Retail Opportunity Investments Provides a Light at the End of Its (Acquisitive) Tunnel

Acquisition-market uncertainty remains for the shopping-center REIT, but management is staying busy improving the business in the meantime.

Steve Symington
Steve Symington
Feb 20, 2019 at 3:45PM
Financials

Retail Opportunity Investments Corp. (NASDAQ:ROIC) announced fourth-quarter 2018 results on Tuesday after the market closed, detailing the shopping-center REIT's efforts to optimize its property portfolio and improve its balance sheet amid a continued pause in acquisitions. The company also offered an early look at its goals for the coming year.

With shares down around 3% in Wednesday's trading as of this writing, let's dig deeper for a better idea of how Retail Opportunity Investments (ROIC) ended the year.

Retail shopping center with "Old Town Square" sign in front

Image source: Retail Opportunity Investments.

Retail Opportunity Investments results: The raw numbers

 
Metric

Q4 2018

Q4 2017

Year-Over-Year Growth (Decline)

Revenue

$75.16 million

$72.75 million

3.3%

GAAP net income attributable to retail opportunity investments

$10.50 million

$10.85 million

(3.2%)

GAAP net income per diluted share

$0.09

$0.10

(10%)

Diluted funds from operations (FFO)

$36.52 million

$37.04 million

(1.4%)

Diluted FFO per share 

$0.29

$0.30 (3.3%)

Data source: Retail Opportunity Investments. 

What happened with Retail Opportunity Investments this quarter?

  • Full-year 2018 FFO arrived at $142.1 million, or $1.14 per diluted share, in line with guidance for a per-share range of $1.13 to $1.15.
  • Revenue growth was primary made up of a 2% increase in base rents, to $56.8 million, and 6.4% growth in recoveries from tenants, to $16.7 million.
  • Same-space comparative base rent increased 26.8% on 40 new leases totaling 117,649 square feet, and climbed 12% on 69 renewed leases totaling 284,359 square feet.
  • ROIC's portfolio lease rate stood at 97.7% at the end of 2018, marking its fifth straight year above 97%.
  • Same-center net operating income grew 2.5% to $47.4 million.
  • Subsequent to the end of the quarter in February 2019, the company sold Vancouver Market Center for $17 million. ROIC also has a separate contract to sell another property for $13.5 million. 
  • In December 2018, ROIC entered into additional interest rate swap agreements for its $300 million floating-rate unsecured term loan, resulting in a fixed blended annual rate of 3.1% through its maturity in 2022.
  • At the end of the year, 89.5% of ROIC's $1.5 billion in total debt was fixed-rate, with a remaining weighted average maturity of 6.7 years. The company has no scheduled debt maturities in 2019 or 2020.

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What management had to say

CEO Stuart Tanz stated:

During 2018, we again achieved strong, record-setting results with property operations. We leased a record 1.5 million square feet during the year, more than double the amount of space originally scheduled to expire. For the fifth consecutive year, we achieved a portfolio lease rate above 97%, ending 2018 at a new record high year-end rate of 97.7%. Additionally, for the seventh consecutive year, we achieved same-center [net operating income] growth, along with again achieving strong, double-digit growth in our [re-leasing] spreads ... During 2018, we embarked on several key initiatives aimed at enhancing the long-term intrinsic value and competitive strength of the company's portfolio, most notably focusing on disposing non-core properties and identifying densification opportunities. Additionally, in terms of balance sheet initiatives, during 2018 we raised equity, reduced secured debt and enhanced our debt maturity schedule.

As for the company's strategic pause in acquisitions given uncertainty in the markets, Tanz elaborated during the subsequent conference call:

Today, based on what we are seeing, the uncertainty in the acquisition market is subsiding such that we could see off-market opportunities become more favorable as we move through the year. ... The high-end of our guidance assumes that we will acquire $50 million of shopping centers utilizing proceeds from asset sales to fund new acquisitions. Beyond this base assumption, we continue to feel the number of interesting and off-market opportunities with private sellers wanting to explore taking the ROIC currency. Assuming we can structure these opportunities on accretive terms, keeping our balance sheet intact, we could possibly acquire properties notably north of that $50 million base target. That said, it's too early just yet to fully know how the acquisition market will play out for this year. Therefore we continue to take a conservative approach with respect to external growth in our guidance in 2019.

Check out the latest Retail Opportunity Investments earnings call transcript.

Looking forward

More specifically for full-year 2019, the company expects FFO per share to be in the range of $1.11 to $1.15 -- including $0.02 to $0.03 per share of expenses from a combination of new accounting rules, and incremental interest for the above-mentioned swap agreements -- with net income per share in the range of $0.40 to $0.44.

All things considered, it's hard to blame the company for taking a prudent stance regarding its outlook for this year as long as acquisition-market uncertainty persists. In the meantime, I think investors should be pleased that Retail Opportunity Investments admirably delivered as promised while improving the state of its portfolio and balance sheet.