Retail Opportunity Investments Corp.(NASDAQ: ROIC) announced solid fourth-quarter 2016 results Wednesday after the market closed, capping a great year forthe specialized real estate investment trust (REIT) as it continues to grow its portfolio of grocery-anchored shopping centers.
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Let's take a closer look at what drove Retail Opportunity Investments' business to end 2016, as well as what investors can expect going forward.
One of Retail Opportunity investments' 81 grocery-anchored chopping centers. Image source: Retail Opportunity Investments.
Retail Opportunity Investments' headline numbers
Fourth-quarter revenue grew 23% year over year, to $63.1 million, primarily driven by 21.8% growth in base rents, to $48.4 million, and 28.4% growth in recoveries from tenants, to $13.8 million. On the bottom line, net income attributable to the company increased 39% year over year, to $9.6 million, or $0.09 per share.
However, a more meaningful metric to gauge Retail Opportunity Investments' success as a REIT is funds from operations (FFO), which essentially measures cash flow from operations. Retail Opportunity Investments' fourth-quarter FFO grew 28.2% year over year, to $33.2 million, and FFO per share increased a more modest 8%, to $0.27.
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That brought full-year 2016 FFO to $124.8 million, or $1.08 per diluted share, up 12.5% from FFO per diluted share of $0.96 in 2015. For perspective, Retail Opportunity Investments' latest guidance called for lower 2016 FFO per diluted share in the range of $1.05 to $1.07.
Growing its property portfolio
When all was said and done in 2016, Retail Opportunity Investments acquired eight grocery-anchored shopping centers encompassing 752,000 square feet for $332.6 million. Though already outlined at the time of itsthird-quarter report in late October, new shopping center acquisitions in the fourth quarter included:
- Trader Joe's at the Knolls, a 100%-leased, 52,000-square-foot property in Long Beach, California, for $29.2 million.
- Bridle Trails Shopping Center, a 100%-leased, 106,000-square-foot property in Kirkland, Washington, for $32.8 million.
In addition, Retail Opportunity Investments has committed to $91.8 million in grocery-anchored acquisitions so far in 2017, including:
- Closing in January on the acquisition of PCC Natural Markets Plaza, a 100%-leased, 34,000-square-foot property located in Edmonds, Washington, for $8.6 million.
- A binding contract to acquire The Terraces, a 89%-leased, 173,000-square-foot property in Rancho Palos Verdes, California, for $54.1 million.
- A binding contract to acquire Santa Rosa Southside Shopping Center, a 100%-leased, 124,000-square-foot property in Santa Rosa, California, for $29.1 million. Note Retail Opportunity Investments will fund part of this acquisition by issuing roughly $3.9 million of its common stock at $23 per share in the form of operating partnership units.
Pricing power and capital returns
Retail Opportunity Investments' portfolio lease rate improved 60 basis points from last quarter, to 97.6%, marking three straight years of keeping the metric above 97% (and four straight years above 96%).
Same-space comparative base rent increased 24.3% year over year during the quarter. Of 107 leases executed in Q4, Retail Opportunity Investments achieved a 33.1% increase in same-space comparative base rent on 49 new leases totaling 240,542 square feet, and a 16.7% increase in base rent on 58 renewed leases totaling 206,119 square feet. Relatedly,same-center net operating income (NOI) increased 5.5% year over year for the quarter, to $35.8 million. That same-center NOI base is currently comprised of 68 shopping centers owned by ROIC as of October 1, 2015.
Finally, Retail Opportunity Investments on Wednesday declared a quarterly cash dividend of $0.1875 per share, representing a 4.5% increase from its previous dividend of $0.18 per share. As a REIT, Retail Opportunity Investments must return at least 90% of its income to shareholders in the form of dividends.
According to CEO Stuart Tanz:
2016 proved to be another stellar year of growth and performance for the company.We continued to enhance our presence across the West Coast, through our disciplined acquisition program, adding $332.6 million of grocery-anchored shopping centers to our portfolio. [...] Additionally, we continued to maintain our financial strength and flexibility raising a balance of new capital, totaling $424.1 million, to prudently fund our growth. Looking ahead at 2017 and beyond, we intend to remain steadfast to the core principals that have driven our success thus far and are confident in our ability to continue to build value and deliver strong results.
For the full year of 2017, Retail Opportunity Investments anticipates FFO per diluted share of $1.10 to $1.14, or growth of 1.9% to 5.6% from 2016. The company also expects earnings per diluted share of $0.38 to $0.40 -- above Wall Street's expectation for 2017 earnings of $0.34 per share.
In the end, this was a great report from Retail Opportunity Investments. The company modestly overdelivered on its guidance promises, continued to demonstrate its ability to increase rents and keep portfolio lease rates high, boosted its dividend, and kept methodically expanding its scope through new shopping center acquisitions. So apart from perhaps looking for slightly higher growth in FFO per share going forward -- and keeping in mind cash flow can fluctuate in any given quarter depending on the effects of closed acquisitions or renewed leases -- I think investors should be happy with where their company stands today.
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