Retail Opportunity Investments Corp (ROIC) 2010 Q4 法說會逐字稿

Welcome to Retail Opportunity Investments fourth-quarter 2010 conference call. Participants are currently in a listen-only mode. Following the Company's prepared comments, the call will be opened up for questions.

Please note that certain matters discussed in the 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. Now I would like to introduce a Stuart Tanz, the Company's Chief Executive Officer.

Thank you. Here with me today is John Roche, our Chief Financial Officer, and Rich Schoebel, our Chief Operating Officer.

As many of you know, the Company was formed as a real estate investment trust in the fourth quarter of 2009. Our strategy is to acquire neighborhood and community shopping centers predominately anchored by supermarkets and drugstores and other retailers providing daily necessities. Our efforts are focused on acquiring shopping centers located in demographically strong supply constrained markets, most notably on the West Coast where our team has successfully operated for over 20 years.

I'm pleased to report that in just over a year's time since our formation, we have made significant progress at amassing a portfolio of irreplaceable shopping centers. To date, we have completed over $442 million of shopping center investments.

Our portfolio today stands at 25 shopping centers totaling over 2.8 million square feet diversified across the Western US with shopping centers located in California, Washington and Oregon. More specifically, our shopping centers are strategically located in key densely populated markets including the Los Angeles, San Diego, San Francisco, Seattle and Portland metropolitan regions. And within these regions, our properties are typically among the most dominant grocery anchored shopping centers in their respective trade areas.

Very important, we are carefully amassing our portfolio by capitalizing on our long-standing relationships and in-depth market knowledge. Based on this, we are able to access attractive acquisition opportunities that in most cases are not widely marketed.

As an example, in the fourth quarter which was our most active quarter to date, we completed over $144 million of shopping center investments all of which came through existing relationships. Specifically, during the fourth quarter, we acquired an interest in Crossroads Shopping Center in Seattle, which without a doubt is considered one of the best and one of the most dominant shopping centers in the Pacific Northwest.

We have known the owner for many years dating back to our days at Pan Pacific when we acquired several other shopping centers from the owner. I have had my eye on buying Crossroads for a long time and had approached the owner about it numerous times over the years.

Persistence finally paid off. The transaction is a two-step acquisition whereby we will initially acquire a 49% interest in Crossroads for $42 million and we have the right to acquire the remaining 51% in 2014.

In the meantime, we are working hard hand-in-hand with our partner in terms of managing and leasing the property. We believe the shopping center has tremendous upside potential going forward through re-merchandising and re-tenanting expiring space with a focus of bringing additional strong necessity-based retailers to the center as well as capitalizing on development opportunities at the property.

We consider this asset given its long-standing prominence in the marketplace as the cornerstone of our Pacific Northwest portfolio, which now stands at 11 shopping centers. In addition to capitalizing on our relationships to directly acquire exceptional shopping centers like Crossroads, in the current environment with many properties being overleveraged, we have been able to acquire attractive shopping centers through our relationships with lenders, utilizing a two-step strategy whereby we first acquire the underlying mortgage typically at a discount and then second, we quickly move to acquire the ownership of the shopping center outright at a cost well below the replacement value.

As an example, during the fourth quarter we landed a three shopping center portfolio in California. The portfolio was not marketed. We were contacted by the bank that held the loan secured by the shopping centers.

We've had a relationship with the bank for a number of years. The bank was seeking to sell the loans by year-end and knew that we had the market knowledge and financial wherewithal to quickly underwrite and close the transaction.

Following our acquiring the loans at year-end, we quickly converted our loan position into owning the shopping centers outright which we just completed last week. Of the three shopping centers, two are located in the Sacramento market and one is located in Palm Desert.

Our total cost in acquiring the centers including our original purchase of the loans in the fourth quarter was $52.5 million which equates to only $121 per square foot. And as with Crossroads, we believe there's significant upside with these properties.

Lastly, based on our success thus far and ongoing activity, I'm pleased to announce that the Company has increased its quarterly cash dividend by 33% to $0.08 per share. The dividend will be paid on March 31 to shareholders of record as of March 15. And now, I'll turn the call over to John to discuss the Company's financial results for the fourth quarter and our outlook to 2011. John?

For the fourth quarter of 2010, the Company had net income of $2.4 million, equating to $0.06 per diluted share. In terms of funds from operations, FFO for the fourth quarter was $5.6 million or $0.13 per diluted share.

Results for the fourth quarter were positively impacted by two items. First, during the fourth quarter the Company received $1.9 million of tax refunds for the years 2007 through 2009. Secondly, fourth-quarter results include a bargain purchase gain of $2.2 million related to a property acquired earlier in the year.

Partially offsetting these amounts were acquisition underwriting costs of $1.2 million. These costs were notably higher than prior quarters as our investment activity ramped up during the fourth quarter and included costs for the transactions we closed in the fourth quarter and a portion of the costs related to the shopping centers that we have acquired thus far in 2011.

Historically acquisition underwriting costs have been capitalized for GAAP, tax and FFO purposes. Changes in GAAP now require that these costs be expensed and therefore include an FFO. Excluding these acquisition underwriting costs, modified FFO was $6.8 million or $0.16 per diluted share for the quarter.

With respect to our balance sheet, at December 31, the Company had $464 million of total assets consisting of $85 million in cash and $379 million in real estate investments and other assets. Total debt outstanding at year-end was $42 million, equating to a debt to total assets ratio of just 9%. The $42 million consists of mortgage loans that we assumed as part of acquiring three shopping centers during 2010.

As we have noted on prior calls, as we acquire shopping centers, we will assume mortgages from time to time but only in situations where it will not impede our financial flexibility. Our long-term goal is to primarily utilize unsecured debt.

Consistent with that goal during the fourth quarter the Company established an unsecured credit facility for $175 million. We have the ability to expand the facility to $250 million over time. And it's important to note that today 89% of our portfolio based on square footage is unencumbered giving us considerable flexibility as we move forward.

With that in mind, looking ahead at 2011, we currently expect funds from operations to be between $0.50 and $0.60 per diluted share for the year. Given that we are in the midst of our initial growth phase, the biggest factor in achieving $0.50 or $0.60 in FFO is acquisitions.

Based on having acquired $442 million of properties thus far in roughly 13 months time and based on our current pipeline, our guidance assumes we will acquire approximately $350 million during the year. We are assuming that we acquire properties at cap rates between 7 and 7.5%.

We're assuming that these acquisitions are financed with a combination of our remaining cash, borrowings under our currently unused unsecured line of credit, assumption of existing mortgage debt when appropriate as well as issuance of new debt depending on market conditions. Included in our FFO guidance is an acquisition underwriting cost assumption ranging between 2 million and $2.75 million for 2011.

Excluding these costs, we expect modified FFO per share to be in the $0.54 to $0.66 range for 2011. In terms of dividends for 2011, we expect to distribute cash dividends quarterly that in aggregate for the year will equate to approximately 70 to 80% of FFO. As always, our Board of Directors will evaluate the dividend each quarter. Now Rich Schoebel our COO will discuss property operations. Rich?.

Thanks, John. As Stuart indicated, our portfolio today stands at 25 shopping centers encompassing approximately 2.8 million square feet of gross leasable area diversified across the West Coast.

Five of our shopping centers are located in Northern California representing 23% of our total GLA predominantly in the San Francisco and Sacramento markets. 30% of our GLA is located in Southern California predominantly in the Los Angeles market and also now in the San Diego market.

Three properties, 21% of our GLA are located in the Seattle, Washington market including Crossroads which I will discuss a minute. And 26% of our portfolio is located in the Portland, Oregon market where we currently own seven shopping centers and are developing an eighth center which we expect to complete later this year.

A key component of our business plan is targeting unique opportunities where we can capitalize on our established relationships both as it relates to acquisitions and leasing. Our approach thus far has been two-pronged.

One, acquiring grocery anchored shopping centers that are well leased with stable cash flow where we can enhance value by aggressively releasing expiring space and improving the tenant mix. And two, acquiring shopping centers that represent exceptional lease-up repositioning opportunities.

18 of our shopping centers are stabilized well-leased properties. To date we have leased over 125,000 square feet of space including leasing 64,000 square feet of previously vacant space, raising the occupancy level across the 18 properties to 95% currently.

As Stuart mentioned, we're very excited to have Crossroads Shopping Center as part of our portfolio. As a former head of the Pacific Northwest region of Pan Pacific and having lived and worked in the region for many years, I can tell you that this is truly an irreplaceable property.

It is located in the heart of the Seattle market specifically in the densely populated affluent community of Bellevue, which as I'm sure most of you know is home to Microsoft. In fact, Crossroads is located just down the street from Microsoft's headquarters.

The shopping center totals 465,000 square feet and is anchored by Kroger supermarket, operating under their QFC flag; Bed, Bath and Beyond; Sports Authority, Joann Fabrics and Michaels. And as Stuart indicated, we believe the property has tremendous potential going forward.

In addition to our stabilized properties, we currently have five shopping centers that represent exceptional repositioning opportunities. We acquired these properties at a blended yield of 6.9% based on existing in-place leases equating to a 72% occupancy rate at the time we acquired the properties.

We are working diligently at leasing the available space to bring the occupancy level in line with our stabilized portfolio which we expect to accomplish as we move through the year and should increase our yield. An important part of our leasing strategy is to proactively improve the tenant mix across our portfolio with an emphasis on daily necessity retailers.

Today, our top four tenants based on annualized rent and seven of our top tenants are grocery and drug store operators including a strong mix of national operators such as Safeway and Kroger and well-established regional grocers such as New Seasons, Fresh & Easy and Henry's Marketplace. In addition to our daily necessity focus, we are equally focused on maintaining and furthering our tenant diversity as we grow our portfolio.

Our top 10 tenants today only account for 27% of our total base rent which is down from 33% at the end of the third quarter. And 372 of our 403 total leases today account for less than 1% of our base rent individually.

Lastly, in terms of leasing opportunities going forward, we expect demand for our space in our centers to continue ramping up, enhancing our ability to achieve NOI growth predominantly through leasing vacant space which currently totals about 277,000 square feet as well as releasing expiring space.

Looking out over the next two years through 2012, we currently have 128 leases that are scheduled to expire totaling approximately 411,000 square feet. 123 of those leases are in line non-anchor space representing an excellent opportunity for us to improve the tenant mix and achieve solid growth. Now, I'll turn the call back over to Stewart.

Thanks, Rich. As 2011 gets underway, we are hard at work continuing to build our portfolio. As John discussed, our goal is to complete $350 million of shopping center investments in 2011.

Thus far, we have already invested $57 million in the first quarter, acquiring two exceptional grocery anchored centers in California, one in San Diego and one in the San Francisco metropolitan area.

These two centers are in addition to the three-property portfolio I discussed earlier where we converted our mortgage position to owning the three shopping centers outright. Additionally, we currently have $40 million of acquisitions that subject to completing due diligence we expect to close in the next 60 to 90 days. Beyond that, our pipeline remains very active and we are excited about the opportunities that we are pursuing in our core markets today.

While we are pleased with the growth we have achieved in a relatively short period of time, we remain steadfast with our strict underwriting. As an example, as a part of identifying and completing our $442 million of shopping center investments over the past 13 months, we underwrote over $4 billion of acquisition opportunities during that time.

Our goal is to carefully build a shopping center portfolio that will provide the Company with a balance of long-term stable cash flow and good growth opportunities for years to come. In other words, as we move through 2011 and complete our initial growth phase, our objective is to have a base portfolio where by going forward we can generate consistent rent growth, NOI growth and FFO growth quarter after quarter, year after year, just as we did at Pan Pacific.

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

(Operator Instructions) Paul Adornato, BMO Capital.

Stuart, was wondering if you could describe any changes you may have seen in the transaction market since last quarter, particularly if you've noticed any change in the behavior of sellers, of the banks and just perhaps comment on the overall volume of transactions that you are seeing out there.

Sure, well in terms of the transaction market, we have seen -- and of course I will have to talk about the West Coast and the East Coast. But in terms of the East Coast, not much activity in terms of the first quarter of the year.

In terms of the West Coast though, I will tell you we have seen a lot of activity. In fact I have seen more activity in the last 90 days on the West Coast than I have probably seen over the last three years.

In terms of sellers and banks, I think sellers given that values have gone up, cap rates have compressed, we are seeing that sellers are now bringing more property to the market. And in terms of banks, we are beginning to see banks as well look at their portfolios that they have got on their own balance sheets and we are in active discussions with some of these banks as well in terms of buying either mortgages or the real estate directly from them. So, looking at the market today, we're very positive in terms of what we see and the activity really is much stronger today than we have seen in the last several years.

And what about with respect to the overall volume of capital that is out there looking to invest in shopping centers? Would you say that pool of capital is larger, much larger to equal the larger transaction volume these days?

The pool of capital is larger. The pool of capital I have found on the East Coast continues to be quite plentiful.

The West coast, there has been more capital coming to the West Coast. However the capital on the West Coast is still somewhat discreet in terms of what they are buying and at what price. So, yes, there is more capital but we continue to find very good acquisitions underneath the surface through our relationships as well as looking at widely marketed deals.

What percent of your pipeline is on the East Coast?

Today I would tell you 85% of our pipeline is on the West Coast, 15% of our pipeline is on the East Coast.

Great, thank you.

Laura Clark, Green Street.

You just mentioned that you're seeing cap rate compression today. Can you give us a range of how cap rates are changing and higher versus lower quality assets across the markets where you're focusing your efforts?

Sure. Cap rates for A assets have compressed. We are seeing those cap rates now down to the 5.5 to 6.5 range. The B assets are in the 6.5 to 7.5 cap range. And the C assets have not compressed as much as the As and Bs.

And of course that will vary market to market. On the West Coast, we're finding that there's a bit more cap rate compression in California than the Pacific Northwest.

On the East Coast, it depends again on the marketplace but we are finding again the markets around the New York, New Jersey and some of the denser markets on the East Coast, those cap rates are probably 50 basis points lower than what we're seeing on the West Coast which historically it's been the opposite.

I think the other thing to point out here is while cap rates have compressed, we're talking about operating fundamentals are down relative to where they have been historically and therefore the actual value on a per square foot basis is still not inconsequentially below where they have been historically.

Okay, great. And if we see further cap rate compression, especially let's say in the B properties and in the B quality spectrum, will that impact your 2011 acquisition plans?

No, we continue to -- again our pipeline is very full right now. We haven't seen this much product again in some time. If the -- most of the transactions that we are doing again are off market and because of our knowledge of the market and the ability to move as quickly as we can move, that continues to give us some advantage in terms of pricing.

So, I don't think that will have much impact in terms of meeting our goals this year. As John laid out, we are anticipating buying assets at 7 to 7.5 cap range. I believe we will meet that goal.

Okay, great. Then lastly, you just mentioned you've got a pipeline of opportunities on the West and the East Coast. But given that you haven't acquired anything on the East Coast to date, do you have any further thoughts on stepping away from the East Coast and fully concentrating your efforts out West?

Well our efforts have always been concentrated out West. And we have a very talented team on the ground out West both in leasing and property management.

But in terms of looking at the East Coast, we will continue to look at the East Coast. And you know we'll continue to monitor what we see and again if that's the right opportunity comes along, we will buy it. But the emphasis again with our experience and our knowledge will continue to be more on the West Coast.

Okay, great. Thanks so much.

Andy Lewis Charles, Motley Fool.

Great quarter. I have two questions tied to financing. Are there any updates on the warrant repurchasing program?

To date we have acquired no warrants.

Okay, great. And then secondly, the credit facility that you secured. Is it just going to be a temporary facility in order to acquire the properties and then eventually rolling those properties over into some long-term non-recourse financing per property? What is the objective with the line given the limited nature of the half-life of the line?

Well, we did put the facility in place. It is an unsecured facility. It is our expectation on a longer-term basis to use unsecured debt.

So the answer to whether we will encumber these after acquiring them, the answer is no. We are targeting getting an investment grade rating.

We have already had conversations with the rating agencies; potentially using additional bank term debt, private placement. There are a variety of different alternatives.

And what we have been doing and as disclosed previously, we have been entering into forward starting swaps to lock in some of our financing costs going forward (multiple speakers) long-term basis unsecured debt.

Okay, great. So the terms on this current facility going forward, we should -- I won't say expect, but the idea is that you will continue to get better terms. That is your goal, to get better terms on the financing.

Absolutely, I think spreads have continued to contract, ours specifically, and we again with the combination of doing forward swaps as well as the compression in our own spread as the transparency of our business plan becomes more evident that our spreads -- and we will get the benefit of that.

Great news, thanks a lot.

(Operator Instructions) Brett Reiss, Janney Montgomery.

Are there any macroeconomic shocks? I mean one that comes to mind is if gas is $4 or $5 a gallon this summer, will that cause you to pause the pace at which you acquire or just you will look to acquire things set at a cheaper rate?

We've seen actually the gas issue before in terms of running our business plan or creating the business plan that we've created. At Pan Pacific we went through a couple of gas prices.

We have actually found that to be a benefit, and the reason why is because our customer base for our centers typically come from one to three miles. And once in a while, that customer may drive a bit further to get more value.

So what we have found is that with gas prices go up, that is an actual benefit in terms of owning neighborhood and community shopping centers. So, although we are watching the macro picture like everyone else, we believe that could be a positive rather than a negative in terms of increased sales at our community centers.

Okay, that's good to hear. The three California shopping centers that you purchased for $121 a square foot, what would the replacement cost be of those centers maybe ballpark?

The replacement cost for these centers -- now these are very nice centers in terms of the quality of construction. They are in I would call excellent locations in terms of their -- with very, very strong tenant mix.

To replace those centers, I would probably tell you you're in the $250 to $300 range. Again depending on the market, but on a blended basis that's what it would cost to reproduce the quality of these assets.

Another thing I'd point out is that these assets, the borrower had acquired the assets between 2004 and 2007 at a cost of approximately $70 million. What we paid 52 for had previously been acquired for around $70 million.

Great, the Crossroads Shopping Center which you had on a want-to-buy list for so long, what finally motivated the seller to want to sell it to you?

I think a couple of things. Number one, the seller has been very active for many, many years and is getting to a point in his career that he wanted to diversify his holdings. And more importantly, he really looked at the options that he had and with the relationship we had developed with him and as a shareholder at Pan Pacific, he basically looked at this from an estate planning purpose and made the decision that we would be the best partners in terms of doing this transaction.

And on top of that, he did take our stock. The second part of the transaction is we believe a situation -- and again this is driven through estate planning that he really wanted to own stock in a company who is very familiar with and a management team who is very familiar with -- but more importantly, he was willing to take that stock at a premium to where the stock will be trading because of his knowledge of the team here at the Company and the knowledge in terms of the asset and what the asset will do when we are on board managing as we are now with him and when we end up hopefully owning 100% of the asset.

So do I understand you? Part the consideration that the seller is accepting for Crossroads will be stock in ROIC?

That is correct. He has the choice to take cash or stock, but we believe that he will be taking stock in the second part of this transaction.

That kind of is a good lead-in to my next question. I guess if he is considering this and he is a sophisticated seller, then he has some idea of how you folks are going to address the warrant overhang. Could you speak to that at all?

You know what? The warrants didn't come up in terms of our discussion, and I can't tell you today whether the warrants really are an overhang or not.

So, they are out there, and as we keep building the Company, the capital markets will decide what to do in terms of the warrants. But we like the warrants. We think they are a nice source of capital, equity capital going forward at no cost to the shareholders of the Company.

One final question. In the fourth quarter, the leases that had come due and that you perhaps have re-leased, can you give us some color as to what kind of pricing you got there?

Well, the rates on the renewals have been consistent with our underwriting, and then there's also been a fair amount of leasing of first generation space. So previously vacant.

I thank you and the pace of acquisition is very impressive. It takes my breath away. Good luck.

Andy Lewis Charles, Motley Fool.

I have one more question for you. Concerning your leasing pipeline, how is the flows looking? Are you -- on the anchor front and also the ancillary units, are you guys -- is your leasing team feeling comfortable with the flow and interest you are getting on the vacant spaces?

Yes, we have stabilized properties and redevelopment properties and we have signed two anchor leases on our redevelopment portfolio and the stabilized properties have been -- the leasing activity has been strong.

And do you see it trending more positive in the future? I mean are there -- whether it's through industry talk or from your own research, are you optimistic forecasting forward as in it's going to get stronger? Do you think it's just stabilized? Or there's anything for your team to be worried about?

We see the leasing activity as positive on both the stabilized and the redevelopment properties and the activity has been strong.

The point that we talked about previously is the fact that we are coming in at reduced cost and therefore our ability to lease up space relative to competitive properties in the area is pretty strong. We can go having acquired vacancy in our acquisitions and go to -- and having paid significantly less on a per-square-foot basis and our ability to go and again increase occupancy, that is a big advantage.

And you are handling all leasing in-house, correct?

Leasing is done in-house at the Company. We don't use third parties to do anything.

That's great. Thanks a lot, Stuart.

Jonathan (inaudible) Investments.

I wanted to get a better understanding of how you guys expect G&A to grow over time. I was hoping maybe you could maybe elaborate on the growth over the next three to five years or maybe you could tell us what percent of revenues you expected to be at as the portfolio grows. Anything would help.

We can talk about 2011 and we are projecting between $8.5 million and $9 million. Part of that is a function of acquisitions because again, G&A is really a gross number offset by management fees embedded in the NOI line.

So on a run rate basis end of the year, we are projecting to be closer to the $8 million which will again we benefit from having the entire portfolio and the management fees offsetting some of our gross cost. But for 2011, we're projecting between 8.5 and 9.

And our goal long-term as at Pan Pacific is to keep that number in the 6 to 7% range long term. That is what we did at Pan Pacific and we actually have better efficiencies at ROIC than we did at Pan Pacific but that would be our long-term goal.

I'm not showing any further questions in the queue. I'd like to turn it back over to Mr. Tanz for closing comments.

Great. In closing, I would like to thank all of you for joining us today. If you have any additional questions, please contact John, Rich or me directly. Thanks again and have a great day everyone.

Thank you, ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.