You've heard me say before that "the safest dividend is the one that's just been raised". Arguably, that does not mean that any stock is safe simply because the dividend was just increased; however, a dividend increase provides the best possible evidence of dividend safety.
There's a lot of intelligence that can be derived from a dividend increase - even more than current earnings projections or a truckload of accretive acquisitions. For companies with meaningful dividend bumps, an investor can interpret forward-looking signs and map out future growth and total return prospects.
Also, a dividend increase represents a commitment by a company that its shareholders are important, and the message is plain and simple: You can count on the income.
One of my favorite Small Cap REITs is Retail Opportunity Investments Corporation (NASDAQ:ROIC). Recently, the San Diego-based Shopping Center REIT announced a cash dividend of 16 cents per share, representing a 6.7% increase over the previous dividend. I think the chart below will sum up my affection for this stock that has increased its dividend by an average of 18% over the last 3 years.
Management That Means Business
In addition to dividend policy, another tell-tell sign that a stock is safe is Inside Ownership. Usually, senior management and directors are the first to know when operations are improving and earnings (and dividends) are rising. If management begins to buy stock in the open market, it's a safe bet that things are good. Oftentimes, insiders also have insight into marketing, improving industry conditions, and the potential for future financial transactions that may improve the health of the business.
According to Yahoo Finance, there were several Insider Buying transactions for ROIC during the month of February, and the largest purchase was from the company's CEO, Stuart Tanz. In addition to the more recent purchase (75,000 shares), Tanz is also the largest individual shareholder at ROIC, with a reported 979,602 shares (valued at around $15 million).
I have been following Tanz and ROIC since the company listed shares in October 2007, and after watching the company report a few strong quarters of growth, I decided to purchase a few shares last Fall. My initial acquisition price was $13.60 per share, and I have been pleased with the results - shares up around 9.9% (closed at $14.98).
ROIC turned an excellent quarter and year-end report card, with most recent results including the acquisition of around $437 million in shopping centers in 2013. Recently, I caught up with ROIC's CEO (Stuart Tanz) to discuss the latest results and also provide some meaningful insight into the future growth prospects of the company.
As I referenced in a few previous articles, investors deserve to understand "the business behind the business." That's why I asked Stuart Tanz to answer a few questions exclusively for Seeking Alpha.
Thomas: Stuart, congratulations on a quarter and year-end. Can you give us some highlights of your latest results?
Tanz: Our record portfolio growth and operating performance translated into exceptionally strong financial results in 2013. For the year, total revenues increased 48% to $111.2 million, net income grew 330% to $34.0 million, and funds from operations (FFO) increased 94% to $76.0 million. On a per share basis, net income grew 220% to $0.48 per diluted share, and FFO increased 43% to $1.07 per diluted share.
Our strong financial results enabled us to continue delivering increased dividends to our stockholders. During 2013, we distributed dividends totaling $0.60 per share, representing a 13.2% increase over dividends paid in 2012. Additionally, in February 2014, we raised our dividend to $0.64 per share on an annualized basis.
This represents a 6.7% increase and the eighth time in three years that we have increased our dividend, for an aggregate increase of 167%. Delivering reliable dividends to our stockholders, that steadily increase as we grow our portfolio and recurring cash flow, will continue to be an integral part of our business plan.
During 2013, we leased approximately double the amount of space originally scheduled to expire, and achieved a 7.3% increase in same-space comparative cash rents. As a result of our strong leasing activity, for the fourth consecutive year we steadily increased occupancy across our portfolio, reaching a new record high of 96.3% as of year-end.
Thomas: Since going public, ROIC has grown rapidly, and of course that means wider diversification. Can you tell us about your tenant diversification?
Tanz: During 2013, we expanded our tenant base by 37%. At year-end, our portfolio was leased to 1,146 tenants, 95% of which accounted for less than 1% of our total rental revenue, individually. Equally important, we continued to focus on leasing to retailers that provide basic consumer goods and services that are always in demand.
As of year-end, our three largest tenants and seven out of our top ten tenants are nationally-recognized supermarket and drug store chains. Our tenant diversity and focus on necessity-based retailers is the cornerstone of our business, and is one of the core drivers in our ability to consistently deliver strong results year after year.
Thomas: ROIC appears to be focused on three primary states (CA, OR, and WA). Does the company intend to expand outside of these core markets?
Tanz: We will continue to focus on the primary markets on the west coast, these continue to be the most sought-after markets in the country.
Thomas: ROIC has historically acquired distressed centers. Do you plan to continue fishing in that pond, or will the company consider acquiring centers with higher going-in occupancies?
Tanz: ROIC has never acquired distressed centers. As we've begun to build the portfolio in 2009 and 2010, we've acquired performing and non-performing loans at discounts to the long-term intrinsic values. Over the last several years, our focus has shifted to stabilized, high-quality, well-located, grocery-anchored shopping centers, where we can build value through increasing occupancy and rents as leases roll over.
Thomas: What about occupancy? Are you seeing improvement in occupancy, and is that attributed to your management team, market conditions, or both?
Tanz: As a result of our strong leasing activity in 2013 for the 4th consecutive year, we steadily increased occupancy across our portfolio, reaching a new record high of 96.3% as of year-end. We attribute the record occupancy at year-end from owning and operating a high-quality real estate portfolio operating in the most sought-after markets in the country, and a strong management team.
Thomas: Can you tell us about your current capitalization? How does that compare to the peer group?
Tanz: As a result of our debt and equity activities, at year-end 2013, ROIC had a total market capitalization of $1.7 billion, with $622 million of debt outstanding, equating to a conservative 37% debt-to-total market cap ratio.
Thomas: What are your thoughts on the e-commerce sector, and how has ROIC protected itself from the threat of increased competition with Amazon?
Tanz: Owning high-quality grocery & drug-anchored shopping centers provides the shareholders with the most stability, as it relates to the changing e-commerce threat. We believe that e-commerce will not have much impact to the product type that we own and operate given the fact that we cater to the daily necessities of our consumer.
Thomas: Can you tell us about your dividend policy and what's driving the growth of the company's earnings?
Tanz: Our dividend policy is governed by our board of directors. During 2013, we distributed dividends totaling $0.60 per share, representing a 13.2% increase over dividends paid in 2012. Additionally, in February 2014, we raised our dividend to $0.64 per share on an annualized basis. This represents a 6.7% increase and the eighth time in three years that we have increased our dividend, for an aggregate increase of 167%. Delivering reliable dividends to our stockholders, that steadily increase as we grow our portfolio and recurring cash flow, will continue to be an integral part of our business plan.
Thomas: You are one of the largest individual investors in ROIC. Can you tell us what's the value proposition for owning ROIC today?
Tanz: We intend to continue capitalizing on our platform to source new growth opportunities, remaining true to our long-standing, uncompromising strategy of patiently and selectively pursuing only the most attractive transactions. With our established portfolio, market presence, and platform, together with our strong balance sheet and disciplined approach, we are well-equipped to continue building stockholder value.
Thomas: Stuart, thank you for your time, and I look forward to seeing you in May at the annual ReCon in Las Vegas.
People Behind the Property: My next "people behind the property" interview will be with Nicholas Schorsch, CEO of American Realty Capital Properties (ARCP). I plan to publish this interview in my upcoming newsletter, iREIT Investor.
iREIT Investor: Check out my monthly REIT newsletter HERE.
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am long O, DLR, VTR, HTA, STAG, UMH, CSG, GPT, ARCP, ROIC, MPW, HCN, OHI, LXP, KIM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.