Is Retail Opportunity Investments Corp. Stock a Buy Now?

By Markets Fool.com

Source: iStock.

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With a 3%-plus dividend, a focus on grocery-anchored shopping centers (everyone needs groceries, right?), and plenty of growth opportunity, Retail Opportunity Investments Corp. has plenty going for it.

It's worth a second look, anyway.

But as we dig deeper, the key question is simple: Is the stock a buy now, at these prices?

Strategy
ROIC's portfolio is anchored in high-quality West Coast assets.Management concentrates on top-of-the-line properties in or near big population centers (think L.A., Portland, and Seattle).ROIC's portfolio is heavily focused in high-net-worth areas within these larger markets, which gives its tenants access to customers with an attractive demographic profile.

ROIC tends to own whole shopping centers instead of individual, stand-alone buildings. A holistic, shopping center-based strategy gives ROIC a powerful lever that, if used correctly, can catalyze tremendous growth to its rents across the board. By increasing the rent in individual spaces over time, it can gradually improve its tenant profile -- thereby creating a virtuous cycle of tenant and rent upgrades.

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I'll let COO Richard Schoebel explain it a bit better, in this quote from ROIC's Q4 2015 earnings call. (All quotes come from S&P Global Market Intelligence.

"Just to give you a quick example, one of our shopping centers in Northern California, we recaptured an underperforming anchor space that were replaced with a much stronger supermarket operator. Additionally, capitalizing on this new grocery as a draw, we recently signed 2 new anchor leases at the property."

ROIC leverages that new tenant to draw in other, more attractive tenants -- setting off a domino effect of better tenants and escalating rents, leading to more money up front for the REIT, and a shopping center increasingly filled with tenants that ROIC's affluent demographic finds most attractive. That should lead to increased foot traffic, enabling tenants to make even more money, and ultimately lead to even more rent increases.It's a win-win-win across the board, so long as ROIC is careful and disciplined in where it targets these adjustments, always carefully balancing them against the need to keep space filled and the cash flow coming in. Of course, with a portfolio currently 97.2% leased -- and with 99% of that particularly important anchor space leased -- it's clear that management is keeping a very good balance thus far.

Potential problems
Like all REITs, ROIC uses debt to acquire new properties and is sensitive to interest rate increases. The Federal Reserve plans to raise rates twice this year, so that's a potential issue. If the cost of borrowing increases, it's tougher to find profitable acquisitions, and more money gets eaten up by current interest payments if the debt is floating-rate.

Yet ROIC has done good work to lessen the potential pain. At the end of 2015, ROIC had roughly $991 million in debt, of which $436 million was floating-rate and therefore could become more expensive to the company if interest rates increase. But the company is already responding proactively, having converted $100 million of that $436 million to fixed-rate loans since the beginning of 2016.

Another issue is ROIC's geographic concentration. It offers one product in one area -- shopping centers on the U.S. West Coast. It's dependent not just on national economic factors, but also on factors that could be specific to the West Coast. And while ROIC has done well in navigating current challenges -- in its most recent call, Schoebel said a recent minimum-wage increase "had no impact on the rent that [tenants are] willing to pay" -- potential macro problems shouldn't be discounted.

Let's talk numbers
ROIC trades at about 12.6 times 2015's funds from operations (FFO a supplementary measure REITs use to measure their net income once they zero out certain non-cash expenses, such as depreciation). That's cheaper than larger retail REITs such as Realty Income, which trades at roughly 24 times 2015 FFO, and National Retail Properties, trading at 22 times 2015 FFO. It also probably reflects some of the perceived risk of geographic concentration ROIC has. So shares are arguably, well, rather cheap.

Management just boosted ROIC's already solid 3% annual dividend by 6% for 2016, reflecting confidence in the business' growth prospects. At the midpoint of 2016 guidance, the dividend would eat up about 71% of FFO, which looks pretty safe (anything above 85% is a bit suspect), so all appears well on that end, too.

So is it a buy?
Reasonable valuation? Check. Safe dividend? Check. Good business model? Check. Management that's executing well? Check.

For me, that's a yes: This stock is a buy.

The article Is Retail Opportunity Investments Corp. Stock a Buy Now? originally appeared on Fool.com.

Michael Douglass has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Retail Opportunity Investments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.