The following discussion should be read in conjunction with the Retail Opportunity Investments Corp. Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. The Company makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Annual Report on Form 10-K entitled "Statements Regarding Forward-Looking Information." Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Annual Report on Form 10-K entitled "Risk Factors."

Overview

Retail Opportunity Investments Corp. commenced operations in October 2009 as a fully integrated, self-managed REIT. The Company specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers in the western region of the United States, anchored by national and regional supermarkets and drugstores. The Company refers to the properties it targets for investment as its target assets. The Company reincorporated as a Maryland corporation on June 2, 2011. The Company has elected to be taxed as a REIT, for U.S. federal income tax purposes, commencing with the year ended December 31, 2010.

From the commencement of its operations through December 31, 2012, the Company completed approximately $890.9 million of shopping center investments. As of December 31, 2012, the Company's portfolio consisted of 44 wholly-owned retail properties totaling approximately 4.4 million square feet GLA, and one retail property owned through a joint venture, encompassing approximately 464,000 square feet of GLA comprised of a 49% ownership interest in the Crossroads Shopping Center.

As of December 31, 2012, the Company's portfolio was approximately 93.5% leased. At December 31, 2012, the Company considered 40 of its wholly-owned properties to be stabilized properties with a weighted average leased area of 95.2%. The remaining four properties were considered by the Company to be re-development properties that were 69.0 % leased at December 31, 2012. During the year ended December 31, 2012, the Company leased or renewed a total of 728,478 square feet in its portfolio. The Company has committed approximately $8.8 million and $998,000 in tenant improvements and leasing commissions respectively, for the new leases and renewals that occurred during the year ended December 31, 2012. During the year ended December 31, 2012, rental rates were unchanged across its portfolio with respect to lease renewals that expired during such period.

Report on Operating Results

Funds from operations ("FFO"), is a widely-recognized non-GAAP financial measure for REIT's that the Company believes when considered with financial statements determined in accordance with GAAP, provides additional and useful means to assess its financial performance. FFO is frequently used by securities analysts, investors and other interested parties to evaluate the performance of REITs, most of which present FFO along with net income as calculated in accordance with GAAP.

The Company computes FFO in accordance with the "White Paper" on FFO published by the National Association of Real Estate Investment Trusts ("NAREIT"), which defines FFO as net income attributable to common stockholders (determined in accordance with GAAP) excluding gains or losses from debt restructuring, sales of depreciable property, and impairments, plus real estate related depreciation and amortization, and after adjustments for partnerships and unconsolidated joint ventures.

The Financial Accounting Standards Board ("FASB") guidance relating to business combinations requires any acquirer of a business (investment property) to expense all acquisition costs related to the acquisition, the amount of which will vary based on each specific acquisition and the volume of acquisitions. Accordingly, during the years ended December 31, 2012, 2011 and 2010 the costs of acquisition activity reduced the Company's FFO. For the years ended December 31, 2012, 2011 and 2010 the Company expensed $1.3 million, $2.3 million and $2.6 million, respectively relating to real estate acquisitions.

The Company considers FFO a meaningful additional measure of operating performance because it primarily excludes the assumption that the value of its real estate assets diminishes predictably over time and industry analysts have accepted it as a performance measure.

However, FFO:

· does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); and

· should not be considered an alternative to net income as an indication of the Company's performance.

FFO as defined by the Company may not be comparable to similarly titled items reported by other REITs due to possible differences in the application of the NAREIT definition used by such REITs. The table below provides a reconciliation of net income applicable to stockholders in accordance with GAAP to FFO for the years ended December 31, 2012, 2011 and 2010.

                                                            For the year ended       For the year ended       For the year ended
                                                            December 31, 2012        December 31, 2011        December 31, 2010
Net income (loss) for period                               $          7,892,613     $          9,656,321     $           (400,921 )
Plus: Real property depreciation                                     14,265,121                9,460,303                2,347,536
Amortization of tenant improvements and allowances                    4,956,577                2,931,160                  710,574
Amortization of deferred leasing costs                               12,027,888               10,993,941                3,046,274
Funds from operations                                      $         39,142,199     $         33,041,725     $          5,703,463
Net Cash Provided by (Used in):
Operating Activities                                       $         24,720,566     $         17,286,197     $          2,305,270
Investing Activities                                       $       (261,574,478 )   $       (225,154,948 )   $       (290,775,946 )
Financing Activities                                       $        207,228,554     $        157,449,929     $        (10,033,741 )

Results of Operations

At December 31, 2012, the Company had an ownership interest in 45 properties, of which 44 are consolidated in the accompanying financial statements and one is accounted for under the equity method of accounting. The Company believes, because of the location of the properties in densely populated areas, the nature of its investments provide for relatively stable revenue flows even during difficult economic times. The Company has a strong capital structure with manageable debt as of year ended December 31, 2012. The Company expects to continue to actively explore acquisition opportunities consistent with its business strategy.

Results of Operations for the year ended December 31, 2012 compared to the year ended December 31, 2011

The following comparison for the year ended December 31, 2012 compared to the year ended December 31, 2011, makes reference to the effect of the same-store properties. Same-store properties represent all consolidated operating properties owned by the Company in the same manner during both periods which totalled 17 of the Company's 44 consolidated properties. Operating income is defined as operating income generated from the Company's consolidated operating properties (net of depreciation and amortization).

During the year ended December 31, 2012, the Company generated net income of approximately $7.9 million compared to net income of $9.7 million generated during the year ended December 31, 2011. The substantial cause of the differences during the two periods resulted from a decrease in the bargain purchase gains recorded during 2012 as compared to 2011. During the year ended December 31, 2012, the Company recognized $3.9 million in bargain purchase gains, when recording the fair values of two properties that were acquired during the period through Conveyance in Lieu of Foreclosure Agreements. In addition, during the year ended December 31, 2012 the Company recognized a $2.1 million gain upon the acquisition of the remaining interest in a property from its joint venture partner. During the year ended December 31, 2011, the Company recorded $9.5 million in bargain purchase gains relating to four properties that were acquired during the period through a Conveyance in Lieu of Foreclosure Agreement. In addition during the year ended December 31, 2012, the Company incurred approximately $11.4 million of interest expense compared to approximately $6.2 million during the year ended December 31, 2011, due to higher borrowings on the term loan/credit facility in 2012 as compared to 2011. Operating income increased by $9.7 million as a result of an increase in the number of properties owned by the Company in 2012 compared to 2011 and an increase in same- store properties operating income. As of December 31, 2012, the Company owned 44 properties as compared to 30 properties at December 31, 2011. The newly acquired properties increased operating income during 2012 by approximately $7.8 million. Operating income from the 17 same-store properties increased operating income by approximately $2.0 million primarily due to an increase in the weighted average leased area in 2012 for these properties. During the year ended December 31, 2012 general and administrative costs increased approximately $3.2 million as compared to the year ended December 31, 2011 primarily due to $2.8 million of costs incurred related to moving the Company's corporate operations from White Plains, New York to San Diego, California and due to the increased costs of approximately $400,000 related to the increase in the number of properties owned in 2012. During the year ended December 31, 2012, interest income generated from mortgages notes receivables decreased by approximately $802,000 as a result of the Company obtaining ownership interest in three properties that were previously secured by a mortgage note. The Company obtained the properties through a Conveyance in Lieu of Foreclosure agreement during the year ended December 31, 2011.

Results of Operations for the year ended December 31, 2011 compared to the year ended December 31, 2010

During the year ended December 31, 2011, the Company generated net income of approximately $9.7 million compared to a net loss of approximately $400,900 incurred during year ended December 31, 2010. The substantial cause of the differences during the two periods resulted from higher amounts recognized in 2011 relating to bargain purchase gains and higher operating income (net of depreciation and amortization) from owned properties. The Company recognized a $9.5 million bargain purchase gain in 2011, when recording the fair values of four properties that were acquired during the period through conveyance in lieu of foreclosure agreements. In comparison, in 2010 the Company recognized a bargain purchase gain of $2.2 million in recording the fair value of one of its properties when evaluating the purchase price allocation. The Company generated higher operating income (net of depreciation and amortization) as a result of an increase in the number of properties owned by the Company in 2011 compared to 2010. As of December 31, 2011, the Company owned 30 properties which generated operating income (net of depreciation and amortization) of approximately $15.1 million. In comparison, as of December 31, 2010 the Company owned 17 properties which generated operating income (net of depreciation and amortization) of approximately $4.6 million. During the year ended December 31, 2011, the Company generated mortgage interest income of approximately $1.9 million from several mortgage notes receivables compared with $1.1 million during the year ended December 31, 2010. During the year ended December 31, 2011, the Company generated approximately $1.5 million from investments in unconsolidated joint ventures. The income during such period from its investments in unconsolidated joint ventures was generated from two investments in mortgage notes receivables and an investment in a shopping center. The Company generated approximately $38,000 of income from its investment in a shopping center held for a partial month during the year ended December 31, 2010. General and administrative expenses increased to approximately $9.8 million during the year ended December 31, 2011, from approximately $8.4 million during the comparable period in 2010 due to additional costs from the increase in the number of properties owned in 2011 compared to 2010. During the year ended December 31, 2011, interest income recognized was approximately $1.1 million lower than the corresponding period in 2010 due to lower cash balances in 2011 resulting from the utilization of cash to acquire properties and mortgage notes receivable after the year ended December 31, 2010. During the year ended December 31, 2011, the Company incurred approximately $6.2 million of interest expense compared to approximately $324,000 during the year ended December 31, 2011, due to higher average outstanding borrowings on mortgage notes payable, the term loan and credit facility. During the year ended December 31, 2011, the Company had $110.0 million outstanding on its term loan and although there were no borrowings outstanding on the credit facility at December 31, 2011 the Company incurred interest expense on borrowings that were paid off during the year. The Company did not have any term loan or credit facility debt outstanding during the twelve months ended December 31, 2010.

Critical Accounting Policies

Critical accounting policies are those that are both important to the presentation of the Company's financial condition and results of operations and require management's most difficult, complex or subjective judgments. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. This summary should be read in conjunction with the more complete discussion of the Company's accounting policies included in Note 1 to the Company's consolidated financial statements.

Recently Issued Accounting Pronouncements

See Note 1 to the accompanying consolidated financial statements.

Revenue Recognition

The Company records base rents on a straight-line basis over the term of each lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in tenant and other receivables on the accompanying consolidated balance sheets. Most leases contain provisions that require tenants to reimburse a pro-rata share of real estate taxes and certain common area expenses. Adjustments are also made throughout the year to tenant and other receivables and the related cost recovery income based upon the Company's best estimate of the final amounts to be billed and collected. In addition, the Company also provides an allowance for future credit losses in connection with the deferred straight-line rent receivable.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is established based on a quarterly analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivables, the payment history of the tenants or other debtors, the financial condition of the tenants and any guarantors and management's assessment of their ability to meet their lease obligations, the basis for any disputes and the status of related negotiations, among other things. Management's estimates of the required allowance is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on tenants, particularly those at retail properties. Estimates are used to establish reimbursements from tenants for common area maintenance, real estate tax and insurance costs. The Company analyzes the balance of its estimated accounts receivable for real estate taxes, common area maintenance and insurance for each of its properties by comparing actual recoveries versus actual expenses and any actual write-offs. Based on its analysis, the Company may record an additional amount in its allowance for doubtful accounts related to these items. In addition, the Company also provides an allowance for future credit losses in connection with the deferred straight-line rent receivable.

Real Estate

Land, buildings, property improvements, furniture/fixtures and tenant improvements are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Renovations and/or replacements, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.

Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and improvements), and acquired intangible assets and liabilities (consisting of above-market and below-market leases and acquired in-place leases). The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management's determination of the relative fair values of these assets. In valuing an acquired property's intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, and estimates of lost rental revenue during the expected lease-up periods based on its evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs.

The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant. Above-market and below-market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management's estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of acquisition. Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company's experience and the relevant facts and circumstances that existed at the time of the acquisitions. The value of the above-market and below-market leases associated with the original lease term is amortized to rental income, over the terms of the respective leases. The value of below-market rental lease renewal options is deferred until such time as the renewal option is exercised and subsequently amortized over the corresponding renewal period. The value of in-place leases are amortized to expense, and the above-market and below-market lease values are amortized to rental income, over the remaining non-cancellable terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recognized in operations at that time. The Company will record a bargain purchase gain if it determines that the purchase price for the acquired assets was less than the fair value. The Company will record a liability in situations where any part of the cash consideration is deferred. The amounts payable in the future are discounted to their present value. The liability is subsequently re-measured to fair value with changes in fair value recognized in the consolidated statements of operations. If, up to one year from the acquisition date, information regarding fair value of assets acquired and liabilities assumed is received and estimates are refined, appropriate property adjustments are made to the purchase price allocation on a retrospective basis.

The Company is required to make subjective assessments as to the useful life of its properties for purposes of determining the amount of depreciation. These assessments have a direct impact on its net income.

Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:

Buildings 39-40 years
Property Improvements 10-20 years
Furniture/Fixtures 3-10 years
Tenant Improvements Shorter of lease term or their useful life

Asset Impairment

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to aggregate future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value. Management does not believe that the value of any of the Company's real estate investments was impaired at December 31, 2012.

The Company reviews its investments in its unconsolidated joint ventures for impairment periodically and the Company would record an impairment charge when events or circumstances change indicating that a decline in the fair values below the carrying values has occurred and such decline is other-than temporary. The ultimate realization of the Company's investment in its unconsolidated joint ventures is dependent on a number of factors, including the performance of each investment and market conditions. Management does not believe that the value of its unconsolidated joint venture was impaired at December 31, 2012.

REIT Qualification Requirements

The Company has elected to be taxed as a REIT under the Code, and believes that it has been organized and has operated in a manner that will allow it to continue to qualify for taxation as a REIT under the Code.

The Company is subject to a number of operational and organizational requirements to qualify and then maintain qualification as a REIT. If the Company does not qualify as a REIT, its income would become subject to U.S. federal, state and local income taxes at regular corporate rates that would be substantial and the Company may not be permitted to re-elect to qualify as a REIT for four taxable years following the year that it failed to qualify as a REIT. The resulting adverse effects on the Company's results of operations, liquidity and amounts distributable to stockholders would be material.

Liquidity and Capital Resources

Liquidity is a measure of the Company's ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain its assets and operations, make distributions to its stockholders and meet other general business needs. During the year ended December 31, 2012, the Company's primary sources of cash were (i) cash on hand and cash flows from operating activities, (ii) proceeds from bank borrowings and (iii) proceeds from the sale of common stock. As of December 31, 2012, the Company has determined that it has adequate working capital to meet its debt obligations and operating expenses for the next twelve months.

The Company has a $200.0 million senior unsecured revolving credit facility with several banks. The credit facility also provides that the Company may from time to time request increased aggregate commitments of $100.0 million under certain conditions set forth in the credit facility, including the consent of the lenders for the additional commitments. The initial maturity date of the credit facility is August 29, 2016, subject to a one-year extension option, which may be exercised by the Company upon satisfaction of certain conditions, including payment of an extension fee to the credit facility administrative agent in an amount equal to 0.25% multiplied by the aggregate commitments to be shared pro rata among the lenders thereto.

In addition, the Company has a $200.0 million senior unsecured term loan facility with several banks. The term loan also provides that the Company may from time to time request increased aggregate commitments of $100.0 million under certain conditions set forth in the term loan, including the consent of the lenders for the additional commitments. The maturity date of the term loan is August 29, 2017.

As of December 31, 2012, $200.0 million and $119.0 million were outstanding under the term loan and credit facility, respectively. The average interest rate on the term loan and credit facility during the twelve months ended December 31, 2012 was 1.8%. The Company had $80.5 million available to borrow under the credit facility at December 31, 2012. The Company had no available borrowings under the term loan at December 31, 2012.

In connection with the acquisition of two properties, the Company assumed two mortgages representing an unpaid principal amount as of December 31, 2012 of approximately $19.6 million.

During the year ended December 31, 2011, the Company entered into an ATM Equity OfferingSM Sales Agreement ("sales agreement") with Merrill Lynch, Pierce, Fenner & Smith Incorporated to sell shares of the Company's common stock, par value $0.0001 per share, having aggregate sales proceeds of $50.0 million from time to time, through an "at the market" equity offering program under which Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as sales agent and/or principal ("agent"). During the year ended December 31, 2012 and 2011 the Company sold 3,051,445 and 131,800 shares respectively, under the sales agreement, which resulted in gross proceeds of approximately $37.8 million and $1.5 million, respectively and commissions of approximately $657,700 and $29,900, respectively, paid to the agent. During the three months ended December 31, 2012 the Company sold 74,000 shares under the sales agreement, which resulted in gross proceeds of approximately $951,000 and commissions of approximately $14,000 paid to the agent. At December 31, 2012, the Company had sold since the inception of the plan a total of 3,183,245 shares under the sales agreement, which resulted in gross proceeds of approximately $39.3 million and commissions of approximately $687,600 paid to the agent.

While the Company generally intends to hold its target assets as long term investments, certain of its investments may be sold in order to manage the Company's interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of its investments, if any, cannot be predicted with any certainty.

Potential future sources of capital include cash flows from operating activities and proceeds from unsecured or secured financings from banks or other lenders. In addition, the Company plans to finance future acquisitions of its . . .