, we are always speaking to these warrant holders and if the right opportunity comes along we may buy more warrants back.

Paul Adornato – BMO Capital Markets

Okay. And do you have any sense on when warrant holders may be inclined to exercise?

Michael B. Haines

That's the really tough on to call. It's really beyond our control, Paul and if anyone is guessing, we don't want to try to second guess when that might occur.

Paul Adornato – BMO Capital Markets

Okay, great. And so, when you showed us some properties in San Diego last fall, you took us to a number of ethnic centers. And was wondering if that is a niche property type that you like, especially in this environment where cap rates are becoming compressed?

Stuart A. Tanz

Well, I think it really dependent Rich, so I think it really depends on the center. The centers that you – we toured you in San Diego, those are grocers fit perfectly with the demographic. And we’ve always want to own the dominant grocer in the market. So we will continue call to look at all different types of grocers, with the focus of diversification in terms of our tenant base, and more importantly the stability of the income stream that comes along with these tenants. But the centers that we’ve showed you, those two particular centers are doing extremely well, and currently, one is 100% occupied and the other one is going to probably approach that type of occupancy, as we move into the second quarter of the year.

Paul Adornato – BMO Capital Markets

Okay. And finally with respect to the guidance, you’re still guiding towards same-store NOI of 4% to 6%, yet you did substantially better than that in this quarter. Are there specific things that you see that might decelerate that rate, or is it just you haven’t sharpened the pencil too much?

Stuart A. Tanz

No, I think we’re just seeing a little bit conservative on our guidance on that. If we beat our targets, that’s great, but we don’t want to get over our skis, so to speak, with respect to predicting where we think our same-store NOI is going be.

Paul Adornato – BMO Capital Markets

Okay. Great. Thank you.

Michael B. Haines

Thank you, Paul.

Operator

Thank you. And our next question comes from the line of Jason White from Green Street Advisors.

Jason Adam White – Green Street Advisors

Good morning guys.

Stuart A. Tanz

I know it’s good morning, where you are Jason?

Jason Adam White – Green Street Advisors

The earnings are very, very early.

Stuart A. Tanz

Exactly.

Jason Adam White – Green Street Advisors

A couple questions for you. First of all on just what is your commenced occupancy versus the leased rate that you disclose?

Michael B. Haines

Well, I mean are you talking about like the debits being leased and occupied?

Jason Adam White – Green Street Advisors

Yes.

Michael B. Haines

Yeah it’s about 2%.

Jason Adam White – Green Street Advisors

Okay. So that has narrowed substantially?

Stuart A. Tanz

Yes.

Jason Adam White – Green Street Advisors

Okay. And that one of the main drivers of your same store high growth being closer to 8% than your range this quarter?

Stuart A. Tanz

Yeah, primarily from leasing up of the vacant space.

Jason Adam White – Green Street Advisors

Okay. So any other main drivers of the same-store number that aren't just kind of typical same-store components, or any one-time items or anything that were outstanding?

Michael B. Haines

Not any one-time item.

Jason Adam White – Green Street Advisors

Okay. And then, now that you had a little bit of time with these the recent portfolio acquisition under your belt, have you noticed any other opportunity in the portfolio that you maybe didn't see when you are underwriting them?

Stuart A. Tanz

In the particular portfolio that we bought Jason or in…

Jason Adam White – Green Street Advisors

Yes.

Stuart A. Tanz

I think we – there are some potential pad opportunities that were exploring that really weren't part of our original underwriting. So there are definitely opportunities there with all properties, we're always looking to maximize the opportunity.

Jason Adam White – Green Street Advisors

Okay. And then one final question. Just as you are out in the market, Stuart, and you see all various properties for sale that may be in or out of your sweet spot, if you look at your properties versus what you are looking at in the market, how would you mark your portfolio to market from a cap rate basis, based on all the market intel that you gather?

Stuart A. Tanz

Well, in terms of the West Coast obviously each market Jason is going to be a bit different, but in general the type of assets that we own today are trading in the high 4s and low 5s. So if you'd ask me what would a blended cap rate be in terms of our portfolio today, I would tell you certainly in the mid 5 or mid 6 cap rate range in terms of where the market is right now.

Jason Adam White – Green Street Advisors

Okay. That is very helpful. Thanks a lot guys.

Stuart A. Tanz

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is a follow-up from the line of Paul Adornato from BMO Capital Markets.

Stuart A. Tanz

Hi, Paul.

Paul Adornato – BMO Capital Markets

Yes. So part of the investment thesis with ROIC early on, was that are you guys were going to take advantage of the economic distress in your markets, on the West Coast markets. So I was wondering if you could kind of update us on the level of financial stress that you see within property owners, and whether that thesis still has some run way in front of it?

Stuart A. Tanz

The financial distress in terms of depth is getting much – we're not seeing as many as those opportunities today as we did when we first started. However, the stress in the market is still there, we still have our pulse on a number of owners that are capital constrained or that’s coming due over the next year that current weren’t conversations with. So we are not as focused on buying that today as we were initially, because those opportunities really aren’t there. We are very focused however, on buying as we have over the last several years very high-quality assets in situations where owners are under some form of stress that still exist Paul, we still are seeing that.

Paul Adornato – BMO Capital Markets

Okay, great. Thanks very much.

Stuart A. Tanz

Thank you, Paul.

Operator

Thank you. And that concludes our question-and-answer session. I would like to turn the conference back to Stuart Tanz for any concluding remarks.

Stuart A. Tanz

Well 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 directly. Also you can find additional information in 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 19, be sure to look us up. Our new booth is on the second floor of the South Hall, specifically at S490 N Street. We hope to see you all there. Thanks again and have a great day everyone.

Operator

Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Retail Opportunity Investments' CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts