ROIC - Retail Opportunity Investments Corp

[Myth465]

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??)

 

The vibe I get is they can lower the price of the warrants for 30 days, but they have to do it for everyone. So they can set the price of warrant exercise at $10, and it will be set for 20 days. A number of people will exercise and book the $1.15 gain or so if the shares are at $11.15. This will give them capital, and they can avoid adding more debt, or selling shares. If no one converts then the original rules for the warrants are in effect.

 

I see it as win win. They have a source of capital they can tap at basically any price. Thats my read. I would presume any issue would be pre negotiated with Pine River. Pine River would convert maybe 1 million warrants at $9 or $10 or $11. They would book a quick gain and give ROIC some capital for future acquisitions. A few retail holders would also convert. I think shareholders are fine either way. The company will have to go to the capital market at some point. I dont think they want to lever up past 50% equity, and right now the deals are pretty good. Sell shares at a 5% yield, buy assets at 9% cap rates, nice work if you can get it.

 

They need to raise the dividend as high as possible, before doing anything on the warrants. This would move up the SP. Thats my 2 cents, after reading this late into the night. Not sure how else it would work.....

[bathtime]

From Sumzero:

 

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05/09/2011 at 05:29PM

Someone requested an update, so here goes: Not much has changed. The company seems to be on track to be fully invested within its 18 month time frame, and dividends should increase as FFO increases. A similar valuation to peers, (e.g., Kimco) should put us above the $12 strike. Additionally, the company hinted at some ideas with respect to the warrants on the last call. The warrants seem to bother institutional (mutual fund) buyers the most. Management keeps on insisting that they like the warrants because they are an inexpensive capital raising vehicle, but mutual funds and sell siders keep referencing the "overhang" and dilution. It is my opinion (and this is pure speculation -- I have no knowledge to this effect) that one of the "ideas" that may be lurking out there is a warrant exchange, particularly with the hedge fund Pine River who owns the maximum allowable amount of warrants but no common shares. Pine River engaged in a similar sort of transaction with Resolute Energy, extracting a ~9% discount from that exchange. This may be why CEO Tanz referenced the underwriting discounts and costs of the warrants in the last call...perhaps this is a set up to justify a discounted warrant exchange and provide immediate cash to the company for investment. In any case, the warrant exchange of Resolute Energy had the effect of "removing the overhang" and shares of REN went from ~$11 to as high as ~$18 post exchange. Of course REN is an oily E&P, and we know what has happened to oil so certainly all of this can't be attributed to lifting the warrant overhang...but can some of it? Also of note, Pine River exchanged their REN warrants then bought MORE. REN warrants went to $4 from the mid $1's.

 

ROIC also has some interesting ways to grow their portfolio aside from pure capital raises. I asked Tanz about the Crossroads deal in Washington on the call because the company has an option on several other properties from this seller and would use stock valued at a premium to market to acquire the properties. This would be tax efficient for the seller (I believe) and would also allow ROIC to achieve greater scale without using debt or cash. The impact here, of course, would be reducing G&A as a % of sales...which at this size is meaningful.

 

All in all I continue to remain optimistic on ROIC's prospects and their share price, and believe the warrants will benefit by extension, especially with the significant amount of theta remaining with the 2014 expiry.

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[Myth465]

Thanks Bathtime, very similar to my thinking. Seems like its best to just wait and hope. Someone though is accumulating warrants.

[claphands22]

Interesting idea. I don't know much about REITS, hoping someone can clarify my questions.

 

Looking at the balance sheet they don't have much cash left, so how are they going to increase their FFO if they won't have enough capital to do acquisitions?

 

Warrants exercise at 12 and cost around a buck, so the stock price needs to be around 13 by 2014 to break even on the warrant trade. If REITS are being valued at a 5% dividend rate, that means ROIC needs to start declaring 65 cents per share in dividends to break even. Right now ROIC is offering a 36 cent per share dividend, with a 2011 FFO estimate around 60 - 70 cents per share. What percent of FFO will ROIC be able to reasonably payout in dividends?

 

The warrant idea is very interesting, yet I need to be confident about the ability to increase the dividend to somewhere around 90 cents a share to make the risk/reward appetizing.  Also, as it has been mentioned above, there is already huge risk of REITS being re-priced downward due to inflation/interest rate hikes. ROIC might very well be able to increase dividends per share around 90 cents, but by that time the REITs might already be re-priced.

[Myth465]

1. Using an unsecured credit line - They want debt at 50% of equity. After that they will have to sort the warrants.

 

2. Thats the key risk, Interest rate risk. If rates rise to 3%, then they share price will probably readjust to a yield of 8%. Hence why I think of it as a deflation hedge, and buy the warrants in a small amount.

 

3. The FFO estimate / guidance is a bit low. If you look at the writeup they have an FFO estimate prepared using Cap rates. Thats the bases I used. I think they will raise FFO accordingly, but am not sure how fast they will do it or if they can bet Bernanke. As you pointed out thats the main risk.

 

One potential saving grace, is if they run out of cash and debt and have more deals. They will likely lower the warrant exercise price, which is what they alluded too on the call. Its all a gamble when you throw in the interest rate. You either need to be hedging for deflation, or be convinced that rates stay low. I have done well off 70 cents, but wouldnt be buying here without conviction relating to rates.

[claphands22]

[really just talking out loud here, if anyone could see where my thought process is wrong here please tell me]

 

So if they want debt, to be 50% of equity, and their total liabilities are 100M (probably too conservative to use this number as their total debt) right now, and equity is 400M, that means they'll have another 100M of debt-expansion capital to deploy + 10M of cash capital.  I am not sure what current rate they are paying on that unsecured line, looks like the rate depends on which base rate the bank decides on

 

The Company has an unsecured revolving credit facility with several banks.  The facility provides for borrowings of up to $175.0 million and contains an accordion feature, which allows the Company to increase the facility amount up to an aggregate of $250.0 million subject to commitments and other conditions.  The facility has an initial maturity date of December 1, 2012 with an option that allows the Company to extend the facility for one year upon satisfaction of certain conditions.  Interest on outstanding amounts is at a rate equal to an applicable rate based on the consolidated leverage ratio of the Company and its subsidiaries, plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds for Dollar deposits for the relevant period (the "Eurodollar Rate"), or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus one-half of 1%, (b) the rate of interest announced by Bank of America, N.A. as its "prime rate," and © the Eurodollar Rate plus 1.00% (the "Base Rate")  The Company is obligated to pay (i) an unused facility fee of (a) 0.50% if the total outstanding principal amount is less than 50% of the aggregate commitments or (b) 0.40% if the total outstanding principal amount is greater than or equal to 50% of the aggregate commitments, and (ii) a fronting fee with respect to each letter of credit issued under the credit agreement. The facility contains certain representations, financial and other covenants typical for this type of facility. The Company’s ability to borrow under the facility is subject to its compliance with the covenants and other restrictions on an ongoing basis. The Company was in compliance with such covenants at March 31, 2011. The Company borrowed $13.0 million under the facility during the three months ended March 31, 2011.

 

The current Bank of America prime rate is 3.25%, so I'll use that.  That means, if they can get the 7% cap rates, and expand their 100M debt capital, that's an increase of 3.75M pre-tax, plus 700K from cash on hand (10m*7% cap rate). That's only an increase of 4.45M pre-tax (with my assumptions, on cap rate, prime rate, expansion of capital. Or a 10 cent per share increase in pre-tax earnings.

 

Last quarter, FFO was .26 a share, which brings an annual FFO up to 1.04 share. If they can add an additional 0.10 a share, that brings FFO up to 1.14 a share, which seems possible by 2012.  Also, current occupancy rate is 95%, I believe the management said during their passed project occupancy was 97%, so there is plausible (yet slight) expansion that could happen here. 

 

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Adding this from the May 4th press release:

 

ROIC intends to distribute cash dividends on its common stock during the remainder of 2011 in an amount approximately equivalent to 70% to 80% of estimated FFO.

 

 

That means if FFO can hit 1.14 a share, and dividend payout is 70% - that's  80 cents a share; giving it the 5% dividend reit multiple, could reasonable bring the stock price to 15.96; so the warrants, would then trade around 4.

 

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any thoughts or comments?

[junto.investing]

From Sumzero:

 

----

05/09/2011 at 05:29PM

Someone requested an update, so here goes: Not much has changed. The company seems to be on track to be fully invested within its 18 month time frame, and dividends should increase as FFO increases. A similar valuation to peers, (e.g., Kimco) should put us above the $12 strike. Additionally, the company hinted at some ideas with respect to the warrants on the last call. The warrants seem to bother institutional (mutual fund) buyers the most. Management keeps on insisting that they like the warrants because they are an inexpensive capital raising vehicle, but mutual funds and sell siders keep referencing the "overhang" and dilution. It is my opinion (and this is pure speculation -- I have no knowledge to this effect) that one of the "ideas" that may be lurking out there is a warrant exchange, particularly with the hedge fund Pine River who owns the maximum allowable amount of warrants but no common shares. Pine River engaged in a similar sort of transaction with Resolute Energy, extracting a ~9% discount from that exchange. This may be why CEO Tanz referenced the underwriting discounts and costs of the warrants in the last call...perhaps this is a set up to justify a discounted warrant exchange and provide immediate cash to the company for investment. In any case, the warrant exchange of Resolute Energy had the effect of "removing the overhang" and shares of REN went from ~$11 to as high as ~$18 post exchange. Of course REN is an oily E&P, and we know what has happened to oil so certainly all of this can't be attributed to lifting the warrant overhang...but can some of it? Also of note, Pine River exchanged their REN warrants then bought MORE. REN warrants went to $4 from the mid $1's.

 

ROIC also has some interesting ways to grow their portfolio aside from pure capital raises. I asked Tanz about the Crossroads deal in Washington on the call because the company has an option on several other properties from this seller and would use stock valued at a premium to market to acquire the properties. This would be tax efficient for the seller (I believe) and would also allow ROIC to achieve greater scale without using debt or cash. The impact here, of course, would be reducing G&A as a % of sales...which at this size is meaningful.

 

All in all I continue to remain optimistic on ROIC's prospects and their share price, and believe the warrants will benefit by extension, especially with the significant amount of theta remaining with the 2014 expiry.

----

 

bathtime, do you have the original sumzero write up?

[junto.investing]

from the latest 10-Q:

 

"The Company has the right to redeem all of the warrants it issued in the Public Offering and the Private Placement Warrants, at a price of $0.01 per warrant upon 30 days' notice while the warrants are exercisable, only in the event that the last sale price of the common stock is at least a specified price."

 

I must not be reading this correctly... does anyone else have a better idea of what the above means?

[claphands22]

Here is the full part of the page

 

The Company has the right to redeem all of the warrants it issued in the Public Offering and the Private Placement Warrants, at a price of $0.01 per warrant upon 30 days' notice while the warrants are exercisable, only in the event that the last sale price of the common stock is at least a specified price.  The terms of the warrants are as follows:

 

· The exercise price of the warrants is $12.00.

 

·The expiration date of the warrants is 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 is $18.75.

 

·The price at which the Company's common stock must trade before the Company is able to redeem the Private Placement Warrants is (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.

 

Company can't redeem until the stock is trading at $18.75, at that time you have 30 days to redeem your warrant. When the stock is trading for 18.75 the warrants will be worth $6.75 during those 30 days (assuming the stock price stays constant.)

[junto.investing]

Here is the full part of the page

 

The Company has the right to redeem all of the warrants it issued in the Public Offering and the Private Placement Warrants, at a price of $0.01 per warrant upon 30 days' notice while the warrants are exercisable, only in the event that the last sale price of the common stock is at least a specified price.  The terms of the warrants are as follows:

 

· The exercise price of the warrants is $12.00.

 

·The expiration date of the warrants is 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 is $18.75.

 

·The price at which the Company's common stock must trade before the Company is able to redeem the Private Placement Warrants is (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.

 

Company can't redeem until the stock is trading at $18.75, at that time you have 30 days to redeem your warrant. When the stock is trading for 18.75 the warrants will be worth $6.75 during those 30 days (assuming the stock price stays constant.)

 

Makes sense. Thanks for clarifying.

[Myth465]

I bought another position of warrants today, and plan to trade them. This thing moves around so much. I hope to move these at around .95 and will hold my core position till 2014, or until something interesting happens.

[rogermunibond]

ROIC is offering $50M in shares through an at the money sales agreement with ML.

 

http://www.sec.gov/Archives/edgar/data/1407623/000117184311001877/f424b5_062211.htm

[bargainman]

ROIC is offering $50M in shares through an at the money sales agreement with ML.

 

http://www.sec.gov/Archives/edgar/data/1407623/000117184311001877/f424b5_062211.htm

 

Hmm can't say I'm happy about this.. Would much rather they put out a rights offering to current share holders...

[smo001]

They're still at it.  :P

http://www.montereyherald.com/business/ci_18460247?nclick_check=1

[rogermunibond]

Pacific Grove is a closing of a previously announced transaction.

 

It seems like the ROIC crew may be getting outbid of properties.  I've read about three very decent properties in the SD area (right in Tanz's wheelhouse) that were sold at much higher caps than would be expected.

 

A lot more institutional money is getting allocated to CRE and is looking for a home.

[rogermunibond]

http://finance.yahoo.com/news/Retail-Opportunity-pz-486430969.html?x=0&.v=1

 

I'm pleased to report I am wrong!  Acquisitions are robust.  :)  And FFO guidance is confirmed but frankly as Myth as surmised they should surpass it easily.

 

 

Morada Ranch

 

In May 2011, ROIC acquired Morada Ranch shopping center for $23.8 million. The shopping center is approximately 101,800 square feet and is anchored by Raley's Supermarket. The property is located in Stockton, California. The property is currently 91.2% leased.

 

Country Club Gate

 

In July 2011, ROIC acquired Country Club Gate for $22.8 million. The shopping center is approximately 109,000 square feet and is anchored by Save Mart Supermarket and Rite Aid. The property is located in Pacific Grove, California, in the heart of the Monterey peninsula. The property is currently 92.8% leased.

 

Renaissance Towne Center

 

In August 2011, ROIC acquired Renaissance Towne Center for $23.8 million. The shopping center is approximately 53,000 square feet and is anchored by CVS Pharmacy. The property is located in La Jolla, California, within the San Diego metropolitan area. The property is currently 92.7% leased.

 

Canyon Park Shopping Center

 

In July 2011, ROIC acquired Canyon Park Shopping Center for $18.4 million. The shopping center is approximately 122,000 square feet and is anchored by Albertsons and Rite Aid. The property is located in Bothell, Washington, within the Seattle metropolitan area. The property is currently 100.0% leased.

 

Kress Building

 

ROIC has a binding contract to acquire Kress Building for $29.5 million. The property is a three-story shopping center, totaling 72,000 square feet, located in the heart of Seattle's central business district at the intersection of Pike Street and 3rd Avenue. The property is anchored by Kress Supermarket (IGA), the only full-size, traditional grocer located in Seattle's CBD. The property is currently 100.0% leased.

 

Wilsonville Old Town Square

 

ROIC has a binding contract to acquire Wilsonville Old Town Square for a 7.75% capitalization rate equating to approximately $20.0 million. The property is a newly developed 200,000 square foot shopping center, anchored by Fred Meyer (Kroger). The property is located in Wilsonville, within the Portland metropolitan area. ROIC is developing the shopping center in a joint venture with Gramor Development. ROIC expects to complete the development and acquire the property in the fourth quarter of 2011. The property is currently 91.0% leased.

[Myth465]

Dammit they are still working on a warrant plan. I am hoping to raise capital and was hoping for something to come out.

[rogermunibond]

41,400,000 public warrants which cannot be exercised cashless

 

8,000,000 private placement warrants which have cashless exercise.

 

IMO, they are the sticking point.  Does mgmt want to pay off the PP warrants on a cashless basis in order to get more capital from the public warrants?

 

Purchase price of the PP warrants was recorded at $1.00 so they are going to have to shell out $10-16 million to cancel these.  I think there hope is to convince the PP holders to convert to equity along wit the rest of the public warrant holders.

 

[OracleofCarolina]

Anyone still interested in this idea?

[Myth465]

I still hold a big position. Warrants will be in the money if the stock moves 6% more for me. We have 2 more years for them to play out. The Feds will also keep rates low until 2014. They dont announce new acquisitions anymore so I cant wait to see what they did in Q4 with the cash they raised.

[bargainman]

Detailed article on ROIC:

 

http://seekingalpha.com/article/564471-roic-stock-your-portfolio-with-the-breakfast-of-champions

 

Also good to hear good words from Ralph Block on this REIT:

 

http://boards.fool.com/the-name-of-the-game-in-reitville-and-probably-in-30023529.aspx

 

[Myth465]

The warrants are cheap again. I bought another slug yesterday.

[doc75]

Is anyone still following the ROIC warrants? 

 

Interesting action recently.  The strike is $12, expiry in Oct 2014.  Common has been trading recently in the $12.90's while simultaneously the warrants have been trading below $0.90.  Not a lot of volume, but even still...

 

 

[Myth465]

I own. The warrants sell at no premium. Very interesting. I would buy warrants and short stock, but I dont short. I buy at 80 cents and unload at 90 cents, in a trading account. ROIC should move up quite a bit next year due to lack of reorg costs and increased occupency, rents, and assets. I have a good 10% stake and think they will do well next year with the Fed keeping rates at zero.

[doc75]

I own. The warrants sell at no premium. Very interesting. I would buy warrants and short stock, but I dont short. I buy at 80 cents and unload at 90 cents, in a trading account. ROIC should move up quite a bit next year due to lack of reorg costs and increased occupency, rents, and assets. I have a good 10% stake and think they will do well next year with the Fed keeping rates at zero.

 

I always thought the near lack of premium was strange.  But at a discount is very strange!  I have read speculation that the company is keeping the share price down with their ATM offering so they can decay the warrant time value and make an opportunistic bid for them.  I'm not so sure about that theory, but management is definitely reluctant to address the warrant issue.

 

REITs are trading pretty high these days, but I agree with your outlook for ROIC.  Do you have 10% in the warrants or the common? 

 

I've been thinking of trading the warrants but have always been afraid to unload when I feel they should be worth much more.