ROIC - Retail Opportunity Investments Corp

[Myth465]

stahleyp that was the big kicker for me. I think it was a holding company which is owned by some of the directors or something like that. I believe they came over from the merger. I dont view it as dilutive. Management is correct, its another source of capital. The company was simple a pile of cash which traded below BV for most of 2010. They hired a smart guy and his team. That guy used the cash to buy assets at cap rates of 8% all in after a bit of leg work and releases.

 

the next leg is to take on 50% debt and buy more properties at 8%. Finally you need dividends so that the REIT gets revalued at a high multiple due to the low rate environment. Take the cash and debt turn it into buildings yielding 8% with upside on releases, then revalue the whole thing at 4% - 6%.

 

This guy has made 40% in 3 months and I am sure he wants full value. I believe his warrants have an even higher call price as well. Management and myself only gets paid if the shareprice gets where it needs to be by 2014. They are doing their best, hopefully REITs continue to trade at these insanely high valuations.

[stahleyp]

thanks for the input guys.

 

myth, i don't follow commercial property all that much. About a year or so ago, I know Klarman was looking at it, though. When you say "hopefully REITs continue to trade at these insanely high valuations," that does concern me a bit. If they are high now, that means there is a good chance they'll be lower in the future.

[Myth465]

thanks for the input guys.

 

myth, i don't follow commercial property all that much. About a year or so ago, I know Klarman was looking at it, though. When you say "hopefully REITs continue to trade at these insanely high valuations," that does concern me a bit. If they are high now, that means there is a good chance they'll be lower in the future.

 

Yes you are correct. REITS inmo are overpriced due to the low yield environment. Well I guess they are fairly priced given where treasures trade at. Similar to Corporates everyone can issue debt at low prices because funds and others are yield starved. This has pushed up the prices of anything in the high yield space. REITs inmo should probably trade at 6% to 8% yield but are trading at closer to 4% or 5%. Given that I hold the warrants I would prefer for ROIC to be revalued as a REIT to a 4% yield, but thats more of a time thing. If they can ramp up before rates on treasuries rise then we can get paid out quicker on the warrants. If rates move up the thesis should still hold out unless they rocket up very quickly.

 

Basically do you believe in Deflation or Inflation.

[rogermunibond]

Klarman's getting involved in real estate developments.

 

London

 

http://online.wsj.com/article/BT-CO-20110225-708983.html

 

Atlanta

 

http://www.bizjournals.com/atlanta/news/2011/02/23/baupost-has-300m-to-restart-streets.html

[rogermunibond]

So Roche is primarily the guy driving the unsecured debt versus secured mortgages.  He gave a number of reasons in favor of unsecured.  Most had to do with operational flexibility.  The last year he was at New Plan Excel Realty Trust they had 500 something shopping centers/malls and $440 million in mortgages and $1,200 million in unsecured notes.  Said it makes senses for commercial properties like office buildings or hotels but not with smaller shopping centers.  First not cost effective - fees and legal costs associated with mortgage on $600 million office building pretty close to $25 million shopping center.  Second makes it harder to sell properties that have appreciated in value -  buyer needs to bring more cash to the table to pay off existing mortgage - so takes away a portion of the buyers in the market.  Third, if you do an exchange, overpriced mortgage (say written at 8% versus market at 7%) means less value coming to you from the other party.  Fourth, similar problem if you have a pool of mortgages on shopping centers and you sell one of the underperforming ones, when you go to defease the property you have to put more value into the pool.  Said that mortgages have their place mostly when you expect things to remain sideways value wise.  But generally doesn't like to use them.

 

As an example of operational flexibility, he gave an example of Walmart wanting to expand its box and you can't get approval from the servicer or insurance company fast enough - Walmart moves an buys property nearby.

 

Last reason was that in a financial panic, they could borrow against the unencumbered properties.

 

SGA should decrease - doesn't see staffing as a problem -  they are self-managed.  They charge a mgmt fee to themselves which is taken out of NOI.  Doesn't see the SGA costs exceeding mgmt fee.

 

I asked about the private placement warrants - he said that of the warrants outstanding - the private placement warrants were the only ones that are cashless.  So that is the main source of dilution.  Plus the buyback does not apply to the private placement warrants.

 

Oh and he said they now have $50 million in deals, so they added $10 million in past week or so.

[Myth465]

Did anyone buy the warrants. We are up 51%, high yield is doing quite well in this environment. I love the leverage on this one. As the stock creeps up we seem to rocket up.

[Guest Bronco]

I bought a little. 

 

You and Harry are like a coin with heads on both sides.  Always a winner.

 

Must be something magical in the water down in Texas. 

[Myth465]

I bought a little. 

 

You and Harry are like a coin with heads on both sides.  Always a winner.

 

Must be something magical in the water down in Texas. 

 

Lol hopefully that coin doesnt fall off the table. Swizzed seems to have the magic touch with oil and gas, I have followed him into Petrobank.

[prunes]

The comment about the owner of Crossroads Shopping Center possibly accepting 51% payment in stock is pretty compelling. Also, already management has signed two anchors at its development properties. Nice.

 

Agreed Myth -- the warrants seem pretty compelling. I'm still a little worried about interest rate risk, but it shouldn't be significant enough to prevent the stock getting above $12 by any means. The warrants have fallen back down to what looks like a good level to buy in.

[Myth465]

Yep my basis is around 71 cents. I prefer $1, but we have a few years for this to play out. This was a 10% position but has dropped to a 6-7% position due to oil and gas rallying. Half the smart people I follow predict deflation with lower and lower rates which would make a 4% reit a great yield, and the other half predict run away inflation which raise risk free rates towards 4% - 7% pretty much crushing reits.

 

It wouldnt kill the investment thesis but would make it harder. I have setup a pair trade. Oil for inflation hedge, and ROIC for a poor man deflation hedge. If Prem is right I make 8.5 times my money on a 10% investment capital position. If wrong and inflation takes off then I do quite well with oil and hard assets.

 

I am hoping somehow both of them are right  ;D. I like the manager and am hoping they really crack up the deals over Q2. Prunes one of the real reasons I like this is because I dont see Management being a problem. I think they will execute just fine, as you mentioned the main risk is Interest Rate related. Jim Grant also said he likes commercial realty in the none Class Property space which is another vote of confidence.

[prunes]

Nice basis.

 

Do you know of any oil / other hard asset opportunities that are still cheap? I don't have any exposure to that sector but agree it would be good to hedge the risk.

 

What's your background by the way? I work in CRE so ROIC is right up my alley.

[Myth465]

Interesting - I work in Manufacturing though, its related to oil and gas equipment (wellheads, bops, that sort of stuff). I have followed oil for 4-5 years and generally believe that oil will get more expensive overtime. Swizzed is the resident oil and gas expert I would say and I have followed him into ATPG and Petrobank which are both written up here.

 

Petrobank is still quite cheap (almost at a 52 week low and I bought with oil over $100), and ATPG may be crossing its inflection point right about now. Its still cheaper then it was pre BP spill  and is bringing online projects which will almost double production.

 

My major winner in the space is SD. I sold just a bit, but plan on holding the rest. It has run quite a bit but I think is worth a bit more. It is also written up here. Finally ATUSF which was posted on the board is probably the best inflation / hard asset owner manager investment. It was posted by Dazel. A significant slow down in China would probably harm all of these investments but ATUSF the most inmo.

 

Petrobank - http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3338.0

ALS Minerals - http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3613.0

ATP Oil and Gas - http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3294.0

Sandridge Energy - http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3427.0

 

Whats your general thoughts on Commercial Re, do you think its attractive right now, and what do you think of Managements model? I cant find any real holes related to their model.

[prunes]

Myth,

 

I did some more due diligence on this and I'm not really sure the numbers work. Suppose you could make an 8% return on ROIC's $430 MM in total cash and already purchased RE assets (optimistic given management's recent guidance). So property cash flows before leasing commissions and tenant improvements would be $34 MM. (Cap rates are based on NOI, not CF.) After deprecation reserves of ~2 MM and ~8 MM G&A you're looking at $24 MM income, not including acquisition costs that were $2.6 MM in 2010 (these will decrease after the company's acquisitions slow).

 

This is the unlevered scenario. The company has to pay out 90% of income as dividends, so the implied dividend yield would be about 5%.

 

Now suppose the company can assume 50% leverage on its $430 MM in RE assets plus cash, less the $42 MM note payable currently outstanding. Assume these, using our 8% cap rate, and NOI grows to $46 MM. Hold G&A stable (generous assumption) and pro-rate our capex reserves. 90% of this figure--$35 MM--is $31.5 MM, or a 7.3% dividend. So if you want to assume that this stock should ultimately trade at a 5% dividend this gives us maybe 50% upside in the common.

 

Now, granted I'm ignoring the potential upside from leasing the more value-add properties, but I'm also ignoring not insignificant costs associated with lease-up: tenant improvements and leasing commissions.

 

The comps cited in Motley Fool's analysis are, with the exception of Acadia, all relatively large companies with market cap > $1 B. As your company gets smaller, it gets tougher to satisfy the G&A overhead, which is what is happening here I think. So I'm not sure the multiples analysis is being done correctly. Look at the price to book ratio for FUR, for example.

 

I know you mentioned you put a model together. I'd be interested to see what your assumptions are.

 

---

 

Regarding my thoughts about the commercial real estate industry, I'm not looking at buying any of the major REITs. The pricing doesn't make sense to me. It's all because interest rates are so low. I just like this stock from a deep value perspective. Further, CRE still hasn't dealt with bad loans on many properties--instead, these loans are simply being extended and amended. When interest rates go up, that could be the incentive for lenders finally to foreclose.

[Myth465]

This is similar to an offline discussion I had in late 2010. I haven't had a chance to really go through the 10k and update my thoughts, due to work and exams. I plan to really review things in early May. Here was my response.

 

You make some good points, ROIC is similar to FUR though right now. Just about impossible to model based on the detail they give you. Many of the new purchases closed during the quarter so I cant think of a decent way to figure out the cash they throw off without more detail from Management. You also have all the acquisition costs which also cloud things. FUR has started foreclosing on property and I don't know what kind of returns those will generate until we see what the cash flow looks like. From the call they have a 2 prong approach. Buy well leased properties and buy properties where you can lease up some unused space. They have 14 props.

9 are well leased with occupancy rates of 96%. The rest are being leased up. Rents are either flat or moving up. On the recent deal they think they will have a 12% NOI once its all said and done. 67 leases expire by 2012 and they think they can move these up. The CEO on this call said the acquisition cash yield is 8% not including releasing or other enhancements. The pipeline seems pretty strong and I have no idea what those will bring, but they will give 2011 FFO guidance on the next call. They expect to close YE at $370 million with an 8% yield which will grow substantially as they release and fill up the properties. Then they have the warrants which they may or may not buy, and then they have the 50% unsecured debt they can take on.

 

---

 

Ultimately they will trade on FFO and yield. If they are able to run through all the cash, and appropriate debt - say 50%. Then they will trade on yield from that point on. They should be much closer to $1 billion enterprise value than now (though as you say still small vs. the comps listed). The acquisition costs and everything will drop off, and the question will be what is the FFO runrate going forward (including repairs / excluding acquisition costs). It will take time, but my thesis is the cash is spent, properties are released at flat or higher rates, and occupancy is in the high 90s. After a quarter or two of that, and if the yield follows they will get the right multiple (which is currently probably a bit too high considering where reits trade and where yields are). I think all this will be in place prior to warrant expiration, I just have no idea where yields will be.

 

My line of thinking is similar to yours though I assume a higher blended caprate due to "enhancements", some deals will be high quality 8% yields which expiring leases,  and some will be ok but underleased properties with 8% yields, but low occupancies. I think on average the blended rate will be higher, and I believe Management has confirmed that they have the space to growth regarding G&A.

 

FUR is a horrible comp. I owned them for 2-3 years (until last week), and even I have a hard time getting my mind / hands around whats going on there. The legacy assets are more of an anchor than an asset for FUR, and I dont think analysts or owners can follow them well. I think thats why the BV is off, I love the loan transactions, but they will not trade at a premium to a boring easy to follow REIT for sometime, due to their complication (various platforms, jvs, RE securities, loan assets, concord, ect.). I think ROIC is a fairly simple story and hopefully will be simpler in 2013 once everything is fully deployed.

 

----

 

I agree on CRE (I was hoping for a collapse but it hasnt come, I think extend and pretend will go on for a while). It seems like buying buildings is great right now, but REITs are trading at 20x FFO. Which makes no sense outside of yield pigs who dont feel like they have a choice. I would probably just go buy junk bonds but even those tend to have pretty crappy yields. I understand the reit valuations but it doesnt make sense given my capital base, its horrible and will correct significantly with inflation (at least for the short term), but will do quite well with deflation.

 

[prunes]

The word cap rate is thrown around ambiguously sometimes. It would be much more helpful if management would share what kind of IRR it is targeting. Because if you buy a 70% leased property throwing off a 7.5% cash yield, that is much more attractive than buying a stabilized property at a 7.5% cap, because of the additional upside.

 

I'm not sure you can necessarily make the assumption that new leases will be signed at higher rents. Management has said that part of its strategy will be to undercut the market on rents due to its lower acquisition prices. By doing this it will be able to lease up its properties quickly hopefully. I suppose the question should be: higher than what? Higher than existing contract rents, or that management is expecting to be able to raise the current level of rent the property can command? If the former, I'm skeptical. Rents have really fallen off. If the latter, then this should be doable.

 

My point is just that this isn't necessarily a no-brainer deep value play here. There definitely is some risk associated with it and I'm not sure how much of a margin of safety truly exists. I'll need to think about it more.

[Myth465]

I agree, its a tough one, and an IRR would be much more helpful. Most of what I wrote is "color" from the last 3 calls which is why I was really looking forward to the 10k. FUR has excellent disclosure and I am hoping ROIC is decent enough as well.

 

Its not typically my cup of tea. I am a deep value guy. Usually 2x-3x on upside for every 1x of downside, and at least 50 cents on the dollar. This is not a 50 cent dollar, and inmo is fairly priced at its current stock price. Its a jockey bet at fair value similar to LUK, FUR (better discount here based on BV / FV), or FFH / LRE currently (using BV as a proxy for value).

 

Originally I owned FUR, moved that capital here. Made a small bit of coin then found the warrants. The goal was to take 1/8 of my capital out of common and put it in the warrants thinking I would rather risk much less, with a similar upside (assuming it worked out and the stock hit $18). If the stock didnt double in 3 years, then my capital would have been dead money anyway. As I thought more and more about it, I really liked the idea as a pair trade and upped the position and paired it with oil / hard assets. With 25% of my capital with these two. I felt fairly protected against inflation and deflation. Oil has taken off and now a majority of my assets are there. I feel comfortable with this small position, but am sleeping less easy with the outsized oil position.

 

---

 

The thesis requires trust in Management, and trust in deflation or no inflation to really work. If one of those falters then it doesnt work out. We also have time going against us, and what I would call a REIT bubble.

 

The disclosure when deals are done is lacking and they have quite a bit going on right now. Management has stated that the properties they are buying (the high quality ones) are leased at below market rates. I believe the approach is 2 pronged. On the underleased space you buy at a low basis. With that low basis and no interest costs you can underprice you leases to improve occupancy. The other prong is great assets with long leases which are expiring. The neighborhoods are great and so are the anchors so that tenant will pay up to keep the space.

 

Thats my understanding, but as you say its all hearsay. Management can sell. They are saying all the right things. Its music to my hears and makes perfect sense. You just cant see it in the numbers due to the newness of it all. I guess the 10k is out. Time to open it up. I have been spending alot more time with the oil and gas stocks in my portfolio due to the rally. This one popped up to $1, I listened to the call, read the press release, celebrated and forgot about it. Now its moved back down, and the 10k is out. Probably time for a more detailed look again.

 

 

[rogermunibond]

http://finance.yahoo.com/news/Retail-Opportunity-pz-3693509046.html?x=0&.v=1

 

Contracts to acquire two more shopping centers - $46.6 million.

[Myth465]

Great color on the call. Operations are progressing nicely, and the SP is following. I need to dig thru the filings, to clear up some accounting noise. I wouldnt think the bargain purchase gain would flow through FFO, but could be wrong. If they dont then guidance seems very low.

 

Though I am curious as to what they have planned this year for the warrants. I dont mind losing them, but I hope to be adequately compensated. Will have to look into a few other deals, the only other warrants I have owned are Resolute Energy's and I sold those before they announced the deal to close them out.

 

A large warrant holder appears to like warrants quite a bit. When researching I noticed that he held Resolute warrants, as well as a few other current positions. I didnt like much else, but I may have to thumb through his filings to see how these things have worked out in the past. Looks like something is cooking for Q3 or Q4 regarding them.

 

Does anyone have any insights, and has anyone owned warrants prior?

[ERICOPOLY]

The comment about the owner of Crossroads Shopping Center possibly accepting 51% payment in stock is pretty compelling.

 

That's a low risk investment.

 

The Crossroads Shopping Center is where I ate many, many lunches.  It's just 5 minutes from the Microsoft main campus.  A large food-court drives traffic to the center of the Crossroads mall.

 

Driving route:  http://tinyurl.com/3rk2yjz

 

And everyone at Microsoft is getting a raise:

http://seattletimes.nwsource.com/html/microsoft/2014841923_microsoft22.html

 

[rogermunibond]

Seems like their 2011 FFO guidance is a lowball number.  Especially given their ability to lease up vacancies.

 

I'm a REN warrant holder too, from the Hicks Acquisition SPAC, but I don't recall Resolute mgmt doing anything with most of the warrants.  They did do warrant exchanges with Pine River Capital.  This most recent bout of selling probably takes their average share price below $18 so the warrants aren't callable yet.

 

The main issue with these SPAC warrants is that they are NOT cashless.  So you do need to put up money to exercise them.

[Myth465]

Seems like their 2011 FFO guidance is a lowball number.  Especially given their ability to lease up vacancies.

 

I'm a REN warrant holder too, from the Hicks Acquisition SPAC, but I don't recall Resolute mgmt doing anything with most of the warrants.  They did do warrant exchanges with Pine River Capital.  This most recent bout of selling probably takes their average share price below $18 so the warrants aren't callable yet.

 

The main issue with these SPAC warrants is that they are NOT cashless.  So you do need to put up money to exercise them.

 

Yes the deal I was thinking of was with Pine River. I noticed in Jan that they owned a decent chunk of warrants here as well. How do you see this playing out Roger, how can they do something on the warrants? Also are there any other warrants you like?

[stahleyp]

what's up with the volume on the warrants today? over 500,000 shares.

[Myth465]

what's up with the volume on the warrants today? over 500,000 shares.

 

Not sure, twice the volume as on the shares. I think they are in play. Management said they would do something with them over the next few quarters. Someone is likely making a bet. Its not me, I could only dream of that kind of capital lol.

[Myth465]

From the 10k. Not sure what to make of this. I will have to noodle on this for a while. I would love for the price to be lowered, but am wondering if Management could also change the call price? Interesting.

 

 

Outstanding warrants to purchase an aggregate of 49,400,000 shares of our common stock are currently exercisable at an exercise price of $12.00 per share.

 

The warrant exercise price may be lowered under certain circumstances, including, among others, in our sole discretion at any time prior to the expiration date of the warrants for a period of not less than 20 business days; provided, however, that any such reduction shall be identical in percentage terms among all of the warrants. These warrants likely will be exercised if the market price of the shares of our common stock equals or exceeds the warrant exercise price. Therefore, as long as warrants remain outstanding, there will be a drag on any increase in the price of our common stock in excess of the warrant exercise price. To the extent such warrants are exercised, additional shares of our common stock will be issued, which would dilute the ownership of our existing stockholders. Further, if these warrants are exercised at any time in the future at a price lower than the book value per share of our common stock, existing stockholders could suffer substantial dilution of their investment, which dilution could increase in the event the warrant exercise price is lowered. Additionally, if we were to lower the exercise price in the near future, the likelihood of this dilution could be accelerated.

 

[biaggio]

Myth, that does not sound too good for shareholders, but a better deal if you are a warrant holder, as I read it-if shares go up in price, warrant appreciate, if shares go down in price warrants ok as the purchase  price adjusted down for warrants(heads I win, tails I don t lose too much??)