Did you ever wish you owned a portfolio of shopping centers that produced rental income? With an investment in Retail Opportunity Investments Corporation (ROIC), investors can own a portion of a REIT that produces dividend income with a 4.1% yield. Let ROIC lay out the big money to purchase the shopping centers while you share their profits in a stock investment. This REIT owns and manages a diverse portfolio of necessity based retail properties. This includes well located shopping centers anchored by supermarkets and drug stores. The REIT owns and operates 50 shopping centers which comprise about 5.6 million square feet.
ROIC operates under one business segment: ownership of commercial real estate properties. It doesn't break down the business into specific types of properties for performance measurement purposes. The REIT's strategy is to acquire shopping centers located in densely populated metropolitan areas of the United States. The areas targeted by ROIC show population and income growth. The necessity-based retailers that the REIT targets draws consistent shopping traffic which results in steady sales for its tenants and a steady revenue for ROIC. This positions the REIT well for increased future FFO growth.
The REIT establishes large, long-term leases to major national and regional retailers, supermarkets and drug stores. Shorter-term leases are also given to national, regional and local retailers. The longer-term tenants provide a stable base of rental revenue, while the short-term tenants allow for flexibility and rental growth. ROIC's goal is to provide investors with sustainable, long-term growth and value through all economic cycles.
When looking at ROIC's valuation, I compared it with a few competitors that also operate as REITs: Vornado Realty Trust (VNO), Kimco Realty (KIM) and The Macerich Company (MAC). Each REIT's funds from operations (FFO) was taken into consideration to get a comparable price to FFO ratio. The capital expenditures associated with property maintenance/improvements were then subtracted from the FFO to get the adjusted funds from operations (AFFO). The 2012 year ending figures were used for these calculations.
Price to FFO
Price to AFFO
The trailing view of these REITs shows that ROIC is overvalued as compared to its competitors on both FFO and AFFO. However, the true measure will be to look ahead with FFO estimates to see if ROIC is priced well for future FFO growth. ROIC just recently raised its 2013 guidance for FFO per share to be within the range of $0.99 to $1.04. Analysts were previously expecting the FFO per share to be $0.77. If the analyst FFO per share is used, ROIC has a forward price to FFO of 18.9. However, it would be wiser to use the company's new estimated range, which would give ROIC a forward price to FFO range of 14 to 14.7. Here's how the forward price to FFO looks for ROIC and the competitors:
Forward Price to FFO
ROIC looks attractive as compared to its competitors when looking at expected FFO for FY2013. The REIT looks attractively priced for a long-term position. Since ROIC raised its expected FFO for FY2013, good things must be happening for the REIT.
Catalysts for ROIC
During the third quarter of 2013, ROIC invested $186.2 million in three grocery-anchored shopping centers. The REIT also has a contract to acquire a fourth shopping center as part of that total. This brings the year-to-date acquisition total to $368 million. The recent acquisitions include:
· Five Points Plaza in Huntington Beach, CA, which is anchored by Trader Joe's and Old Navy and has 161,000 square feet.
· Robinwood Shopping Center in West Linn, Oregon, which is anchored by a new Wal-Mart (WMT) Neighborhood Market and has 71,000 square feet.
ROIC also acquired the remaining 51% of the Crossroads Shopping Center in September, which contains 464,000 square feet in Bellevue, Washington. It is anchored by Kroger (QFC Supermarket), Sports Authority and Bed Bath & Beyond (BBBY). These acquisitions should produce more rental income for ROIC and will positively contribute to the REIT's raised FFO forecasts for FY2013.
The REIT will continue to look for new shopping center acquisitions to add to its portfolio in the future. This will allow for continued FFO growth which should lead to dividend raises and price appreciation for investors. ROIC has achieved an increased dividend payment every year since 2010. The REIT went public at the end of 2009.
The REIT depends upon the health of the commercial real estate market, specifically the mid to upscale shopping centers that it focuses on. If a large tenant's business failed, this could negatively affect ROIC's income. However, it looks like ROIC has chosen shopping centers with reliable anchors, so I think it would take an unexpected business failure to negatively affect the REIT. With the economy making incremental improvements and with strong anchored tenants in its shopping centers, the chance for a tenant to default looks slim.
Retail Opportunity Investments offers investors an attractive valuation in terms of forward looking FFO growth. The REIT pays a 4.1% dividend for yield-hungry investors. As ROIC continues to make strategic acquisitions, the REIT's FFO is likely to continue to grow which should allow the dividend payments to be raised and also allow for steady price appreciation.