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Retail Opportunity Investments Keeps Growing Its Portfolio

By Steve Symington – Oct 27, 2016 at 7:15AM

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The market wasn't impressed by the shopping center REIT's reasonably solid quarter. Here's what investors need to know.

One of Retail Opportunity Investments' 81 grocery-anchored shopping centers. Image source: Retail Opportunity Investments.

Shares of Retail Opportunity Investments Corp. (ROIC -0.04%) may have fallen 3% Wednesday after the grocery-anchored shopping center real estate investment trust (REIT) released third-quarter 2016 results, but that doesn't mean investors should be displeased with its current position. To better understand the market's muted reaction to these results, let's take a closer look at what Retail Opportunity Investments achieved over its most recent quarter.

Retail Opportunity Investments' headline numbers

To start, quarterly revenue increased 18.5% year over year, to just under $59.4 million, while net income attributable to the company declined 1.9% over the same period, to $7.4 million, or $0.07 per share. 

As a REIT, however, a more useful metric to gauge Retail Opportunity Investments' progress is funds from operations (FFO), which essentially measures its cash flow from operations. Third-quarter FFO increased 20.9% year over year, to $31.3 million, and remained flat on a per-share basis (diluted), at $0.26. Though we don't typically keep close tabs on Wall Street's near-term demands, note analysts' consensus estimates predicted the company would generate the same per-share FFO, but on slightly higher revenue of $59.7 million.

Retail Opportunity Investments CEO Stuart Tanz added:

We continue to capitalize on the strong fundamentals across our core West Coast markets to grow our portfolio and enhance value. [...] Importantly, we also continue to maintain our solid financial position. At quarter-end, our debt ratio was a conservative 29% and our interest coverage was a strong 4.2 times for the third quarter. With all of our accomplishments year-to-date, we are poised for a strong finish to 2016 and positioned to enter 2017 with great momentum.

On acquisitions

To be sure, ROIC has acquired a total of eight grocery-anchored shopping centers for $332 million so far in 2016, up from its commitment of $289.4 million at the end of last quarter.

More specifically in the third quarter, Retail Opportunity Investments acquired two more shopping centers for a total of $24.9 million, including:

  • Monterey Center, a 100%-leased, 26,000-square-foot property in downtown Monterey, California, for $12.1 million.
  • Rose City Center, a 100%-leased, 61,000-square-foot property in Portland, Oregon, for $12.8 million.

In addition, ROIC has already made two grocery-anchored shopping center acquisitions so far in the fourth quarter for a total of $62 million, including:

  • Trader Joe's at the Knolls, a 100%-leased, 52,000-square-foot property in Long Beach, California, for $29.2 million.
  • Bridle Trails Shopping Center, a 100%-leased, 106,000-square-foot property in Kirkland, Washington, for $32.8 million.

On pricing power and lease rates

Meanwhile, Retail Opportunity Investments' portfolio lease rate fell 20 basis points sequentially, to 97%, but still marked its 11th straight quarter keeping rates at or above 97%.

Next, Retail Opportunity Investments achieved a 16.5% year-over-year increase in same-space comparative base rent. Of the 95 leases executed in the third quarter, ROIC was able to increase same-space comparative cash rent 16.5% from 41 new leases totaling 156,997 square feet, and had even more impressive 35.5% growth in base rent from 54 renewed leases totaling 295,800 square feet. As such, same-center net operating income grew 4% year over year during the quarter, to $33.2 million.

Finally -- and keeping in mind as a REIT, Retail Opportunity Investments must return at least 90% of its income to shareholders in the form of dividends -- its board held steady the company's quarterly cash dividend at $0.18 per share.

Looking forward

Retail Opportunity Investments now expects full-year FFO per diluted share to be in the range of $1.05 to $1.07, representing a $0.02-per-share increase to the bottom end of its previous guidance. Earnings per diluted share are expected to be $0.31, down from ROIC's previous per-share earnings guidance in the range of $0.38 to $0.39.

In the end, there were no bells and whistles contained in this report to truly excite the market. Rather, investors were treated to more of the same steady effort by Retail Opportunity Investments to grow its portfolio of properties and ultimately build toward generating sustained (and ideally market-beating) returns for shareholders. So while the market may have bid shares down modestly today, I think long-term investors have no reason to worry about Retail Opportunity Investments' position.

Steve Symington owns shares of Retail Opportunity Investments. The Motley Fool owns shares of and recommends Retail Opportunity Investments. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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