Retail Opportunity Investments Corp (ROIC) 2012 Q1 法說會逐字稿

Welcome to Retail Opportunity Investments first-quarter 2012 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 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 the Company's off to a strong start in 2012. We continue to successfully execute our business plan of broadening our portfolio through acquiring quality grocery-anchored shopping centers and quickly enhancing value through our proactive management and leasing programs.

In terms of acquisitions, we have over $75 million of shopping center investments committed today. Plus we have another $100 million that we currently have tied up and are midway through our due diligence process. Beyond the $175 million, our pipeline of acquisition opportunities continues to be active. Importantly, we continue to focus on acquiring exceptional shopping centers in strong markets that offer a combination of stable cash flow derived from long-term leases to strong, well-established anchor retailers, along with identifiable opportunities to quickly enhance value.

As an example, during the first quarter, we acquired a grocery and drug store-anchored shopping center in San Diego. We acquired the property in an off-market direct-to-owner transaction. The center is 100% leased and is anchored by strong grocery and drug store operators with well-established customer bases in the community. These anchors provide the center with a base of reliable recurring cash flow.

In terms of upside, the property is fully entitled for a 10,000 square-foot expansion specifically for inline retailers that will complement the grocery and drug store anchors. We were already aggressively pursuing the expansion and have about 70% of the space spoken for. We expect to start construction next month, which should be completed by year-end. We acquired the property at a going-in cap rate of approximately 7% based on existing in-place leases. Once we complete the expansion, our all-in overall cash yield will increase to upwards of 9%.

To give you another example, we are in escrow to acquire an exceptional irreplaceable shopping center in the San Francisco market. The property is well located in a densely populated community with very strong demographics, including a population base of 250,000 within a five-mile radius at an average household income of $126,000.

We are acquiring the property in an off-market direct-to-owner transaction. While the center is anchored by a well-established regional grocery with very strong sales numbers, the property as been undermanaged by the previous private local owner. As a result, the center is currently 80% occupied with a number of inline spaces available, which represent a great opportunity for our leasing team. In fact, notwithstanding currently being in escrow, which we expect to close on within the next few days, we are already in discussions with inline retailers for the available space. Once we bring the occupancy level up to be in line with our core portfolio, our yield will increase by about 200 basis points similar to our acquisition in San Diego.

These two acquisitions are indicative of the types of unique off-market opportunities that we are sourcing by capitalizing on our long-standing relationships and in-depth knowledge across our core markets. They were also indicative of our ability to quickly and significantly enhance value.

Along with focusing on broadening our portfolio, we are also very focused on maximizing property operations. As Rich will discuss in a minute, we are off to a great start in 2012, including increasing our overall portfolio occupancy and achieving solid re-leasing numbers. We also posted a double-digit increase in same-center net operating income for the first quarter. So with our ongoing success both with securing off-market opportunities to acquire exceptional shopping centers and with our property operations, we are fully on track with achieving our goals for the year.

And now I will turn call over to John to discuss the Company's financial results for the quarter. John.

Thanks, Stuart. Starting with our income statement, for the first quarter, the Company had $16.6 million in total revenues as compared to $10 million in total revenues for the first quarter of 2011 representing a 66% increase. The significant increase in revenues reflects the growth of our portfolio from acquisitions over the past year, as well as strong leasing activity. And as Stuart noted, same-center net operating income increased significantly by 10% on a cash basis for the first quarter.

In terms of net income and funds from operations, during the first quarter, the Company had net income of $1.1 million equating to $0.02 per diluted share. FFO for the first quarter was $8.4 million or $0.17 per diluted share. While our earnings and FFO per-share numbers are below results from the first quarter of 2011, you may recall that during the first quarter of 2011, we had a bargain purchase gain of $5.8 million related to the conversion of three mortgage loans to fee interest.

Also affecting the quarter-over-quarter comparative per-share results is the equity raise that we completed in the fourth quarter of 2011. As a result, our share count increased by 19% for the first quarter of 2012 as compared to the first quarter of 2011.

With respect to dividends, during the first quarter, the Company distributed a cash dividend of $0.12 per diluted share equating to a 71% FFO payout ratio.

Turning to our balance sheet, at March 31, the Company had a total market cap of approximately $840 million with $193 million of total debt outstanding equating to a conservative debt to total market cap ratio of approximately 23%.

With respect to the $193 million of debt, $125 million is unsecured and only $68 million is secured. On a square footage basis, 87% of our portfolio is unencumbered and at March 31, we had $15 million outstanding on our $175 million unsecured credit line. Subsequent to the end of the quarter, we repaid a $6.8 million mortgage, which was the only debt we have maturing for the next two years.

Lastly, in terms of FFO guidance, we continue to expect FFO per share for 2012 to be between $0.68 and $0.78 per diluted share for the year. There are two primary drivers in achieving our 2012 guidance. One key driver is already largely in hand, that coming from internal growth attributed to our leasing activity during the past year. The other key driver is acquisitions. As Stuart discussed, we already have about $175 million in acquisitions spoken for. So we are well on our way to reaching our goal of acquiring $250 million during 2012.

Now Rich Schoebel, our COO, will discuss property operations. Rich.

Thanks, John. At March 31, our portfolio totaled 34 shopping centers encompassing approximately 3.9 million square feet of gross leasable area diversified across the West Coast. Ten 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 own seven shopping centers.

As Stuart indicated, demand for space across our portfolio continues to be strong and we continue to work diligently to capitalize on this. In fact, during the first quarter, we increased overall portfolio occupancy by 100 basis points from 91.3% at year-end to 92.3% as of March 31. This is particularly noteworthy given that, in the shopping center industry, leasing activity is usually relatively quiet in the first quarter following the holiday season with occupancy typically slipping a bit. So the fact that we actually increased our overall occupancy speaks to the quality of our portfolio, to the strength of our markets and to our management and leasing capabilities.

Specifically, during the first quarter, we executed 53 leases totaling approximately 172,000 square feet. Breaking that down between new and renewed leases, during the first quarter, we renewed 23 leases totaling 122,000 square feet, including two key anchor tenants. Of the 23 tenants that we renewed, the vast majority simply exercised renewal options, many of which had built-in clauses stipulating that the renewal base rent would be the greater of market rent or their previous rent.

Given that many of these leases were put in place five or so years ago at the height of the market, most of the renewals were executed at the previous existing rent. Accordingly, on a same space comparative basis, base rents increased modestly on average by 1% on a cash basis during the first quarter.

In terms of new leases, during the first quarter, we executed 30 new leases totaling 50,000 square feet, all of which were inline shop space and the bulk of this involved leasing up previously vacant space at newly acquired properties where we achieved base rents that were at or above our initial underwriting.

Furthermore, we are currently in discussion with various anchor and inline retailers with respect to the available space across our operating portfolio, which totaled approximately 261,000 square feet as of March 31.

With respect to releasing spreads on new leases, given that the bulk of the space was previously vacant, the amount of expiring space was minimal. So the same-space comparative number, which was approximately 5% on a cash basis, is not a statistically meaningful number. However, the fact that we achieved a positive spread speaks to our ability to quickly add value at newly acquired centers.

I would also like to add that while pushing rental rates is an important part of negotiating with new tenants, equally important to us is securing the right mix of tenants and newly acquired properties. Having the right mix of tenants enhances consumer traffic at our centers and drives up demand for space, which in turn will enhance our ability to drive up rental rates going forward. Our strategy is to aggressively work our tenant base with the goal of enhancing not only near-term value, but also long-term value at each shopping center. Now I'll turn the call back over to Stuart.

Thanks, Rich. Before opening up the call for your questions, I would like to make a couple of additional comments starting with our dividend. Based on our ongoing success, I am pleased to announce that the Company has again increased its cash dividend. The quarterly dividend, which we paid on May 30, will be $0.13 per share representing an 8.3% increase over our previous cash dividend.

Since we commenced paying cash dividends back in the second quarter of 2010, we have increased the dividend five times, more than doubling the dividend along the way. Continuing to deliver reliable cash dividends to our shareholders that steadily increase over time in step with our growing business and cash flow will continue to be an important part of our business plan.

At the core of our business plan is maintaining a strong and diverse portfolio and tenant base. Key to our acquisition program is maintaining a well-distributed, geographically diverse portfolio. To that end, as our ongoing acquisition activity indicates, we are continuing to broaden our portfolio in each of our key markets. In fact, with respect to the $175 million of shopping center investment opportunities that we have lined up thus far in 2012 involving eight properties, three of the shopping centers are located in Southern California with two in the Los Angeles market and one in San Diego, two investments are located in northern California with one in the San Francisco market and one in Sacramento and three shopping centers are located in the Pacific Northwest with two in Seattle and one in the Portland market.

Just as we are focused on maintaining and enhancing our geographic balance, we continue to keep a careful eye on furthering our tenant diversity. Today, our portfolio is leased to over 600 tenants, the vast majority of which individually account for less than 1% of our total base rent.

Building and maintaining a diverse portfolio of quality shopping centers in strong markets, together with being very hands-on in closely managing each property as Rick said, aggressively working our tenant base everyday is at the very core of our success today and will continue to drive our ability to generate consistently strong results going forward.

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

(Operator Instructions) Craig Schmidt, Bank of America.

Stuart, I guess my first question is how does the competition for acquisition stand today versus say a year ago?

The competition out West -- there is competition. We don't see a lot of institutional capital chasing very high-quality stabilized assets. We don't see a lot of REITs that active. And on the private side, we see some activity, but when you look at it in comparison year-over-year, it is -- I will tell you it is a bit more active, but we still have the ability to continue doing what we've done in the past and that is to continue to source off-market transactions given our relationships.

And what do you think you might be at the end of the year with acquisitions?

Well, we are off to a great start. Primarily everything that we have -- we've closed or in the pipeline are off-market transactions. And I think as we move through the year, I think we will certainly meet our target of 250 and hopefully do better.

Okay. And just lastly, do you have a sense of what portion of your same-store NOI bucket is relative to the total over NOI for the first quarter?

Well, at 17 of the properties that we owned overall, the percentage I don't know off the top of my head.

But about half?

Again, that number will change as the year goes by, Craig, because, as we've discussed, it's all 17 properties that we owned for the quarter and obviously, as additional properties roll in, we will add those in as we go forward.

Okay, thank you.

Cedrik Lachance, Green Street Advisors.

Just have a big picture question in regards to your leasing infrastructure. I would like you to describe it a little bit. Where do you have teams in place? How many people are now in plus in your leasing infrastructure? And how big do you think the portfolio can get to based on the number of people that you have at this point?

Well, the good news about our leasing structure is that our leasing staff is the same staff that we had at Pan Pacific, both in the Pacific Northwest and California. So we have worked with these people many, many years and currently, we've got two up in the Pacific Northwest led by Betsy Shriver and we've got two in California led by Steve Erhard. Again, both old employees of Pan Pacific.

Going forward, as we continue to grow the portfolio, we will look at adding to our leasing team. But right now given the demand that we see in the market and given the fact that we have worked so closely together for so many years doing what we have done, we believe that we will continue to be up for that challenge and hopefully continue to lease at the pace we have been leasing.

Okay. And then in terms of cap rates, when you go after properties, let's try to think about a property of similar quality with similar demographics in a similar area, if that property is located in California versus being located outside of California, what do you think that cap rate difference needs to be?

The cap rate needs to be? Outside of California?

Yes. So if you think along the West Coast outside of California, how much more or less would you want to have in terms of cap rates versus a property that is in California?

Well, the West Coast really has four distinct markets that we operate in and when you look at cap rates and compare them to California, I will tell you the Pacific Northwest is probably 25 basis points different, but they are all pretty close. I mean there is really not -- for the quality of assets -- grocery-anchored assets that we acquire, there is really not that much differential between the various markets.

Okay, great. Thank you.

Paul Adornato, BMO Capital Markets.

I'm going to ask my favorite question and that is was wondering if you could provide any update with respect to the warrants and perhaps more broadly looking at the next let's say $100 million of potential acquisitions, how might we expect that to be funded?

Addressing the warrants, Paul, we continue to meet with our advisers, continue to evaluate the alternatives. But, at this point in time, there is nothing new to report.

Okay.

The $100 million, John, in terms of funding the next $100 million of (inaudible)?

Again, we have capacity under our existing credit facility, which also has an accordion and we would anticipate issuing new term debt as we need capacity under our credit facility. And so we believe that that support is there from our bank group and that is how we fund it.

Okay. And Stuart, you talked about kind of the quick turnaround that you are able to execute on these assets. Might that include some dispositions in the intermediate term?

We continue to look at the disposition side and as we look out certainly for the balance of the year, we will focus on that. But again we, Paul, as you know, are in the growth stage of the Company so -- and there are several assets that we don't have a lot of internal growth left. So we do keep evaluating that and as we move through the year, we probably will look at disposing of a couple of assets.

And finally, just looking at the smaller tenants, obviously, in some markets, you're bullish enough to start adding small tenant space, the San Diego asset that you described. Was wondering if you could perhaps generalize and compare the appetite for space amongst small tenants today versus six months or a year ago?

Well, there is demand across all three aspects of the tenant space, national, regional and local. In terms of the local market --

I'd say the demand from the local tenants has picked up this year over last year and we are seeing a lot more inquiries coming in and seeing really good activity from the local tenant base.

Thank you.

Jeff Lau, Sidoti & Co.

Question on the piece of debt or the loan that you guys purchased. Was there something about the shopping center that I guess attracted you to that debt or can you talk a little bit about that?

Sure, I mean the property is located in the Sacramento market. It is a drugstore-anchored shopping center and it is a good property well-located in a strong submarket. The current owner was under a lot of financial distress, and the property was undermanaged. It was only about 70% occupied. We would love to own this center. We purchased the mortgage at about a 25% discount to the face amount and we are currently in discussions with the owner about getting the property in lieu of foreclosure.

Going in -- our analysis going in, Jeff, with all the vacancy is about a 7 -- just over a 7 cap rate. We believe once we get a hold of the property, we can pick that up by 200 or 300 basis points.

Great, thank you.

(Operator Instructions) David West, Davenport & Company.

Just on the incremental $100 million of potential investments you have talked about, could you characterize those a little bit in terms -- are they mostly stabilized properties or was there any repositioning and what kind of cap rates are you seeing on those opportunities?

Well, the $100 million includes three exceptional irreplaceable shopping centers. In the $100 million, there is also Wilsonville, which is a joint venture that we've talked about in the past. That particular project we have passed the 90% mark and we will be purchasing that asset over the next 30 days.

The other two properties are located in Southern California and we -- again, in terms of these assets being stabilized versus value add, I will tell you primarily they are all stabilized, well-leased, but there is some components through our leasing that we believe we can add value. And whether that is kicking a tenant out and retenanting or repositioning one or two of these assets, they are very strong assets and we are very excited about what we see in the pipeline as it relates to what we have under contract.

You addressed my Wilsonville questions. I guess lastly for John, I noticed in the disclosures on the supplement that you added a couple interest rate swaps I think totaling $75 million in April. What kind of impact will that have on interest expenses?

As always, those have been out there actually for a period of time. They commenced in April. We had actually put them on I'm going to say last year and is part of our interest rate management. Again we note in the information that we were 70% plus fixed at 3-30. We are actually 100% fixed today as a function of those swaps, which kicked in in April.

Very good, thanks so much.

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Stuart Tanz for any closing remarks.

Thank you. In closing, I would like to thank all of you for joining us today. If you have any additional questions, please feel free to call John, Rich or myself. You can also, of course, find additional information on the Company's quarterly supplemental package, which is posted on our website at www.ROICREIT.net.

And lastly, for those who are attending the ICSC convention in Las Vegas starting May 20, be sure to look us up. Our booth is C147 Jay Street and we hope to see all of you there. Thanks again and have a great day, everyone.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.