Retail Opportunity Investments Corp (ROIC) 2013 Q2 法說會逐字稿

Welcome to Retail Opportunity Investment's second-quarter 2013 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 the 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.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements and expectations. Information regarding such risks and factors is described in the Company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K. Participants are encouraged to refer to the Company's filings with the SEC regarding such risks and factors as well as more information regarding the Company's financial and operational results. The Company's filings can be found on its website.

Now would like to introduce Stuart Tanz, the Company's Chief Executive Officer.

Thank you.

Here with me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer. We are pleased to report that the Company had a very productive quarter and first half of the year. In fact, in terms of acquisitions, 2013 has thus far proven to be our most active and successful to date. Through the first six months, we acquired 182 million of grocery-anchored shopping centers, including 142 million acquired in the second quarter.

Importantly, through our existing relationships we continue to cultivate rare off-market opportunities to acquire exceptional shopping centers in the strongest sought-after markets on the West Coast. The four shopping centers we acquired during the second quarter are excellent examples of this. In the San Francisco Bay area, we acquired a grocery-anchored shopping center that is well-situated in a densely populated residential community with an average household income of over $114,000. The supermarket that anchors the center has a very established customer base with the property. In fact, this center is one of the grocer's best-performing highest-volume stores in their portfolio.

The property is currently 91% leased, providing immediate upside through leasing the available space. Additionally, the existing leases are substantially below market with a considerable number of them rolling within the next 12 to 24 months, with no renewal options. It is an ideal opportunity for our Northern California leasing team to take full advantage of and enhance the underlying value going forward.

With this acquisition we now own six shopping centers in the Bay Area totaling over 500,000 square feet. In addition to expanding our portfolio in the Bay Area, during the second quarter we acquired another grocery-anchored shopping center in San Diego. As we discussed on our last call, we added another shopping center to our Los Angeles portfolio, specifically in Diamond Bar, where we now own and control the two primary grocery-anchored shopping centers in that community.

With respect to the Pacific Northwest portfolio, specifically in the Seattle market, during the second quarter we acquired a recently developed grocery-anchored shopping center. As we discussed on our last call the developer became capital-constrained and as a result was not able to complete the initial lease-up. Since acquiring the property, we have already begun to lease the available space and we are on track to have the property over 90% leased by year-end.

Along with acquisitions, we continue to focus on maximizing property operations. We increased our overall portfolio occupancy again during the second quarter and achieved a significant increase in same-center net operating income.

Additionally, we are pleased to report that during the second quarter the Company was awarded investment-grade ratings from both Moody's and Standard & Poor's. Becoming an investment-grade rated Company has been one of our core objectives since commenced operations as a shopping center REIT.

While we have carefully grown our business, starting from scratch in late 2009, to a portfolio that to date totals over 5 million square feet, we have worked hard at maintaining a strong low-levered unencumbered balance sheet. We are pleased that our investment, property management and financing disciplines have earned these investment-grade ratings. Looking ahead, being in a position to now access the investment grade unsecured debt market, we believe enhances our ability to continue growing our portfolio and business.

In terms of equity, as we discussed on our last call, since the beginning of the year, a considerable number of the Company's warrants have and continue to be exercised. Thus far in 2013, we have received over $220 million in equity proceeds from warrants that have been exercised, including $65 million of proceeds during the second quarter. As it stands today, approximately 77% of the Company's warrants have been retired.

With that, I will turn the call over to Mike to take you through our financial results for the second quarter and first six months, as well as our outlook for the second half of the year. Mike?

Thanks, Stuart.

With respect to the Company's financial results, we continue to achieve record highs in total revenue and net operating income thanks our ongoing acquisition and leasing activity. For the second quarter the Company had total revenues of $26.1 million and net operating income of $6.6 million, which is more than double the amount of total NOI reported for the second quarter of 2012. For the first six months of 2013 the Company had total revenues of $50.4 million and net operating income of $12.5 million, again approximately double of that reported for the first six months of 2012.

Additionally, net operating income on a same-center comparative basis continued to increase significantly, as Stuart indicated. Specifically same-center cash NOI increased by 9.5%, which is the fifth consecutive quarter that we achieved same-center NOI growth in excess of 7%.

In terms of net income and funds from operations, during the second quarter the Company had net income of $2.5 million and total FFO of $12.7 million. For the first six months of 2013, the Company had net income of $4.8 million and total FFO of $24.2 million. As Stuart touched on, during the first six months, a significant amount of the Company's warrants were exercised. Specifically, 18.4 million warrants have been exercised to date, including 5.4 million warrants exercised in the second quarter.

As a result, our total weighted average shares outstanding increased substantially by approximately 40% for the second quarter and by 33% for the first six months, as compared to the weighted average shares outstanding for the second quarter and first six months 2012. In terms of our per share results, taking into account the increased weighted average shares outstanding, net income for the second quarter of 2013 was $0.03 per diluted share and FFO was $0.18 per diluted share. For the first six months of 2013 the Company had net income $0.07 per diluted share and FFO of $0.36 per diluted share.

With respect to our balance sheet at June 30, the Company had a total market cap of $1.4 billion with $386 million total debt outstanding, equating to a conservative debt to total market cap ratio of approximately 27%. With respect to the $386 million of debt, approximately 80% of that, or $305 million is unsecured, including $105 million outstanding on our unsecured line of credit.

As Stuart discussed, during the second quarter we were awarded investment-grade ratings. Our well-laddered debt maturities and strong financial ratios were key attributes to achieving the ratings. We have no debt maturing in 2013, and we only have a modest amount maturing in the next two years. Specifically, only $22 million matures in 2014, and only $29 million matures in 2015.

Additionally, for the second quarter the Company's interest coverage was a strong 4.5 times, and consistent with our low leverage, our net debt to annualized EBITDA ratio was approximately 6 to 1. Another important attribute of the Company is our unencumbered portfolio. On a square footage basis as of June 30, 90% of our portfolio was unencumbered.

In terms of our FFO guidance for 2013, on our last earnings call three months ago we stated that we expected funds from operations to be in the range of $0.77 to $0.82 per diluted share for the full year 2013. At the time, we know that while our guidance took into account the roughly 13 million of warrants that had been exercised to that point, given that warrants being exercised is something that's out of our control, we were not making any assumption in our guidance regarding future warrants being exercised. And as additional warrants are exercised we would adjust accordingly.

That said, notwithstanding an additional 5.4 million of warrants being exercised during the second quarter, the Company achieved FFO per share in line with our guidance, and we are today reaffirming our previous guidance of achieving $0.77 to $0.82 in FFO per diluted share for the full year 2013. As we stated in our last call, our guidance does not make any assumption going forward as to additional warrants being exercised.

There are approximately 11.6 million warrants outstanding, which expire in October of 2014. To help balance the near-term impact from warrants being exercised, we are repurchasing a portion of the warrants as opportunities arise. To date, since the beginning of 2013, we repurchased 11.5 million warrants.

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

Thanks, Mike.

At June 30 our portfolio totaled 50 shopping centers, encompassing approximately 5.4 million square feet of gross leasable area, geographically diversified across the West Coast. As Stuart indicated, we increased our overall portfolio occupancy. In fact we reached a new high for the year of 93.5% as of June 30, which is our fifth consecutive quarter of achieving higher occupancy on a year-over-year comparative basis. Importantly, demand for space continues to be strong across each of our core markets.

For example, in our Pacific Northwest portfolio, specifically in Seattle, as Stuart highlighted, we are seeing a lot of activity and interest at our newly acquired shopping center, Canyon Crossing. Additionally at our Crossroads property, which is the largest shopping center in our portfolio, when we took over the leasing it was 86% occupied. Today, thanks to the efforts of our leasing team, Crossroads is at an all-time high occupancy of 99%.

In Portland, at our Division Crossing shopping center, building on the momentum and interest that we generated in the first quarter by bringing in a very strong national retailer as the new primary anchor for the center, we now have another strong retailer lined up to take the remaining available space. With respect to our Northern California portfolio, demand for space also remains strong, particularly in the Bay Area where we just added our sixth property, as Stuart discussed. And lastly, during the first six months we have seen a significant increase in retailer demand for space in Southern California, where we currently own over 2 million square feet.

To take you through our specific leasing results thus far in 2013, as we discussed on our last call, during the first quarter we executed several key anchor leases, such that we have no anchor leases scheduled to expire for the remainder of 2013. Our focus during the second quarter was on leasing in-line shop space where we continue to work hard at maximizing the tenant mix.

Specifically, during the second quarter we executed 48 non-anchor leases totaling approximately 83,000 square feet. Breaking that down between new and renewed leases, during the second quarter we executed 25 new leases totaling 46,000 square feet and renewed 23 leases totaling 37,000 square feet.

In terms of same-space comparative numbers, cash rents increased by approximately 2.5%. Thus far through the first six months of 2013, we have executed 82 leases totaling 254,000 square feet, including two anchor leases executed in the first quarter totaling 105,000 square feet, and 80 non-anchor leases totaling 149,000 square feet.

Looking ahead at the second half of 2013, we currently have 71 non-anchor leases scheduled to expire between now and year-end, totaling 136,000 square feet, which represents about 3% of our total leased GLA. As always, we are aggressively pursuing re-leasing this space, seeking to capitalize on every opportunity to enhance the underlying value of our portfolio.

Now I will turn the call back over to Stuart.

Thanks, Rich.

With our strong results for the first six months of 2013, we are heading into the second half of the year with good momentum. In terms of acquisitions, in addition to the 182 million that we've acquired thus far, we have another 140 million currently under contract. Assuming we close these transactions, we will surpass our stated goal of acquiring 275 million for the year. Notwithstanding this, in light of the number of warrants that continue to be exercised, we are maintaining our previously stated FFO per share guidance, as Mike discussed.

Importantly, while the timing of the warrants being exercised is impacting our per-share results this year, given the extraordinary acquisition opportunities that we continue to source, having the additional equity capital from the warrants will no doubt benefit the Company long-term. Furthermore, with our strong financial position that has been enhanced this year by the additional equity capital and investment-grade ratings, together with our solid market presence on the West Coast, which now totals over 5 million square feet, our competitive position is as strong as ever today. As such, we are very excited and confident about the Company's future prospects.

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

(Operator Instructions)

Paul Adornato, BMO.

Good afternoon. Good morning. First on the capital side, congrats on the investment-grade ratings. Was wondering if you could tell us what we should expect with respect to debt capacity in order to maintain these ratings? Where do you think the leverage will be over the longer term?

Hey, Paul, it's Mike. We're going to try to manage our overall leverage into the mid 30% range to try to keep it fairly low. So, we've been working with rating agencies to work with them on those parameters.

Okay. With respect to the warrants, I guess I won't be able to ask about the warrants for too much longer (laughter), but while I still can, did the warrants that you repurchased during the quarter, did you mention the price at which you bought them back?

To date so far we've bought 11.5 million for a total of $22 million.

We are looking forward, Paul, to having the warrants, we only have another year left as you know, so that will move very quickly.

Yes. The warrants that you bought back this quarter, did you mention the average price for this quarter? And was that negotiated or did you buy them back in the open market?

Those were privately negotiated transactions and for the quarter we acquired 3.7 million warrants for roughly $11.3 million.

Okay. Finally, looking at the same-store results, I was wondering if you could break it down a little bit for us? And if you were to, let's say, exclude the lease-up that's baked into that number and also the mark-to-market on the rents, if you were to exclude those items, what type of same-store growth would we see in the portfolio?

Well, the 9.5% increase was based on 31 properties that we've owned since April 1 of 2012. The primary driver was the lease-up of available space in those assets. That's essentially a cash-based NOI, so it wouldn't have any of the mark-to-market for FASB 401 adjustments in that number.

Okay, great. Thanks very much.

RJ Milligan, Raymond James.

To follow-up on Paul's question on the same-store NOI growth, if -- the occupancy was up 70 basis points year over year, but you are saying the lease-up drove the bulk of the same-store NOI growth, I was wondering if you could connect those dots for me.

Well the occupancy is going to be on a portfolio-wide basis, correct? But the same-store is just on the 31 assets themselves. So the growth is going to be largely attributable to the same-store properties versus newer assets we've acquired.

In the pool of the same-store properties, there was probably three or four assets that have come in more recently in the pool, that were, if I can recall, a couple of those assets were some debt we that bought early on, value-add type of transactions, where occupancies were as low as 13%, 15% when we bought them, and today those assets are now close to 100% occupied. A lot of the same-store is being driven by some of the more value-add assets we bought earlier. But also on the very high-quality assets that we bought in that pool that had high vacancy, given that we bought those assets coming out of the Great Recession.

Okay. It seems like the portfolio occupancy would have increased more if lease-up was contributing to that 9.5% same-store NOI growth.

I don't know how we would break that down unless we went property by property.

Okay. In terms of the investment-grade rating, congratulations. I was curious if you were thinking about doing a debut bond offering sometime this year, or what your timing and what that might look like.

Well, we are very pleased we are investment-grade rated now. We look at the bond market very, very closely, almost daily, because of the volatility recently. We currently have just over $300 million of unsecured debt on the balance sheet. That debt doesn't mature for another three years or so. So we have got plenty of time on our side to wait and look for an opportunistic window to potentially trim it out sooner rather than later.

I look at it as we are in a great position here because, number one, potentially we've got a bit more cash coming in from the warrants, which will continue to de-lever the balance sheet. And the second thing is that we swapped out some of our interest rate exposure. So the great news is that, in my view, is that we can be patient and strike at the right time in terms of the marketplace.

Okay. What's the average cap rate on the properties acquired year-to-date? And can you give us an estimate of the cap rates that are on the properties that are under negotiation?

With respect to the stabilized acquisitions that we've made in year, the cap rate is about 6.2%. Going forward, we see good upside with these acquisitions and these opportunities that we identified during our underwriting. We believe we can probably increase those yields about 100 basis points over the next 12 to 24 months.

In terms of cap rates, the market, there's a number of properties currently on the market. The fully-leased trophy properties are currently trading in the low 5%s, 5% cap rate range, as we would say, with a number of public and private buyers lining up for those deals. But chasing those deals is not our focus. We focus, as you probably know, on off-market unique opportunities where we can acquire exceptional shopping centers at more reasonable terms and then quickly add value.

In terms of B and C assets, those cap rates have really not trended, they have not gone up really that much since the volatility and the spike in the 10-year. But I do tell you that's in the primary markets. In the tertiary markets, you're beginning to see some weakness in terms of valuations.

Okay. That's helpful. Stuart, I was wondering if you could give us a bigger picture on the West Coast. Obviously we've been hearing from the other shopping center REITs. Fundamentals are really improving, not a lot of new supply coming online. Curious what inning you think we are in, in terms of the up cycle on the West Coast?

Every market that -- we operate in four different markets. I will tell you that as Rich articulated, Southern California is starting to show some real strength, Seattle and Northern California, doing extremely well. Portland is also beginning to take the overflow from Seattle, in terms of we're having a very strong quarter so far in Portland. That's beginning to show a lot of strength as well.

If you ask me in terms of what inning we're in on the West Coast, I think we're still in the fourth inning. We're still seeing the fundamentals get better across the entire market, again, primary markets.

Are you seeing any threats of new supply coming into those primary markets?

No new supply whatsoever, anywhere.

Great guys. Thank you.

Todd Thomas, KeyBanc Capital.

Hello, good morning. Jordan Sadler is on with me here as well. First question, following up on the same-store NOI, you maintained your range for FFO and I think same-store guidance was 4% to 6% for the year. You are in the mid 8% range here year-to-date, and apologies if I missed it, but did you update your forecast for the full year same-store NOI growth?

No, I don't think we did. The number of properties included in the quarterly analysis increases each quarter. The full-year 4% to 6% guidance was based on 29 properties that we've now owned since the beginning of 2012. So for those 29 properties, given where we've been with the quarterly results, we expect the same-store NOI growth for those properties to be towards the higher end of that 4% to 6% range.

Okay. Then, in terms of acquisitions, it's a very productive first half of the year. It sounds like there's quite a good-sized pipeline here with what's under contract or what's under negotiation. Curious how, looking further out, how the pipeline stacks up today versus maybe last quarter and whether you think the you're going to be able to continue shaking deals loose here, heading into 2014 at a similar pace?

The pipeline at this Company has never been stronger. It is amazing to see how many off-market direct-to-owner transactions have come our way. And I think some of the volatility in the market has helped us a bit, because some of the owners who we know well have come back to us very recently in terms of continuing their discussions.

The second half looks great. Looking into next year at this point, I can tell you we've never seen a better market for this Company sitting here today in terms of the pipeline.

Okay. So in terms of thinking about funding investments, obviously you have some cash coming in if the warrants continue to get exercised. You have about $100 million outstanding on the line, so you still have capacity there, and now you have access to the bond market.

How should we think about funding investments going forward? Is it basically load up the line and then term that out potentially later in the year? Maybe you could give us a little bit of a sense for how the investments would work here.

I think it's going be a combination of the usage of the line and the expectation that at some point the additional warrant proceeds are going to come in, which will help de-lever. And to the extent that that doesn't come to fruition timely, we have other sources we can use to tap capital, whether it be the bond market or otherwise.

Again, I have got to reiterate, as I said in my speech, that although these warrants have been somewhat dilutive, they have provided the equity for growth in this Company and will continue to provide equity for growth for the Company going forward. So we are very comfortable in terms of looking out over the next year in terms of equity. We don't need equity.

Our balance sheet is in great shape. So, I think the Company and its shareholders are in great shape today, looking at our capital structure. It's a great place to be in my view, even with all the volatility in the market.

Okay. A question on Granada in Northern California. Can you give a sense for how much of the GLA is expected to roll in the next 12 to 24 months? And how far below market you estimate the rents are today?

Somewhere in the range of around 40% of that GLA will roll maybe a little bit higher. The below market, it's probably, depending on the lease, there's anywhere from 30% upwards of 50% below market in some cases.

The vacancy at that center, believe it or not, has already been leased even before we closed this transaction. The 9% was done; that's how strong of an asset Granada is.

Okay and lastly, maybe a little bit of a bigger picture question. There's been some consolidation taking place in the supermarket industry and it appears like it's picking up a little bit. I'd be curious to get your thoughts on that and how you're thinking about it with regard to your portfolio today?

Well, one of the things we concentrate on obviously, is our tenant concentration, very important to us. Looking at it in terms of our pipeline, that concentration will get a lot better looking into the second half of the year. So from a Company perspective, the exposure to our larger tenants will get much less as we move into the year, in terms of what we have under contract right now, so that's great.

In terms of the supermarket business, consolidation, we see consolidation out there. Most of that has occurred out East, not West. Were watching a couple of supermarkets out West in terms of what might happen, like Fresh & Easy, and what might have been there in terms of consolidation.

But I've been doing this for 22 years. I've seen a lot of, call it consolidation. To me, as long as you own great real estate, you can have lots of consolidation and that's what it's all about. I don't think it's going to have much impact. I think, if anything, it's going to strengthen the industry and provide a much stronger base of tenants to work with.

The other thing to point out is the independent side of that business continues to do very well. Our independent grocers we have got in our portfolio, sales continue to be extremely strong and they are doing great. So, the business in general is very healthy right now.

Okay great. Thank you.

Jason White, Green Street Advisors.

Going back to your acquisition cap rate year to date, you said 6.2%. Is that stabilized number or is that a current yield?

That is a current yield going in.

Okay, great. You also have, I know you talked a lot about your leased rate, do you have an in-place occupancy currently and what it was a year ago?

Good question. Because that obviously would have driven the same-store sales.

A year ago -- Jason, can we have Rich get back to you on that number? We've got it, we just have to go back and take a quick look.

Yes, that's fine, no problem. On the standard occupancy, do you have a feel for what your portfolio stabilized occupancy could get to? Can you get it to 95%, 96%? What do you hope to get it to?

What's driving down the portfolio are some debt deals, that there's only three left in the current portfolio, that's in -- two or three are in the lease-up stage. I believe we're going to make some very strong progress.

By the way, this is the first quarter that we consolidated all our real estate in terms of reporting. We no longer segregate the portfolio, going forward. But the two assets or three assets that really are being driven by lease-up at this point, if we can get a lot of traction there -- well, if you strip that out, Rich what is our stabilize if we strip out the -- we'd be about, what? 97%, 96%?

If you took out the repositioning, it would be over 95%. 96%.

Hopefully, Jason, we can get the entire portfolio that type of number by year end. I think we can get to the 95%, 96% level.

By year-end?

By year-end.

Okay great. I noticed Brixmor has a smattering of properties across your markets in Southern California and maybe a couple in Northern California. Are those assets that you would want to see in your portfolio? Or are they totally different type assets that would never be a fit for ROIC?

Good assets, some of them are located in more tertiary markets, like the Central Valley. We have seen them all. So I would tell you we would want probably 50% of those assets, because they are in our back yard and that being the primary markets. And a then a spatter of them, again, are in more tertiary markets. But again, it's a very nice portfolio.

Okay thanks a lot.

Thank you. I show no further questions. I would like to turn the conference back to Mr. Stuart Tanz for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.