Retail Opportunity Investments Corp (ROIC) 2011 Q4 法說會逐字稿

Welcome to Retail Opportunity Investments fourth-quarter and year end 2011 conference call. Participants are currently in a listen-only mode. Following the Company's prepared remarks, 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. Now I would like to introduce 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. I am pleased to report that the Company had a very successful and productive year in 2011, achieving a number of key objectives and firmly establishing Retail Opportunity Investments Corp as a shopping center REIT on the rise.

During 2011, we expanded our portfolio by 80% in terms of GLA, completing $288 million of shopping centers acquisitions, enhancing our presence across all of our core West Coast markets, specifically adding six exceptional shopping centers to our northern California portfolio, three in Southern California, and adding four shopping centers to our Pacific Northwest portfolio. Very important, we continue to fully capitalize on our market knowledge and long-standing relationships. Together with our constructive balance sheet and considerable capacity to source discrete, off market, director owner opportunities to acquire attractively priced exceptional shopping centers.

Consistent with our business plan, we continue to acquire a balance of stable, well leased, grocery anchored properties, as well as shopping centers that represent exceptional repositioning opportunities where we can fully capitalize on our leasing expertise and long-standing relationships with key retailers to quickly enhance value. In fact, during 2011, we leased a significant amount of previously vacant space and newly acquired properties. As a result, with these leases now in place, we expect to generate strong same store NOI growth in 2012 in the 8% to 10% range on a year-over-year cash basis. We expect that the bulk of this growth will occur in the second half of the year.

Just as we are focused on building exceptional portfolio, we are equally focused on maintaining a strong and flexible balance sheet. During 2011, we successfully completed a number of key financing activities including refinancing our credit facility, significantly lowering our borrowing costs, as well as the turning out $110 million that was outstanding on our line, and we raised upwards of $80 million of equity. Lastly, I'm pleased to report that Retail Opportunity Investment Corp posted an 25% total return to shareholders in 2011, which was the highest among shopping center REITs and substantially above the REIT industry as a whole. A component of our total return was in the form of quarterly cash dividends. During 2011, as we steadily grew our portfolio and business, we increased our cash dividend along the way, doubling the dividend amount during the course of the year. I'm pleased to announce today the Board has declared a $0.12 per share cash dividend to be paid on March 15.

Looking ahead at 2012, delivering reliable cash dividends that steadily increase in step with our growing portfolio, will continue to be an important part of our business plan. Now I will turn the call over to John to discuss the Company's financial results for 2011 and our outlook for 2012.

Thanks, Stuart. For the year ended December 31, 2011 the Company had net income of $9.7 million, equating to $0.23 per diluted share. In terms of funds from operations, FFO for the year was $33 million, or $0.78 per diluted share. Results for the year were positively impacted by bargain purchase gains totaling $9.4 million related to converting mortgage notes to fee interest on four shopping centers during the year.

In connection with the $280 million of property acquisitions completed during 2011, the Company incurred acquisition underwriting costs totaling $2.3 million. Excluding these acquisition underwriting costs, modified FFO was $35.3 million, or $0.83 per diluted share for the year. For the fourth quarter of 2011, the Company had net income of $234,000, equating to $0.01 per diluted share. FFO for the fourth quarter totaled $7.5 million, or $0.17 per diluted share. Included in FFO is approximately $1 million of one-time revenue related to leasing activities on a net basis during the quarter. Excluding acquisition underwriting cost, which totaled $515,000 during the fourth quarter, modified FFO was $8 million, equating to $0.18 per diluted share.

Turning to our balance sheet, at December 31 the Company had $694 million in total assets with $170 million of total debt outstanding, equating to a conservative debt to total assets ratio of approximately 24%. With respect to the $170 million of debt, approximately $60 million of secured debt and $110 million is unsecured. On the square footage basis, 89% of our portfolio was unencumbered at year end. At year end, we had no borrowings outstanding on our unsecured credit facility.

As Stuart highlighted, during 2011 we completed several important balance sheet initiatives aimed at enhancing the Company's financial flexibility and capacity to continue growing. First we extended the maturity on our $175 million unsecured credit facility for another three years, with an option to extend it for a fourth year. We substantially lowered the borrowing costs by more than 100 basis points. In conjunction with this, we entered into a four-year, $110 million unsecured term loan with the same borrowing cost as our credit facility. Additionally, both the credit facility and the term loan have accordion features, providing the Company the flexibility to increase the credit facility to $300 million and the term loan to $175 million. Both the credit facility and the term loan include a covenant package consistent with our investment grade peers. As we have previously stated, our long-term goal is to primarily utilize high grade, unsecured debt. Establishing these two new facilities is an important step in that direction.

With respect to raising equity, during the fourth quarter of 2011, we successfully completed our first public stock offering as a REIT, raising over $77 million in net proceeds. We completed the offering late in the fourth quarter, so the per share impact to earnings and FFO will not be fully reflected until the first quarter. Looking ahead, with this equity raise, together with our conservative 24% debt ratio and untapped credit facility at your end, we have the capacity to execute our business plan for 2012.

Looking ahead at 2012, we currently expect funds from operations to be between $0.68 to $0.78 per diluted share for the year. While on the surface this appears flat as compared to 2011, bear in mind that we had over $9 million in one-time bargain purchase gains in 2011. In our 2012 guidelines, those one-time gains are now being effectively replaced with recurring cash flow from the portfolio and as current, Stuart indicated, a component of achieving our 2012 guidance is already in our grasp, coming from internal growth attributed to our leasing activity during the past year.

In addition to the in-place leasing, the pace of acquisitions will be an important factor in achieving our 2012 guidance. We are assuming that we will acquire approximately $250 million ratably through the year. We are assuming that we acquire properties at an average cap rate of 7%. Included in our FFO guidance is an acquisition underwriting cost assumption of roughly $2.5 million for 2012. Excluding these costs, we expect modified FFO per share to be in the $0.73 to $0.83 range for 2012. In terms of dividends, for 2012, we expect to distribute cash dividends that in aggregate for the year will equate to approximately 70% to 80% of FFO. Now Rich Schoebel, our COO, will discuss property operations.

Our portfolio today stands at 34 shopping centers encompassing approximately 3.8 million square feet of gross leasable area diversified across the West Coast. 10 of our properties, or 30% of our GLA, is located in Southern California, most notably in the Los Angeles and San Diego markets. Eight of our shopping centers are located in our Northern California region, representing 25% of our total GLA, primarily in the San Francisco and Sacramento markets. Nine properties, representing 24% of our total GLA, is located in the Portland, Oregon market and 21% of our GLA is in the Seattle market where we now own seven shopping centers. As these numbers reflect, our portfolio is well distributed, evenly balanced across key West Coast markets which is an integral part of our business plan and investment strategy.

Another 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. As Stuart indicated, our approach is two-pronged. One, acquiring grocery anchored shopping centers that are well leased with stable cash flow where we can enhance value by releasing expiring space and improving the tenant mix over time. Two, acquiring shopping centers that represent exceptional lease up, repositioning opportunities. To date we have acquired 25 stable, well-established shopping centers. Since taking ownership, we have worked diligently at improving the tenant mix, releasing expiring space to new retailers that cater to the daily needs of the surrounding community, as well as aggressively leasing up available space.

In addition to the 25 stabilized shopping centers, we have also acquired to date eight shopping centers that represent exceptional repositioning opportunities. We acquired these properties at a blended yield of 7% based on existing in-place leases, equating to a 72% occupancy rate at the time we acquired the centers. In a relatively short period of time, we have made significant progress with these shopping centers. In fact during 2011, we completed our repositioning initiatives at four of the properties, substantially increasing the average occupancy at these centers to 90% as of your end. Accordingly, these properties are now included as part of our stabilized portfolio, bringing our stabilized portfolio to 29 shopping centers today with an average occupancy rate of 94% as of year end.

We currently have four properties that we are in the process of repositioning that we are on track to complete during 2012. In terms of look looking at our occupancy for the portfolio as a whole, including stabilized and repositioning properties together, we have increased occupancy by 260 basis points from the time acquired each property. At your end, the portfolio as a whole was 91.3% leased. An important part of our leasing strategy is to proactively improve the tenant mix across our portfolio with an emphasis on daily necessity retailers.

AT year end, our top 4 tenants, based on annualized base rent, and 7 of our top 10 tenants are grocery and drugstore operators, including a strong mix of national operators such as Safeway and Kroger and well-established regional grocers such as New Season and Sprouts. In addition to our daily necessity focus, we are equally focused on enhancing our tenant diversity as we grow our portfolio. With adding 13 shopping centers to our portfolio in 2011, our tenant base has expanded significantly, going from 285 leases at the end of 2010 to 574 releases as of year end 2011, off which, 542 leases account for less than 1% of our total base rent individually.

In terms of leasing opportunities going forward, we expect demand for space at our centers to be strong in 2012. In fact, thus far in the first quarter, we are already seeing a significant amount of retailer interest in leasing space across all of our core markets, considerably more than what is typical in the first quarter when leasing market is relatively quiet following the holiday season. As of year end we had approximately 277,000 square feet of available space across our portfolio, of which, we are already in discussions with various retailers on about 90% of that space. Additionally, 105 existing leases are scheduled to expire in 2012, totaling 374,000 square feet.

While the vast majority of these leases are to smaller in-line tenants that were for the most part put in place five or so years ago at the height of the market, given the strength of the markets today and coupled with our hands-on management which is considerably more proactive than the mom-and-pop management of many of the previous owners, we expect to renew and release the expiring space at or above current rent levels on average. Furthermore, we have several anchor space opportunities that we are proactively pursuing retenanting where we expect to significantly increase rent, potentially by as much is double the previous rent levels. Taking all of this into consideration, we expect to achieve solid leasing results and NOI growth across our portfolio in 2012. Now I will turn the call back over to Stuart.

As we get under way in 2012, in addition to the strong start on the leasing front, we are also off to a good start with acquisitions. We already have a total of $65 million in our sights thus far, including one shopping center that we acquired last week for $29 million and another exceptional shopping center that we have under contract for $16 million. Additionally, at our newly developed shopping center, Wilsonville Town Center, we are fast approaching the 90% leasing threshold, whereupon reaching it, we will then acquire the property outright for approximately $20 million, which equates to a 7.75% cap rate.

Looking beyond the $65 million of acquisitions that we currently have lined up, our pipeline is very active. We are continuing to see a strong flow of off market opportunities to acquire exceptional shopping centers, many of which are being put in place discreetly as a result of being under capitalized or facing significant loan maturities. With our market knowledge, relationships, and financial wherewithal, we are well-positioned to continue capitalizing on these opportunities. As such, we are confident that we can acquire $250 million in 2012. While we are confident that we will achieve our growth objectives in 2012, rest assured that we remain committed to our long-standing prudent strategy of carefully seeking out only the most attractive opportunities to acquire irreplaceable shopping centers that will provide the Company with a balance of long-term, stable cash flow and good growth opportunities for years to come.

Finally, in the two years time since we commenced operation as a shopping center REIT, we have worked diligently at building an exceptional portfolio and operating platform. Today, we have successfully completed over $650 million of shopping center investments, establishing a strong presence in four key markets across the West Coast, markets that our management team has operated in for over 20 years and knows extremely well. Today, we firmly believe that we have the critical mass and infrastructure in place to drive strong, consistent operating results going forward. And with our conservative balance sheet, we are poised to continue growing our portfolio and taking the Company to new heights. Now we will open up the call for your questions.

(Operator Instructions).Paul Adornato, BMO Capital Markets.

Stuart, I was wondering if you could tell us a little bit about if your appetite for risk has changed as you go into 2012, that is, the proportion of stabilized versus opportunistic versus lease up opportunities, what should be expected in 2012?

I think you can expect what you have seen over the last two years in terms of our growth. We are going to continue to focus on buying very strong asset shopping centers that are stabilized, where there will upside in terms of either vacancy or rollover. As well as, looking at opportunities that may come on the debt side. Those are hard to come by. We have been focused, of course, been making sure that we -- when we look at those type of opportunities to make sure that we underwrite them in terms of what the upside we see, but again the focus will continue to be more on the stabilized side as we move forward.

You mentioned some strength among retailers looking for space. I was wondering if that was at the anchor level or at the small shop space, I was wondering if you could break that down a little bit.

We are seeing it across all three, national, regional and local, with an emphasis on the local side in the first quarter, we are off to a very strong start. Of course, we don't know what is going to happen as we move through both the quarter and the year, but demand is definitely much better today than we have seen over the last three years as it relates to our portfolio.

Finally, with the stock price around $12, I was wondering if there's any update on the warrants?

Again, as you know, the warrants by their terms are a means of raising equity. We will continue to work with the warrant holders to structure a mutually beneficial transaction to provide that equity ideally when we need it as opposed to the single point in time in 2014, and would like to believe that will make progress in '12, but again that is yet to be determined.

Craig Schmidt, Bank of America Merrill Lynch.

It looks like your activity in terms of acquisition picked up in northern California. Of the $250 million for 2012, will that also be as active?

We are going to continue to be active across all the regions that we operate in. What we have done so far this year has been the Pacific Northwest, and Southern California. But again, we will continue to be focused on opportunities across all our primary markets.

Earlier in the call you mentioned the same store NOI growth of approximately 8% to 10%. When would you be reporting some additional metrics outside of occupancy for us to look at your internal growth?

Going forward into 2012, it is our expectation that we will be reporting same-store and leasing going forward.

Jeff Lau, Sidoti.

I was just wondering, now the Company is still spread between three or four states, would you still consider yourself geographically concentrated at all?

As you've heard, we are really focused and have been focused on the West Coast of the country which in our view is four distinct, separate markets. Seattle, Portland, San Francisco Bay area, Sacramento and Southern California which is primarily Los Angeles, Orange County and San Diego. Those four markets are the markets we will continue to focus on. In terms of the East, we will continue to look for opportunities in the East, but we have yet to find the right transaction. We continue to find much more attractive opportunities out West.

Would you say you are closer to breaking that ice on the East or is still in the same spot as last quarter?

We continue to look for opportunities in the East, but we find the West to have much more fragmentation in the market as it relates to grocery anchored shopping centers that are owned by REITs, and the numbers are quite dramatic. It is a much, much higher percentage in the East than in the West. We just continue to feel that in terms of the marketplace, the opportunities, and of course our knowledge being on the West Coast for over 20 years doing what we do, we will continue to really source in the West versus East, but, on the other hand, we are continuing to look in the East. And if the right opportunity comes along, we will consider that and potentially buy it.

Is there anything on the books that you are planning to sell at all?

The answer is yes. We have a number of assets that we have identified where value has been created through lease up and/or management over the last couple years that has now, from an NOI perspective, don't have must much more internal growth. We will begin to look at selling some of those assets as we move into the second, third quarter of the year because it is important to show our investors and shareholders that we can maximize value on properties that we buy and more importantly, that we can redeploy that capital into assets that we can build value with.

Cedric Lachance, Green Street advisors.

Want to go back again on the markets. Your definition of core markets on the West Coast, as well as your appetite perhaps to expand that definition a little bit, and other than what you have identified, which seems to be in reasonable proximity to the ocean, would you be more comfortable going in land, whether it's Vegas, whether it's any other markets that are still considered West Coast but not necessarily particularly close to the coast?

I will tell you, we certainly like being close to the ocean. In fact, our call this morning is from our office in La Jolla. But when it comes to looking at the more, what I would call tertiary markets in terms of the West Coast, we are being extremely selective in terms of buying assets in those markets, primarily because of rent growth and income growth going looking out the next couple years. That doesn't mean we won't buy anything because if the right opportunity comes along, we will look at buying something. But again, our focus will continue to be those primary markets where demographics, from both a density and income standpoint, are very high.

In terms of other markets out West, like Vegas, you probably know from the Pan Pacific days, we were one of the largest operators in Nevada. We continue to watch some of these other markets. There may be an interesting entry point looking out the next year or two, but again with the fragmentation that we see on the West Coast, we will continue to keep doing what we have been doing geographically.

David West, Davenport & Company.

First a question regarding comfort with financial leverage. You noted right now it is very modest, you see sides of 24% the debt to asset ratio. Is there an upper limit to that number that you would have a comfort factor with?

We have said previously, 40% to 50% and again 45% is what our target leverage is.

Again, as a percent to percent assets?

As a percent of assets, yes.

John, probably another quick question for you on the number side. Educate me a little bit regarding the warrants if the share price trade trades about $12 for some period of time, would you have to start counting the warrants in your fully diluted share base?

We would indeed for fully diluted under the treasury stock method. Again, based upon where we have been to date, there has not been significant dilution. To the extent that, again, we do move up significantly, there will be dilution, I point that out that is an accounting treatment as it relates to dividends and everything else. Again, it is somewhat of a twist to the story, but one that I think people will understand.

(Operator Instructions). Brett Reiss, Janney Montgomery Scott.

Barnes & Noble, do we have any exposure if they go under and if they go under, is it good, bad, or just a non-event for us?

In our current portfolio, we have no Barnes & Noble. In a joint venture that we've got out in Bellevue, there is a Barnes & Noble at that property. But the rent that Barnes & Noble are paying is substantially below market and we've actually had a couple of LOIs already come in for that space at more than double than what they're currently paying. But they are not going anywhere at the present time. In terms of our direct portfolio, no exposure again in terms of Barnes & Noble.

I may be beating a dead horse, but circling back to the warrants. If you pay out 70%, 80% of funds from operations, the dividend is going to lift next year to $0.54 to $0.62. And between that and you're doing such a good job, people will latch onto the story. The pressure for the stock to be above $12 is going to become greater. Can you give us some feel or color of how you could stagger an exercise of the warrants so it is not the big dilutive hit that we are all concerned about?

Again, I don't think this is the forum to go into any kind of details as it relates to our discussions. I will say that we have worked diligently to structure a transaction to accelerate the warrants. I would point out that we look at this from the viewpoint of the common shareholders. And the only way that we are going to end up with a transaction is based upon what is good for the common. We will continue to work on it, but at this point in time, it will be premature to lay out any specific scenario.

I show no further questions from the phone lines at the moment. I would like to turn the conference back to Mr. Tanz for any final remarks.

Thank you. In closing, I would like to thank all of you for joining us today. If you have any additional questions always feel free to call John Roche or myself. Also, you can find additional information on the Company's quarterly supplemental package, which is now posted on our website at www.roicreit.com. Thanks again and have a great day.

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