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EX-32.1 - EXHIBIT 32.1 - RETAIL OPPORTUNITY INVESTMENTS CORPexh_321.htm
EX-31.1 - EXHIBIT 31.1 - RETAIL OPPORTUNITY INVESTMENTS CORPexh_311.htm
EX-31.2 - EXHIBIT 31.2 - RETAIL OPPORTUNITY INVESTMENTS CORPexh_312.htm

 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number 001-33749

RETAIL OPPORTUNITY INVESTMENTS CORP.

RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
(Exact name of registrant as specified in its charter)

Maryland (Retail Opportunity Investments Corp.)

Delaware (Retail Opportunity Investments Partnership, LP)

(State or other jurisdiction of
incorporation or organization)

26-0500600 (Retail Opportunity Investments Corp.)

94-2969738 (Retail Opportunity Investments Partnership, LP)

(I.R.S. Employer
Identification No.)

8905 Towne Centre Drive, Suite 108
San Diego, California
(Address of principal executive
offices)
92122
(Zip code)
   

(858) 677-0900
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Retail Opportunity Investments Corp. Yes    No 
Retail Opportunity Investments Partnership, LP Yes    No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Retail Opportunity Investments Corp. Yes    No 
Retail Opportunity Investments Partnership, LP Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Retail Opportunity Investments Corp.

Large accelerated filer Accelerated filer Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company

 

Retail Opportunity Investments Partnership, LP

Large accelerated filer Accelerated filer Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Retail Opportunity Investments Corp. Yes    No 
Retail Opportunity Investments Partnership, LP Yes    No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 99,485,125 shares of common stock, par value $0.0001 per share, outstanding as of October 23, 2015.

 

 

 

 

 

EXPLANATORY PARAGRAPH

 

This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2015 of Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”), and Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”) of which ROIC is the parent company and general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “the Company,” “we,” “us,” “our,” or “our company” refer to ROIC together with its consolidated subsidiaries, including the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “the Operating Partnership” refer to Retail Opportunity Investments Partnership, LP together with its consolidated subsidiaries.

 

ROIC operates as a real estate investment trust (“REIT”) and as of September 30, 2015, ROIC owned an approximate 96.3% partnership interest and other limited partners owned the remaining 3.7% partnership interest in the Operating Partnership. Retail Opportunity Investments GP, LLC, ROIC’s wholly-owned subsidiary, is the sole general partner of the Operating Partnership, and as the parent company, ROIC has the full and complete authority over the Operating Partnership’s day-to-day management and control.

 

The Company believes that combining the quarterly reports on Form 10-Q of ROIC and the Operating Partnership into a single report will result in the following benefits:

 

·facilitate a better understanding by the investors of ROIC and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;
·remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both ROIC and the Operating Partnership; and
·create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

 

Management operates ROIC and the Operating Partnership as one enterprise. The management of ROIC and the Operating Partnership are the same.

 

There are a few differences between ROIC and the Operating Partnership, which are reflected in the disclosures in this report. The Company believes it is important to understand the differences between ROIC and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. ROIC is a REIT, whose only material asset is its ownership of direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, which is the sole general partner of the Operating Partnership. As a result, ROIC does not conduct business itself, other than acting as the parent company of the Operating Partnership and issuing equity from time to time. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from warrant exercises and equity issuances by ROIC, which are contributed to the Operating Partnership, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) or through the issuance of operating partnership units (“OP Units”).

 

Non-controlling interests is the primary area of difference between the Consolidated Financial Statements for ROIC and the Operating Partnership. The OP Units in the Operating Partnership that are not owned by ROIC are accounted for as partners’ capital in the Operating Partnership’s financial statements and as non-controlling interests in ROIC’s financial statements. Accordingly, this report presents the Consolidated Financial Statements for ROIC and the Operating Partnership separately, as required, as well as Earnings Per Share / Earnings Per Unit and Capital of the Operating Partnership.

This report also includes separate Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 4. Controls and Procedures sections and separate Chief Executive Officer and Chief Financial Officer certifications for each of ROIC and the Operating Partnership as reflected in Exhibits 31 and 32.

 

 

TABLE OF CONTENTS

Page

Part I. Financial Information 1
Item 1.   Financial Statements 1
Consolidated Financial Statements of Retail Opportunity Investments Corp.:  
Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014 1
Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2015 and September 30, 2014 2
Consolidated Statement of Equity (Unaudited) for the nine months ended September 30, 2015 3
Consolidated Statements of Cash Flow (Unaudited) for the nine months ended September 30, 2015 and September 30, 2014 4
Consolidated Financial Statements of Retail Opportunity Investments Partnership, LP:  
Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014 5
Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2015 and September 30, 2014 6
Consolidated Statement of Partners’ Capital (Unaudited) for the nine months ended September 30, 2015 7
Consolidated Statements of Cash Flow (Unaudited) for the nine months ended September 30, 2015 and September 30, 2014 8
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 40
Item 4.   Controls and Procedures 41
Part II. Other Information 42
Item 1.   Legal Proceedings 42
Item 1A.  Risk Factors 42
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3.   Defaults Upon Senior Securities 42
Item 4.   Mine Safety Disclosures 42
Item 5.   Other Information 42
Item 6.   Exhibits 42
Signatures 44

 

 

Part I. Financial Information

Item 1. Financial Statements

RETAIL OPPORTUNITY INVESTMENTS CORP.

Consolidated Balance Sheets

(In thousands, except share data)

 

   September 30, 2015
(unaudited)
  December 31, 2014
ASSETS          
Real Estate Investments:          
Land  $611,791   $550,078 
Building and improvements   1,426,761    1,235,820 
    2,038,552    1,785,898 
Less:  accumulated depreciation   121,459    88,173 
Real Estate Investments, net   1,917,093    1,697,725 
Cash and cash equivalents   6,953    10,773 
Restricted cash   286    514 
Tenant and other receivables, net   26,635    23,025 
Deposits   1,000    4,500 
Acquired lease intangible assets, net of accumulated amortization   68,690    71,433 
Prepaid expenses   597    2,454 
Deferred charges, net of accumulated amortization   40,122    39,731 
Other   1,438    1,541 
Total assets  $2,062,814   $1,851,696 
           
LIABILITIES AND EQUITY          
Liabilities:          
Term loan  $300,000   $ 
Credit facility   16,225    156,500 
Senior Notes Due 2024   246,736    246,521 
Senior Notes Due 2023   246,430    246,174 
Mortgage notes payable   62,873    94,183 
Acquired lease intangible liabilities, net of accumulated amortization   123,186    118,359 
Accounts payable and accrued expenses   22,824    12,173 
Tenants’ security deposits   4,314    3,961 
Other liabilities   9,864    11,043 
Total liabilities   1,032,452    888,914 
Commitments and contingencies        
           
Equity:          
Preferred stock, $.0001 par value 50,000,000 shares authorized; none issued and outstanding        
Common stock, $.0001 par value 500,000,000 shares authorized; and 99,485,125 and 92,991,333 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively   10    9 
Additional paid-in-capital   1,112,809    1,013,561 
Dividends in excess of earnings   (112,951)   (80,976)
Accumulated other comprehensive loss   (7,278)   (8,882)
Total Retail Opportunity Investments Corp. stockholders’ equity   992,590    923,712 
Non-controlling interests   37,772    39,070 
Total equity   1,030,362    962,782 
Total liabilities and equity  $2,062,814   $1,851,696 

 

See accompanying notes to consolidated financial statements.


-1-
 

RETAIL OPPORTUNITY INVESTMENTS CORP.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(In thousands, except per share data)

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2015  2014  2015  2014
Revenues                    
Base rents  $37,654   $31,558   $108,884   $87,230 
Recoveries from tenants   10,279    8,143    29,809    24,137 
Other income   2,144    1,155    2,721    2,754 
Total revenues   50,077    40,856    141,414    114,121 
                     
Operating expenses                    
Property operating   7,285    5,865    21,064    18,062 
Property taxes   4,933    4,160    14,351    11,566 
Depreciation and amortization   18,059    15,365    52,567    42,986 
General and administrative expenses   3,092     2,987    9,387    8,324 
Acquisition transaction costs   91    125    507    654 
Other expense   254    58    507    405 
Total operating expenses   33,714    28,560    98,383    81,997 
                     
Operating income   16,363    12,296    43,031    32,124 
                     
Non-operating income (expenses)                    
Interest expense and other finance expenses   (8,526)   (6,865)   (25,407)   (20,695)
Gain on sale of real estate       1,550        4,869 
Net income   7,837    6,981    17,624    16,298 
Net income attributable to non-controlling interests   (295)   (233)   (681)   (584)
Net Income Attributable to Retail Opportunity Investments Corp.  $7,542   $6,748   $16,943   $15,714 
Net earnings per share – basic:  $0.08   $0.07   $0.18   $0.19 
Net earnings per share – diluted:  $0.08   $0.07   $0.18   $0.19 

Dividends per common share

  $0.17   $0.16   $0.51   $0.48 
                     
Comprehensive income:                    
Net income  $7,837   $6,981   $17,624   $16,298 
Other comprehensive income (loss)                    
Unrealized gain (loss) on swap derivative                    
Unrealized swap derivative loss arising during the period       135        (2,792)
Reclassification adjustment for amortization of interest expense included in net income   535    869    1,604    2,641 
Other comprehensive income (loss)   535    1,004    1,604    (151)
Comprehensive income    8,372    7,985    19,228    16,147 
Comprehensive income attributable to non-controlling interests   (295)   (233)   (681)   (584)
Comprehensive income attributable to Retail Opportunity Investments Corp.  $8,077   $7,752   $18,547   $15,563 


See accompanying notes to consolidated financial statements.

-2-
 

RETAIL OPPORTUNITY INVESTMENTS CORP.

Consolidated Statement of Equity

(Unaudited)

(In thousands, except share data)

 

   Common Stock               
   Shares  Amount  Additional paid-in capital  Retained earnings (Accumulated deficit)  Accumulated other comprehensive loss  Non- controlling interests  Equity
Balance at December 31, 2014   92,991,333   $9   $1,013,561   $(80,976)  $(8,882)  $39,070   $962,782 
Shares issued under the 2009 Plan   360,627                         
Repurchase of common stock   (78,570)       (1,316)               (1,316)
Cancellation of restricted stock   (2,832)                        
Stock based compensation expense           3,490                3,490 
Adjustment to non-controlling interests ownership in Operating Partnership           (2,702)           2,702     
Proceeds from the sale of common stock   6,064,567    1    101,292                101,293 
OP Unit redemption   150,000        2,731            (2,731)    
Registration expenditures           (4,247)               (4,247)
Cash dividends ($0.51 per share/unit)               (48,797)       (1,950)   (50,747)
Dividends payable to officers               (121)           (121)
Net income attributable to Retail Opportunity Investments Corp.               16,943            16,943 
Net income attributable to non-controlling interests                       681    681  
Other comprehensive income                   1,604        1,604 
Balance at September 30, 2015   99,485,125   $10   $1,112,809   $(112,951)  $(7,278)  $37,772   $1,030,362 

 

See accompanying notes to consolidated financial statements.

-3-
 

RETAIL OPPORTUNITY INVESTMENTS CORP.

Consolidated Statements of Cash Flow

(Unaudited)

(In thousands)

   Nine Months Ended September 30,
   2015  2014
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $17,624   $16,298 
Adjustments to reconcile net income to cash provided by operating activities:          
Depreciation and amortization   52,567    42,986 
Amortization of deferred financing costs and mortgage premiums, net   119    (311)
Straight-line rent adjustment   (3,847)   (2,516)
Amortization of above and below-market rent   (7,346)   (5,262)
Amortization relating to stock based compensation   3,490    2,689 
Provisions for tenant credit losses   1,574    1,463 
Other noncash interest expense   1,604    1,308 
Gain on sale of real estate       (4,869)
Settlement of interest swap agreements       (3,230)
Restricted cash   205    (287)
Tenant and other receivables   (1,337)   (4,482)
Prepaid expenses   1,857    804 
Accounts payable and accrued expenses   10,369    3,761 
Other assets and liabilities, net   (2,284)   4,090 
Net cash provided by operating activities   74,595    52,442 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Investments in real estate   (235,786)   (322,684)
Proceeds from sale of real estate       27,622 
Increase in restricted cash       (12,048)
Improvements to properties   (19,278)   (15,666)
Deposits on real estate acquisitions   3,500    (4,225)
Construction escrows and other   23    207 
Net cash used in investing activities   (251,541)   (326,794)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Principal repayments on mortgages   (65,156)   (9,528)
Proceeds from mortgage loan   35,500     
Proceeds from term loan   300,000     
Proceeds from draws on credit facility   306,000    318,300 
Payments on credit facility   (446,275)   (251,950)
Proceeds from exercise of warrants       56,002 
Distributions to OP Unitholders   (1,950)   (1,503)
Deferred financing and other costs   (1,766)   (66)
Proceeds from the issuance of common stock   101,293    214,907 
Registration expenditures   (4,286)   (9,462)
Dividends paid to common stockholders   (48,918)   (38,685)
Repurchase of common stock   (1,316)   (587)
Net cash provided by financing activities   173,126    277,428 
Net increase (decrease) in cash and cash equivalents   (3,820)   3,076 
Cash and cash equivalents at beginning of period   10,773    7,920 
Cash and cash equivalents at end of period  $6,953   $10,996 
           
Other non-cash investing and financing activities – increase (decrease):          
Intangible lease liabilities  $15,609   $35,426 
Interest rate swap asset  $   $(1,169)
Interest rate swap liabilities  $   $(2,529)
Proceeds receivable from exercise of warrants  $   $(173)
Accrued real estate improvement costs  $503   $3,434 
OP Unit redemption  $2,731   $ 

 

See accompanying notes to consolidated financial statements.

 

-4-
 

RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP

Consolidated Balance Sheets

(In thousands)

 

   September 30, 2015
(unaudited)
  December 31,
2014
ASSETS          
Real Estate Investments:          
Land  $611,791   $550,078 
Building and improvements   1,426,761    1,235,820 
    2,038,552    1,785,898 
Less:  accumulated depreciation   121,459    88,173 
Real Estate Investments, net   1,917,093    1,697,725 
Cash and cash equivalents   6,953    10,773 
Restricted cash   286    514 
Tenant and other receivables, net   26,635    23,025 
Deposits   1,000    4,500 
Acquired lease intangible assets, net of accumulated amortization   68,690    71,433 
Prepaid expenses   597    2,454 
Deferred charges, net of accumulated amortization   40,122    39,731 
Other   1,438    1,541 
Total assets  $2,062,814   $1,851,696 
           
LIABILITIES AND CAPITAL          
Liabilities:          
Term loan  $300,000   $ 
Credit facility   16,225    156,500 
Senior Notes Due 2024   246,736    246,521 
Senior Notes Due 2023   246,430    246,174 
Mortgage notes payable   62,873    94,183 
Acquired lease intangible liabilities, net of accumulated amortization   123,186    118,359 
Accounts payable and accrued expenses   22,824    12,173 
Tenants’ security deposits   4,314    3,961 
Other liabilities   9,864    11,043 
Total liabilities   1,032,452    888,914 
           
Commitments and contingencies        
           
Capital:          
Partners’ capital, unlimited partnership units authorized:          
ROIC capital (consists of general and limited partnership interests held by ROIC)   999,868    932,594 
Limited partners’ capital (consists of limited partnership interests held by third parties)   37,772    39,070 
Accumulated other comprehensive loss   (7,278)   (8,882)
Total capital   1,030,362    962,782 
Total liabilities and capital  $2,062,814   $1,851,696 

 

See accompanying notes to consolidated financial statements.

 

-5-
 

RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(In thousands, except unit data)

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2015  2014  2015  2014
Revenues                    
Base rents  $37,654   $31,558   $108,884   $87,230 
Recoveries from tenants   10,279    8,143    29,809    24,137 
Other income   2,144    1,155    2,721    2,754 
Total revenues   50,077    40,856    141,414    114,121 
                     
Operating expenses                    
Property operating   7,285    5,865    21,064    18,062 
Property taxes   4,933    4,160    14,351    11,566 
Depreciation and amortization   18,059    15,365    52,567    42,986 
General and administrative expenses   3,092    2,987    9,387    8,324 
Acquisition transaction costs   91    125    507    654 
Other expense   254    58    507    405 
Total operating expenses    33,714    28,560    98,383    81,997 
                     
Operating income     16,363    12,296    43,031    32,124 
                     
Non-operating income (expenses)                    
Interest expense and other finance expenses   (8,526)   (6,865)   (25,407)   (20,695)
Gain on sale of real estate       1,550        4,869 
Net Income Attributable to Retail Opportunity Investments Partnership, LP  $7,837   $6,981   $17,624   $16,298 
                     
Net earnings per unit – basic and diluted:   $0.08   $0.07   $0.18   $0.19 
                     
Distributions per unit   $0.17   $0.16   $0.51   $0.48 
                     
                     
Comprehensive income:                    
Net income  $7,837   $6,981   $17,624   $16,298 
Other comprehensive income (loss)                    
Unrealized gain (loss) on swap derivative                    
Unrealized swap derivative loss arising during the period       135        (2,792)
Reclassification adjustment for amortization of interest expense included in net income   535    869    1,604    2,641 
Other comprehensive income (loss)   535    1,004    1,604    (151)
Comprehensive income  $8,372   $7,985   $19,228   $16,147 

   

See accompanying notes to consolidated financial statements.

 

-6-
 

RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP

Consolidated Statement of Partners’ Capital

(Unaudited)

(In thousands, except unit data)

 

 

   Limited Partner’s Capital (1)  ROIC Capital (2)      
   Units  Amount  Units  Amount  Accumulated
other
comprehensive
loss
  Capital
Balance at December 31, 2014   3,921,314   $39,070    92,991,333   $932,594   $(8,882)  $962,782 
OP Units issued under the 2009 Plan           360,627             
Repurchase of OP Units           (78,570)   (1,316)       (1,316)
Cancellation of OP Units           (2,832)            
Stock based compensation expense               3,490        3,490 
Adjustment to non-controlling interests ownership in Operating Partnership       2,702        (2,702)        
Issuance of OP Units in connection with sale of common stock           6,064,567    101,293        101,293 
Redemption of OP Units   (150,000)   (2,731)   150,000    2,731         
Registration expenditures               (4,247)       (4,247)
Cash distributions ($0.51 per unit)       (1,950)       (48,797)       (50,747)
Dividends payable to officers               (121)       (121)
Net income attributable to Retail Opportunity Investments Partnership, LP       681        16,943        17,624 
Other comprehensive income                   1,604    1,604 
Balance at September 30, 2015   3,771,314   $37,772    99,485,125   $999,868   $(7,278)  $1,030,362 

 

 

(1) Consists of limited partnership interests held by third parties.
(2) Consists of general and limited partnership interests held by ROIC.

 

 

See accompanying notes to consolidated financial statements.

 

-7-
 

RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP

Consolidated Statements of Cash Flow

(Unaudited)

(In thousands)

   Nine Months Ended September 30,
   2015  2014
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $17,624   $16,298 
Adjustments to reconcile net income to cash provided by operating activities:          
Depreciation and amortization   52,567    42,986 
Amortization of deferred financing costs and mortgage premiums, net   119    (311)
Straight-line rent adjustment   (3,847)   (2,516)
Amortization of above and below market rent   (7,346)   (5,262)
Amortization  relating to stock based compensation   3,490    2,689 
Provisions for tenant credit losses   1,574    1,463 
Other noncash interest expense   1,604    1,308 
Gain on sale of real estate       (4,869)
Settlement of interest rate swap agreements       (3,230)
Change in operating assets and liabilities          
Restricted cash   205    (287)
Tenant and other receivables   (1,337)   (4,482)
Prepaid expenses   1,857    804 
Accounts payable and accrued expenses   10,369    3,761 
Other assets and liabilities, net   (2,284)   4,090 
Net cash provided by operating activities   74,595    52,442 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Investments in real estate   (235,786)   (322,684)
Proceeds from sale of real estate       27,622 
Increase in restricted cash       (12,048)
Improvements to properties   (19,278)   (15,666)
Deposits on real estate acquisitions   3,500    (4,225)
Construction escrows and other   23    207 
Net cash used in investing activities   (251,541)   (326,794)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Principal repayments on mortgages   (65,156)   (9,528)
Proceeds from mortgage loan   35,500     
Proceeds from term loan   300,000     
Proceeds from draws on credit facility   306,000    318,300 
Payments on credit facility   (446,275)   (251,950)
Proceeds from the issuance of OP Units upon exercise of warrants       56,002 
Deferred financing and other costs   (1,766)   (66)
Proceeds from the issuance of OP Units in connection with issuance of common stock   101,293    214,907 
Registration expenditures   (4,286)   (9,462)
Distributions to Unitholders   (50,868)   (40,188)
Repurchase of OP Units   (1,316)   (587)
Net cash provided by financing activities   173,126    277,428 
Net increase (decrease) in cash and cash equivalents   (3,820)   3,076 
Cash and cash equivalents at beginning of period   10,773    7,920 
Cash and cash equivalents at end of period  $6,953   $10,996 
           
Other non-cash investing and financing activities – increase (decrease):          
Intangible lease liabilities  $15,609   $35,426 
Interest rate swap asset  $   $(1,169)
Interest rate swap liabilities  $   $(2,529)
Proceeds receivable from exercise of warrants  $   $(173)
Accrued real estate improvement costs  $503   $3,434 

 

See accompanying notes to consolidated financial statements.

-8-
 

Notes to Consolidated Financial Statements

1.Organization, Basis of Presentation and Summary of Significant Accounting Policies

Business

Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”), is a fully integrated and self-managed real estate investment trust (“REIT”). ROIC specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers on the west coast of the United States anchored by supermarkets and drugstores.

ROIC is organized in a traditional umbrella partnership real estate investment trust (“UpREIT”) format pursuant to which Retail Opportunity Investments GP, LLC, its wholly-owned subsidiary, serves as the general partner of, and ROIC conducts substantially all of its business through, its operating partnership subsidiary, Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), together with its subsidiaries. Unless otherwise indicated or unless the context requires otherwise, all references to the “Company”, “we,” “us,” “our,” or “our company” refer to ROIC together with its consolidated subsidiaries, including the Operating Partnership.

With the approval of its stockholders, ROIC reincorporated as a Maryland corporation on June 2, 2011. ROIC began operations as a Delaware corporation, known as NRDC Acquisition Corp., which was incorporated on July 10, 2007, for the purpose of acquiring assets or operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination. On October 20, 2009, ROIC’s stockholders and warrantholders approved the proposals presented at the special meetings of stockholders and warrantholders, respectively, in connection with the transactions contemplated by the Framework Agreement (the “Framework Agreement”) ROIC entered into on August 7, 2009 with NRDC Capital Management, LLC (“NRDC”), which, among other things, set forth the steps to be taken by ROIC to continue its business as a corporation that has elected to qualify as a REIT for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2010.

ROIC’s only material asset is its ownership of direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, which is the sole general partner of the Operating Partnership. As a result, ROIC does not conduct business itself, other than acting as the parent company and issuing equity from time to time. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from warrants exercised and equity issuances by ROIC, which are contributed to the Operating Partnership, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) or through the issuance of operating partnership units (“OP Units”).

 

Recent Accounting Pronouncements

In April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.” The pronouncement requires reporting entities to present debt issuance costs related to a note as a direct deduction from the face amount of that note presented in the balance sheet. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply the amendments in the ASU retrospectively to all prior periods. The Company does not expect that the adoption of this pronouncement will have a material impact on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the impact this pronouncement will have on the Company’s consolidated financial statements.

-9-
 

Principles of Consolidation

The accompanying consolidated financial statements are prepared on the accrual basis in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, the consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and the results of operations and cash flows for the periods presented. Results of operations for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2014.

The consolidated financial statements include the accounts of the Company and those of its subsidiaries, which are wholly-owned or controlled by the Company. Entities which the Company does not control through its voting interest and entities which are variable interest entities (“VIEs”), but where it is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.

The Company follows the FASB guidance for determining whether an entity is a VIE and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. As of September 30, 2015, the Company does not have any VIEs.

A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of equity in the consolidated balance sheet and modify the presentation of net income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the disclosure of contingent assets and liabilities, the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods covered by the financial statements. The most significant assumptions and estimates relate to the purchase price allocations, depreciable lives, revenue recognition and the collectability of tenant receivables, other receivables, notes receivables, the valuation of performance-based restricted stock, stock options, warrants, and derivatives. Actual results could differ from these estimates.

Federal Income Taxes

Commencing with ROIC’s taxable year ended December 31, 2010, ROIC elected to qualify as a REIT under Sections 856-860 of the Internal Revenue Code (the “Code”). Under those sections, a REIT that, among other things, distributes at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) and meets certain other qualifications prescribed by the Code will not be taxed on that portion of its taxable income that is distributed.

Although it may qualify as a REIT for U.S. federal income tax purposes, ROIC is subject to state income or franchise taxes in certain states in which some of its properties are located. For all periods from inception through September 26, 2013 the Operating Partnership had been an entity disregarded from its sole owner, ROIC, for U.S. federal income tax purposes and, as such, had not been subject to federal income taxes. Effective September 27, 2013, the Operating Partnership issued 3,290,263 OP Units in connection with the acquisitions of two shopping centers, Crossroads Shopping Center and Five Points Plaza. Accordingly, the Operating Partnership ceased being a disregarded entity and instead began being treated as a partnership for federal income tax purposes.

-10-
 

The Company follows the FASB guidance that defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The FASB also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company records interest and penalties relating to unrecognized tax benefits, if any, as interest expense. As of September 30, 2015, the statute of limitations for the tax years 2012 through and including 2014 remain open for examination by the Internal Revenue Service (“IRS”) and state taxing authorities.

 

ROIC intends to make regular quarterly distributions to holders of its common stock.  U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income.  ROIC intends to pay regular quarterly dividends to stockholders in an amount not less than its net taxable income, if and to the extent authorized by its board of directors.  Before ROIC pays any dividend, whether for U.S. federal income tax purposes or otherwise, it must first meet both its operating requirements and its debt service on debt.  If ROIC’s cash available for distribution is less than its net taxable income, it could be required to sell assets or borrow funds to make cash distributions or it may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

Real Estate Investments

All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred. The Company expenses transaction costs associated with business combinations in the period incurred. During the nine months ended September 30, 2015 and 2014, capitalized costs related to the improvement or replacement of real estate properties were approximately $18.8 million and $19.1 million, respectively.

Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and improvements), and acquired intangible assets and liabilities (consisting of above-market and below-market leases and acquired in-place leases). Acquired lease intangible assets include above-market leases and acquired in-place leases, and acquired lease intangible liabilities represent below-market leases, in the accompanying consolidated balance sheets. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management’s determination of the relative fair values of these assets. In valuing an acquired property’s intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, and estimates of lost rental revenue during the expected lease-up periods based on management’s evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs. Leasing commissions, legal and other related costs (“lease origination costs”) are classified as deferred charges in the accompanying consolidated balance sheets.

The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant. Above-market and below-market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of acquisition. Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The value of the above-market and below-market leases is amortized to rental income, over the terms of the respective leases including option periods, if applicable. The value of in-place leases are amortized to expense over the remaining non-cancellable terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recognized in operations at that time. The Company may record a bargain purchase gain if it determines that the purchase price for the acquired assets was less than the fair value. The Company will record a liability in situations where any part of the cash consideration is deferred. The amounts payable in the future are discounted to their present value. The liability is subsequently re-measured to fair value with changes in fair value recognized in the consolidated statements of operations. If, up to one year from the acquisition date, information regarding fair value of assets acquired and liabilities assumed is received and estimates are refined, appropriate property adjustments are made to the purchase price allocation on a retrospective basis.

 

-11-
 

In conjunction with the Company’s pursuit and acquisition of real estate investments, the Company expensed acquisition transaction costs during the three months ended September 30, 2015 and 2014 of approximately $91,000 and $125,000, respectively, and approximately $507,000 and $654,000 during the nine months ended September 30, 2015 and 2014, respectively.

Regarding the Company’s 2015 property acquisitions (see Note 2), the fair value of in-place leases and other intangibles have been allocated to intangible asset and liability accounts.

Any reference to the number of properties and square footage are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of its financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

 

Asset Impairment

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to aggregate future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value. Management does not believe that the value of any of the Company’s real estate investments was impaired at September 30, 2015.

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed the federally insured limit by the Federal Deposit Insurance Corporation. The Company has not experienced any losses related to these balances.

Restricted Cash

The terms of several of the Company’s mortgage loans payable require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established and is not available to fund other property-level or Company-level obligations.

Revenue Recognition

Management has determined that all of the Company’s leases with its various tenants are operating leases. Rental income is generally recognized based on the terms of leases entered into with tenants. In those instances in which the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. Minimum rental income from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Percentage rent is recognized when a specific tenant’s sales breakpoint is achieved. Property operating expense recoveries from tenants of common area maintenance, real estate taxes and other recoverable costs are recognized in the period the related expenses are incurred.

Termination fees (included in rental revenue) are fees that the Company has agreed to accept in consideration for permitting certain tenants to terminate their lease prior to the contractual expiration date. The Company recognizes termination fees in accordance with Securities and Exchange Commission Staff Accounting Bulletin 104, “Revenue Recognition,” when the following conditions are met: (a) the termination agreement is executed; (b) the termination fee is determinable; (c) all landlord services pursuant to the terminated lease have been rendered; and (d) collectability of the termination fee is assured. Interest income is recognized as it is earned. Gains or losses on disposition of properties are recorded when the criteria for recognizing such gains or losses under GAAP have been met.

-12-
 

The Company must make estimates as to the collectability of its accounts receivable related to base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes accounts receivable by considering tenant creditworthiness, current economic trends, and changes in tenants’ payment patterns when evaluating the adequacy of the allowance for doubtful accounts receivable. The Company also provides an allowance for future credit losses of the deferred straight-line rents receivable. The provision for doubtful accounts at September 30, 2015 and December 31, 2014 was approximately $4.3 million and $3.6 million, respectively.

 

Depreciation and Amortization

The Company uses the straight-line method for depreciation and amortization. Buildings are depreciated over the estimated useful lives which the Company estimates to be 39 to 40 years. Property improvements are depreciated over the estimated useful lives that range from 10 to 20 years. Furniture and fixtures are depreciated over the estimated useful lives that range from 3 to 10 years. Tenant improvements are amortized over the shorter of the life of the related leases or their useful life.

Deferred Charges

Deferred charges consist principally of leasing commissions and acquired lease origination costs (which are amortized ratably over the life of the tenant leases) and financing fees (which are amortized over the term of the related debt obligation). Deferred charges in the accompanying consolidated balance sheets are shown at cost, net of accumulated amortization of approximately $22.0 million and $18.8 million, as of September 30, 2015 and December 31, 2014, respectively.

Internal Capitalized Leasing Costs

 

The Company capitalizes a portion of payroll-related costs related to its leasing personnel associated with new leases and lease renewals. These costs are amortized over the life of the respective leases. During the three months ended September 30, 2015 and 2014, the Company capitalized approximately $279,000 and $256,000, respectively. During the nine months ended September 30, 2015 and 2014, the Company capitalized approximately $804,000 and $692,000, respectively.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and tenant receivables. The Company places its cash and cash equivalents in excess of insured amounts with high quality financial institutions. The Company performs ongoing credit evaluations of its tenants and requires tenants to provide security deposits.

 

Earnings Per Share

Basic earnings per share (“EPS”) excludes the impact of dilutive shares and is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock and then shared in the earnings of the Company.

During the three and nine months ended September 30, 2014, the effect of the 41,400,000 warrants to purchase ROIC’s common stock (the “Public Warrants”) issued in connection with ROIC’s initial public offering (the “IPO”) for the period of time these warrants were outstanding during such period, were included in the calculation of diluted EPS as the weighted average share price of ROIC’s common stock was greater than the exercise price of such warrants during these periods. See Note 6 to the accompanying consolidated financial statements. On October 23, 2014, ROIC’s remaining outstanding warrants expired. No warrants were outstanding during the three and nine months ended September 30, 2015.

For the three and nine months ended September 30, 2015 and 2014, basic EPS was determined by dividing net income allocable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. Net income during the applicable period is also allocated to the time-based unvested restricted stock as these grants are entitled to receive dividends and are therefore considered a participating security.  Time-based unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders other than the holders of time-based unvested restricted stock. The performance-based restricted stock awards outstanding under the 2009 Plan described in Note 7 are excluded from the basic EPS calculation, as these units are not participating securities until they vest.

-13-
 

The following table sets forth the reconciliation between basic and diluted EPS for ROIC (in thousands, except share data):

   Three Months Ended September 30,  Nine Months Ended September 30,
   2015  2014  2015  2014
Numerator:                    
Net Income  $7,837   $6,981   $17,624   $16,298 
Less income attributable to non-controlling interest   (295)   (233)   (681)   (584)
Less earnings allocated to unvested shares   (58)   (39)   (173)   (120)
Net income available for common stockholders, basic  $7,484   $6,709   $16,770   $15,594 
                     
Numerator:                    
Net Income  $7,837   $6,981   $17,624   $16,298 
Less earnings allocated to unvested shares   (58)   (39)   (173)   (120)
Net income available for common stockholders, diluted  $7,779   $6,942   $17,451   $16,178 
                     
Denominator for basic EPS – weighted average common equivalent shares   96,722,628    91,055,414    94,479,375    80,336,440 
Warrants       413,197        786,462 
OP Units   3,771,314    3,132,042    3,825,710    3,132,042 
Restricted stock awards – performance-based   163,167    151,907    153,191    138,780 
Stock options   98,354    87,657    102,705    83,468 
Denominator for diluted EPS – weighted average common equivalent shares   100,755,463    94,840,217    98,560,981    84,477,192 

 

Earnings Per Unit

 

The following table sets forth the reconciliation between basic and diluted earnings per unit for the Operating Partnership (in thousands, except unit data):

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2015  2014  2015  2014
Numerator:                    
Net Income  $7,837   $6,981   $17,624   $16,298 
Less earnings allocated to unvested shares   (58)   (39)   (173)   (120)
Net income available to unitholders, basic and diluted  $7,779   $6,942   $17,451   $16,178 
                     
Denominator:                    
Denominator for basic earnings per unit – weighted average common equivalent units   100,493,942    94,187,456    98,305,085    83,468,482 
Warrants       413,197        786,462 
Restricted stock awards – performance-based   163,167    151,907    153,191    138,780 
Stock options   98,354    87,657    102,705    83,468 
Denominator for diluted earnings per unit – weighted average common equivalent units   100,755,463    94,840,217    98,560,981    84,477,192 

Stock-Based Compensation

The Company has a stock-based employee compensation plan, which is more fully described in Note 7.

The Company accounts for its stock-based compensation plans based on the FASB guidance which requires that compensation expense be recognized based on the fair value of the stock awards less estimated forfeitures.  Restricted stock grants vest based upon the completion of a service period (“time-based grants”) and/or the Company meeting certain established financial performance criteria (“performance-based grants”).  Time-based grants are valued according to the market price for the Company’s common stock at the date of grant.  For performance-based grants, a Monte Carlo valuation model is used, taking into account the underlying contingency risks associated with the performance criteria.  It is the Company’s policy to grant options with an exercise price equal to the quoted closing market price of stock on the grant date.  Awards of stock options and time-based grants of stock are expensed as compensation on a straight-line basis over the vesting period.  Awards of performance-based grants are expensed as compensation under an accelerated method and are recognized in income regardless of the results of the performance criteria.

-14-
 

Derivatives

The Company records all derivatives on the balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. When the Company terminates a derivative for which cash flow hedging was being applied, the balance which was recorded in Other Comprehensive Income is amortized to interest expense over the remaining contractual term of the swap. The Company includes cash payments made to terminate interest rate swaps as an operating activity on the statement of cash flows, given the nature of the underlying cash flows that the derivative was hedging. As of September 30, 2015, the Company does not have any derivatives outstanding.

Segment Reporting

The Company’s primary business is the ownership, management, and redevelopment of retail real estate properties. The Company reviews operating and financial information for each property on an individual basis and therefore, each property represents an individual operating segment. The Company evaluates financial performance using property operating income, defined as operating revenues (base rent and recoveries from tenants), less property and related expenses (property operating expenses and property taxes). The Company has aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities including the fact that they are operated using consistent business strategies, are typically located in major metropolitan areas, and have similar tenant mixes.

Reclassifications

Certain reclassifications have been made to the prior period consolidated financial statements and notes to conform to the current year presentation.

 

2.Real Estate Investments

The following real estate investment transactions have occurred during the nine months ended September 30, 2015.

Property Acquisitions

On January 6, 2015, the Company acquired the property known as Ontario Plaza located in Ontario, California, for a purchase price of approximately $31.0 million. Ontario Plaza is approximately 150,000 square feet and is anchored by El Super Supermarket and Rite Aid Pharmacy. The property was acquired with borrowings under the Company’s credit facility.

 

On January 6, 2015, the Company acquired the property known as Park Oaks Shopping Center located in Thousand Oaks, California, for a purchase price of approximately $47.7 million. Park Oaks Shopping Center is approximately 110,000 square feet and is anchored by Safeway (Vons) Supermarket. The property was acquired with borrowings under the Company’s credit facility.

 

On January 7, 2015, the Company acquired the property known as Winston Manor Shopping Center located in South San Francisco, California, for a purchase price of approximately $20.5 million. Winston Manor Shopping Center is approximately 50,000 square feet and is anchored by Grocery Outlet Supermarket. The property was acquired with borrowings under the Company’s credit facility.

 

On May 6, 2015, the Company acquired key anchor spaces at two of its existing shopping centers for a purchase price of approximately $23.1 million including a 59,000 square foot space at its Pinole Vista Shopping Center, located in Pinole, California, and an anchor space leasehold interest at its Canyon Park Shopping Center, located in Bothell, Washington. These anchor spaces were acquired with borrowings under the Company’s credit facility.

 

-15-
 

On July 1, 2015, the Company acquired the property known as Jackson Square located in Hayward, California, within the San Francisco metropolitan area, for a purchase price of approximately $32.5 million. Jackson Square is approximately 114,000 square feet and is anchored by Safeway Supermarket, CVS Pharmacy and 24 Hour Fitness. The property was acquired with borrowings under the Company’s credit facility.

 

On July 28, 2015, the Company acquired the property known as Sunnyside Village Square located in Happy Valley, Oregon, within the Portland metropolitan area, for a purchase price of approximately $17.5 million. Sunnyside Village Square is approximately 89,000 square feet and is anchored by Haggen Supermarket. The property was acquired with borrowings under the Company’s credit facility.

 

On July 28, 2015, the Company acquired the property known as Tigard Promenade located in Tigard, Oregon, within the Portland metropolitan area, for a purchase price of approximately $21.0 million. Tigard Promenade is approximately 88,000 square feet and is anchored by Safeway Supermarket. The property was acquired with borrowings under the Company’s credit facility.

 

On September 1, 2015, the Company acquired the property known as Gateway Centre located in San Ramon, California, within the San Francisco metropolitan area, for a purchase price of approximately $42.5 million. Gateway Centre is approximately 110,000 square feet and is anchored by SaveMart (Lucky) Supermarket and Walgreens. The property was acquired with borrowings under the Company’s credit facility.

 

 

 

 

 

 

 

 

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The financial information set forth below summarizes the Company’s purchase price allocation for the properties acquired during the nine months ended September 30, 2015 (in thousands).

   September 30, 2015
ASSETS     
Land  $61,688 
Building and improvements   174,928 
Acquired lease intangible assets   10,764 
Deferred charges   4,015 
Assets acquired  $251,395 
LIABILITIES     
Acquired lease intangible liabilities  $15,609 
Liabilities assumed  $15,609 

 

With respect to these acquisitions, the fair value of in-place leases and other intangibles have been allocated to intangible asset and liability accounts. All allocations are preliminary and may be adjusted as final information becomes available.

Pro Forma Financial Information

The pro forma financial information is based upon the Company’s historical consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014, adjusted to give effect to these transactions as if they had been completed at the beginning of 2014.

The pro forma financial information set forth below is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of each year, nor does it purport to represent the results of future operations (in thousands).

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
   2015  2014  2015  2014
Statements of operations:            
Revenues  $50,702   $47,016   $146,595   $140,044 
Property operating and other expenses   24,773    21,204    74,196    65,725 
Depreciation and amortization   18,178    17,478    54,105    51,967 
Net income attributable to Retail Opportunity Investments Corp.  $7,751   $8,334   $18,294   $22,352 

 

The following table summarizes the operating results included in the Company’s historical consolidated statements of operations for the three and nine months ended September 30, 2015, for the properties acquired during the nine months ended September 30, 2015 (in thousands).

   Three Months Ended
September 30, 2015
  Nine Months Ended
September 30, 2015
Statements of operations:          
Revenues  $3,547   $7,567 
Property operating and other expenses   1,060    2,162 
Depreciation and amortization   1,613    3,574 
Net income attributable to Retail Opportunity Investments Corp.  $874   $1,831 

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3.Tenant Leases

Space in the Company’s shopping centers is leased to various tenants under operating leases that usually grant tenants renewal options and generally provide for additional rents based on certain operating expenses as well as tenants’ sales volume.

Future minimum rents to be received under non-cancellable leases as of September 30, 2015 are summarized as follows (in thousands):

  Minimum Rents
Remaining 2015  $34,577 
2016   133,325 
2017   119,776 
2018   100,872 
2019   81,732 
Thereafter   341,613 
Total minimum lease payments  $811,895 

 

4.Mortgage Notes Payable, Credit Facilities and Senior Notes

ROIC does not hold any indebtedness. All debt is held directly or indirectly by the Operating Partnership; however, ROIC has guaranteed the Operating Partnership’s term loan, revolving credit facility, carve-out guarantees on property-level debt, the Senior Notes Due 2024 and the Senior Notes Due 2023.

Mortgage Notes Payable

The mortgage notes payable collateralized by respective properties and assignment of leases at September 30, 2015 and December 31, 2014, respectively, were as follows (in thousands):

Property  Maturity Date  Interest Rate  September 30, 2015  December 31, 2014
Renaissance Towne Centre  June 2015   5.13%  $   $16,205 
Crossroads Shopping Center  September 2015   6.50%       48,581 
Gateway Village III  July 2016   6.10%   7,193    7,270 
Bernardo Heights Plaza  July 2017   5.70%   8,449    8,581 
Santa Teresa Village  February 2018   6.20%   10,669    10,830 
Diamond Hills Plaza  October 2025   3.55%   35,500     
           $61,811   $91,467 
Mortgage Premium           1,062    2,716 
Total mortgage notes payable          $62,873   $94,183 

 

On April 1, 2015, the Company paid off the mortgage note related to the Renaissance Towne Centre shopping center without penalty, in accordance with the prepayment provisions of the note, for a total of approximately $16.1 million.

On September 1, 2015, the Company paid off the mortgage note related to the Crossroads Shopping Center without penalty, in accordance with the maturity provision of the note, for a total of approximately $48.3 million.

 

On September 1, 2015, the Company entered into a $35.5 million loan with PNC Bank, National Association. The loan is secured by the Diamond Hills Plaza property and bears interest at 3.55%. The loan matures on October 1, 2025, is interest only through September 30, 2021 and amortizes thereafter, on a 30 year amortization.

 

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Credit Facilities

On September 29, 2015, the Company entered into a term loan agreement (the "Term Loan Agreement") with KeyBank National Association, as Administrative Agent, and U.S. Bank National Association, as Syndication Agent and the other lenders party thereto, under which the lenders agreed to provide a $300.0 million unsecured term loan facility. The Term Loan Agreement also provides that the Company may from time to time request increased aggregate commitments of $200.0 million under certain conditions set forth in the Term Loan Agreement, including the consent of the lenders for the additional commitments. The initial maturity date of the term loan is January 31, 2019, subject to two one-year extension options, which may be exercised upon satisfaction of certain conditions including the payment of extension fees. Borrowings under the Term Loan Agreement bear interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of the Company, plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the relevant period (the "Eurodollar Rate"), or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the rate of interest announced by the Administrative Agent as its "prime rate," and (c) the Eurodollar Rate plus 1.00% (the “Base Rate”). The Term Loan Agreement contains customary representations, financial and other covenants.

 

As of September 30, 2015, $300.0 million was outstanding under the term loan facility. The interest rate on the term loan facility was 1.3% at September 30, 2015.

 

The Operating Partnership has a revolving credit facility with several banks which provides for borrowings of up to $500.0 million. Additionally, the credit facility contains an accordion feature, which allows the Operating Partnership to increase the facility amount up to an aggregate of $1.0 billion, subject to lender consents and other conditions. The maturity date of the credit facility has been extended to January 31, 2019, subject to a further one-year extension option, which may be exercised by the Operating Partnership upon satisfaction of certain conditions.

 

The Company obtained investment grade credit ratings from Moody’s Investors Service (Baa2) and Standard & Poor’s Ratings Services (BBB-) during the second quarter of 2013. Borrowings under the credit facility accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of the Company, plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds for dollar deposits for the relevant period (the “Eurodollar Rate”), or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the rate of interest announced by KeyBank, National Association as its “prime rate,” and (c) the Eurodollar Rate plus 1.00% (the “Base Rate”). Additionally, the Operating Partnership is obligated to pay a facility fee at a rate based on the credit rating level of the Company, currently 0.20%, and a fronting fee at a rate of 0.125% per year with respect to each letter of credit issued under the credit facility. The credit facility contains customary representations, financial and other covenants. The Operating Partnership’s ability to borrow under the credit facility is subject to its compliance with financial covenants and other restrictions on an ongoing basis. The Operating Partnership was in compliance with such covenants at September 30, 2015.

As of September 30, 2015, $16.2 million was outstanding under the credit facility. The average interest rate on the credit facility during both the three and nine months ended September 30, 2015 was 1.2%. The Operating Partnership had $483.8 million available to borrow under the credit facility at September 30, 2015.

Senior Notes Due 2024

 

The carrying value of the Company’s Senior Notes Due 2024 is as follows (in thousands):

 

   September 30, 2015  December 31, 2014
Principal amount  $250,000   $250,000 
Unamortized debt discount   (3,264)   (3,479)
Senior Notes Due 2024:  $246,736   $246,521 

 

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On December 3, 2014, the Operating Partnership completed a registered underwritten public offering of $250.0 million aggregate principal amount of 4.000% Senior Notes due 2024 (the “Senior Notes Due 2024”), fully and unconditionally guaranteed by ROIC. The Senior Notes Due 2024 pay interest semi-annually on June 15 and December 15, commencing on June 15, 2015, and mature on December 15, 2024, unless redeemed earlier by the Operating Partnership. The Senior Notes Due 2024 are the Operating Partnership’s senior unsecured obligations that rank equally in right of payment with the Operating Partnership’s other unsecured indebtedness, and effectively junior to (i) all of the indebtedness and other liabilities, whether secured or unsecured, and any preferred equity of the Operating Partnership’s subsidiaries, and (ii) all of the Operating Partnership’s indebtedness that is secured by its assets, to the extent of the value of the collateral securing such indebtedness outstanding. ROIC fully and unconditionally guaranteed the Operating Partnership’s obligations under the Senior Notes Due 2024 on a senior unsecured basis, including the due and punctual payment of principal of, and premium, if any, and interest on, the notes, whether at stated maturity, upon acceleration, notice of redemption or otherwise. The guarantee is a senior unsecured obligation of ROIC and ranks equally in right of payment with all other senior unsecured indebtedness of ROIC. ROIC’s guarantee of the Senior Notes Due 2024 is effectively subordinated in right of payment to all liabilities, whether secured or unsecured, and any preferred equity of its subsidiaries (including the Operating Partnership and any entity ROIC accounts for under the equity method of accounting). The interest expense recognized on the Senior Notes Due 2024 during the three months ended September 30, 2015 included $2.5 million and approximately $72,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2024 during the nine months ended September 30, 2015 included $7.5 million and approximately $215,000 for the contractual coupon interest and the accretion of the debt discount, respectively.

 

In connection with the Senior Notes Due 2024 offering, the Company incurred approximately $2.2 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2024.

 

Senior Notes Due 2023

 

The carrying value of the Company’s Senior Notes Due 2023 is as follows (in thousands):

 

   September 30, 2015  December 31, 2014
Principal amount  $250,000   $250,000 
Unamortized debt discount   (3,570)   (3,826)
Senior Notes Due 2023:  $246,430   $246,174 

 

On December 9, 2013, the Operating Partnership completed a registered underwritten public offering of $250.0 million aggregate principal amount of 5.000% Senior Notes due 2023 (the “Senior Notes Due 2023”), fully and unconditionally guaranteed by ROIC. The Senior Notes Due 2023 pay interest semi-annually on June 15 and December 15, commencing on June 15, 2014, and mature on December 15, 2023, unless redeemed earlier by the Operating Partnership. The Senior Notes Due 2023 are the Operating Partnership’s senior unsecured obligations that rank equally in right of payment with the Operating Partnership’s other unsecured indebtedness, and effectively junior to (i) all of the indebtedness and other liabilities, whether secured or unsecured, and any preferred equity of the Operating Partnership’s subsidiaries, and (ii) all of the Operating Partnership’s indebtedness that is secured by its assets, to the extent of the value of the collateral securing such indebtedness outstanding. ROIC fully and unconditionally guaranteed the Operating Partnership’s obligations under the Senior Notes Due 2023 on a senior unsecured basis, including the due and punctual payment of principal of, and premium, if any, and interest on, the notes, whether at stated maturity, upon acceleration, notice of redemption or otherwise. The guarantee is a senior unsecured obligation of ROIC and will rank equally in right of payment with all other senior unsecured indebtedness of ROIC. ROIC’s guarantee of the Senior Notes Due 2023 is effectively subordinated in right of payment to all liabilities, whether secured or unsecured, and any preferred equity of its subsidiaries (including the Operating Partnership and any entity ROIC accounts for under the equity method of accounting). The interest expense recognized on the Senior Notes Due 2023 during the three months ended September 30, 2015 included approximately $3.1 million and $87,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2023 during the nine months ended September 30, 2015 included approximately $9.4 million and $256,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2023 during the three months ended September 30, 2014 included approximately $3.1 million and $84,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2023 during the nine months ended September 30, 2014 included approximately $9.3 million and $245,000 for the contractual coupon interest and the accretion of the debt discount, respectively.

 

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In connection with the Senior Notes Due 2023 offering, the Company incurred approximately $2.6 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2023.

 

5.Preferred Stock of ROIC

ROIC is authorized to issue 50,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. As of September 30, 2015 and December 31, 2014, there were no shares of preferred stock outstanding.

6.Common Stock and Warrants of ROIC

Common Stock

On August 10, 2015, the Company issued 5,520,000 shares of common stock in a registered public offering, including shares issued upon the exercise in full of the underwriters’ option to purchase additional shares, resulting in net proceeds of approximately $87.3 million, after deducting the underwriters’ discounts and commissions and offering expenses. The net proceeds were used to reduce borrowings under the Operating Partnership’s $500.0 million unsecured revolving credit facility.

 

ATM

On September 19, 2014, ROIC entered into four separate Sales Agreements (the “2014 sales agreements”) with each of Jefferies LLC, KeyBanc Capital Markets Inc., MLV & Co. LLC and Raymond James & Associates, Inc. (each individually, an “Agent” and collectively, the “Agents”) pursuant to which ROIC may sell, from time to time, shares of ROIC’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $100.0 million through the Agents either as agents or principals. During the nine months ended September 30, 2015, ROIC sold a total of 544,567 shares under one of the 2014 sales agreements, which resulted in gross proceeds of approximately $9.9 million and commissions of approximately $149,000 paid to the agent.

Warrants

 

Simultaneously with the consummation of the IPO, NRDC purchased 8,000,000 Private Placement Warrants at a purchase price of $1.00 per warrant. The Private Placement Warrants were identical to the Public Warrants except that the Private Placement Warrants were exercisable on a cashless basis as long as they were still held by NRDC or its members, members of its members’ immediate families or their controlled affiliates. The purchase price of the Private Placement Warrants approximated the fair value of such warrants at the purchase date.

 

ROIC had the right to redeem all of the outstanding warrants it issued in the IPO, at a price of $0.01 per warrant upon 30 days’ notice while the warrants are exercisable, only in the event that the last sale price of the common stock is at least a specified price. The terms of the warrants are as follows:

 

·The exercise price of the warrants was $12.00.
·The price at which ROIC’s common stock must trade before ROIC was able to redeem the warrants it issued in the IPO was $18.75.
·To provide that a warrantholder’s ability to exercise warrants was limited to ensure that such holder’s “Beneficial Ownership” or “Constructive Ownership,” each as defined in ROIC’s charter, did not exceed the restrictions contained in the charter limiting the ownership of shares of ROIC’s common stock.

ROIC had reserved 53,400,000 shares for the exercise of the Public Warrants and the Private Placement Warrants, and issuance of shares under ROIC’s 2009 Equity Incentive Plan (the “2009 Plan”). During the three and nine months ended September 30, 2014, the third-party warrant holders exercised a total of 1,258,558 and 4,652,431 Public Warrants, respectively, resulting in a total of $15.1 million and $55.8 million proceeds, respectively. On October 23, 2014, ROIC’s remaining outstanding warrants expired and 64,452 warrants expired unexercised.

 

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Stock Repurchase Program

 

On July 31, 2013, the Company’s board of directors authorized a stock repurchase program to repurchase up to a maximum of $50.0 million of the Company’s common stock. During the nine months ended September 30, 2015, the Company did not repurchase any shares of common stock under this program.

 

7.Stock Compensation for ROIC

ROIC follows the FASB guidance related to stock compensation which establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of the employer’s stock. The guidance also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.

In 2009, ROIC adopted the 2009 Plan. The 2009 Plan provides for grants of restricted common stock and stock option awards up to an aggregate of 7.5% of the issued and outstanding shares of ROIC’s common stock at the time of the award, subject to a ceiling of 4,000,000 shares.

Restricted Stock

During the nine months ended September 30, 2015, ROIC awarded 343,070 shares of restricted common stock under the 2009 Plan, of which 117,275 shares are performance-based grants and the remainder of the shares are time-based grants. The performance-based grants vest in three equal annual tranches, based on pre-defined market-specific performance criteria with vesting dates on January 1, 2016, 2017 and 2018.

A summary of the status of ROIC’s non-vested restricted stock awards as of September 30, 2015, and changes during the nine months ended September 30, 2015 are presented below:

   Shares  Weighted Average Grant Date Fair Value
Non-vested at December 31, 2014   559,358   $11.51 
Granted   343,070   $15.58 
Vested   (257,175)  $12.09 
Cancelled   (2,832)  $15.88 
Non-vested at  September 30, 2015   642,421   $14.34 

 

For the three months ended September 30, 2015 and 2014, the amounts charged to expenses for all stock-based compensation arrangements totaled approximately $1.3 million and $984,000, respectively. For the nine months ended September 30, 2015 and 2014, the amounts charged to expenses for all stock-based compensation arrangements totaled approximately $3.5 million and $2.7 million, respectively.

8.Capital of the Operating Partnership

As of September 30, 2015, the Operating Partnership had 103,256,439 OP Units outstanding. ROIC owned an approximate 96.3% partnership interest in the Operating Partnership at September 30, 2015, or 99,485,125 OP Units. The remaining 3,771,314 OP Units are owned by other limited partners. A share of ROIC’s common stock and an OP unit have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership.

Subject to certain exceptions, holders may redeem their OP Units, at the option of ROIC, for cash or for shares of ROIC common stock on a one-for-one basis. If cash is paid in the redemption, the redemption price is equal to the average closing price on the NASDAQ Stock Market for shares of ROIC’s common stock over the ten consecutive trading days immediately preceding the date a redemption notice is received by ROIC.

 

On April 3, 2015, the Company received notices of redemption for 150,000 OP Units. The Company elected to redeem the OP Units for shares of ROIC common stock on a one-for-one basis, and accordingly, 150,000 shares of ROIC common stock were issued.

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The redemption value of the OP Units outstanding at September 30, 2015 (owned by the limited partners, not including ROIC), had such units been redeemed at September 30, 2015, was approximately $63.0 million based on the average closing price on the NASDAQ Stock Market of ROIC common stock for the ten consecutive trading days immediately preceding September 30, 2015, which amounted to $16.71 per share.

 

Retail Opportunity Investments GP, LLC, ROIC’s wholly-owned subsidiary, is the sole general partner of the Operating Partnership, and as the parent company, ROIC has the full and complete authority over the Operating Partnership’s day-to-day management and control. As the sole general partner of the Operating Partnership, ROIC effectively controls the ability to issue common stock of ROIC upon redemption of any OP Units. The redemption provisions that permit ROIC to settle in either cash or common stock, at the option of ROIC, are further evaluated in accordance with applicable accounting guidance to determine whether temporary or permanent equity classification on the balance sheet is appropriate. The Company evaluated this guidance, including the requirement to settle in unregistered shares, and determined that the OP Units meet the requirements to qualify for presentation as permanent equity.

 

9.Fair Value of Financial Instruments

The Company follows the FASB guidance that defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies as discussed in Note 1. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts realizable upon disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

The carrying values of cash and cash equivalents, restricted cash, tenant and other receivables, deposits, prepaid expenses, other assets, accounts payable and accrued expenses are reasonable estimates of their fair values because of the short-term nature of these instruments. The carrying value of the revolving credit facility is deemed to be at fair value since the outstanding debt is directly tied to monthly LIBOR contracts.  The fair value, based on inputs not quoted on active markets, but corroborated by market data, or Level 2, of the outstanding Senior Notes Due 2024 at September 30, 2015 is approximately $239.5 million. The fair value, based on inputs not quoted on active markets, but corroborated by market data, or Level 2, of the outstanding Senior Notes Due 2023 at September 30, 2015 is approximately $263.0 million. Mortgage notes payable were recorded at their fair value at the time they were assumed and are estimated to have a fair value of approximately $62.8 million with an interest rate range of 3.1% to 3.6% and a weighted average interest rate of 3.4% as of September 30, 2015. These fair value measurements fall within level 3 of the fair value hierarchy.

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Derivative and Hedging Activities

During the year ended December 31, 2014, the Company cash settled its remaining outstanding interest rate swaps, and accordingly, none are outstanding as of September 30, 2015. The Company’s objectives in using interest rate derivatives historically were to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Company used interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives that are designated as cash flow hedges are recorded in AOCI and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.

The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative.  This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities.  The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

 

The Company incorporated credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements.  In adjusting the fair value of its derivative contract for the effect of non-performance risk, the Company considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

 

Amounts paid, or received, to cash settle interest rate derivatives prior to their maturity date are recorded in AOCI at the cash settlement amount, and will be reclassified to interest expense as interest expense is recognized on the hedged debt. During the next twelve months, the Company estimates that $2.1 million will be reclassified as an increase to interest expense.

Derivatives in Cash Flow Hedging Relationships

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2015 and 2014, respectively (in thousands). Amounts reclassified from other comprehensive income (“OCI”) due to ineffectiveness are recognized as interest expense.

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

   2015  2014  2015  2014
Amount of gain (loss) recognized in OCI on derivative  $   $135   $   $(2,792)
Amount of  loss reclassified from accumulated OCI into interest  $535   $869   $1,604   $2,641 

 

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10.Commitments and Contingencies

In the normal course of business, from time to time, the Company is involved in legal actions relating to the ownership and operations of its properties. In management’s opinion, the liabilities, if any, that ultimately may result from such legal actions are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.

The following table represents the Company’s future minimum annual lease payments under operating leases as of September 30, 2015 (in thousands):

 

  Operating Leases
Remaining 2015  $228 
2016   980 
2017   1,049 
2018   1,054 
2019   1,059 
Thereafter   37,271 
Total minimum lease payments  $41,641 

 

 

 

 

 

 

 

 

 

-25-
 

Tax Protection Agreements

 

In connection with the acquisition of the remaining 51% of the partnership interests in the Terranomics Crossroads Associates, LP and the acquisition of 100% of the equity interest in SARM Five Points Plaza LLC in 2013 and the acquisition of Wilsonville Town Center in 2014, the Company entered into Tax Protection Agreements with certain limited partners of the Operating Partnership. The Tax Protection Agreements require the Company, subject to certain exceptions, to indemnify the respective Sellers receiving OP Units against certain tax liabilities incurred by them, as calculated pursuant to the respective Tax Protection Agreements. If the Company were to trigger the tax protection provisions under these agreements, the Company would be required to pay damages in the amount of the taxes owed by these limited partners (plus additional damages in the amount of the taxes incurred as a result of such payment). The Tax Protection periods for Terranomics Crossroads Associates, LP and SARM Five Points Plaza LLC, and Wilsonville, were provided for twelve and ten years, respectively.

 

11.Related Party Transactions

The Company has entered into several lease agreements with an officer of the Company, whereby pursuant to the lease agreements, the Company is provided the use of storage space. For the three months ended September 30, 2015 and 2014, the Company incurred approximately $11,000 and $10,000, respectively, of expenses relating to the agreements. For the nine months ended September 30, 2015 and 2014, the Company incurred approximately $32,000 and $27,000, respectively, of expenses relating to the agreements. These expenses were included in general and administrative expenses in the accompanying consolidated statements of operations.

12.Subsequent Events

In determining subsequent events, the Company reviewed all activity from October 1, 2015 to the date the financial statements are issued and discloses the following items:

On October 27, 2015, ROIC’s board of directors declared a cash dividend on its common stock and OP Units of $0.17 per share or unit, payable on December 29, 2015 to holders of record on December 15, 2015.

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words “believes,” “anticipates,” “projects,” “should,” “estimates,” “expects,” and similar expressions are intended to identify forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and in Section 21F of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Actual results may differ materially due to uncertainties including:

·our ability to identify and acquire retail real estate that meet our investment standards in our markets;
·the level of rental revenue and net interest income we achieve from our assets;
·the market value of our assets and the supply of, and demand for, retail real estate in which we invest;
·the state of the U.S. economy generally, or in specific geographic regions;
·the impact of economic conditions on our business;
·the conditions in the local markets in which we operate and our concentration in those markets, as well as changes in national economic and market conditions;
·consumer spending and confidence trends;
·our ability to enter into new leases or to renew leases with existing tenants at the properties we own or acquire at favorable rates;
·our ability to anticipate changes in consumer buying practices and the space needs of tenants;
·the competitive landscape impacting the properties we own or acquire and their tenants;
·our relationships with our tenants and their financial condition and liquidity;
·our ability to continue to qualify as a REIT for U.S. federal income tax;
·our use of debt as part of our financing strategy and our ability to make payments or to comply with any covenants under our senior unsecured notes, our unsecured credit facilities or other debt facilities we currently have or subsequently obtain;
·the level of our operating expenses, including amounts we are required to pay to our management team;
·changes in interest rates that could impact the market price of our common stock and the cost of our borrowings; and
·legislative and regulatory changes (including changes to laws governing the taxation of REITs).

Forward-looking statements are based on estimates as of the date of this report. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.

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We caution that the foregoing list of factors is not all-inclusive. All subsequent written and oral forward-looking statements concerning us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We caution not to place undue reliance upon any forward-looking statements, which speak only as of the date made. We do not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based. Other sections of this report may include additional factors that could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Overview

Retail Opportunity Investments Corp. (“ROIC”) is organized in an UpREIT format pursuant to which Retail Opportunity Investments GP, LLC, its wholly-owned subsidiary, serves as the general partner of, and ROIC conducts substantially all of its business through, its operating partnership, Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), together with its subsidiaries. ROIC reincorporated as a Maryland corporation on June 2, 2011. ROIC has elected to be taxed as a REIT, for U.S. federal income tax purposes, commencing with the year ended December 31, 2010.

ROIC commenced operations in October 2009 as a fully integrated and self-managed REIT, and as of September 30, 2015, ROIC owned an approximate 96.3% partnership interest and other limited partners owned the remaining approximate 3.7% partnership interest in the Operating Partnership. ROIC specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers on the west coast of the United States, anchored by supermarkets and drugstores.

From the commencement of its operations through September 30, 2015, the Company has completed approximately $2.0 billion of shopping center investments. As of September 30, 2015, the Company’s portfolio consisted of 68 retail properties totaling approximately 8.1 million square feet of gross leasable area (“GLA”).

As of September 30, 2015, the Company’s portfolio was approximately 97.1% leased. During the nine months ended September 30, 2015, the Company leased or renewed a total of 1.0 million square feet in its portfolio. The Company has committed approximately $16.4 million, or $38.12 per square foot, in tenant improvements, including building improvements, for new leases that occurred during the nine months ended September 30, 2015. The Company has committed approximately $1.2 million, or $2.81 per square foot, in leasing commissions, for the new leases that occurred during the nine months ended September 30, 2015. Tenant improvement and leasing commission commitments for renewed leases were not material for the nine months ended September 30, 2015.

 

Subsequent Events

On October 27, 2015, ROIC’s board of directors declared a cash dividend on its common stock and OP Units of $0.17 per share or unit, payable on December 29, 2015 to holders of record on December 15, 2015.

 

Results of Operations

 

At September 30, 2015, the Company had 68 properties, all of which are consolidated (“consolidated properties”) in the accompanying financial statements. The Company believes, because of the location of the properties in densely populated areas, the nature of its investments provides for relatively stable revenue flows even during difficult economic times. The Company has a strong capital structure with manageable debt as of September 30, 2015. The Company expects to continue to actively explore acquisition opportunities consistent with its business strategy.

 

Property operating income is a non-GAAP financial measure of performance. The Company defines property operating income as operating revenues (base rent and recoveries from tenants), less property and related expenses (property operating expenses and property taxes). Property operating income excludes general and administrative expenses, depreciation and amortization, acquisition transaction costs, other expense, interest expense, gains and losses from property acquisitions and dispositions, extraordinary items, tenant improvements and leasing commissions. Other REITs may use different methodologies for calculating property operating income, and accordingly, the Company’s property operating income may not be comparable to other REITs.

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Property operating income is used by management to evaluate and compare the operating performance of the Company’s properties, to determine trends in earnings and to compute the fair value of the Company’s properties as this measure is not affected by the cost of our funding, the impact of depreciation and amortization expenses, gains or losses from the acquisition and sale of operating real estate assets, general and administrative expenses or other gains and losses that relate to our ownership of our properties. The Company believes the exclusion of these items from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating the Company’s properties as well as trends in occupancy rates, rental rates and operating costs.

Property operating income is a measure of the operating performance of the Company’s properties but does not measure the Company’s performance as a whole. Property operating income is therefore not a substitute for net income or operating income as computed in accordance with GAAP.

Results of Operations for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

Property Operating Income

The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to consolidated property operating income for the three months ended September 30, 2015 and 2014 (in thousands).

  

Three Months Ended

September 30,

   2015  2014
Operating income per GAAP  $16,363   $12,296 
Plus: Depreciation and amortization   18,059    15,365 
 General and administrative expenses   3,092    2,987 
 Acquisition transaction costs   91    125 
 Other expenses   254    58 
Total portfolio property operating income  $37,859   $30,831 

The following comparison for the three months ended September 30, 2015 compared to the three months ended September 30, 2014, makes reference to the effect of the same-center properties. Same-center properties, which totaled 58 of the Company’s 68 properties as of September 30, 2015, represent all operating properties owned by the Company during the entirety of both periods presented and consolidated into the Company’s financial statements during such periods.

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The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to property operating income for the three months ended September 30, 2015 related to the 58 same-center properties owned by the Company during the entirety of both the three months ended September 30, 2015 and 2014 and consolidated into the Company’s financial statements during such periods (in thousands).

 

   Three Months Ended September 30, 2015
   Same-Center  Non Same-Center  Total
Operating income (loss) per GAAP  $18,017   $(1,654)  $16,363 
Plus: Depreciation and amortization   15,430    2,629    18,059 
 General and administrative expenses (1)       3,092    3,092 
 Acquisition transaction costs   3    88    91 
 Other expenses (1)       254    254 
Property operating income  $33,450   $4,409   $37,859 

___________________________

(1) For illustration purposes, general and administrative expenses and other expenses are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center.

 

The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to property operating income for the three months ended September 30, 2014 related to the 58 same-center properties owned by the Company during the entirety of both the three months ended September 30, 2015 and 2014 and consolidated into the Company’s financial statements during such periods (in thousands).

 

   Three Months Ended September 30, 2014
   Same-Center  Non Same-Center  Total
Operating income (loss) per GAAP  $15,079   $(2,783)  $12,296 
Plus: Depreciation and amortization   15,262    103    15,365 
 General and administrative expenses (1)       2,987    2,987 
 Acquisition transaction costs   39    86    125 
 Other expenses (1)       58    58 
Property operating income  $30,380   $451   $30,831 

______________________

(1) For illustration purposes, general and administrative expenses and other expenses are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center.

 

During the three months ended September 30, 2015, the Company generated property operating income of approximately $37.9 million compared to property operating income of $30.8 million generated during the three months ended September 30, 2014. Property operating income increased by $7.0 million during the three months ended September 30, 2015 primarily as a result of an increase in the number of properties owned by the Company in 2015 compared to 2014.  As of September 30, 2015, the Company owned 68 consolidated properties as compared to 58 properties at September 30, 2014. The newly acquired properties increased property operating income in 2015 by approximately $4.0 million. The 58 same-center properties increased property operating income by approximately $3.1 million. The increase in same-center property operating income was due primarily to lease termination fees and increases in base rents and recoveries from tenants at the properties.

 

Depreciation and amortization

The Company incurred depreciation and amortization expenses during the three months ended September 30, 2015 of approximately $18.1 million compared to $15.4 million incurred during the three months ended September 30, 2014. Depreciation and amortization expenses were higher in 2015 as a result of an increase in the number of properties owned by the Company in 2015 compared to 2014.

General and administrative expenses

The Company incurred general and administrative expenses during the three months ended September 30, 2015 of approximately $3.1 million compared to approximately $3.0 million incurred during the three months ended September 30, 2014. General and administrative expenses increased approximately $105,000 primarily due to an increase in compensation-related expenses.

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Acquisition transaction costs

The Company incurred property acquisition costs during the three months ended September 30, 2015 of approximately $91,000 compared to $125,000 incurred during the three months ended September 30, 2014. Property acquisition costs were lower in 2015 primarily due to legal and other professional fees incurred related to acquisition activity in 2014.

Interest expense and other finance expenses

The Company incurred interest expense during the three months ended September 30, 2015 of approximately $8.5 million compared to approximately $6.9 million during the three months ended September 30, 2014. The increase of approximately $1.6 million was primarily due to additional interest incurred related to the Senior Notes Due 2024 which were issued in December 2014, slightly offset by a decrease in interest on interest rate swaps, as the swaps were all settled in December 2014, and a decrease in interest expense incurred as a result of the payoff of the loans on Renaissance Towne Centre and Crossroads Shopping Center.

 

Gain on sale of property

On August 25, 2014, the Company sold the Oregon City Point Shopping Center, a non-core shopping center located in Oregon City, Oregon. The sales price of this property of approximately $12.4 million, less costs to sell, resulted in net proceeds of approximately $12.0 million. The Company recorded a gain on sale of property of approximately $1.6 million for the three months ended September 30, 2014. There were no property sales in the three months ended September 30, 2015.

 

Results of Operations for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Property Operating Income

The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to consolidated property operating income for the nine months ended September 30, 2015 and 2014 (in thousands).

  

Nine Months Ended

September 30,

   2015  2014
Operating income (loss) per GAAP  $43,031   $32,124 
Plus: Depreciation and amortization   52,567    42,986 
 General and administrative expenses   9,387    8,324 
 Acquisition transaction costs   507    654 
 Other expenses   507    405 
Total portfolio property operating income  $105,999   $84,493 

 

The following comparison for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, makes reference to the effect of the same-center properties. Same-center properties, which totaled 53 of the Company’s 68 properties as of September 30, 2015, represent all operating properties owned by the Company during the entirety of both periods presented and consolidated into the Company’s financial statements during such periods.

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The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to property operating income for the nine months ended September 30, 2015 related to the 53 same-center properties owned by the Company during the entirety of both the nine months ended September 30, 2015 and 2014 and consolidated into the Company’s financial statements during such periods (in thousands).

 

   Nine Months Ended September 30, 2015
   Same-Center  Non Same-Center  Total
Operating income (loss) per GAAP  $43,387   $(356)  $43,031 
Plus: Depreciation and amortization   36,579    15,988    52,567 
 General and administrative expenses (1)       9,387    9,387 
 Acquisition transaction costs   51    456    507 
 Other expenses (1)       507    507 
Property operating income  $80,017   $25,982   $105,999 

______________________

(1) For illustration purposes, general and administrative expenses and other expenses are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center.

 

The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to property operating income for the nine months ended September 30, 2014 related to the 53 same-center properties owned by the Company during the entirety of both the nine months ended September 30, 2015 and 2014 and consolidated into the Company’s financial statements during such periods (in thousands).

 

   Nine Months Ended September 30, 2014
   Same-Center  Non Same-Center  Total
Operating income (loss) per GAAP  $38,391   $(6,267)  $32,124 
Plus: Depreciation and amortization   37,656    5,330    42,986 
 General and administrative expenses (1)       8,324    8,324 
 Acquisition transaction costs   92    562    654 
 Other expenses (1)       405    405 
Property operating income  $76,139   $8,354   $84,493 

______________________

(1) For illustration purposes, general and administrative expenses and other expenses are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center.

 

During the nine months ended September 30, 2015, the Company generated property operating income of approximately $106.0 million compared to property operating income of $84.5 million generated during the nine months ended September 30, 2014. Property operating income increased by $21.5 million during the nine months ended September 30, 2015 primarily as a result of an increase in the number of properties owned by the Company in 2015 compared to 2014.  As of September 30, 2015, the Company owned 68 consolidated properties as compared to 58 properties at September 30, 2014. The newly acquired properties increased property operating income in 2015 by approximately $17.6 million. The 53 same-center properties increased property operating income by approximately $3.9 million. The increase in same-center property operating income was due primarily to lease termination fees and increases in base rents and recoveries from tenants at the properties.

Depreciation and amortization

The Company incurred depreciation and amortization expenses during the nine months ended September 30, 2015 of approximately $52.6 million compared to $43.0 million incurred during the nine months ended September 30, 2014. Depreciation and amortization expenses were higher in 2015 as a result of an increase in the number of properties owned by the Company in 2015 compared to 2014.

General and administrative expenses

The Company incurred general and administrative expenses during the nine months ended September 30, 2015 of approximately $9.4 million compared to $8.3 million incurred during the nine months ended September 30, 2014. General and administrative expenses increased approximately $1.1 million primarily due to an increase in compensation-related expenses.

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Acquisition transaction costs

The Company incurred property acquisition costs during the nine months ended September 30, 2015 of approximately $507,000 compared to $654,000 incurred during the nine months ended September 30, 2014. Property acquisition costs were lower in 2015 primarily due to legal and other professional fees incurred related to acquisition activity in 2014.

Interest expense and other finance expenses

The Company incurred interest expense during the nine months ended September 30, 2015 of approximately $25.4 million compared to approximately $20.7 million during the nine months ended September 30, 2014. The increase of approximately $4.7 million was primarily due to additional interest incurred related to the Senior Notes Due 2024 which were issued in December 2014, slightly offset by a decrease in interest on interest rate swaps, as the swaps were all settled in December 2014 and a decrease in interest expense and a decrease in interest expense incurred as a result of the payoff of the loans on Renaissance Towne Center and Crossroads Shopping Center.

 

Gain on sale of property

On June 5, 2014, the Company sold Phillips Village Shopping Center, a non-core shopping center located in Pomona, California with an occupancy rate of approximately 10.4% as of May 31, 2014. The sales price of this property of approximately $16.0 million, less costs to sell, resulted in net proceeds to the Company of approximately $15.6 million. The Company recorded a gain on sale of approximately $3.3 million for the nine months ended September 30, 2014.

On August 25, 2014, the Company sold the Oregon City Point Shopping Center, a non-core shopping center located in Oregon City, Oregon. The sales price of this property of approximately $12.4 million, less costs to sell, resulted in net proceeds of approximately $12.0 million. The Company recorded a gain on sale of property of approximately $1.6 million for the nine months ended September 30, 2014.

 

There were no property sales during the nine months ended September 30, 2015.

Funds From Operations

Funds from operations (“FFO”), is a widely-recognized non-GAAP financial measure for REITs that the Company believes when considered with financial statements presented in accordance with GAAP, provides additional and useful means to assess its financial performance. FFO is frequently used by securities analysts, investors and other interested parties to evaluate the performance of REITs, most of which present FFO along with net income as calculated in accordance with GAAP.

The Company computes FFO in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income attributable to common stockholders (determined in accordance with GAAP) excluding gains or losses from debt restructuring, sales of depreciable property, and impairments, plus real estate related depreciation and amortization, and after adjustments for partnerships and unconsolidated joint ventures.

However, FFO:

·does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); and
·should not be considered an alternative to net income as an indication of our performance.

FFO as defined by the Company may not be comparable to similarly titled items reported by other REITs due to possible differences in the application of the NAREIT definition used by such REITs.

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The Financial Accounting Standards Board (“FASB”) guidance relating to business combinations requires, among other things, an acquirer of a business (or investment property) to expense all acquisition costs related to the acquisition, the amount of which will vary based on each specific acquisition and the volume of acquisitions. Accordingly, the costs of completed acquisitions will reduce our FFO. Acquisition costs for the three months ended September 30, 2015 and 2014 were approximately $91,000 and $125,000, respectively. Acquisition costs for the nine months ended September 30, 2015 and 2014 were approximately $507,000 and $654,000, respectively.

The table below provides a reconciliation of net income applicable to stockholders in accordance with GAAP to FFO for the three and nine months ended September 30, 2015 and 2014 (in thousands).

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

   2015  2014  2015  2014
Net income attributable to ROIC common stockholders  $7,542   $6,748   $16,943   $15,714 
Plus:  Depreciation and amortization   18,059    15,365    52,567    42,986 
Gain on sale of real estate       (1,550)       (4,869)
Funds from operations – basic   25,601    20,563    69,510    53,831 
Net income attributable to non-controlling interests   295    233    681    584 
Funds from operations – diluted  $25,896   $20,796   $70,191   $54,415 

Cash Net Operating Income (“NOI”)

Cash NOI is a non-GAAP financial measure of the Company’s performance. The most directly comparable GAAP financial measure is operating income. The Company defines cash NOI as operating revenues (base rent and recoveries from tenants), less property and related expenses (property operating expenses and property taxes), adjusted for non-cash revenue and operating expense items such as straight-line rent and amortization of lease intangibles, debt-related expenses, and other adjustments. Cash NOI also excludes general and administrative expenses, depreciation and amortization, acquisition transaction costs, other expense, interest expense, gains and losses from property acquisitions and dispositions, extraordinary items, tenant improvements and leasing commissions. Other REITs may use different methodologies for calculating cash NOI, and accordingly, the Company’s cash NOI may not be comparable to other REITs.

Cash NOI is used by management internally to evaluate and compare the operating performance of the Company’s properties. The Company believes cash NOI provides useful information to investors regarding the Company’s financial condition and results of operations because it reflects only those cash income and expense items that are incurred at the property level, and when compared across periods, can be used to determine trends in earnings of the Company’s properties as this measure is not affected by non-cash revenue and expense recognition items, the cost of the Company’s funding, the impact of depreciation and amortization expenses, gains or losses from the acquisition and sale of operating real estate assets, general and administrative expenses or other gains and losses that relate to the Company’s ownership of properties. The Company believes the exclusion of these items from operating income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating the Company’s properties as well as trends in occupancy rates, rental rates and operating costs.

Cash NOI is a measure of the operating performance of the Company’s properties but does not measure the Company’s performance as a whole and is therefore not a substitute for net income or operating income as computed in accordance with GAAP.

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Same-Center Cash NOI

The following table makes reference to the effect of the same-center properties. Same-center properties, which totaled 58 and 53 of the Company’s 68 properties for the three and nine months ended September 30, 2015, respectively, represent all operating properties owned by the Company during the entirety of both periods presented and consolidated into the Company’s financial statements during such periods.

The table below provides a reconciliation of same-center cash NOI to consolidated operating income for the three and nine months ended September 30, 2015 and 2014 (in thousands).

   Three Months Ended September 30,  Nine Months Ended September 30,
   2015  2014  2015  2014
Same-center cash NOI  $28,386   $26,830   $70,337   $67,243 
Non same-center cash NOI   3,877    448    23,143    7,923 
Total Company cash NOI   32,263    27,278    93,480    75,166 
Adjustments                    
Depreciation and amortization   (18,059)   (15,365)   (52,567)   (42,986)
General and administrative expenses   (3,092)   (2,987)   (9,387)   (8,324)
Acquisition transaction costs   (91)   (125)   (507)   (654)
Other expense   (254)   (58)   (507)   (405)
Property revenues and expenses (1)   5,596    3,553    12,519    9,327 
Operating income  $16,363   $12,296   $43,031   $32,124 

______________________

(1) Includes straight-line rents, amortization of above and below-market lease intangibles, lease termination fees, and expense and recovery adjustments related to prior periods.

 

During the three months ended September 30, 2015, the Company generated same-center cash NOI of approximately $28.4 million compared to same-center cash NOI of approximately $26.8 million generated during the three months ended September 30, 2014, representing a 5.8% increase. During the nine months ended September 30, 2015, the Company generated same-center cash NOI of approximately $70.3 million compared to same-center cash NOI of approximately $67.2 million generated during the nine months ended September 30, 2014, representing a 4.6% increase. The increases in same-center cash NOI during the three and nine month periods ending September 30, 2015 over the comparable prior year periods were primarily the result of increases in base rents and recoveries from tenants.

 

Critical Accounting Policies

 

Critical accounting policies are those that are both important to the presentation of the Company’s financial condition and results of operations and require management’s most difficult, complex or subjective judgments. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. This summary should be read in conjunction with the more complete discussion of the Company’s accounting policies included in Note 1 to ROIC’s and the Operating Partnership’s consolidated financial statements.

Revenue Recognition

The Company records base rents on a straight-line basis over the term of each lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in tenant and other receivables on the accompanying consolidated balance sheets. Most leases contain provisions that require tenants to reimburse a pro-rata share of real estate taxes and certain common area expenses. Adjustments are also made throughout the year to tenant and other receivables and the related cost recovery income based upon the Company’s best estimate of the final amounts to be billed and collected. In addition, the Company also provides an allowance for future credit losses in connection with the deferred straight-line rent receivable.

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Allowance for Doubtful Accounts

The allowance for doubtful accounts is established based on a quarterly analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivables, the payment history of the tenants or other debtors, the financial condition of the tenants and any guarantors and management’s assessment of their ability to meet their lease obligations, the basis for any disputes and the status of related negotiations, among other things. Management’s estimates of the required allowance is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on tenants, particularly those at retail properties. Estimates are used to establish reimbursements from tenants for common area maintenance, real estate tax and insurance costs. The Company analyzes the balance of its estimated accounts receivable for real estate taxes, common area maintenance and insurance for each of its properties by comparing actual recoveries versus actual expenses and any actual write-offs. Based on its analysis, the Company may record an additional amount in its allowance for doubtful accounts related to these items. In addition, the Company also provides an allowance for future credit losses in connection with the deferred straight-line rent receivable.

Real Estate

Land, buildings, property improvements, furniture/fixtures and tenant improvements are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Renovations and/or replacements, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.

Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and improvements), and acquired intangible assets and liabilities (consisting of above-market and below-market leases and acquired in-place leases). The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management’s determination of the relative fair values of these assets. In valuing an acquired property’s intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, and estimates of lost rental revenue during the expected lease-up periods based on its evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs.

The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant. Above-market and below-market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of acquisition. Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The value of the above-market and below-market leases associated with the original lease term is amortized to rental income, over the terms of the respective leases. The value of below-market rental lease renewal options is deferred until such time as the renewal option is exercised and subsequently amortized over the corresponding renewal period. The value of in-place leases are amortized to expense, and the above-market and below-market lease values are amortized to rental income, over the remaining non-cancellable terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recognized in operations at that time. The Company will record a bargain purchase gain if it determines that the purchase price for the acquired assets was less than the fair value. The Company will record a liability in situations where any part of the cash consideration is deferred. The amounts payable in the future are discounted to their present value. The liability is subsequently re-measured to fair value with changes in fair value recognized in the consolidated statements of operations. If, up to one year from the acquisition date, information regarding fair value of assets acquired and liabilities assumed is received and estimates are refined, appropriate property adjustments are made to the purchase price allocation on a retrospective basis.

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The Company is required to make subjective assessments as to the useful life of its properties for purposes of determining the amount of depreciation. These assessments have a direct impact on the Company’s net income.

Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:

Buildings (years) 39 - 40
Property Improvements (years) 10 - 20
Furniture/Fixtures (years) 3 - 10
Tenant Improvements (years)   Shorter of lease term or their useful life  

 

Asset Impairment

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to aggregate future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value. Management does not believe that the value of any of the Company’s real estate investments was impaired at September 30, 2015.

REIT Qualification Requirements

ROIC has elected and qualified to be taxed as a REIT under the Code, and believes that it has been organized and has operated in a manner that will allow it to continue to qualify for taxation as a REIT under the Code.

ROIC is subject to a number of operational and organizational requirements to qualify and then maintain qualification as a REIT. If ROIC does not qualify as a REIT, its income would become subject to U.S. federal, state and local income taxes at regular corporate rates that would be substantial and the Company cannot re-elect to qualify as a REIT for four taxable years following the year that it failed to qualify as a REIT. The resulting adverse effects on the Company’s results of operations, liquidity and amounts distributable to stockholders would be material.

Liquidity and Capital Resources of the Company

In this “Liquidity and Capital Resources of the Company” section and in the “Liquidity and Capital Resources of the Operating Partnership” section, the term “the Company” refers to Retail Opportunity Investments Corp. on an unconsolidated basis, excluding the Operating Partnership.

The Company’s business is operated primarily through the Operating Partnership, of which the Company is the parent company and which it consolidates for financial reporting purposes. Because the Company operates on a consolidated basis with the Operating Partnership, the section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.

The Company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company. The Company itself does not hold any indebtedness other than guarantees of indebtedness of the Operating Partnership, and its only material assets are its ownership of direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, the sole general partner of the Operating Partnership. Therefore, the consolidated assets and liabilities and the consolidated revenues and expenses of the Company and the Operating Partnership are the same on their respective financial statements. However, all debt is held directly or indirectly by the Operating Partnership. The Company’s principal funding requirement is the payment of dividends on its common stock. The Company’s principal source of funding for its dividend payments is distributions it receives from the Operating Partnership.

As the parent company of the Operating Partnership, the Company, indirectly, has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control. The Company causes the Operating Partnership to distribute such portion of its available cash as the Company may in its discretion determine, in the manner provided in the Operating Partnership’s partnership agreement.

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The Company is a well-known seasoned issuer with an effective shelf registration statement filed in June 2013 that allows the Company to register unspecified various classes of debt and equity securities. As circumstances warrant, the Company may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. Any proceeds from such equity issuances would be contributed to the Operating Partnership. The Operating Partnership may use the proceeds to acquire additional properties, pay down debt, and for general working capital purposes.

Liquidity is a measure of the ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain its assets and operations, make distributions to its stockholders and meet other general business needs.  The liquidity of the Company is dependent on the Operating Partnership’s ability to make sufficient distributions to the Company. The primary cash requirement of the Company is its payment of dividends to its stockholders.

During the nine months ended September 30, 2015, the Company’s primary sources of cash were proceeds from the sale of common stock through an equity offering, its ATM program and distributions from the Operating Partnership. As of September 30, 2015, the Company has determined that it has adequate working capital to meet its dividend funding obligations for the next twelve months.

On August 10, 2015, the Company issued 5,520,000 shares of common stock in a registered public offering, including shares issued upon the exercise in full of the underwriters’ option to purchase additional shares, resulting in net proceeds of approximately $87.3 million, after deducting the underwriters’ discounts and commissions and offering expenses.

On September 19, 2014, the Company entered into four separate Sales Agreements (the “2014 sales agreements”) with each of Jefferies LLC, KeyBanc Capital Markets Inc., MLV & Co. LLC and Raymond James & Associates, Inc. (each individually, an “Agent” and collectively, the “Agents”) pursuant to which the Company may sell, from time to time, shares of the Company’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $100.0 million through the Agents either as agents or principals. During the nine months ended September 30, 2015, the Company sold a total of 544,567 shares under one of the 2014 sales agreements, which resulted in gross proceeds of approximately $9.9 million and commissions of approximately $149,000 paid to the agent.

For the nine months ended September 30, 2015, dividends paid to stockholders totaled approximately $48.9 million.  Additionally, for the nine months ended September 30, 2015, the Operating Partnership made distributions of approximately $1.9 million to the non-controlling interest OP Unitholders. On a consolidated basis, cash flows from operations for the same period totaled approximately $74.6 million.  For the nine months ended September 30, 2014, dividends paid to stockholders totaled approximately $38.7 million.  Additionally, for the nine months ended September 30, 2014, the Operating Partnership made distributions of approximately $1.5 million to the non-controlling interest OP Unitholders. In the future, it is expected that the cash flows from stabilized properties will be sufficient to cover the dividends paid to stockholders.

 

Potential future sources of capital for the Company include debt and equity issuances.

Liquidity and Capital Resources of the Operating Partnership

In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms the “Operating Partnership,” “we”, “our” and “us” refer to the Operating Partnership together with its consolidated subsidiaries or the Operating Partnership and the Company together with their respective consolidated subsidiaries, as the context requires.

During the nine months ended September 30, 2015, the Operating Partnership’s primary sources of cash were (i) proceeds from the sale of common stock that were contributed to the Operating Partnership, (ii) proceeds from bank borrowings under the revolving credit facility, (iii) proceeds from a term loan funded on September 29, 2015, (iv) proceeds from the Diamond Hills Plaza loan and (v) cash flow from operations. As of September 30, 2015, the Operating Partnership has determined that it has adequate working capital to meet its debt obligations and operating expenses for the next twelve months.

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On September 29, 2015, the Company entered into a term loan agreement (the "Term Loan Agreement") with KeyBank National Association, as Administrative Agent, and U.S. Bank National Association, as Syndication Agent and the other lenders party thereto, under which the lenders agreed to provide a $300.0 million unsecured term loan facility. The Term Loan Agreement also provides that the Company may from time to time request increased aggregate commitments of $200.0 million under certain conditions set forth in the Term Loan Agreement, including the consent of the lenders for the additional commitments. The initial maturity date of the term loan is January 31, 2019, subject to two one-year extension options, which may be exercised upon satisfaction of certain conditions including the payment of extension fees. Borrowings under the Term Loan Agreement bear interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of the Company, plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the relevant period (the "Eurodollar Rate"), or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the rate of interest announced by the Administrative Agent as its "prime rate," and (c) the Eurodollar Rate plus 1.00% (the “Base Rate”). The Term Loan Agreement contains customary representations, financial and other covenants.

 

As of September 30, 2015, $300.0 million was outstanding under the term loan facility. The interest rate on the term loan facility was 1.3%.

 

The Operating Partnership has a revolving credit facility with several banks which provides for borrowings of up to $500.0 million. Additionally, the credit facility contains an accordion feature, which allows the Operating Partnership to increase the facility amount up to an aggregate of $1.0 billion, subject to lender consents and other conditions. The maturity date of the credit facility is January 31, 2019, subject to a further one-year extension option, which may be exercised by the Operating Partnership upon satisfaction of certain conditions.

As of September 30, 2015, $16.2 million was outstanding under the credit facility. The average interest rate on the credit facility during both the three and nine months ended September 30, 2015 was 1.2%. The Operating Partnership had $483.8 million available to borrow under the credit facility at September 30, 2015.

The Company obtained investment grade credit ratings from Moody’s Investors Service (Baa2) and Standard & Poor’s Ratings Services (BBB-) during the second quarter of 2013. Since receiving the investment grade credit ratings from the two rating agencies, borrowings under the loan agreements accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of ROIC, plus, as applicable, (i) the Eurodollar Rate, or (ii) the Base Rate. Additionally, the Operating Partnership is obligated to pay a facility fee at a rate based on the credit rating level of the Company, currently 0.20%, and a fronting fee at a rate of 0.125% per year with respect to each letter of credit issued under the credit facility. The agreement contains customary representations, financial and other covenants. The Operating Partnership’s ability to borrow under the credit facility is subject to its compliance with financial covenants and other restrictions. The Operating Partnership was in compliance with such covenants at September 30, 2015.

The Operating Partnership issued $250.0 million aggregate principal amount of unsecured senior notes in December 2014 and $250.0 million aggregate principal amount of unsecured senior notes in December 2013, each of which were fully and unconditionally guaranteed by the Company.

While the Operating Partnership generally intends to hold its assets as long term investments, certain of its investments may be sold in order to manage the Operating Partnership’s interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions.  The timing and impact of future sales of its investments, if any, cannot be predicted with any certainty.

 

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The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands):

 

   Nine Months Ended September 30,
   2015  2014
       
Net Cash Provided by (Used in):          
Operating Activities  $74,595   $52,442 
Investing Activities  $(251,541)  $(326,794)
Financing Activities  $173,126   $277,428 

 

Net Cash Flows from:

Operating Activities

Net cash flows provided by operating activities amounted to $74.6 million in the nine months ended September 30, 2015, compared to $52.4 million in the comparable period in 2014. During the nine months ended September 30, 2015, cash flows from operating activities increased by approximately $22.2 million primarily due to an increase in property operating income of approximately $21.5 million.

 

Investing Activities

Net cash flows used in investing activities amounted to $251.5 million in the nine months ended September 30, 2015, compared to $326.8 million in the comparable period in 2014. During the nine months ended September 30, 2015, cash flows used in investing activities decreased by approximately $75.3 million, primarily due to the decrease in investments in real estate of approximately $87.0 million offset by a decrease in proceeds from the sale of real estate approximately $27.6 million.

 

Financing Activities

Net cash flows provided by financing activities amounted to $173.1 million for the nine months ended September 30, 2015, compared to $277.4 million in the comparable period in 2014. During the nine months ended September 30, 2015, cash flows provided by financing activities decreased by approximately $104.3 million. This decrease was primarily due to a decrease of approximately $113.6 million in proceeds from the issuance of common stock for the nine months ended September 30, 2015 as compared to the same period of 2014, the receipt of approximately $56.0 million in proceeds from the exercise of warrants in the first nine months of 2014 as compared to no proceeds from the exercise of warrants in the same period during 2015, the net increase in principal repayments on mortgages of $55.6 million for the nine months ended September 30, 2015 as compared to the same period of 2014, offset by proceeds from a mortgage loan of $35.5 million entered into in 2015, and an increase in dividends paid to stockholders of approximately $10.2 million for the nine months ended September 30, 2015 as compared to the same period of 2014, offset by a net increase in borrowing under credit facilities of $93.4 million for the nine months ended September 30, 2015 as compared to the same period of 2014, including proceeds from a term loan of $300.0 million entered into in September 2015.

 

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Contractual Obligations

The following table presents the principal amount of the Company’s long-term debt maturing each year, including amortization of principal based on debt outstanding and other contractual obligations at September 30, 2015 (in thousands):

   2015  2016  2017  2018  2019  Thereafter  Total
Contractual obligations:                                   
Mortgage Notes Payable Principal (1)  $131   $7,583   $8,460   $10,137   $   $35,500   $61,811 
Mortgage Notes Payable Interest   716    2,599    2,189    1,382    1,278    7,268    15,432 
Credit facility (2)                   16,225        16,225 
Term loan (3)   1,018    3,965    3,954    3,954    300,325        313,216 
Senior Notes Due 2024 (4)   5,000    10,000    10,000    10,000    10,000    300,000    345,000 
Senior Notes Due 2023 (5)   6,250    12,500    12,500    12,500    12,500    300,000    356,250 
Operating lease obligations   228    980    1,049    1,054    1,059    37,271    41,641 
Total  $13,343   $37,627   $38,152   $39,027   $341,387   $680,039   $1,149,575 

__________________

 

(1)Does not include unamortized mortgage premium of $1.1 million as of September 30, 2015.
(2)For the purpose of the above table, the Company has assumed that borrowings under the credit facility accrue interest at the average interest rate on the credit facility during both the three and nine months ended September 30, 2015, which was 1.2%. Borrowings under the credit facility bear interest at a rate equal to an applicable rate based on the credit rating level of the Company, plus, as applicable (i) a LIBOR rate determined by reference to the cost of funds for dollar deposits for the relevant period, or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the rate of interest announced by KeyBank, National Association as its “prime rate,” and (c) the Eurodollar Rate plus 1.00%.
(3)For the purpose of the above table, the Company has assumed that borrowings under the term loan accrue interest at the interest rate on the term loan at September 30, 2015, which was 1.3%. Borrowings under the term loan bear interest at a rate equal to an applicable rate based on the credit rating level of the Company, plus, as applicable (i) a LIBOR rate determined by reference to the cost of funds for dollar deposits for the relevant period, or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the rate of interest announced by KeyBank, National Association as its “prime rate,” and (c) the Eurodollar Rate plus 1.00%.
(4)Represents payments of interest only in years 2015 through 2023 and payments of both principal and interest in 2024.
(5)Represents payments of interest only in years 2015 through 2022 and payments of both principal and interest in 2023.

 

For the new leases that occurred during the nine months ended September 30, 2015, the Company has committed approximately $16.4 million and $1.2 million in tenant improvements (including building improvements) and leasing commissions, respectively. Tenant improvement and leasing commission commitments for renewed leases were not material for the nine months ended September 30, 2015. As of September 30, 2015, the Company did not have any capital lease or purchase obligations.

The Company has entered into several lease agreements with an officer of the Company. Pursuant to the lease agreements, the Company is provided the use of storage space.

Off-Balance Sheet Arrangements

As of September 30, 2015, the Company does not have any off-balance sheet arrangements.

Real Estate Taxes

The Company’s leases generally require the tenants to be responsible for a pro rata portion of the real estate taxes.

Inflation

The Company’s long-term leases contain provisions to mitigate the adverse impact of inflation on its operating results.  Such provisions include clauses entitling the Company to receive (a) scheduled base rent increases and (b) percentage rents based upon tenants’ gross sales which generally increase as prices rise.  In addition, many of the Company’s non-anchor leases are for terms of less than ten years, which permits the Company to seek increases in rents upon renewal at then-current market rates if rents provided in the expiring leases are below then-existing market rates.  Most of the Company’s leases require tenants to pay a share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.

Leverage Policies

The Company employs prudent amounts of leverage and uses debt as a means of providing additional funds for the acquisition of its properties and the diversification of its portfolio. The Company seeks to primarily utilize unsecured debt in order to maintain liquidity and flexibility in its capital structure.

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The Operating Partnership has a revolving credit facility with several banks which provides for borrowings of up to $500.0 million. Additionally, the credit facility contains an accordion feature, which allows the Operating Partnership to increase the facility amount up to an aggregate of $1.0 billion, subject to lender consents and other conditions. The maturity date of the credit facility is January 31, 2019, subject to a further one-year extension option, which may be exercised by the Operating Partnership upon satisfaction of certain conditions. The Company has a term loan agreement under which the lenders agreed to provide a $300.0 million unsecured term loan facility. The term loan agreement also provides that the Company may from time to time request increased aggregate commitments of $200.0 million under certain conditions set forth in the term loan agreement, including the consent of the lenders for the additional commitments. The initial maturity date of the term loan is January 31, 2019, subject to two one-year extension options, which may be exercised upon satisfaction of certain conditions including the payment of extension fees. Additionally, the Operating Partnership issued $250.0 million aggregate principal amount of unsecured senior notes in December 2014 and $250.0 million aggregate principal amount of unsecured senior notes in December 2013. The credit facility, term loan and the principal amounts of the two senior notes are fully and unconditionally guaranteed by the Company.

 

The Company may borrow on a non-recourse basis at the corporate level or Operating Partnership level. Non-recourse indebtedness means the indebtedness of the borrower or its subsidiaries is secured only by specific assets without recourse to other assets of the borrower or any of its subsidiaries. Even with non-recourse indebtedness, however, a borrower or its subsidiaries will likely be required to guarantee against certain breaches of representations and warranties such as those relating to the absence of fraud, misappropriation, misapplication of funds, environmental conditions and material misrepresentations. Because non-recourse financing generally restricts the lender’s claim on the assets of the borrower, the lender generally may only proceed against the asset securing the debt. This may protect the Company’s other assets.

The Company plans to evaluate each investment opportunity and determine the appropriate leverage on a case-by-case basis and also on a Company-wide basis. The Company may seek to refinance indebtedness, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase the investment.

 

The Company plans to finance future acquisitions through a combination of cash, borrowings under its credit facilities, the assumption of existing mortgage debt, the issuance of OP Units, and equity and debt offerings. In addition, the Company may acquire retail properties indirectly through joint ventures with third parties as a means of increasing the funds available for the acquisition of properties.

Distributions

The Operating Partnership and ROIC intend to make regular quarterly distributions to holders of their OP Units and common stock, respectively.  The Operating Partnership pays distributions to ROIC directly as a holder of units of the Operating Partnership, and indirectly to ROIC through distributions to Retail Opportunity Investments GP, LLC, a wholly owned subsidiary of ROIC.  U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income.  ROIC intends to pay regular quarterly dividends to its stockholders in an amount not less than its net taxable income, if and to the extent authorized by its board of directors.  If ROIC’s cash available for distribution is less than its net taxable income, ROIC could be required to sell assets or borrow funds to make cash distributions or ROIC may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

Recently Issued Accounting Pronouncements

See Note 1 to the accompanying consolidated financial statements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risk exposure is to changes in interest rates related to its debt. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company’s future financing requirements.

As of September 30, 2015, the Company had $316.2 million of variable rate debt outstanding. The Company has primarily used fixed-rate debt and forward starting interest rate swaps to manage its interest rate risk. See the discussion under Note 9 to the accompanying consolidated financial statements for certain quantitative details related to the interest rate swaps.

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The Company previously entered into five forward starting interest rate swaps in order to economically hedge against the risk of rising interest rates that would affect the Company’s interest expense related to its future anticipated debt issuances as part of its overall borrowing program. During the years ended December 31, 2014 and 2013, the Company settled its interest rate swaps in accordance with their settlement dates, and there are no interest rate swaps outstanding as of September 30, 2015.

See Note 9 of the accompanying consolidated financial statements for a discussion on how the Company values derivative financial instruments.  The Company calculates the value of its interest rate swaps based upon the present value of the future cash flows expected to be paid and received on each leg of the swap.  The cash flows on the fixed leg of the swap are agreed to at inception and the cash flows on the floating leg of a swap change over time as interest rates change.  To estimate the floating cash flows at each valuation date, the Company utilizes a forward curve which is constructed using LIBOR fixings, Eurodollar futures, and swap rates, which are observable in the market.  Both the fixed and floating legs’ cash flows are discounted at market discount factors.  For purposes of adjusting its derivative valuations, the Company incorporates the nonperformance risk for both itself and its counterparties to these contracts based upon Moody’s KMV ratings in order to derive a curve that considers the term structure of credit.

 

As a corporation that has elected to qualify as a REIT for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2010, ROIC’s future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates.  Market risk refers to the risk of loss from adverse changes in market prices and interest rates.  The Company will be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make real estate-related debt investments.  The Company’s interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, the Company expects to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates.  In addition, the Company uses derivative financial instruments to manage interest rate risk.  The Company will not use derivatives for trading or speculative purposes and will only enter into contracts with major financial institutions based on their credit rating and other factors.  See Note 9 of the accompanying consolidated financial statements.

 

Item 4.    Controls and Procedures

Controls and Procedures (Retail Opportunity Investments Corp.)

ROIC’s Chief Executive Officer and Chief Financial Officer, based on their evaluation of the ROIC’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as of the end of the period covered by this report, the ROIC’s disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information relating to ROIC that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder.

During the nine months ended September 30, 2015, there was no change in ROIC’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, ROIC’s internal control over financial reporting.

Controls and Procedures (Retail Opportunity Investments Partnership, LP)

The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Operating Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as of the end of the period covered by this report, the Operating Partnership’s disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information relating to the Operating Partnership that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder.

During the nine months ended September 30, 2015, there was no change in the Operating Partnership’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

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Part II. Other Information

Item 1.    Legal Proceedings

We are not involved in any material litigation nor, to our knowledge, is any material litigation pending or threatened against us, other than routine litigation arising out of the ordinary course of business or which is expected to be covered by insurance and not expected to harm our business, financial condition or results of operations.

Item 1A.    Risk Factors

See our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no significant changes to our risk factors during the nine months ended September 30, 2015.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2015, ROIC purchased the following:

 

  

Total Number of

Shares Purchased (1)

  Average Price Paid per Share  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs  Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
July 1, 2015 to July 31, 2015   606   $15.86         
August 1, 2015 to August 31, 2015                
September 1, 2015 to September 30, 2015                
Total   606   $15.86         

 

(1)  Represents shares repurchased by the Company in connection with the net share settlement to cover the minimum taxes on vesting of restricted stock issued under the Company's 2009 Equity Incentive Plan that vested.

 

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

None.

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Item 6.    Exhibits

2.1Articles of Merger between Retail Opportunity Investments Corp., a Delaware corporation, and Retail Opportunity Investments Corp., a Maryland corporation, as survivor.(1)
3.2Articles of Amendment and Restatement of Retail Opportunity Investments Corp.(1)
3.3Bylaws of Retail Opportunity Investments Corp.(1)
3.4Second Amended and Restated Limited Partnership Agreement of Retail Opportunity Investments Partnership, LP by and dated as of September 27, 2013 among Retail Opportunity Investments GP, LLC as general partner, Retail Opportunity Investments Corp. and the other limited partners thereto, dated as of September 27, 2013 (2)
10.1Term Loan Agreement, dated as of September 29, 2015, by and among Retail Opportunity Investments Partnership, LP, as the Borrower, Retail Opportunity Investments Corp., as the Parent Guarantor, certain subsidiaries of the Parent Guarantor identified therein, as the Subsidiary Guarantors, KeyBank National Association, as Administrative Agent, U.S. Bank National Association, as the Syndication Agent and the other lenders party thereto. (3)
31.1Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema

101.CAL XBRL Taxonomy Extension Calculation Linkbase

101.DEF XBRL Taxonomy Extension Definition Linkbase

101.LAB XBRL Taxonomy Extension Label Linkbase

101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

 
(1)Incorporated by reference to the Company’s current report on Form 8-K filed on June 3, 2011.
(2)Incorporated by reference to the Company’s current report on Form 8-K filed on October 2, 2013.
(3)Incorporated by reference to the Company’s current report on Form 8-K filed on October 2, 2015.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

RETAIL OPPORTUNITY INVESTMENTS CORP.   RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP, by Retail Opportunity Investments GP, LLC, its sole general partner  
       
Registrant    Registrant  
       
       
/s/ Stuart A. Tanz    /s/ Stuart A. Tanz   
Name: Stuart A. Tanz   Name: Stuart A. Tanz  
Title: Chief Executive Officer   Title: Chief Executive Officer  
       
Date:  October 29, 2015   Date:  October 29, 2015  
       
       
       
/s/ Michael B. Haines    /s/ Michael B. Haines   
Name: Michael B. Haines   Name: Michael B. Haines  
Title: Chief Financial Officer   Title: Chief Financial Officer  
       
Date:  October 29, 2015   Date:  October 29, 2015  

 

 

 

 

 

 

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