Source: Company
Retail Opportunity Investments Corporation (ROIC -0.89%) is an overlooked retail REIT because of its relatively low market capitalization of only $1.4 billion and its relatively short dividend record. However, with a seemingly endless hunger for growth, a rigorously applied strategic game plan and an opportunistic acquisition strategy, Retail Opportunity Investments has a lot to offer.
And if its past record is any indication of its future, the big-time investor in neighborhood shopping centers has a lot more room to expand both its property portfolio and its market valuation.
1. Focus on necessity-based properties
According to company information, Retail Opportunity Investments "is focused on acquiring, owning leasing, repositioning and managing a diverse portfolio of necessity-based retail properties".
The company largely focuses on neighborhood shopping centers, drugstores, national as well as regional supermarkets and discount stores in densely populated urban areas with average to above-average purchasing power.
Retail Opportunity Investments' focus on necessity-based retail properties makes it also somewhat distinguishable from other rapidly growing REITs with a retail focus. The upside: Necessity-based retail properties such as supermarkets, benefit from constant demand and from what economists would call 'demand inelasticity'.
Supermarkets will always be frequented as customers shop for necessities such as food, drinks, hygienic products etc. which in turn ensures high occupancy rates for the supermarket and shopping center properties of Retail Opportunity Investments.
Source: Company.
2. Acquisition policy fueling growth
Retail Opportunity Investments makes 'growth via acquisitions' a central portfolio growth strategy. The company has been quite active over the last five years, acquiring lots of properties in order to grow its property footprint across economically promising geographies.
The REIT usually shoots for 100% ownership stakes and intends to improve under-utilized properties and to increase their occupancy profile.
Since 2013, Retail Opportunity Investments has conducted 13 transactions with a focus on the West Coast markets, especially in California.
Source: ROIC Investor Presentation.
A downside of an aggressive acquisition policy is the effect of dilution. REITs oftentimes conduct secondary common stock offerings in order to finance acquisitions or refinance credit facilities which they secured in order to move quickly, should acquisition targets appear in their crosshairs.
Dilution happens when companies continue to increase their share count and reduce the company's earnings attributable to each share.
On June 19, 2014 Retail Opportunity Investments announced the closing of a common stock offering netting the company proceeds of $206 million which will be utilized to support further portfolio growth.
Going forward, investors should expect a few more equity offerings as the company displays a high degree of acquisition thirst.
3. Strategic focus on key West Coast markets
Retail Opportunity Investments is a retail property player seeking specific exposure to high-growth urban areas on the West Coast.
These three metro target areas are all economically promising: high household income, positive employment growth and a tendency for increasing retail rents.
Source: ROIC Investor Presentation.
4. High occupancy rates
One of the most important responsibilities of a retail property investor is to keep occupancy rates high and vacancy rates as low as possible, no matter what it takes.
In that regard, Retail Opportunity Investments has a promising track record and has increased its portfolio occupancy rate from 93% in Q1 2013 to 95.9% in Q1 2014. However, investors need to realize that Retail Opportunity Investments also purchases under-managed properties, which naturally puts a bit of downward pressure on its total portfolio occupancy rate.
But this is not necessarily a bad thing.
In fact, a lot of value for real estate investors is being generated by normalizing and improving occupancy rates. Room for improvement also means that there is an opportunity to create value for shareholders -- which is what investors want to see anyways.
Source: ROIC Investor Presentation.
5. Dividend yield
Right off the bat, investors in Retail Opportunity Investments get to enjoy a 4.05% dividend yield. However, this not the end of the story. The REIT's dividend record is relatively short compared to other industry heavyweights, but it is encouraging nonetheless.
In 2010, Retail Opportunity Investments started to pay $0.06 per share quarterly which has now risen to $0.16 per share, reflecting a total increase of 167% in just four years.
This dividend record has huge implications for investors of Retail Opportunity Investments today: There is a high probability that the REIT will pay out rising amounts of cash in the coming quarters and years as it continues its acquisition spree throughout its West Coast core markets.
The Foolish Bottom Line
With a focus on defensive lines of businesses -- supermarkets and drugstores, among others -- a focused approach to tackling key strategic markets on the West Coast and demonstrated acquisition drive, Retail Opportunity Investments has everything investors could look for in an aggressively growing REIT.
Add to that: A 4% dividend yield with an implicit promise of rising distributions down the line, and investors should have all the reasons in the world to be looking optimistically into the future.
