ROIC - Retail Opportunity Investments Corp

[Myth465]

Management is annoying regarding the warrants. They had a big plan for em to be released in the second or third quarter, and now just plain dont want to comment. They have a new CFO who will likely have an impact.

 

I own all warrants. I have held my main position for a year plus in a roth, and just began to trade in other accounts. If ROIC goes to $12.50 the warrants go to $80 cents or so. Its profitable but you will miss a big push up at some point.

 

They could have gotten the warrants at $1 a year ago when they were at 75 cents. Now I would want at least $1.30 or so. I am holding a member of the board owns a significant slug of warrants which are cashless if my memory is correct. Due to this I believe we will be taken care of  :).

 

ROIC has sandbagged this year. They dont have a choice next year, results will be great. The share price and divi will move up, and so will the warrant value. They will have to act now or let us participate in the share appreciation.

[BG2008]

A couple observations:

 

1. I've met Stuart Tanz and John Roche in NYC last year face to face.  They are certainly a bunch of sharp guys.  I've had follow up conversations with John from time to time.  From my convos with management, it is very clear to me that they have constant dialogue with the warrant holders regarding getting rid of the warrants.  It seems like the hedge funds who own the warrants are demanding a price that management isn't willing to part with.  They are essentially engaging in a game of chicken where management is saying "let's wait till Oct 2014 and see what the funds are going to do."  They seem very steadfast that if the funds wants to get any value for the warrants, they need to exercise them and pay the $12/share.

 

2. ROIC hasn't made a distressed  acquisition in a while.  I was more excited when they were buying assets from the lenders and rehabbing them.  Now they are buying 90% leased assets at 7.5% cap rates.  Relatively speaking, it's not a bad strategy when your shareholders are happy with a 4.0% yield.  But, I was hoping that 30% of their portfolio will be build with lender assets where they can get 20% pro-forma cap rates.  Over a 2-3 year period, that will add a tremendous amount of value.

 

3. The reason there is no premium for the warrants is that ROIC pays a 4% dividend.  Every quarter, the intrinsic value goes down by $0.12/share. 

[doc75]

A couple observations:

 

1. I've met Stuart Tanz and John Roche in NYC last year face to face.  They are certainly a bunch of sharp guys.  I've had follow up conversations with John from time to time.  From my convos with management, it is very clear to me that they have constant dialogue with the warrant holders regarding getting rid of the warrants.  It seems like the hedge funds who own the warrants are demanding a price that management isn't willing to part with.  They are essentially engaging in a game of chicken where management is saying "let's wait till Oct 2014 and see what the funds are going to do."  They seem very steadfast that if the funds wants to get any value for the warrants, they need to exercise them and pay the $12/share.

 

2. ROIC hasn't made a distressed  acquisition in a while.  I was more excited when they were buying assets from the lenders and rehabbing them.  Now they are buying 90% leased assets at 7.5% cap rates.  Relatively speaking, it's not a bad strategy when your shareholders are happy with a 4.0% yield.  But, I was hoping that 30% of their portfolio will be build with lender assets where they can get 20% pro-forma cap rates.  Over a 2-3 year period, that will add a tremendous amount of value.

 

3. The reason there is no premium for the warrants is that ROIC pays a 4% dividend.  Every quarter, the intrinsic value goes down by $0.12/share.

 

Thanks for the comments!

 

No 1 is very interesting.  No 2 was something that also caught my eye, and a reason I moved out of the common into other things.  I still don't understand how No 3 explains the warrants trading at a "negative premium".  Am I missing something or is this just an inefficiency in an illiquid market?

 

 

[MYDemaray]

The other thing here is management seems to be using the at-the-market ("ATM") offering mechanism to intentionally keep a lid on the shares.  The company is so under-levered, yet they aren't using their debt.  In theory, management could keep expanding the ATM.  At some point it gets ridiculous though.

[MYDemaray]

3. The reason there is no premium for the warrants is that ROIC pays a 4% dividend.  Every quarter, the intrinsic value goes down by $0.12/share.

 

Intrinsic value of the equity doesn't drop $0.12/share (a company earning its cost of equity is unaffected by a payout vs. reinvestment at that cost of equity).  Are you referring to the warrant pricing model?

[Myth465]

I wouldnt own the common here, very little upside with massive downside due to interest rate risk. With a 4% yield its hard not too make money here. Too many levers to pull for Management if rates dont go up.

 

Management doesnt have to buy the warrants, but due to things they can control and things they can not the share price is being held down. The move has consumed some FFO, the ATM keeps the price down, the refusal to increase leverage also keeps the price down. As old properties are fixed up, up leased, and occupied the returns will continue to grow. At some point the share price will reflect this as long as the Fed keeps rates near zero.

 

Management has also discussed selling fully leased up properties for decent cap rates and redeploying those assets. Plenty of ways to win and only one real way to lose, the Fed raising rates and investors demanding higher returns.

 

If ROIC moves to $13.50 or $14 a share by 2014 we will do quite well without a buy back of the warrants. Thats why I hold my core piece and will trade when shares drop to $12 or so.

[BG2008]

Myth, I agree that I won't own the common.  Tanz had mentioned that at some point he would sell some of the properties to "show" shareholders that he's creating value.  Claremont center is a very successful asset that they bought.  If I have to guess, Tanz will probably sell that particular asset and show a $10-20mm gain.  The problem with these warrants is that there are so many of them and unlike options, they dilute the shares when they are exercised.  The warrant to common ratio is about 1 to 1.  Fundamentally, there exists a chicken and egg issue and which comes first.  In order for the warrants to the be exercised, the shares need to trade over $13.50 for the fund who bought them at under $1.  Because every mutual fund knows this, they won't pay more than $13 per share until the dividend yield becomes a screaming buy.  I think a dividend yield at 5-6% will warrant a repricing.  Getting there while buying 7.5% cap rate assets is tough.  Tanz won't go over 50% debt to capitalization.  So, there will be a limit on how much debt they will put on the company. But, we're not maxed out yet. 

 

I've put together a model on an asset by asset basis if anyone cares to take a look.  I've also created a pro-forma 2014 model by assuming additional acquisitions, ATM offerings, etc.  A few things in the horizon that worries me, the buy at 7.5% cap rate, and borrow at 5% isn't creating a whole lot of value and add in the ATM that increases shares outstanding.  Fiscal cliff and its tax implication on dividend income.  It seems that the mutual funds who own this name are okay with getting a 4% yield and care less about capital appreciation of the underlining stock.  I have feeling that management is getting a bit comfy with that kind of expectation.  In general, the "pretend and extend" had gone on long enough where there really isn't a whole lot of distressed inventory in the market.  I've also looked at Stuart Tanz past track record at Pan Pacific, if dividends were reinvested, one would've gotten a 600% return over a decade.  However, a key driver to that fantastic return was the massive compression in dividend yields.  At one point, Pan Pacific traded at over 10% dividend yield.  Anyone interested in this name should look at Pan Pacific's history.   

 

I think that the warrant outcome will be quite binary.  We may wake up one day and they've struck a deal to buy them back, offer a common for warrant exchange, or the stock price simply inched above $13 and the warrants trades up as well.  Now with 1 year and 10 months till expiration, time decay will start to accelerate.  If the stock trades down merely by 90 cents, the warrants could end up worthless.  If we experience a downturn, i.e. 08/09 scenario, these warrants will likely be out of the money for a while and there will be little time value that the market will be willing to pay for.  I clearly see the upside in the situation, but I'm constantly tormented by the lack of a catalyst, time decay, and the slow value add in the underlining portfolio.  Might have a better entry point if Obama and the Republicans can't agree to a fiscal cliff deal.  Some clarity on dividend tax rates would be nice as well.

   

[Myth465]

You bring up good points and those are my secondary fears as well. I havent looked in great detail at the new properties and I guess was hoping to see more of a mix of distressed vs settled properties. I dont have great visibility on that, but as you said it doesnt make sense to do much more if its literally a spread of 2.5%. With a board member holding significant warrants I think they will find a decent solution. My basis is 70 cents, and my drop date is probably 1 year out. I think in 10 months we will trade up a bit as the FFO improves due to less move costs, higher occ rates, and more properties. I think the market will tip Managements hand and something will have to be done. With 22 months to go I am happy to trade with a small position and sit on my gain to see how it plays out.

 

The fiscal cliff will be sorted in 22 months, and the main risk is the Fed raising rates but they keep kicking that can down the road. I also like the limit of 50% and like the use of senior debt vs property debt unless the prop debt is advantageous.

 

I would like to see your document, and thanks for the discussion you bring up very good points.

[claphands22]

I owned ROICW  and sold it for a loss to buy something else. At the end of the day, I didn't feel comfortable owning the warrants in something I would never buy the common of.

 

 

[MYDemaray]

To deal with the situation of a large number of warrants outstanding, I understand that one potential option is an exchange offer that exercises a portion while restriking and extending another portion. A few months ago, I would have thought an exchange offer was close at hand. From recent things I'm hearing, I'm not so sure. Hard for me to fully understand management's intentions here.

 

The fact the Fed's low rate target extends beyond warrant expiration is part of what keeps me hanging around.  I think we just saw the fiscal cliff selling over the past few months after the election, and I think if anything we may see some buying in 2013 generally as people realize that some yield with a higher tax rate may be better than cash (their thoughts, not mine).

 

I also believe management is doing their best to get rated in 2013 so they can issue a slug of bonds. I've been told the agencies want to see north of $1bn in assets before issuing a rating...that might be one reason they are using the ATM, but I think it's more to supress share price. The ATM isn't dilutive to shareholders per se, it simply anchors the share price.

 

Anyone else see the recent warrant agent agreement as more than just housekeeping?  Management says it was just cleaning things up, but seems like strange timing...new CFO, etc.

[bobp]

The warrants are interesting but I have concerns. I just can't see management letting the common go higher with a 12 $ warrant outstanding. Why won't they just keep selling stock through the ATM for the next two years? If they can increase the dividend the common holders aren't hurt. At some point they could even pay a big dividend which would reflect in the common price and obviously hurt the warrants.  Suppose they pay a fifty cent dividend a year from now?

 

There's a lot I don't understand here, but it just smells to me like these won't go higher. And, I do own a very small amount I bought for a trade a while back.

 

I know an earlier post said that a board member may own cashless warrants. Does management own any of the public warrants?

[MYDemaray]

I think one thing that keeps them from completely keeping a lid on share price is that they aren't 100% of volume.  I did the math, and now forget, but I think they were less than 10% of volume in some of their heaviest ATM quarters.  In addition, they are subject to blackout periods after the quarter ends a couple days after earnings.  They can't issue during this period....so, ATM as a means to control share price has some limitations

[MYDemaray]

...also warrant strike would be adjusted for special or stock dividends per the warrant agreement.

[Myth465]

Things are going on behind the scenes. If Management was serious about the warrants they could have bought them on the open market at 70 cents for much of this year or last. Im going to wait and see.

[bargainman]

I stopped looking at ROIC in detail a while back. Can someone explain what this ATM offering mechanism is?  I missed that, is it something recent?  Thanks.

[MYDemaray]

Basically, it's an "at-the-money" offering.  They registered the securities and can issue new shares into the market at any point to raise equity capital.  Agreement was entered into June 2011.

[rogermunibond]

http://finance.yahoo.com/news/retail-opportunity-investments-corp-acquiring-100000856.html

 

SAN DIEGO, Dec. 28, 2012 (GLOBE NEWSWIRE) -- Retail Opportunity Investments Corp. (ROIC) announced today, in an off-market transaction, it has closed on three shopping centers and has a binding contract to acquire a fourth shopping center. The four properties together comprise a portfolio transaction totaling $114 million, encompassing approximately 444,000 square feet of gross leaseable area. The portfolio was previously owned and operated by a Southern California family. The acquisitions are being funded with borrowings under ROIC's unsecured credit facility.

 

Stuart A. Tanz, President and Chief Executive Officer of Retail Opportunity Investments Corp. stated, "We are excited to be acquiring this exceptional portfolio of Southern California shopping centers. The properties were not marketed. We accessed the transaction through a long-standing relationship. The shopping centers are well-located at major intersections within densely populated communities, which we know extremely well, and are an excellent strategic fit with our current Southern California portfolio. The four shopping centers represent a balance of stable cash flow, derived from well-established anchor retailers, and numerous value-added growth opportunities." Mr. Tanz added, "With three of the four properties closed, we have completed a total of $278.0 million of shopping center investments in 2012, surpassing our target for the year. Looking ahead, we expect to close the fourth property in the first quarter of 2013. Additionally, as part of the portfolio transaction, we have rights of first refusal to acquire the seller's remaining properties in Southern California, which include three additional grocery-anchored shopping centers."

 

Cypress West

In December 2012, ROIC acquired Cypress West for $27.6 million. The shopping center is approximately 106,000 square feet and is anchored by Ralph's Supermarket (Kroger) and Rite Aid. The property is located in Cypress, California, in the heart of Orange County and is currently 94.1% leased.

 

Redondo Beach Plaza

In December 2012, ROIC acquired Redondo Beach Plaza for $30.8 million. The shopping center is approximately 111,000 square feet and is anchored by Von's Supermarket (Safeway). The property is located in Redondo Beach, California, within the Los Angeles metropolitan area and is currently 98.8% leased.

 

Harbor Place Center

In December 2012, ROIC acquired Harbor Place Center for $27.7 million. The shopping center is approximately 120,000 square feet and is anchored by Albertson's Supermarket and Ross Dress for Less. The property is located in Garden Grove, California, in the heart of Orange County and is currently 100% leased. Albertson's is no longer operating at the shopping center. ROIC is currently in advanced discussions with several national retailers regarding the Albertson's space.

 

Diamond Bar Town Center

ROIC has a binding contract to acquire Diamond Bar Town Center for $27.8 million. The shopping center is approximately 107,000 square feet and is anchored by Wal-Mart, featuring Wal-Mart's new grocery-store format. The property is located in Diamond Bar, California, within the Los Angeles metropolitan area and is currently 91.2% leased.

 

Rights of First Refusal

As part of the portfolio transaction, ROIC also has contractual rights of first refusal to acquire three additional grocery-anchored shopping centers located in the Los Angeles and Orange County metropolitan areas, including: Hawthorne Plaza, a 97,000 square foot shopping center located in Hawthorne, California, anchored by Albertson's Supermarket; Plaza Del Sol, a 165,000 square foot shopping center located, Burbank, California, anchored by Vallarta Supermarket; and Peninsula Marketplace, a 95,000 square foot shopping center located in Huntington Beach, California, anchored by Ralph's Supermarket (Kroger).

[lookingstill]

http://finance.yahoo.com/news/retail-opportunity-investments-corp-announces-100000940.html

[MYDemaray]

Yeah...I think they are trying to prod others into exercising.

[Myth465]

Ya it looks that way.

[lookingstill]

Ya it looks that way.

 

Myth, did you sell out of this or still holding? Tx.

[rogermunibond]

Nrdc is the Richard Baker group that brought out the original SPAC, so these are cashless warrants.  That's a big chunk of the warrant overhang gone, all of the private placement warrants.

 

$8 mill paid for the private placement warrants, $8.9 million in shares recvd.

[lookingstill]

http://investor.roicreit.com/releasedetail.cfm?ReleaseID=742018

[MYDemaray]

4.5M warrants have been exercised in addition to NRDC warrants, providing $54.6M in proceeds.  This is new information since the conference call, found in the 10-K: http://www.sec.gov/Archives/edgar/data/1407623/000117184313000777/f10k_022813.htm

[MYDemaray]

Today ROIC announced that it has eliminated 57% of warrants outstanding through either exercise or direct repurchase.  You'll notice that they purchased these for about $1.38/warrant which was above the market price of $1.15 at the time.  I've been told the $1.38 is exactly the same as Bloomberg's calculated intrinsic value.  Since then, ROIC shares have risen, and the intrinsic value of the warrants has likely risen since then. There is probably an opportunity for arb funds here to go in buy the warrants at market, and receive 15 cents per or thereabouts above their purchase directly from the company.

 

http://finance.yahoo.com/news/retail-opportunity-investments-corp-provides-090000629.html