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ROIC > SEC Filings for ROIC > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for RETAIL OPPORTUNITY INVESTMENTS CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RETAIL OPPORTUNITY INVESTMENTS CORP


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Quarterly Report on Form 10-Q, we refer to Retail Opportunity Investments Corp. and its consolidated subsidiaries as "we," "us," "Company," or "our," unless we specifically state otherwise or the context indicates otherwise.

When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words "believes," "anticipates," "projects," "should," "estimates," "expects," and similar expressions are intended to identify forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and in Section 21F of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Actual results may differ materially due to uncertainties including:

our ability to identify and acquire retail real estate investments that meet our investment standards in our target markets;

the level of rental revenue and net interest income we achieve from our target assets;

the market value of our assets and the supply of, and demand for, retail real estate investments in which we invest;

the length of the current economic downturn;

the conditions in the local markets in which we operate and our concentration in those markets, as well as changes in national economic and market conditions;

consumer spending and confidence trends;

our ability to enter into new leases or to renew leases with existing tenants at the properties we own or acquire at favorable rates;

our ability to anticipate changes in consumer buying practices and the space needs of tenants;

the competitive landscape impacting the properties we own or acquire and their tenants;

our relationships with our tenants and their financial condition and liquidity;

our ability to continue to qualify as a real estate investment trust (a "REIT") for U.S. federal income tax;

our use of debt as part of our financing strategy and our ability to make payments or to comply with any covenants under any borrowings or other debt facilities we currently have or subsequently obtain;

the level of our operating expenses, including amounts we are required to pay to our management team and to engage third party property managers;

changes in interest rates that could impact the market price of our common stock and the cost of our borrowings; and

legislative and regulatory changes (including changes to laws governing the taxation of REITs).

Forward-looking statements are based on estimates as of the date of this report. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.

-19-

The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Overview

Retail Opportunity Investments Corp. commenced operations in October 2009 as a fully integrated and self-managed REIT. The Company specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers in the western and eastern regions 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.

From the commencement of its operations through March 31, 2013, the Company has completed approximately $930.7 million of shopping center investments. As of March 31, 2013, the Company's portfolio consisted of 46 wholly-owned retail properties totaling approximately 4.5 million square feet of gross leasable area ("GLA"). The Company also owns one retail property through a joint venture, which is comprised of a 49% ownership interest in the Crossroads Shopping Center, a 463,402 square foot shopping center situated on approximately 40 acres of land, which is currently 97.7% leased.

As of March 31, 2013, the Company's wholly-owned portfolio was approximately 93.0% leased. At March 31, 2013, the Company considered 42 of its wholly-owned properties to be stabilized properties with a weighted average leased area of 95.3%. The remaining four properties were considered by the Company to be re-development properties that were 67.4% leased at March 31, 2013. During the three months ended March 31, 2013, the Company leased or renewed a total of 171,200 square feet in its portfolio. The Company has committed approximately $451,000 and $146,000 in tenant improvements and leasing commissions, respectively, for the new leases and renewals that occurred during the three months ended March 31, 2013. During the three months ended March 31, 2013, rental rates across the Company's portfolio, with respect to lease renewals that expired during such period, remained essentially flat.

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.

Subsequent Events

On April 15, 2013, the Company acquired the property known as Canyon Crossing Shopping Center located in Puyallup, Washington, within the Seattle metropolitan area, for a purchase price of approximately $35.0 million. Canyon Crossing Shopping Center is approximately 121,000 square feet and is anchored by Safeway Supermarket. The property was acquired using borrowings under the Company's credit facility.

On April 22, 2013, the Company acquired the property known as Diamond Hills Plaza located in Diamond Bar, California, within the Los Angeles metropolitan area, for a purchase price of approximately $48.0 million. Diamond Hills Plaza is approximately 140,000 square feet and is anchored by an H Mart Supermarket and a Rite Aid. The property was acquired using borrowings under the Company's credit facility.

On May 1, 2013, the Company's board of directors declared a cash dividend on its common stock of $0.15 per share, payable on June 28, 2013 to holders of record on June 14, 2013.

Subsequent to the quarter end, the Company received notice of warrant exercises for 90,000 warrants, totaling approximately $1.1 million in proceeds.

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Report on Operating Results

Funds from operations ("FFO"), is a widely-recognized non-GAAP financial measure for REITs 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.

In accordance with the Financial Accounting Standards Board ("FASB") guidance relating to business combinations, which, among other things, 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, the costs of completed acquisitions will reduce our FFO. Acquisition costs for the three months ended March 31, 2013 and 2012 were approximately $409,000 and $123,000, respectively.

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 our 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 three months ended March 31, 2013 and 2012.

                                                                        For the Three Months Ended
                                                                   March 31, 2013       March 31, 2012

Net income for period                                              $     2,289,886     $      1,127,404
Plus: Real property depreciation                                         4,248,789            2,954,481
Amortization of tenant improvements and allowances                       1,180,376              946,342
Amortization of deferred leasing costs                                   3,451,965            2,748,995
Depreciation attributable to unconsolidated joint ventures                 352,076              606,265
Funds from operations                                              $    11,523,092     $      8,383,487

Results of Operations

At March 31, 2013, the Company had equity interests in 47 properties, of which 46 are consolidated ("consolidated properties") 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 investment provides for relatively stable revenue flows even during difficult economic times. The Company has a strong capital structure with manageable debt. The Company expects to continue to actively explore acquisition opportunities consistent with its business strategy.

Results of Operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

The following comparison for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, 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 totaled 30 of the Company's 46 consolidated properties. Operating income is defined as operating income generated from the Company's consolidated operating properties (net of depreciation and amortization).

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During the three months ended March 31, 2013, the Company generated net income of approximately $2.3 million compared to net income of $1.1 million generated during the three months ended March 31, 2012. Operating income increased by $3.0 million during the three months ended March 31, 2013 primarily as a result of an increase in the number of properties owned by the Company in 2013 compared to 2012 and an increase in same-store properties operating income. As of March 31, 2013, the Company owned 46 consolidated properties as compared to 32 properties at March 31, 2012. The newly acquired properties increased operating income in 2013 by approximately $4.2 million. Operating income from the 30 same-store properties increased operating income by approximately $440,000. During the three months ended March 31, 2013, the Company incurred approximately $3.8 million of interest expense compared to approximately $2.3 million during the three months ended March 31, 2012, due to higher net borrowings on the term loan/credit facility. During the three months ended March 31, 2013, the Company had a total of $218.0 million outstanding on its term loan and credit facility as compared to $110.0 million outstanding on its term loan at March 31, 2012. The Company incurred property acquisition costs during the three months ended March 31, 2013 of approximately $409,000 compared to $123,000 incurred during the comparable period in 2012. Property acquisition costs were higher in 2013 due to legal costs incurred related to potential acquisitions.

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.

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.

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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 March 31, 2013.

-23-

The Company reviews its investment in its unconsolidated joint venture 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 March 31, 2013.

REIT Qualification Requirements

The Company has elected and qualified 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 cannot 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 three months ended March 31, 2013, the Company's primary sources of cash were (i) cash flows from operating activities, (ii) proceeds from bank borrowings and (iii) proceeds from the exercise of warrants. As of March 31, 2013, 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 revolving credit facility (the "credit facility") with several banks. The credit facility provides for borrowings of up to $200.0 million and contains an accordion feature, which allows the Company to increase the facility amount up to an aggregate of $300.0 million subject to commitments and other conditions. 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.

In addition, the Company has a term loan agreement (the "term loan") with several banks. The term loan provides for a loan of $200.0 million and contains an accordion feature, which allows the Company to increase the facility amount up to an aggregate of $300.0 million subject to commitments and other conditions. The maturity date of the term loan is August 29, 2017.

As of March 31, 2013, $200.0 million and $18.0 million were outstanding under the term loan and credit facility, respectively. The average interest rate on the term loan and credit facility during the three months ended March 31, 2013 was 1.8%. The Company had $182.0 million available to borrow under the credit facility at March 31, 2013. The Company had no available borrowings under the term loan.

During the three months ended March 31, 2013, the Company assumed an existing mortgage loan with an outstanding principal balance of approximately $8.9 million as part of the acquisition of Bernardo Heights Plaza.

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 three months ended March 31, 2013, the Company did not sell any shares under the sales agreement.

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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, proceeds from unsecured or secured financings from banks or other lenders and undistributed funds from operations. In addition, the Company anticipates raising additional capital from future equity and debt financings, and if the value of its common stock continues to exceed the exercise price of its warrants, through the sale of common stock to the holders of its warrants from time to time. The Company is seeking to obtain a credit rating from certain credit agencies to provide it with access to the unsecured bond market, an additional avenue that can be used to fund the Company's liquidity and capital needs. However, no assurance can be given that the Company will continue to seek such a rating or what rating it may receive.

                                       For the Three Months Ended
                                   March 31, 2013       March 31, 2012

Net Cash Provided by (Used in):
Operating Activities              $      4,413,601     $      4,114,107
Investing Activities              $    (34,449,255 )   $    (38,803,129 )
Financing Activities              $     32,236,983     $     11,110,421

Net Cash Flows from:

Operating Activities

Net cash flows provided by operating activities amounted to $4.4 million in the three months ended March 31, 2013, compared to $4.1 million in the comparable period in 2012. During the three months ended March 31, 2013, cash flows from operating activities increased by approximately $300,000 primarily due to additional operating income from acquisitions, offset by an increase in prepaid expenses, primarily due to the timing of real estate tax payments and the additional number of properties owned during the three months ended March 31, 2013, as compared to the same period in 2012. This increase was further offset by an increase in the change in other liabilities related to unearned rent during the three months ended March 31, 2013 as compared to the same period in 2012.

Investing Activities

Net cash flows used in investing activities amounted to $34.4 million in the three months ended March 31, 2013, compared to $38.8 million in the comparable . . .

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