Retail Opportunity Investments Corp (ROIC) 2012 Q2 法說會逐字稿

Welcome to Retail Opportunity Investments second-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 that we had another strong and productive quarter. We continue to broaden our portfolio and operating platform in our core markets on the West Coast. We also achieved exceptional property operating results which helped to drive our financial results to new heights. And we enhanced our strong balance sheet.

Before going through the details of the quarter, I would like to first touch on our announcement this morning regarding the Company's moving its headquarters to the West Coast. As many of you are aware, when we commenced operations as a shopping center REIT back in 2009, our target markets for acquiring shopping centers was the West and East coasts. Notwithstanding, giving careful consideration to numerous opportunities to both coasts, today our acquisition activity has focused out West, were we continue to find exceptional opportunities. With that in mind, during the second half of the year, we will be moving our corporate operations from New York to San Diego, combining corporate functions with property management and leasing functions in one location.

Additionally, once the transition to the West Coast has been completed, John Roche will step down as CFO. John's leadership and invaluable contribution has been instrumental to the Companies growth over the past three years. The Company will soon commence conducting an executive search. In the meantime, John will continue to serve as CFO.

Turning to the Company's activities during 2012, starting with acquisitions. We continue to source unique opportunities across our core West Coast markets to acquire an off market direct-to-owner transactions exceptional grocery-anchored shopping centers. Thus far in 2012, we have acquired 9 properties totaling $134 million, including $49 million acquired in the second quarter.

Of the 9 properties acquired year-to-date, 3 of the shopping centers are located in the Pacific Northwest, with 2 in the Seattle market and 1 in the Portland market. 3 of the properties are located in Northern California, including in the San Francisco and Sacramento markets. And 3 are in Southern California, with 1 in San Diego and 2 shopping centers in the Los Angeles market.

The property we acquired during the second quarter in the Los Angeles area is an excellent example of our ability to capitalize on our relationships in market knowledge to acquire truly the irreplaceable shopping centers on attractive off-market terms. The property was developed as of two years ago and as a trophy asset that is the primary grocery-anchored shopping center serving an award-winning master planned community right on the marina in Oxnard, just north of Malibu.

The owner came directly to us. He was facing significant near-term debt issues and was well aware of our track record of working quickly and successfully to resolve owner and lender issues. Needless to say, we jumped at the opportunity. Knowing the market and the property very well, we underwrote and closed the transaction within a few short weeks. Including first acquiring the debt at a discount followed by acquiring the property outright just a few days later.

Another good example of how we are capitalized on our relationships to build an exceptional portfolio is our ground up development joint venture in Portland, Wilsonville Old Town Square. Yesterday we completed the final step, whereby we acquired our development partners equity interest in the project. So we now own the property 100% out right and we retired the construction loans so the property is now unencumbered.

You may recall that we initiated the joint venture in 2010 as part of acquiring an existing 4 shopping center portfolio in the Portland market from local developer that we have known for years. The development is a grocery-anchored shopping center that is currently 91% leased. With the closing yesterday, our total investment in newly developed center is approximately $21 million and our NOI yield is a strong 7.75%.

With respect to leasing, demand for space continues to be strong across our portfolio. We are working hard to make the most of this, as Rich will discuss. We had one of our most active and successful quarters to date. Securing a number of key new leases and anchor renewals helping to drive occupancy to a new high for the year and helping to generate strong same-center NOI results.

Lastly, based on our continued success in steadily growing our business, I'm pleased to announce that the Company has again increased its cash dividend. The quarterly dividend which will be paid on August 31 will be $0.14 per share, representing a 7.7% increase over our previous dividend. This latest increase represents the sixth increase in our dividend over the past eight quarter's since the Company commenced paying cash dividends.

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

Thanks, Stuart.

Starting with our income statement, for the second-quarter the Company had $18.1 million in total revenues, as compared to $11.5 million in total revenues for the second quarter of 2011. The significant increase in revenues reflects the growth in our portfolio from acquisitions over the past year as well as strong leasing activities. And as Stuart noted, same-center net operating income increased significantly again, specifically by 8% on a cash basis for the second quarter. The 8% number is based on the 22 shopping centers that we own as of the second quarter of 2011.

In terms of net income and funds from operations, during the second quarter the Company had net income of $4.4 million, equating to $0.09 per diluted share as compared to $0.02 per diluted share in the second quarter of 2011. FFO was $12 million, or $0.24 per diluted share for the second quarter of 2012, as compared to $0.14 per diluted share in the second quarter of 2011.

The significant increase in net income and FFO per-share is attributable to two things. One, the growth of our portfolio over the past year. And two, the results were positively impacted by a bargain purchase gain of $3.9 million related to the conversion of two mortgage loans that were both acquired in the second quarter and then quickly converted with the interest, including the property in Los Angeles, as Stuart discussed, as well as the property in our northern California market.

Turning to our balance sheet, that June 30, the Company had a total market cap of $888 million with $235 million of total debt outstanding, equating to a conservative debt-to-total market cap ratio of approximate 26%. With respect to the $235 million of debt, 74% of that, or $174 million is unsecured, and only $61 million is secured. And during the second quarter, we've repaid a small $6.8 million mortgage, which was the only debt we had maturing through the end of 2013.

And as we previously discussed, an integral part of our growing business is maintaining a strong and flexible balance sheet geared towards achieving an investment grade rating down the road. One of the key components to achieving this goal is maintaining a large unencumbered pool of assets. To that end, on a square footage basis today over 90% of our portfolio is unencumbered. And in terms of our investment activities, thus far in 2012, of the 9 properties acquired to date, only one of these is currently encumbered.

In addition to carefully managing our debt composition, we are also prudently raising equity through our ATM program to help fund our growth. During the second quarter, we raised approximately $11 million through the program, at an average net price in excess of $12 a share. With our conservative, low leverage balance sheet with no near-term debt maturities and our growing unencumbered asset base, together with our ability to efficiently access equity capital on an as needed basis, we continue to have the financial wherewithal to prudently fund our growth objectives.

Lastly, in terms of FFO guidance for 2012, notwithstanding being a $0.41 a share for the first six months, in part due to the $3.9 million bargain purchase gain in the second quarter, we continue to expect FFO to be between $0.68 and $0.78 per diluted share for the full-year. This takes into account anticipated costs of approximately $3 million to $3.3 million associated with relocating our corporate offices to the West Coast during the second half of the year.

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

Thanks, John.

At June 30, our portfolio totaled 38 shopping centers, encompassing approximate 4.1 million square feet of gross leasable area, geographically diversified and balanced across the West Coast. 11 of our properties, or 27% of our GLA is located in the Southern California, most notably in the Los Angeles and San Diego markets. 10 of our shopping centers are located in our Northern California region, representing 28% of our total GLA, primarily in the San Francisco and Sacramento markets. 9 properties, representing 23% of our total GLA, are located in the Portland, Oregon, market, and 22% of our GLA is in the Seattle market, where we currently own 8 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 our overall portfolio occupancy to a new high for the year of 92.8% as of June 30.

Driving our occupancy higher was another busy quarter of leasing as we continue to aggressively work our properties in the tenant phase. In fact, the second quarter was our most active to date in terms of total GLA leased. Specifically, during the second quarter, we executed 56 leases totaling approximately 284,000 square feet. And through the first six months of 2012, we have executed 109 leases totaling 457,000 square feet.

Breaking down our second quarter leasing activity between new and renewed leases, during the second quarter we executed 32 new leases totaling 109,000 square feet, which is about double what we leased in the first quarter. An Integral part of our re-leasing strategy is to proactively seek out opportunities to improve the tenant mix and cultivate embedded growth. As an example, during the second quarter, we executed a transaction whereby we replaced an anchor tenant that been struggling for some time, which we identified when we initially underwrote and acquired the property. The tenant was hanging on in part because the rent was substantially below market.

Rather than wait until the tenants lease expired, we instead lined up a new much stronger anchor tenant and worked a transaction where, one, there was no downtime between the leases. Two, we received an early termination fee from the prior tenant. And three, the new tenant took the majority of the space at the much higher market rent for anchor space. The net result is a significant increase in the properties rental revenue, plus, we now have some additional in-line space at the center which generated leases at higher rents in anchor space. And we are already in discussion with several retailers for the space.

With respect to renewal activity, we also had another very strong quarter. Specifically, during the second quarter, we renewed 24 leases totaling 175,000 square feet. Very important, during the second quarter, we reduced 5 key anchor leases including renewing several leases well before their scheduled expirations. As result, looking ahead, we have no anchor leases expiring for the remainder of 2012 and we have no anchor leases expiring in 2013.

In terms of in-line space, we currently have 51 non-anchor leases scheduled to expire in the second half of 2012, totaling 102,000 square feet, which represents about 3% of our total lease GLA. As always, we intend to aggressively pursue re-leasing the space, capitalizing on every opportunity to enhance the underlying value of our portfolio.

Lastly, in terms of same space comparative numbers, cash rent increased by 10% on average for new and renewed leasing activity during the second quarter. While achieving a positive spread is important, equally important to us is securing the right mix of tenants, particularly at 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.

With our strong results for the first half of 2012, we are heading into the balance of the year with good momentum. We are excited about our upcoming corporate move to San Diego. As many of you know, our team operated successfully on the West Coast for over 25 years acquiring, leasing, and managing over $5 billion of shopping centers during that time. Since ROIC commenced operations as a shopping center REIT in 2009, we've been the most active acquirers of neighborhood and community shopping centers on the West Coast.

We have carefully built an exceptional portfolio that now totals over 4 million square feet with a solid presence in key demographically strong, metropolitan markets across the West Coast. We've built our portfolio, not by chasing widely marketed deals, but instead, by carefully seeking out off-market transactions.

Many of which have unique circumstances, such as distressed sellers in need of a quick discrete transaction, or properties that have been perceived near-term leasing challenges. That with our team's skill sets, market knowledge, and relationships, we see the opportunity to create a value. We look forward to having our full team based in San Diego. And are excited about the future prospects of our business and our ability to continue delivering solid results.

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

(Operator Instructions). Craig Schmidt; Bank of America.

Just to be clear, are all of acquisitions going forward going to be based on the West Coast? You are not still looking at assets in the East?

Our focus will continue to be primarily the West Coast. However, I always want to leave open the door of doing other types of transactions. So, going forward, again, the focus is the West Coast, but we won't rule out the possibility in terms of the East, given that the opportunities that we are looking at.

Okay, great. Then on the purchase gain, other than the conversion of the mortgage loans to fee interest, would there be any instances where you might also have purchased gains on some of your acquisitions?

I would not expect that, no. Again, directly related to those situations where we have acquired debt is where we've recognized gains.

Jason White; Green Street Advisors.

I have a question for you about your anchors and with the SuperValu news, and previous A&P news, and grocers struggling. Do have any grocers in your portfolio that are giving you a hard time and you think might have struggles going forward?

No. Not that we know of. A lot of our grocers continue to do very well. And surprisingly so, we got some percentage rent in the first quarter from a couple of grocers that was not expected. In terms of Albertsons, we have four centers with Albertsons in them. They account for just under 2% today of our total base rent. But the occupancy costs at our portfolio for Albertsons are only 1% or 2%, which is very low by industry standards. So in most cases, the rent is well below the market and their sales are fine. So we are not that concerned, but we are keeping a careful eye out.

That's helpful. Transitioning to rents, as you are out there in the market leasing some of this space, obviously, when you acquire these properties you acquire them a lot of times with lower occupancy rates. What are you seeing in terms of rents? Are they trending upward or are they flat? What are you seeing in the market?

We are getting really good rents on the acquisitions. Typically we're very conservative in our underwriting and we are able to exceed that on the lease up.

Okay. Final question, I would direct towards you, Stuart, on what you're seeing in the transaction markets across the West Coast for core assets, B assets? What are you seeing out there in the market?

The market, our pipeline is very strong. We continue to get a lot of inquiries in terms of opportunities both off-market and widely marketed assets. For assets that are considered As, those are now trading in the 5.5 cap range to 6.5 cap range. Bs are trading in the 6 cap rate to 7 cap rate. And Cs which we don't spend a lot of time looking at, are probably have traded down about 50 basis points to 75 basis points, so today they are in the 7.5 to 8.5 range.

Paul Adornato; BMO Capital Markets.

Stuart, was wondering if I could just follow on to your last comment. Just trying to get a sense of the cyclicality of your business model. That is, right now you are taking advantage of some great acquisition opportunities. What's the next phase? Or does this rich acquisition environment continue for the longer-term?

We are going to continue doing what we've done over the last three years. There's still a lot of debt that is coming due in the market. And we continue to see stress in the market, as it relates to sellers and their balance sheets. So, the opportunities are still out there. We currently have another $50 million or $60 million under contract today. We are very excited about what the future looks like in terms of continuing to do what we've done in the past.

Great. That's hopeful. Perhaps a related question, looking at the same property numbers, which continued to be very, very strong. If we were to look at the different components of that growth, could you perhaps give us a little bit of color about where that's coming from? From lease up? From existing rent bumps from any other sources?

Yes, Paul. This is John Roche. I'm going to say the bulk of that is really lease up and that portfolio we're up 120 basis points from last year. Expense control is a factor, but primarily occupancy.

Great. And congratulations, John, it has been great working with you. And hopefully you'll be around for a little bit longer. I appreciate that, Paul. And I will be around for the foreseeable future. Great. Thank you.

RJ Milligan; Raymond James & Associates.

Quick question on dispositions and what you're seeing out there in terms of opportunities to recycle out of some of the assets you've already purchased and leased up?

Sure. We continue to look at debt dispositions in terms of recycling capital. We do have an offer on the table for a non core asset that we are contemplating selling at a substantial profit. The IRR on that yield could get as high as 44% to 45% if we decide to sell it. It is a non core asset. We are leaning towards selling the asset. So we are continuing to look to maximize the value creation that we have had.

As we move into the balance of the year, we will continue to look at those opportunities depending on our pipeline. And really go from there, but we are looking at potentially doing some dispositions. And more on point, to show the market about the amount of time and value that we've created for shareholders over the last several years.

Okay. Thanks. To follow-up on Paul's questioning. In terms of the off-market pipeline, would you say it's a greater percentage of financial distress within the owners? O is it more of a lease up story and they just don't have the capital to put into the center?

It is a combination of both. But primarily, distress is one of the advantages we've had in the market. We had the market to ourselves for a period of time but there's been a lot of roll down in NOI. So sellers continue to struggle in terms of meeting their debt obligations and that's proved to be very advantageous from our standpoint.

And one leads to the other because the stressed owner ultimately doesn't have the capital to reinvest in the center, and ultimately impairs the asset that we can cure in relatively short order.

Okay. Stuart, you said that you had the market share to yourselves for a while. Are you seeing more competition for the types of assets you're looking at whether it be on a marketed basis?

On a marketed basis, yes. Institutional capital, some private capital, certainly on the A assets where we do focus and spend a lot of time on. However, again, our expertise and our reputation in the market gives us the ability to go out and really source what I would call transactions that are not widely marketed.

Michael Emery; Elevated Capital.

Can you help eliminate the decision to use the ATM versus a credit facility, given the relative cost there?

Sure. Again, maintaining the flexibility of our balance sheet is an integral part of our business plan. And based upon the opportunities that we see going forward, we can accretively access capital at these levels. As we did selectively this quarter. Again, the net to the Company on the cost on shares issues was in excess of $12 a share.

Okay. Can you give me the average price or is it just in excess of $12, your saying?

In excess of $12. We will disclose that when we file the Q.

(Operator Instructions). Jeff Lau, Sidoti & Company.

The first question is just regarding the relocation expenses. Is it fair to assume a similar number in regards to G&A from 2011 just $3 million to $3.5 million higher? Or should we be going about that differently?

We had said $9 million to $10 million and as a function of this, it will be between $12 million to $13 million. Again, on a longer term basis, we would expect to move to reduce costs on the longer-term.

Okay. Regarding Novato -- the shopping center Novato, is there any plan in place already about the expansions? Or any date? Or is that just an idea right now?

This is a very exciting transaction for us, Novato. It's one of the great locations in Marin County which is a very dense, very high income area just north of San Francisco, the city of San Francisco. So in terms of Novato, our plan there is to build out. We've got 1 parcel there that is entitled to build 55,000 square feet of retail. And there's another part of the site that is entitled for multi-family.

We are moving ahead with the retail and we are very excited about that. We've been in the market. There's a lot of demand in the market even though we just closed the transaction a couple of weeks ago. But what we plan to do is going forward is to build out that part of the project. And we are expecting an unleveraged yield on that 55,000 square feet to be between 12% and 13%. Again, a very exciting project, for in my view, a irreplaceable piece of real estate.

Okay. Great. My last question is regarding a comment Rich made. I don't know if it was noted anywhere, or if you said it, what was the underperforming anchor that was replaced with the new one?

It was a Raylees up in Sacramento. But I think as many of you know, Raylees has been under significant pressure up there.

Who went in that space?

It is a regional operator, who is a former Food 4 Less franchisee up in the Sacramento market, who has now rolled out a warehouse concept to emulate the Food 4 Less franchise that he used to run.

David West; Davenport & Company.

It sounds like you're being so opportunistic in your acquisitions, are you participating in any auctions at all?

No.

Okay. Just one clarification. In your list of largest tenants, JPMorgan is listed. Are those all branch facilities?

Correct.

Those are the bank branches that Chase JPMorgan has been very active in building out their West Coast presence.

RJ Milligan; Raymond James & Associates.

I'm sorry if I missed this. But Richard, did you say what the leasing spreads were on the renewals in the quarter?

No. I didn't. But where are we? So same space, cash rents for new leases, they were up about 34%, which is largely driven by that anchor lease in Sacramento. Renewals are down just a little bit which is largely driven by another anchor space where the tenant was paying substantially above market which we identified when we underwrote the property.

Is there a way to break out those 2 anchors for the new leases in the renewals to get a more normalized look at what the spreads were?

It could be broken out, but it would be fairly insignificant data point, I believe.

Okay, so about neutral on both?

Yes.

Jason White; Green Street Advisors.

Sorry, one more the question. I was curious on an in-place cap rate for your acquisitions. I realize there, some of them were notes, but on the purchase price, an average of what that rolled up to?

Yes. On average it was about 7.5 on a cap rate basis, with about 100 basis points of additional growth from primarily lease up, Jason, over the next 12 to 18 months.

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

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.

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