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Retail Opportunity Investments Corp. Looks to Build on a Strong Year

By Steve Symington - Apr 25, 2016 at 4:40PM

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What to watch when the shopping center REIT announces Q1 2016 earnings later this week.

One of Retail Opportunity Investments' 73 grocery-anchored shopping centers. Image source: Retail Opportunity Investments Corp.

Retail Opportunity Investments Corp. (ROIC 2.58%) is set to release first-quarter 2016 results this Wednesday, April 27, 2016, after the bell. After closing a slew of promising acquisitions last year and watching funds from operations (FFO) steadily rise as the fruits of those acquisitions fall to the bottom line, investors will be looking for the shopping center REIT to build on what CEO Stuart Tanz described as the company's strongest years to date.

So, what should investors look for when Retail Opportunity Investments' Q1 report hits the wires? 

First, while the company will report revenue and net income as usual, arguably the most important metric for gauging its success is funds from operations (FFO), which essentially measures its cash flow from operations. Last quarter, FFO rose 28.2% year over year, to $25.9 million, and climbed 19% on a per-share basis, to $0.25. This quarter -- and with the caveat that we don't lend much credence to Wall Street's near-term demands -- analysts' consensus estimates predict revenue of $52.8 million, up 17.1% from last year's first quarter. Meanwhile, FFO are expected to increase a penny per share, to $0.25. 

Under-promise, over-deliver?
To that end, Retail Opportunity Investments' current full-year guidance calls for FFO per diluted share between $1.00 and $1.04, the mid-point of which represents modest 6.3% growth from $0.96 per share in 2015, while net income should be $0.34 to $0.36 per share. This also assumes shopping-center acquisitions of roughly $300 million for the year, down from a total of $480 million in 2015, and indicating a decelerated -- but still healthy -- pace of bringing promising new properties into the fold. That said, keep in mind that this time a year ago, Retail Opportunity Investments' initial 2015 guidance called for $300 million in shopping center acquisitions as well, so I'm not ruling out the possibility this year's initial goal could prove conservative as well. 

We should also look for color on Retail Opportunity Investments' latest closed and under-contract acquisitions. Last quarter's outsized activity was a bit of an exception, with five new properties acquired for a total of $243.7 million, and two under contract for $63.2 million. Still, we should expect management to continue opportunistically taking advantage of mismanaged properties ripe for revitalization -- whether or not they're actually on the market -- with details including location, square footage, purchase prices, and lease rates.

Relatedly, listen for evidence of Retail Opportunity Investments' pricing power, including increases in same-space comparative base rent (up 18.1% year over year last quarter). That figure will be broken down into increases from the number and percentage attributable to both new and renewed leases. ROIC will also provide an update to portfolio leased rates, which stood at 97.2% at the end of 2015 and capped the company's second straight year above 97%. At the same time -- and assuming no big changes from existing properties -- leased rates can fluctuate from quarter to quarter depending on the size and current rates of newer acquisitions.

Next, we should look for same-center net operating income to rise (up 5.6% last quarter, to $29.5 million). And because Retail Opportunity Investments is a REIT and must distribute at least 90% of taxable net income to shareholders as dividends, watch for any corresponding changes to its quarterly cash dividend, which was increased 5.9% last quarter, to $0.18 per share.

Finally, investors should receive a refreshed look at the company's guidance for the year, including net income, FFO, and any revised acquisition goals based on the year's early activity. Given Retail Opportunity Investments' track record of relative stability so far, I suspect we'll receive little in the way of surprises later this week.

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