ROIC - Retail Opportunity Investments Corp

[Myth465]

Hat tip to a fellow board member who tipped me on to these guys.

 

This is the other REIT I own. I own the warrants. There is a good writeup floating around sum zero and here is a motley fool article.

 

----

 

The warrants are in the money at $12.70 and one can make $6 on a 70 cents purchase should shares trade up to $18.75 within 4 years. 

 

A company controlled by members of Management owns 8 million warrants. The major risk inmo is execution and rising interest rates. If they can put the cash to work while REITs are trading at high valuations the stock price should double. If interest rates raise then I will likely loose. As a result of the Framework Transactions that were consummated on October 20, 2009, certain terms of the warrants were amended as follows:

 

  

The exercise price of the warrants was increased to $12.00 from $7.50 per share.

  

The expiration date of the warrants was extended from October 17, 2011 to October 23, 2014.

  

The price at which the Company's common stock must trade before the Company is able to redeem the warrants it issued in the Public Offering increased from $14.25 to $18.75.

·  

The price at which the Company's common stock must trade before the Company is able to redeem the Private Placement Warrants increased from $14.25 to (x) $22.00, as long as they are held by the Sponsor or its members, members of its members' immediate families or their controlled affiliates, or (y) $18.75.

·  

To provide that a warrantholder's ability to exercise warrants is limited to ensure that such holder's "Beneficial Ownership" or "Constructive Ownership," each as defined in the Company's certificate of incorporation, does not exceed the restrictions contained in the certificate of incorporation limiting the ownership of shares of the Company's common stock.

 

 

Other Investment Data

 

Good Write-up - Why I'm Buying This Stock, Now!

 

If you believe commercial real estate has bottomed out, I have a California strip mall I'd like to sell you.

No, really. There actually is money to be made buying and stabilizing distressed neighborhood shopping centers and Retail

 

Opportunity Investments Corp. (Nasdaq: ROIC) is the "right place-right time-right guy" way to play it. That's why I'm thrilled to add ROIC to my Rising Stars Portfolio.

 

The business

 

The seeds for ROIC were planted back in 2007, when the Baker family -- founders of National Realty & Development Corp. -- raised close to $400 million through a blank check company, aka a SPAC (special purpose acquisition corporation), with the goal of opportunistically acquiring a real-estate-focused operating company. Two years later, with no major acquisition prospects and faced with the undesirable option of returning their stockpile (SPACs have a limited amount of time to acquire a company), the Bakers dusted off their industry black book and called up the one man they knew could turn a ton of cash into REIT gold: Enter Stuart Tanz.

 

Release the Tanz

 

So, ladies and gentlemen, if I say Stuart Tanz is a real-estate man you will agree. Born into a real-estate family, Stuart has sheetrock running through his veins as he got started early in the business cleaning up trash and making repairs for his dad's shopping center(s). Stuart quickly moved up in the family business and would go on to make a name for himself guiding Pan Pacific Retail Properties from its 1997, $146 million IPO, all the way to its $4 billion sale (including assumed debt) to Kimco

 

Realty Corp. (NYSE: KIM) in 2006. Tanz proved he knew when to hold 'em and exactly when to fold 'em, as Kimco saw its market value get more than halved after the purchase.

 

Tanz now reenters the game to guide ROIC's transition from a SPAC to an opportunistic niche-REIT. Rested and richer, Tanz is wisely reaching to the same playbook that paid off for him before: Underpay for troubled grocery store-anchored shopping centers, make cosmetic touch-ups and necessary repairs, and then lease 'em up. Tanz avoids buying lemons by focusing on three acquisition criteria:

 

• Geography -- Focuses on coastal states with positive population trends and limited space availability.

• Density -- Buys in densely populated areas where at least 180,000 people live within a 1- to 3-mile radius.

• Income demographics -- Targets neighborhoods with median incomes of at least $62,000 a year.

 

While it is still early, the quality of ROIC's initial purchases point to an effective plan being executed by the right man.

 

Why I'm buying (and how much)

 

I'm an asymmetric investor who likes to make big bets on high-probability outcomes that have a seemingly limited downside. Throw in a proven asset allocator, and I'm sold. While ROIC's upside is based mainly on potential, its current value is rooted in cash and backed by real assets. Given the company's current lack of debt, ROIC's reported tangible book value of $9.32 per share serves as my low-end estimate of value, which, based on its current share price, represents only a 5% downside risk.

However, these recent purchases aren't simply worth their acquisition cost; I believe they're worth a bit more. Based on the terms of their initial acquisitions, I estimate that Tanz and company are picking up properties at 10%-20% discounts to intrinsic value. Assuming Tanz uses the $400-million-or-so war chest to acquire properties at 15% discounts, on average, shareholders will be in possession of at least $470 million worth of assets (not counting the use of any debt or leverage). This translates to about $11.30  per share, which would be an 18% return based on today's prices. As to earnings power, I believe ROIC, when fully invested, can comfortably generate somewhere in the order of $35 million to $45 million in EBITDA.

 

Comparing my estimates against some handpicked niche retail REITs creates an interesting picture:

 

REIT

Price / Book

Yield

EV/EBITDA

Realty Income Corp. (NYSE: O)

3.31

4.9%

18.80

Regency Centers (NYSE: REG)

2.27

4.3%

18.47

Federal Realty Investment Trust (NYSE: FRT)

4.43

3.2%

19.42

Acadia Realty Trust (NYSE: AKR)

2.46

3.6%

17.25

Average

3.155

4%

18.62

Retail Opportunity Investment Corp.

1.04

2.5%

N/A

 

Source: Yahoo! Finance as of market close Oct. 27.

 

Using relative multiples and projecting ROIC's potential dividend and subsequent yield provides a wide range of potential values, from very favorable to wildly optimistic. Again, I peg the "lots of things go wrong" downside value at tangible book value. On the upside, I see ROIC worth between $17 and $26 a share. Given today's stock price of $9.62, this investment provides me with a "too good to be true," 15-to-1 reward-to-risk ratio. With that in mind, I am looking to allocate between 8%-12% of my portfolio to this position.

 

Risks

 

First of all, I admit that a large portion of my investment thesis is contingent on Stuart Tanz, his previous track record, and his ability to do it again. But make no mistake, all equity investments, in one way or another, are jockey bets. So, after examining Stuart's previous successes, reviewing his initial ROIC deals and interviewing him about his investment strategies, I must report back that I truly like what I've seen. Stuart is passionate about real estate and growing ROIC. Add in the fact that he ponied up $5 million of his own cash to ride along in the Retail Opportunity rodeo, and you start to realize that shareholders are fortunate to have Tanz holding the reins.

 

Secondly, the state of the economy and commercial real estate is definitely a concern worth considering. Indeed, high unemployment and a prolonged recession would continue to put pressure on retailers, thus increasing the probability of defaults. That's why Tanz and ROIC focus on grocery- and drug-store-anchored shopping centers in neighborhoods with favorable density and income levels. While lower-wage earners are facing double-digit unemployment numbers, ROIC's target demographic are faring much better with rates below 5%. Also, further convulsions in the commercial real estate market actually create additional buying opportunities for Tanz and company.

 

Finally, another potential risk factor is Wal-Mart (NYSE: WMT). Not too many people realize it, but Wal-Mart is the largest grocery seller in the United States. In addition, the company is looking to build smaller-footprint stores, which could do damage to neighborhood centers. While this is a real risk, I believe it's one that will take a decade or more to fully play out.

 

My Foolish bottom line

 

Had things gone a bit differently, ROIC could have easily become a casino or a chain of hotels. Instead, what started as a pile of cash and a dream to profit off of the troubled $1.7 trillion commercial real estate sector may just turn out to be Mr. Tanz's greatest opus.

 

While it's still a scary time for commercial real estate, it is in the midst of the fear and turmoil that the greatest opportunities emerge. Tanz and company ignore the gloomy headlines, and take comfort knowing that real estate is still about location, location, location. Their maniacal coastal focus on drug- and grocery-store-anchored shopping centers in densely populated, moderate-to-high income areas is a sound strategy that I'm happy to be a part of.

 

Pasted from <http://www.fool.com/investing/general/2010/11/01/why-im-buying-this-stock-now.aspx>

 

[rogermunibond]

I'm looking forward to the 4Q CC and earnings.  $116MM in new deals announced, and $240MM in liquidity (cash and CF). 

 

Since the 3Q when ROIC had $212MM in property, $7.8MM in mortgage receivable (B participation note on Riverside Plaza), and $180.7MM in cash, they have announced the following deals:

 

Marketplace Del Rio - $36MM

Division Crossing - $11MM

Halsey Crossing - $7MM

Crossroads Shopping Center (49%) - $12MM (right of first offer on 2 CA and 3 NJ shopping centers - 10 years)

Defaulted mortgages of $50mm (14% discount to outstanding principal secured by 3 CA shopping centers)

 

Unsecured credit facility - $175MM (increaseable up to $75MM)

 

 

[Hawk4value]

Regarding Mr. Tanz's $5m personal stake in the company: how did he get it???    Did he buy shares in the open market with persomal money. Was he awarded option or restricted shares as the new CEO.  Does anyone know???

[Myth465]

Regarding Mr. Tanz's $5m personal stake in the company: how did he get it???    Did he buy shares in the open market with persomal money. Was he awarded option or restricted shares as the new CEO.  Does anyone know???

 

I believe he bought the shares, but I could be wrong. Thats what I remember from my research several months ago.

 

Its been a quite year, but I think Q4 call will be a nice catalyst.

 

 

I am very excited about Q4 and the conference call. They plan to give guidance which should be very helpful. They had a string of deals in Q4 and are really working though the cash horde, the biggest risk I saw was the risk that they pipeline wasnt strong enough, but that is not proving to be the cash.

 

Ideally I would hope they would plow through the small amount of cash left, would then plow through the leverage they have plan, and finally plow through the cash from the rights offering. If they can do the first 2 while in this low yield environment then I believe they will get revalued to a 5% yield.

[bargainman]

Regarding Mr. Tanz's $5m personal stake in the company: how did he get it???    Did he buy shares in the open market with persomal money. Was he awarded option or restricted shares as the new CEO.  Does anyone know???

 

Hmm I thought that he bought them on his own dime..

 

http://www.sec.gov/Archives/edgar/data/1203845/000093041309005477/xslF345/c59120_ex.xml

 

But it looks like at least 100K shares came from the RSU. Plus he has 100K options priced at 10.25.  I'm not sure what the:

 

"Common Stock, par value $0.0001 per share (1)"

 

means exactly.  I'm not sure where I saw definitively that he had bought his own shares...

[Myth465]

Honestly I dont care how he got his shares. He just needs to get the SP up to $18 in 3 years  ;D. If that happens I have close to a 8 bagger.

 

I like his moves and think he will perform. Honestly the situation is basically out of his hands inmo. Reits trade at extremely high valuations, some are down to 3.5% to 5% yields. I would prefer a revaluation based on that, vs. one based on a yield of 8% - 10%.

 

Time is not really on our side. Q4 call hopefully includes a raised dividend, solid guidance, and pipeline details.

[Myth465]

Anyone bought today, that was a nice unexpected run. I watch the stock but not the warrants (Google finance doesnt show them) so I was quite surprised when I logged into my broker today.

[Myth465]

So far so good. With the market tanking and the dollar rising things look good.

 

http://www.globenewswire.com/newsroom/news.html?d=214422

 

HIGHLIGHTS

 

$144.1 million of shopping center investments completed during 4Q'10

$442.5 million of shopping center investments completed since 4Q'09 formation

Net income of $2.4 million, or $0.06 per diluted share for 4Q'10

Funds From Operation (FFO) of 5.6 million, or $0.13 per diluted share for 4Q'10 (1)

$464.2 million of total assets with $42.4 million of debt outstanding at 12/31/10

$175.0 million senior unsecured revolving credit facility established in 4Q'10

Quarterly cash dividend of $0.08 per share of common stock declared (33.3% increase)

[rogermunibond]

Acquisition activity was completing 3Q announced deals.  No new deals in 2011, so far.  Kind of disappointing.  Maybe there will be additional info on the CC.

[Myth465]

I kind of hate the way  :) they report these things. We have a deal announcement then a deal closure. Its hard to keep track of what was bought when.

 

I need 2 pieces of data and only 2. Whats pending in dollars, and whats our liquidity position. I basically want to take the full cash, prior purchases, and future liquidity and put a 7% - 9% cap rate on it. From a modeling perspective. Everything else is gravy.

 

I am also guessing we will have a rolling series of dividend raises. I wonder what the exit rate dividend will be at the end of Q4. That will likely determine the stock price.

 

These probably closed in 2011, but you are probably right no new deals. I trust the guy he says the pipeline is strong.

 

2011 INVESTMENT ACTIVITY TO DATE

 

To date in 2011, ROIC has acquired five shopping centers in three separate transactions as follows:

 

Single Asset Acquisitions:

 

To date in 2011, ROIC has acquired two shopping centers for a total of $56.5 million. The properties acquired are as follows. 

 

Marketplace Del Rio

In January 2011, ROIC acquired Marketplace Del Rio for approximately $35.7 million. The shopping center is approximately 177,000 square feet and is anchored by Stater Brothers Supermarket. The property is located in Oceanside, California, within the San Diego metropolitan area.

 

Pinole Vista

In January 2011, ROIC acquired Pinole Vista for approximately $20.8 million. The shopping center is approximately 165,000 square feet and is anchored by Lucky Supermarket, a Northern California based grocer. The property is located in Pinole, California, within the San Francisco metropolitan area.

 

Properties acquired through conveyance in lieu:

 

On February 17, 2011, ROIC acquired the fee interest in three shopping centers (Desert Springs Marketplace, Mills Shopping Center and Nimbus Winery) through a conveyance-in-lieu of foreclosure agreement for an aggregate cost of approximately $52.5 million. The $52.5 million reflects approximately $2.5 million of expenditures in 2011 in addition to the $50.0 million purchase price of the mortgage notes receivable acquired in December 2010 (as discussed above).

 

Desert Springs Marketplace

Desert Springs Marketplace is a grocery-anchored neighborhood shopping center totaling approximately 105,000 square feet. The property is anchored by Ralphs "Fresh Fare" Grocer (Kroger Co.) and is located in Palm Desert, California.

 

Mills Shopping Center

Mills Shopping Center is a grocery-anchored community shopping center totaling approximately 253,000 square feet. The property is anchored by Raley's Supermarket, a Northern California based grocer, and is located in Rancho Cordova, California, within the Sacramento metropolitan area.

 

Nimbus Winery Shopping Center

Nimbus Winery Shopping Center is a neighborhood shopping center totaling approximately 75,000 square feet. The property is located in Rancho Cordova, California, within the Sacramento metropolitan area.

[rogermunibond]

Two of the 3 conveyed properties look like they might require some leasing up work on the part of ROIC before they are FFO positive.  And it is certainly possible that they have leases expiring, which was one of the reasons the previous owner defaulted.  OTOH Marketplace Del Rio and Pinole Vista look like strong properties from the get go.

 

 

From the 8-K of 12/22/2010

 

Desert Springs Marketplace is a grocery-anchored neighborhood shopping center of approximately 105,157 square feet that is anchored by Ralphs "Fresh Fare" Grocer (Kroger Co.) and Rite Aid Pharmacy.  It is currently 99.1% leased.  Desert Springs Marketplace is located in an area with approximately 100,315 people within a five mile radius, with an average household income of approximately $86,886.

 

Mills Shopping Center is a grocery-anchored neighborhood shopping center of approximately 252,912 square feet that is anchored by Raley's, Sears and Dollar Tree.  It is currently 77.9% leased.  Mills Shopping Center is located in an area with approximately 223,563 people within a five mile radius, with an average household income of approximately $71,156.

 

Nimbus Winery Shopping Center is a grocery-anchored neighborhood shopping center of approximately 74,998 square feet.  It is currently 79.4% leased.  Nimbus Winery Shopping Center is located in an area with approximately 155,250 people within a five mile radius, with an average household income of approximately $87,291.

[Myth465]

I think those will work out well similar to FUR. With the low price they should be able to charge much lower rents and achieve a decent cap rate on their invested capital. I think the prior owners probably wanted rents which were too high due to the fact that they had to service the debt on the properties.

 

Hopefully we still get a blended 8% or so.

[rogermunibond]

Myth, did you get a chance to listen to the CC?

 

 

[Myth465]

Myth, did you get a chance to listen to the CC?

 

 

 

Not yet. I am very happy with the warrant price though. Its a nice gain over a few months. I plan to listen this weekend and will post a full update by Weds or Thurs. The market seems to like things and we are starting to be priced as a REIT vs. a pile of cash. Did you listen, and do you own the warrants or common?

[rogermunibond]

Did not listen yet.  I'll do so tonite and post my thoughts.

 

I own the common and warrants.

[rogermunibond]

Highlights:

 

- Crossroads Shopping Center in Bellevue WA they see as cornerstone NW property

49% ownership now; plan to acquire 51% with option running to 2014 - expectation is that current owner accepts stock for this 2nd phase transaction (estate planning)

 

- east coast - not much activity - 15% of pipeline

 

- west coast - more activity over last 90 days than Tanz has seen in past 3 years - 85% of pipeline

 

- cap rates compressing - they are still targeting 7-7.5% cap rate on their acquisitions (knowledge private owners, off market transactions, and ability to close fast)

5.5-6% A

6.5-7.5% B

C grade less compression

 

- $40 million in acquisitions expected to close in next 90 days

 

- active discussions with a number of banks on acquiring mortgages or properties directly (west coast shopping centers)

 

- targeting investment grade unsecured debt for financing (bank term loans, private placement debt) - do not want to encumber properties

have been buying forward interest rate swaps - they think will help reduce overall cost of financing

 

- long-term targeting 6-7% of revenue in SGA as at Pan Pacific

 

- no buyback action on warrants - see warrants as a good source of capital

 

- 18 shopping centers categorized as stabilized with 95% occupancy

 

- 5 shopping centers categorized as redevelopment with 72% occupancy at time of acquisition

 

- secured to 2 anchor tenants on their redevelopment properties

[Myth465]

Thanks will post my thoughts as soon as I have a chance to review the call. I like the news on the west coast, and the $400 million thats huge and very much ahead of where I thought we would be. I may buy more warrants. They are working thru the cash and debt rather quickly and will need to raise equity soon. That will leave those nice warrants as the next leg...

 

By my count we need $1 in dividends in the current environment for a $20 stock price. All we need is a 25 cents run rate at year end. I will let you do the math on where the warrants will be by then. I think that board member will make 10x on his cash unless we see stagflation / deep inflation.

 

Did they explain why the liked unsecured? I have always found that interesting. I am sure secured would be cheaper. Also what am I missing? outside of macro risk this seems like easy money...

[rogermunibond]

Whoops $40MM is $40 million not $400, sorry about that.

 

I need to look back at the old Pan Pacific and see if they used that same financing.  Are their legal reasons?  Would they need a separate LLC for each property in order to encumber it with a mortgage?  Currently they hold most all properties in the operating partnership.

[Myth465]

Aw that makes sense. Looks like we have a bit more time for them to work thru the capital.

 

I think we are buying towards the bottom of the cycle so I guess we wouldnt need the protection of mortgages. I guess it also gives them another leg to rely on should they need financing.

[rogermunibond]

Myth - I have a call with the CFO today to talk about their financing strategy.  Any questions you want me to ask him?

[bargainman]

Myth - I have a call with the CFO today to talk about their financing strategy.  Any questions you want me to ask him?

 

I'm not Myth, but I would love to know what he and Tanz think of the risk to super market's repeatable business.  With Walmart and Target entering the market do they think there is a significant risk to the steady stream of business of grocery stores as anchor tenants?

[Myth465]

Myth - I have a call with the CFO today to talk about their financing strategy.  Any questions you want me to ask him?

 

You guys are much more proactive than me lol. Another board member had a call as well. I was actually going to update my thoughts on this one today or tomorrow. I listened to the call over the weekend and came away quite impressed. I would like to up my position, but I have no cash.

 

I now have no doubt they will perform. I believe the main factor is how quickly, and under what interest rate environment the revaluation takes place at. I think the warrants could be a big winner for 2012, and a decent winner for 2011. I am talking multi bagger.

 

A few questions. Surprisingly on the call Motley fool asked the best questions.

 

1. Based on guidance what do they project the 2011 exit rate Q4 dividend to be?

 

2. Will the approximate FFO payout ratio remain the same as FFO increases?

 

3. I believe they said they have adequate staffing and can grow with their current G&A, can he confirm that?

 

4. For the under-leased properties with low occupancy - Do these also have an acquisition cap rate of 7% - 7.5% (I think that was it). Increases in occupancy would push up the cap rates, is that correct?

 

5. I know its a work in process, but what ultimately does he see the capital structure looking like? Right now we have largely equity and unsecured debt, followed by potentially additional equity via warrants?  They mentioned getting some long term debt, will this be via bonds? Finally why unsecured debt vs. no recourse mortgage debt? They went into it a bit on the call, and the only advantage I see is additional flexibility to mortgage up the properties should things hit the fan. Is that it?

 

Finally.

 

-Warrants exercise are based on share price, but when do they think they will need that capital? How much debt will they take on before seeking equity, and when do they think they will be tapped out on debt considering the pipeline? Basically whats the desired debt to equity ratio, and when will they need more equity - 2012, 2013??

 

Does Management own any warrants? - I guess we could look at the proxy, I would love to ask this question face to face lol. You would be surprised by what body language gives away. There entire stance on the warrants have completely changed. I am sure the board member, and myself are both happy.

 

-How much available liquidity do they have (after subtracting all publicly announced deals)? - Cash we get a break out of cash and debt - This is a lazy question and one could do it himself.

 

-Based on stated guidance and without taking into account the unannounced $40 million deal - How much remains to acquire to hit guidance? - Similar to last one.

 

With the last 2, I want a breakdown on how much cash / debt they have vs. how much they want to acquire for the rest of the year. Its hard to keep track of due to how the announcements occur. I am unsure if the guidance includes previously announced deals which havent closed or new deals entirely. - Perhaps they could improve reporting by Showing a simple schedule or 2.

 

Cash available

Debt available

=

Total Liquidity

 

+Closed Deals

+Announced Pending Deals

+Remaining 2011 Guidance / Potential Pipeline

=Total 2011 guidance

 

They may do this, havent seen the 10k yet.

 

Thanks again. Let me know which ones you ask and what the answers are should things go as scheduled. If you dont mind me asking how did you schedule such a meeting. I want to do one with SD perhaps one of these days.

 

 

----------------

 

In regards to supermarkets. I dont think its a risk. I am not rich, but not poor and dont like shopping for groceries at Wal-mart or Target. I much prefer the neighborhood HEB, Randalls, Groger, Whole Foods, and ......

 

the target market is doing much better than me lol.

[rogermunibond]

Good questions.  I'll see what I can get answered.

 

"Thanks again. Let me know which ones you ask and what the answers are should things go as scheduled. If you dont mind me asking how did you schedule such a meeting. I want to do one with SD perhaps one of these days."

 

Emailed the IR rep on the 4Q earnings release.  I was surprised to get the time with the CFO actually.

 

[stahleyp]

I looked through the DEF 14A and found this out about the warrants. It looks like "All directors and executive officers as a group" own about 8,000,000 warrants. From what I can find, that's about 20% of the shares outstanding. Isn't that pretty dilutive?

 

http://www.sec.gov/Archives/edgar/data/1407623/000117184310000529/def14a_040610.htm

 

Common Stock Beneficially Owned

     

Name and Business Address(1)

 

Shares(2)(3)

   

Shares Subject to

Options or

Warrants(4)

   

Total

   

Percent of Class

 

Directors and Officers

                     

Melvin S. Adess

    25,000       —       25,000       *

Richard A. Baker

    50,000       8,000,000 (5)     8,050,000       16.1 %

Robert C. Baker

    —       8,000,000 (5)     8,000,000       16.0 %

Michael J. Indiveri

    25,000       —       25,000       *

William L. Mack

    —       8,000,000 (5)     8,000,000       16.0 %

Edward H. Meyer

    25,000       —       25,000       *

Lee S. Neibart

    —       8,000,000 (5)     8,000,000       16.0 %

Charles J. Persico

    40,000 (6)     —       25,000       *

Laura H. Pomerantz

    25,000       —       25,000       *

Stuart A. Tanz

    609,765       —       609,765       1.4 %

Vincent S. Tese

    25,000       —       25,000       *

John B. Roche

    98,200       —       98,200       *

Richard K. Schoebel

    37,500       —       37,500       *

All directors and executive officers as a group

    (13 persons)

    945,465       8,000,000 (5)     8,945,465       18.1 %

[rogermunibond]

Those are the private placement warrants that were given to the sponsors of the original NRDC Acquisition SPAC.