Blank Check Company to Diversified Retail REIT: Transforming from a SPAC in late 2008, Retail Opportunities Investment Corp. (ROIC) has one of the best balance sheets, asset bases, and management teams in the REIT industry. Led by industry stalwart Stuart Tanz, the company targets retail shopping centers with large, financially stable anchor stores. These locations have proven better able to ride out rough markets as the company's most common anchor store (established grocery chains) draws large crowds regardless of the economy.
Forced Selling in Industry with No One to Buy: Leading up to the recent collapse in property prices, many larger REITs saddled up with debt, adding many small non-core assets. With credit tougher to access and debt to service, many companies were forced to sell smaller properties outside their scope of operations, leading to a further collapse in prices. The only buyers in the market (smaller REITS) were having trouble servicing legacy loans themselves and couldn't take advantage of the low prices. ROIC entered the market near the bottom with $400M in cash and no debt. The company's CEO (one of the most successful REIT managers of the last decade) quickly put this capital to work in one of the best environments in history for property buyers.
Market Mispricing Earnings Potential: Because the company is still in the process of adding to their asset base, earnings are still lower than competitors. The market has priced in little to no future growth in earnings despite to company continuing to purchase unique properties at very attractive prices. Once the earnings from these properties flow through, the low stock price should correct.
Future Dividend Increases: The company has grown dividends at a staggering pace considering its limited years in operation. However, their current dividend yield is still lower than many competitors. As earnings materialize, the dividend should rise in line with competitors, prompting investors to value it similarly to most other REITs.
1.2x Understated Book Value: The company trades near book value providing a large margin of safety. Most of their properties were only recently acquired with little time for large price swings. On a transactional basis, the company appears to be acquiring the properties at well below their replacement cost. At 1.2x book value, future growth in earnings and cash flow appear to be priced in for free.
40x P/E on Depressed Earnings: Although the company's 40x P/E appears high, this is at a time of trough earnings for the REIT industry. This figure is in line with many of it's competitors. However, none of ROIC's competitors have the large future earnings potential. Again, on an earnings basis, the company seems to be valuing ROIC as if it were any other REIT, regardless of their earnings stream being under two years old with considerable appreciation potential.