Retail Opportunity Investments Corp (ROIC) 2014 Q2 法說會逐字稿

Welcome to the Retail Opportunity Investments 2014 second quarter conference call. Participants are currently in a listen-only mode. Following the Company's prepared remarks, the call will be open 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. Such forward-looking statement involve known and unknown risk, uncertainties, and other factors which may cause actual results to differ materially from the future results expressed or implied by such forward-looking statements and expectations.

Information regarding such risk and factors is described in the Company's filings with the Securities and Exchange Commission, including the most recent Annual Report on Form 10-K. Participants are encouraged to refer to the Company's filings with the SEC regarding such risk and factors, as well as for more information regarding the Company's financial and operational results. The Company's filings can be found on its website.

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

Thank you. Here with me today is Michael Haines, Chief Financial Officer, and Rich Schoebel, our Chief Operating Officer. We were pleased to report the Company had a very active and successful quarter, achieving record results across all aspects of our business.

Starting with acquisitions, thus far in 2014 we have had a strong year in sourcing all marketing opportunities to acquire exceptional irreplaceable shopping centers across each of our core markets. During the first six months, we have acquired $323 million of shopping centers including our largest, most significant acquisition to date, Fallbrook Center. With respect to Fallbrook, given our market knowledge and our relationship with the seller having previously acquired off-market properties of them in the past, we successfully negotiated, underwrote, and closed the deal in less than 30 days' time.

Importantly, Fallbrook Center is an excellent strategic fit with our portfolio. The property is one of the leading dominant shopping centers serving the West San Fernando Valley. Specifically, Fallbrook is ideally situated in the densely populated affluent community of West Hills, with a trade area population base of upwards of 500,000 people with an average household income in excess of $100,000.

In addition, Warner Center, which is a Class A, 5 million square foot office complex, is less than 2 miles away and draws over 175,000 daytime employees to the trade area.

Fallbrook Center features one of the best and most diverse mix of tenants in the San Fernando Valley market, many of which are our necessity-based retailers. The shopping center is uniquely anchored by three supermarkets, each with a different market niche that is well-suited for the surrounding community. And each has a strong loyal customer base.

Additionally, the property is anchored by a number of leading retailers, including Walmart, Home Depot, Target, and Kohl's, just to name a few, along with many other national, regional, and local retailers. In fact, the range of retail offerings at Fallbrook Center and the cross-shopping synergies afforded by the tenant mix is unparalleled in the San Fernando Valley, making the property a major retail destination in the market, drawing over 15 million shoppers to Fallbrook each year.

Nearly 90% of Fallbrook is leased to anchor tenants with an average remaining lease term of a possibly 12 years, providing a very stable cash flow base. Furthermore, given the property's expansive 118-acre site, its diverse mix of space formats from large to small and a strong demographic profile, Fallbrook offers retailers rare access to one of the most sought after, highly desirable infill markets on the West Coast.

As such, demand for space at the center is very strong. With that in mind, looking ahead, there are numerous opportunities to steadily grow cash flow and enhance the underlying value. We are already hard at work with several initiatives, as Rich will discuss in a minute.

In addition to acquiring Fallbrook, we also acquired two other exceptional shopping centers during the second quarter -- one property in Northern California, specifically in the Bay Area, and one property in the Seattle market. Just like Fallbrook, both acquisitions were off-market transactions that we sourced through long-standing relationships and both shopping centers all well-leased with good upside potential going forward.

Along with acquiring the $254 million of shopping centers during the second quarter, we also sold one non-core property for $16 million, achieving a gain of over $3 million. Additionally, we are currently in the process of selling another non-core property, which we expect to complete in the second half of the year.

Turning to property operations at leasing, we again posted solid results in the second quarter, achieving an all-time high portfolio lease rate of 96.8%, a 2.8% increase in same center cash net operating income, and an 8.3% increase in same space re-leasing cash rents for the quarter.

With respect to our balance sheet, we continue to work hard at maintaining our strong financial position. During the second quarter, we successfully raised $255 million of capital from three sources, a common stock offering totaling $206 million, the property sale I mentioned for $16 million, and over $33 million in proceeds from warrants that were exercised during the quarter. As a result, we lowered our debt ratio down by 17%. Additionally, we acquired Fallbrook unencumbered, thereby increasing our unencumbered GLA by over 17%. All in all, it was a very strong quarter for the Company and a great first six months. Now I will turn the call over to Michael Haines, the Company's Chief Financial Officer, to take you through our financial results. Mike?

Thanks, Stewart. For the three months ended June 30, the Company had $36.9 million of total revenue and $9.7 million in net operating income as compared to $26 million of total revenue and $6.6 million in net operating income for the second quarter of 2013. For the first six months of 2014, the Company had $73.3 million in total revenues and $19.8 million in net operating income as compared to $50.4 million in total revenues and $12.5 million net operating income for the first six months of 2013.

In terms of same center net operating income, NOI increased by 2.8% during the second quarter on a cash basis, which represents our tent 10th consecutive quarter of achieving same-center NOI growth. The 2.8% growth for the second quarter was impacted by two items. One involved removing an underperforming anchor tenant that had an above market lease that had been in place for years, and replacing that tenant with a stronger retailer. The other item involved renewing an anchor lease where there was a onetime [cam] recovery adjustment.

Looking ahead, we remain on track to achieve our previous stated guidance for same-center NOI growth for the year of approximately 5%.

With respect to net income for the second quarter of 2014, the Company had net income of $5.8 million, equating to $0.07 per diluted share, as compared to net income of $2.5 million or $0.03 per diluted share for the second quarter of 2013. Net income for the first six months of 2014 was $9 million or $0.12 per diluted share as compared to net income of $4.8 million or $0.07 per diluted share for the first six months of 2013.

In terms of funds from operations for the second quarter of 2014, FFO totaled $17 million as compared to FFO of $12.7 million for the second quarter of 2013. FFO per diluted share for the second quarter of 2014 was $0.21, representing a 16.7% increase from our FFO per diluted share for the second quarter 2013. FFO for the first six months of 2014 was $33.6 million or $0.42 per diluted share as compared to FFO of $24.2 million or $0.36 per diluted share for the first six months of 2013.

Delivering a strong acquisition pace this year, we executed a common stock offering during the second quarter, as Stuart indicated. We issued of total of 14.4 million shares including the underwriter's overallotmento?=option, raising approximately $206 million in net proceeds. We completed the offering toward the end of the quarter, so only a portion of the 14.4 million shares was reflected in our weighted average share count for the second quarter, whereas all the new [lease] shares from the option will be reflected in the third quarter.

With respect to the warrants, during the second quarter, roughly $2.8 million in warrants were exercised, generating approximately $33 million in proceeds for the Company. To date in the third quarter, an additional $600,000 warrants have been exercised generating another $7.2 million of proceeds for the Company. Year to date, 4 million warrants have been exercised in total, generating $48 million in proceeds. Looking ahead, there is only 1.9 million in warrants left outstanding that expire in less than 90 days from now.

Turning to the balance sheet, taking into account the stock offering of warrants exercised, the Company's total market cap surpassed the $2 billion mark, reaching $2.2 billion as of June 30. As Stuart indicated, we lowered our debt ratio during the second quarter.

As of June 30, the Company had $684 million of total debt outstanding, equating to a debt to total market cap ratio of 31.6%. With respect to the $684 million of debt, approximately $116 million is secured debt. $568 million is unsecured. At June 30, we had approximately $122 million outstanding on our unsecured credit facility.

As Stewart indicated, our unencumbered pool increased during the second quarter with the acquisition of Fallbrook Center. As of June 30, 87% of our portfolio on a square footage basis was unencumbered. For the second quarter of 2014, the Company's interest coverage was a solid 3.5 times.

Now I will turn the call over to Rich Schoebel, our COO, to discuss property operations. Rich?

Thanks, Mike. As we commented on last quarter, the demand for space that we are seeing across our portfolio continues to be among the strongest that we have seen in our 25 years of operating shopping centers on the West Coast. Needless to say, we continue to work very hard at making the most of this demand to drive our occupancy and cash flow higher each quarter.

As Stuart indicated, we ended the second quarter at a new record high for the Company of 96.8% leased, which is a 90 basis point increase from the first quarter and a 330 basis point increase from a year ago. Breaking that down between anchor versus non-anchor, at June 30, our anchor space was 100% leased and our non-anchor in-line space was 92.9% leased.

Indicative of our all of ongoing recent activity, the economic spread between occupied space and leased space, which includes newly signed tenants that will soon take occupancy and commence paying rent, is currently at 5.9%. So there is considerable embedded cash flow growth to come.

In addition to capitalizing on the strong demand to increase occupancy across our portfolio, we are also capitalizing on the strong demand to enhance our tenant mix at every opportunity. For example, notwithstanding our anchor space being virtually full, and only having one anchor lease scheduled to expire later this year, we successfully replaced two anchor tenants during the second quarter with new, stronger retail. We also reconfigured a number of shop spaces at one of our properties, creating a new 20,000 square foot space and leased it to a new anchor tenant.

Additionally, as we have grown our portfolio this year, we have kept a careful eye on enhancing our tenant diversity. Our largest tenant, Safeway, now only accounts for about 4% of our total base rent and our ten largest tenants now account for less than 20% of our total base rent.

With respect to our specific leasing results, during the second quarter we executed 76 leases totaling over 266,000 square feet, achieving a same space comparative rent increase of 8.3% on a cash basis. Breaking that down between new and renewed leases, we executed 42 new leases totaling 203,000 square feet, achieving a same space comparative rent increase of 9.4% on a cash basis. And we executed 34 renewals totaling approximately 63,000 square feet, achieving a same space cash increase of 6.9%.

With respect to Fallbrook Center, to underscore Stuart's comments regarding this landmark acquisition for the Company, our property management and leasing team is very excited to own and operate this unique retail asset. Our team has the skill set to make the most of this property, capitalizing on our market knowledge and our long-standing retailer relationships, including relationships with the vast majority of Fallbrook's existing tenants, as well as long-standing relationships with the major retailers vying to get via access to the San Fernando Valley market.

In fact, we are nothing short of astounded by the level of retailer inquiries that we have received since acquiring Fallbrook. Our leasing team has moved quickly to capitalize on this, and now has virtually all of the available space spoken for. Additionally, we are in the process of implementing several initiatives aimed at enhancing key pedestrian entrances and arcades at the center.

Furthermore, through our underwriting, we identified a perimeter pad building that we believe represents an excellent opportunity for being redeveloped, enlarged, and re-tenanted. Shortly after acquiring Fallbrook, we initiated discussions with the city about the redevelopment. And it is now looking like there is a strong possibility of not just redeveloping the pad, but redeveloping the entire corner of the site as mixed use, which could prove to be a significant enhancement to the overall property and could lead to other similar opportunities down the road. In short, we are very excited about the future prospects of Fallbrook.

With that, I will turn the back over to Stuart.

Thanks, Rich. Looking ahead at the second half of the year, we expect to continue growing our business and achieving solid results. In terms of acquisitions, our pipeline is active as we continue to source off-market opportunities to acquire exceptional shopping centers on attractive terms, enhancing our market presence across each of our core markets.

We are pleased to report that we just signed a contract to acquire another strong asset, in our Portland market. Specifically, we are acquiring a well-established, 168,000 square foot grocery and drug store anchored shopping center that is located just down the street from the shopping center that we developed in 2012, Wilsonville Old Town Square. With this new acquisition, we will now own two of the three primary grocery-anchored centers serving the community, enhancing our ability to capitalize on strong demand for space in the market.

The purchase price for the new center is $35 million. And the seller is taking his equity in the property not in cash, but instead all in the form of operating partnership units based on a value of $16 per share. Beyond this acquisition, our goal is to acquire approximately another $100 million by year-end.

On the leasing front, we are continuing to carefully cull our portfolio, seeking out every opportunity to enhance our tenant base and cash flow. As Rich indicated, there is cash flow growth to come in our portfolio as newly signed leases take occupancy and commence paying rent, which should help drive our same center NOI higher in the second half of the year.

With respect to our balance sheet, as Michael discussed, the warrants will be winding down soon. Remaining warrants should generate about another $23 million in equity proceeds by their expiration in October.

In terms of debt, during the second half of the year, depending upon market conditions, we may look to replace a portion of our short-term floating-rate debt with longer-term fixed rate bonds.

In summary, with our accomplishments during the first six months of 2014, together with the ongoing demand for space and the multitude of opportunities embedded in our portfolio to enhance value, we are headed heading into the second half of the year with good momentum and remain on track to achieve our stated growth objectives for the year. As always, we remain firmly committed to prudently growing our portfolio backed by a conservative, straightforward balance sheet and business plan.

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

(Operator Instructions) Todd Thomas, KeyBanc Capital Markets.

This is actually Grant on for Todd. I just wanted to touch on acquisitions. So you said $100 million or more by the end of the year. You have had a very active year so far. So I just wanted, actually, for the net acquisitions, do you feel comfortable with about $250 million? That would imply a pretty big pickup in the disposition, so I just want to see how you are thinking about that.

Yes. We are still comfortable with that number on a net basis. That would include the dispositions.

Okay. So in addition to Phillips Village, I guess that would imply around $100 million more of dispositions?

No. We currently have a property that has gone hard to be sold in the upcoming -- probably the third quarter we are expecting to close. And then we have got a couple of other assets that we are also currently marketing. If all three of those sell in addition to Phillips, we are still going to hit our target of close to $50 million.

Okay. Then the $100 million, how would you characterize it? I mean, is it one-off? Is it a portfolio of a couple of properties, or just a little color there?

The pipeline is very strong, both in one-offs and portfolios at the present time. So I can't really determine whether we will meet that number as it relates to one property or a number of properties. But, again, we are certainly comfortable with that assumption for the balance of the year.

Okay. And then, Rich, the 96.8% leased rate, I guess where do you see that going from here? Do you think that you may have left some money on the table in the lease-up process? How are you looking at the portfolio right now?

No. I wouldn't say we have left any money on the table. I think that, given our history of high occupancy at our previous company, we expect to maintain that here as well. And what that high occupancy allows us to do is to drive the rents for the remainder space and also on the renewals.

Okay. And then just lastly, on Crossroads, can we get an update on where you guys stand with the redevelopment?

We are making some headway there on the senior housing. We have -- we are working very closely with the city and we expect to give you a lot more color on that progress as we move through the balance of the year, but that process is proceeding at a pretty quick pace at this point.

Paul Adornato, BMO Capital Markets.

Interesting to see that Wilsonville is using OP units or the seller is taking OP units; was wondering if you could just provide an update, if you will. How many OP units or what value of OP units have you issued so far in all of your acquisitions? And, also, in the pipeline, are there more OP unit deals out there?

Sure. There are still a number of very high quality assets on the West Coast that are owned by individuals or families that we have continued to work with through the relationships that we have had with these families and/or individuals for many years. So I do believe that we will be able to continue to source acquisitions, utilizing our currency, which of course is our most precious commodity. But I do believe that we will continue to be able to source acquisitions in terms of using the OP structure. In terms of what we have issued in total today, Mike?

It was just the Crossroads and Five Points transactions from last year and right now there is about 3.1 million OP units outstanding which will be taken into account in our fully diluted share count.

But about [60 million] in total, in terms of OP units, all that have been taken at a premium to where our stock was trading.

Great. And, Stuart, I guess over your career, you have been very good at timing the market in terms of when to get in and when to get out. We have seen cap rates continue to compress on the West Coast, and so was wondering if you could just give us kind of a big picture view of how you see the acquisition environment these days.

Sure. Well, certainly, I have been probably more lucky than smart. But, certainly, the current environment in terms of acquisitions is not as busy as it has been in the past, but we continue to source very strong acquisitions. And, of course, depending on specific property and market, again, we certainly see cap rates still in the low fives, and in some cases now dipping into the fours.

The only other thing to comment on, Paul, going forward, in terms of certainly our real estate, but probably becoming in general, as I think you are beginning to certainly see, certainly on the West Coast, for us, the -- coming out of the Great Recession, we are beginning to see, as Rich mentioned, a large traction in terms of demand. So I do think when you look at our portfolio, and probably a lot of retail in terms of the sector, there is probably still some inherited growth in income given the fact that a lot of these markets are just now starting to see benefits of no supply, and the amount of absorption that has picked up certainly on the West Coast and other areas of the country.

I'm showing new further questions at this time. I would like to turn the call back over to Mr. 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 Mike, Rich, or me directly. Also, you can find additional information on the Company's quarterly supplemental package which is posted on our website. Thanks again and have a great day, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.