RETAIL OPPORTUNITY INVESTMENTS CORP.
When used in this discussion and elsewhere in this Quarterly Report on Form
10-Q, the words "believes," "anticipates," "projects," "may," "will", "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 Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties, including the ongoing impact of the
COVID-19 pandemic, which may cause actual results or outcomes to differ
materially from
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--------------------------------------------------------------------------------those contained in the forward-looking statements. Additional factors, many of which may be influenced by the COVID-19 pandemic, that could cause actual outcomes or results to differ materially from those indicated in these statements include:
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 we achieve from our assets and our ability to collect rents; •the market value of our assets and the supply of, and demand for, retail real estate in which we invest; •the state of theU.S. economy generally, or in specific geographic regions; •the impact of economic conditions, including inflation, 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 real estate investment trust forU.S. federal income tax purposes (a "REIT"); •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 or our credit ratings 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. 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 - 28 - --------------------------------------------------------------------------------
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 whichRetail 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 , aDelaware limited partnership (the "Operating Partnership"), together with its subsidiaries. ROIC reincorporated as aMaryland corporation onJune 2, 2011 . ROIC has elected to be taxed as a REIT, forU.S. federal income tax purposes, commencing with the year endedDecember 31, 2010 . ROIC commenced operations inOctober 2009 as a fully integrated and self-managed REIT, and as ofJune 30, 2022 , ROIC owned an approximate 93.5% partnership interest and other limited partners owned the remaining approximate 6.5% partnership interest in theOperating Partnership . ROIC specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers on the west coast ofthe United States , anchored by supermarkets and drugstores. As ofJune 30, 2022 , the Company's portfolio consisted of 93 properties (92 retail and one office) totaling approximately 10.5 million square feet of gross leasable area ("GLA"). As ofJune 30, 2022 , the Company's retail portfolio was approximately 97.6% leased. During the six months endedJune 30, 2022 , the Company leased or renewed a total of approximately 714,000 square feet in its portfolio. The Company has committed approximately$7.6 million , or$42.89 per square foot, in tenant improvements, including building and site improvements, for new leases that occurred during the six months endedJune 30, 2022 . The Company has committed approximately$312,000 , or$1.76 per square foot, in leasing commissions, for new leases that occurred during the six months endedJune 30, 2022 . The Company has committed approximately$279,000 , or$0.52 per square foot, in tenant improvements, including building and site improvements, for renewed leases that occurred during the six months endedJune 30, 2022 . Leasing commission commitments for renewed leases were not material for the six months endedJune 30, 2022 .
Impact of COVID-19
The spread of COVID-19 had a significant impact on the global economy, theU.S. economy, the economies of the local markets throughout the west coast in which the Company's properties are located, and the broader financial markets. Nearly every industry has been impacted directly or indirectly by the COVID-19 pandemic, and theU.S. retail market came under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis, which impacted the operations of the Company's tenant base to varying degrees. The Company derives revenues primarily from rents and reimbursement payments received from tenants under leases at the Company's properties and the Company's operating results therefore depend materially on the ability of its tenants to make required rental payments. The extent to which the COVID-19 pandemic, including any resurgences or new variants of the virus, continues to impact the businesses of the Company's tenants and the Company's operations and financial condition will depend on future developments which are still uncertain and cannot be predicted with confidence. As is believed to be the case with retail landlords across theU.S. , the Company received a number of rent relief requests from tenants, most often in the form of rent deferral requests. Since the onset of the COVID-19 pandemic, the Company has entered into lease concessions that deferred approximately$11.3 million of contractual amounts billed. As ofJune 30, 2022 , approximately$7.5 million of such deferral amounts have been rebilled in accordance with the underlying agreements, of which approximately$6.7 million , or approximately 89.9%, has been collected. The Company has evaluated rent relief requests on a case-by-case basis. Not all tenant requests have resulted in concession agreements, nor is the Company foregoing its contractual rights under its lease agreements. See Note 1 of the accompanying consolidated financial statements for a discussion on how the Company accounts for COVID-19 related rent concessions. Property operating income is a non-GAAP financial measure of performance. The Company defines property operating income as operating revenues (rental revenue and other income), 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, equity in earnings from unconsolidated joint ventures, and extraordinary items. 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. - 29 - -------------------------------------------------------------------------------- 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
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 endedJune 30, 2022 and 2021 (in thousands):
Three Months Ended
2022 2021
Operating income per GAAP $ 26,597 $ 32,022
Plus: Depreciation and amortization 24,350 23,507
General and administrative expenses 5,702 5,232
Other expense 488 331
Less: Gain on sale of real estate - (9,460)
Property operating income $ 57,137 $ 51,632
The following comparison for the three months ended June 30, 2022 compared to
the three months ended June 30, 2021 , makes reference to the effect of the
same-center properties. Same-center properties, which totaled 85 of the
Company's 93 properties as of June 30, 2022 , 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, except
for the Company's corporate office headquarters.
The table below provides a reconciliation of consolidated operating income, in
accordance with GAAP, to property operating income for the three months ended
June 30, 2022 related to the 85 same-center properties owned by the Company
during the entirety of both the three months ended June 30, 2022 and 2021 and
consolidated into the Company's financial statements during such periods (in
thousands):
Three Months Ended
Same-Center Non Same-Center Total
Operating income (loss) per GAAP $ 31,212 $ (4,615) $ 26,597
Plus: Depreciation and amortization 22,215 2,135 24,350
General and administrative expenses (1) - 5,702 5,702
Other expense (1) - 488 488
Property operating income $ 53,427 $ 3,710 $ 57,137 ______________________
(1)For illustration purposes, general and administrative expenses and other expense are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center properties.
The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to property operating income for the three months endedJune 30, 2021 related to the 85 same-center properties owned by the Company during the - 30 - --------------------------------------------------------------------------------
entirety of both the three months ended
Three Months Ended
Same-Center Non Same-Center Total
Operating income per GAAP $ 27,658 $ 4,364 $ 32,022
Plus: Depreciation and amortization 22,693 814 23,507
General and administrative expenses (1) - 5,232 5,232
Other expense (1) - 331 331
Less: Gain on sale of real estate - (9,460) (9,460)
Property operating income $ 50,351 $ 1,281 $ 51,632 ______________________
(1)For illustration purposes, general and administrative expenses and other expense are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center properties.
During the three months endedJune 30, 2022 , the Company generated property operating income of approximately$57.1 million compared to property operating income of$51.6 million generated during the three months endedJune 30, 2021 , representing an increase of approximately$5.5 million . The property operating income for the 85 same-center properties increased approximately$3.1 million primarily due to an increase in base rents and straight-line rents as a result of an increase in occupancy and re-leasing spreads during the three months endedJune 30, 2022 . The property operating income for the non same-center properties increased approximately$2.4 million due to the net increase in the number of properties the Company owned as ofJune 30, 2022 compared toJune 30, 2021 .
Depreciation and amortization
The Company incurred depreciation and amortization expenses during the three
months ended
General and administrative expenses
The Company incurred general and administrative expenses of approximately$5.7 million during the three months endedJune 30, 2022 compared to$5.2 million incurred during the three months endedJune 30, 2021 .
Gain on sale of real estate
OnApril 21, 2021 , the Company soldEuclid Shopping Center , a shopping center located inSan Diego, California . The sales price of$25.8 million , less costs to sell, resulted in net proceeds of approximately$25.3 million . The Company recorded a gain on sale of real estate of approximately$9.5 million during the three months endedJune 30, 2021 related to this property disposition. There were no property sales during the three months endedJune 30, 2022 .
Interest expense and other finance expenses
The Company incurred interest expense of approximately
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Results of Operations for the six months ended
Property Operating Income
The table below provides a reconciliation of consolidated operating income, in
accordance with GAAP, to consolidated property operating income for the six
months ended
Six Months Ended
2022 2021
Operating income per GAAP $ 53,278 $ 54,476
Plus: Depreciation and amortization 48,112 46,547
General and administrative expenses 10,942 9,607
Other expense 667 484
Less: Gain on sale of real estate - (9,460)
Property operating income $ 112,999 $ 101,654
The following comparison for the six months ended June 30, 2022 compared to the
six months ended June 30, 2021 , makes reference to the effect of the same-center
properties. Same-center properties, which totaled 85 of the Company's 93
properties as of June 30, 2022 , 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, except for the Company's
corporate office headquarters.
The table below provides a reconciliation of consolidated operating income, in
accordance with GAAP, to property operating income for the six months ended June
30, 2022 related to the 85 same-center properties owned by the Company during
the entirety of both the six months ended June 30, 2022 and 2021 and
consolidated into the Company's financial statements during such periods (in
thousands):
Six Months Ended
Same-Center Non Same-Center Total
Operating income (loss) per GAAP $ 61,819 $ (8,541) $ 53,278
Plus: Depreciation and amortization 44,233 3,879 48,112
General and administrative expenses (1) - 10,942 10,942
Other expense (1) - 667 667
Property operating income $ 106,052 $ 6,947 $ 112,999 ______________________
(1)For illustration purposes, general and administrative expenses and other expense are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center properties.
The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to property operating income for the six months endedJune 30, 2021 related to the 85 same-center properties owned by the Company during the entirety of both the six months endedJune 30, 2022 and 2021 and consolidated into the Company's financial statements during such periods (in thousands):
Six Months Ended
Same-Center Non Same-Center Total
Operating income per GAAP $ 53,948 $ 528 $ 54,476
Plus: Depreciation and amortization 44,817 1,730 46,547
General and administrative expenses (1) - 9,607 9,607
Other expense (1) - 484 484
Less: Gain on sale of real estate - (9,460) (9,460)
Property operating income $ 98,765 $ 2,889 $ 101,654 ______________________
(1)For illustration purposes, general and administrative expenses and other expense are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center properties.
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During the six months ended June 30, 2022 , the Company generated property
operating income of approximately $113.0 million compared to property operating
income of $101.7 million generated during the six months ended June 30, 2021 , an
increase of approximately $11.3 million . The property operating income for the
85 same-center properties increased approximately $7.3 million primarily due to
an increase in base rents and straight-line rents as a result of an increase in
occupancy and re-leasing spreads in the six months ended June 30, 2022 . The
property operating income for the non same-center properties increased
approximately $4.1 million primarily due to the net increase in the number of
properties the Company owned as of June 30, 2022 compared to June 30, 2021 .
Depreciation and amortization
The Company incurred depreciation and amortization expenses during the six
months ended
General and administrative expenses
The Company incurred general and administrative expenses of approximately$10.9 million during the six months endedJune 30, 2022 compared to approximately$9.6 million during the six months endedJune 30, 2021 . General and administrative expenses increased approximately$1.3 million primarily as a result of an increase in compensation-related expenses during the six months endedJune 30, 2022 . Gain on sale of real estate OnApril 21, 2021 , the Company soldEuclid Shopping Center , a shopping center located inSan Diego, California . The sales price of$25.8 million , less costs to sell, resulted in net proceeds of approximately$25.3 million . The Company recorded a gain on sale of real estate of approximately$9.5 million during the six months endedJune 30, 2021 related to this property disposition. There were no property sales during the six months endedJune 30, 2022 .
Interest expense and other finance expenses
The Company incurred interest expense during the six months endedJune 30, 2022 of approximately$28.5 million compared to approximately$28.8 million incurred during the six months endedJune 30, 2021 .
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 table below provides a reconciliation of net income applicable to
stockholders in accordance with GAAP to FFO for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net income attributable to ROIC $ 11,507
24,350 23,507 48,112 46,547
Less: Gain on sale of real estate - (9,460) - (9,460)
Funds from operations - basic 35,857 30,531 71,260 60,986
Net income attributable to non-controlling interests 807 1,201 1,632 1,760
Funds from operations - diluted $ 36,664 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 (rental revenue and other income), 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,
equity in earnings from unconsolidated joint ventures, and extraordinary items.
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 table below provides a reconciliation of same-center cash NOI to consolidated operating income in accordance with GAAP for the three and six months endedJune 30, 2022 and 2021. The table makes reference to the effect of the same-center properties. Same-center properties, which totaled 85 of the Company's 93 properties for the three and six months endedJune 30, 2022 , 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, except for the Company's corporate office headquarters (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 GAAP operating income$ 26,597 $ 32,022 $ 53,278 $ 54,476 Depreciation and amortization 24,350 23,507 48,112 46,547 General and administrative expenses 5,702 5,232 10,942 9,607 Other expense 488 331 667 484 Gain on sale of real estate - (9,460) - (9,460) Straight-line rent (915) (294) (1,366) (312) Amortization of above- and below-market rent (3,254) (2,214) (6,311) (4,446) Property revenues and other expenses (1) (265) (52) (589) (181)Total Company cash NOI 52,703 49,072 104,733 96,715 Non same-center cash NOI (3,119) (1,276) (5,655) (2,890) Same-center cash NOI$ 49,584 $
47,796
______________________
(1)Includes anchor lease termination fees, net of contractual amounts, if any, expense and recovery adjustments related to prior periods and other miscellaneous adjustments.
During the three months endedJune 30, 2022 , the Company generated same-center cash NOI of approximately$49.6 million compared to same-center cash NOI of approximately$47.8 million generated during the three months endedJune 30, 2021 , representing a 3.7% increase. This increase is primarily due to an increase in base rents driven by contractual rent increases and an increase in occupancy and re-leasing spreads. During the six months endedJune 30, 2022 , the Company generated same-center cash NOI of approximately$99.1 million compared to same-center cash NOI of approximately$93.8 million generated during the six months endedJune 30, 2021 , representing a 5.6% increase. This increase is primarily due to an increase in base rents driven by contractual rent increases and an increase in occupancy and re-leasing spreads, as well as an increase in early lease termination fee income during the six months endedJune 30, 2022 .
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 theOperating 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 in 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, tenant creditworthiness, current economic trends, including the impact of the COVID-19 pandemic on tenants' businesses, 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 are subject to revision as these factors change and are 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 Investments
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.
The Company recognizes the acquisition of real estate properties, including
acquired tangible (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) at their fair value (for acquisitions
meeting the definition of a business) and relative fair value (for acquisitions
not meeting the definition of a business). 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
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 in-place
leases is 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 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.
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--------------------------------------------------------------------------------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 Building Improvements (years) 10 - 20 Furniture/Fixtures (years) 3 - 10 Tenant Improvements
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. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, legal and environmental concerns, the Company's intent and ability to hold the related asset, as well as any significant cost overruns on development properties. 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 atJune 30, 2022 orDecember 31, 2021 .
REIT Qualification Requirements
The Company 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. The Company is subject to a number of operational and organizational requirements to qualify and then maintain qualification as a REIT. If the Company does not qualify as a REIT, its income would become subject toU.S. federal, state and local income taxes at regular corporate rates that would be substantial and ROIC may not be permitted to re-elect to qualify as a REIT for four taxable years following the year that it failed to qualify as a REIT. The Company's results of operations, liquidity and amounts distributable to stockholders would be significantly reduced if it failed to qualify as a REIT.
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
The Company's business is operated primarily through theOperating 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 theOperating Partnership , the section entitled "Liquidity and Capital Resources of theOperating 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 theOperating Partnership , and its only material assets are its ownership of direct or indirect partnership interests in theOperating Partnership and membership interest inRetail Opportunity Investments GP, LLC , the sole general partner of theOperating Partnership . Therefore, the consolidated assets and liabilities and the consolidated revenues and expenses of the Company and theOperating Partnership are the same on their respective financial statements. However, all debt is held directly or indirectly by theOperating 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 theOperating Partnership . As the parent company of theOperating Partnership , the Company, indirectly, has the full, exclusive and complete responsibility for theOperating Partnership's day-to-day management and control. The Company causes theOperating Partnership to distribute such portion of its available cash as the Company may in its discretion determine, in the manner provided in theOperating Partnership's partnership agreement. - 37 - -------------------------------------------------------------------------------- The Company is a well-known seasoned issuer with an effective shelf registration statement filed inApril 2019 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 theOperating 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 Company's 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 theOperating Partnership's ability to make sufficient distributions to the Company. During the six months endedJune 30, 2022 , the Company's primary sources of cash were distributions from theOperating Partnership and proceeds from the issuance of common stock. As ofJune 30, 2022 , the Company has determined that it has adequate working capital to meet its dividend funding obligations for the next twelve months. OnFebruary 20, 2020 , the ROIC entered into an "at the market" sales agreement, as amended onApril 27, 2022 (the "Sales Agreement"), with each of (i)KeyBanc Capital Markets Inc. ,BTIG, LLC ,BMO Capital Markets Corp. ,BofA Securities, Inc. ,Capital One Securities, Inc. ,Citigroup Global Markets Inc. ,Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc. ,Regions Securities LLC ,Robert W. Baird & Co. Incorporated andWells Fargo Securities, LLC (collectively, the "Agents") and (ii) the Forward Purchasers (as defined below), pursuant to which ROIC may sell, from time to time, shares (any such shares, the "Primary Shares") of ROIC's common stock, par value$0.0001 per share ("Common Stock"), to or through the Agents and instruct certain of the Agents, acting as forward sellers (the "Forward Sellers"), to offer and sell borrowed shares (any such shares, "Forward Hedge Shares," and collectively with the Primary Shares, the "Shares") with the Shares to be sold under the Sales Agreement having an aggregate offering price of up to$500.0 million . The Sales Agreement contemplates that, in addition to the issuance and sale of Primary Shares to or through the Agents as principal or its sales agents, ROIC may enter into separate forward sale agreements with any ofKeyBanc Capital Markets Inc. ,BMO Capital Markets Corp. ,BofA Securities, Inc. ,Citigroup Global Markets Inc. ,Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc. andWells Fargo Securities, LLC or their respective affiliates (in such capacity, the "Forward Purchasers"). If ROIC enters into a forward sale agreement with any Forward Purchaser, ROIC expects that such Forward Purchaser or its affiliate will borrow from third parties and, through the relevant Forward Seller, sell a number of Forward Hedge Shares equal to the number of shares of Common Stock underlying the particular forward sale agreement, in accordance with the mutually accepted instructions related to such forward sale agreement. ROIC will not initially receive any proceeds from any sale of Forward Hedge Shares through a Forward Seller. ROIC expects to fully physically settle each particular forward sale agreement with the relevant Forward Purchaser on one or more dates specified by ROIC on or prior to the maturity date of that particular forward sale agreement by issuing shares of Common Stock (the "Confirmation Shares"), in which case ROIC expects to receive aggregate net cash proceeds at settlement equal to the number of shares of Common Stock underlying the particular forward sale agreement multiplied by the relevant forward sale price. However, ROIC may also elect to cash settle or net share settle a particular forward sale agreement, in which case ROIC may not receive any proceeds from the issuance of shares of Common Stock, and ROIC will instead receive or pay cash (in the case of cash settlement) or receive or deliver shares of Common Stock (in the case of net share settlement). During the six months endedJune 30, 2022 , ROIC sold a total of 1,288,213 shares under the Sales Agreement, which resulted in gross proceeds of approximately$25.2 million and commissions of approximately$252,000 paid to the Agents. The Company intends to use the net proceeds for general corporate purposes, which may include, among other things, the funding of acquisitions and additions to working capital. For the six months endedJune 30, 2022 , dividends paid to stockholders totaled approximately$38.1 million . Additionally, for the six months endedJune 30, 2022 , distributions paid from theOperating Partnership to the non-controlling interest holders of OP Units ("OP Unitholders") totaled approximately$3.0 million . On a consolidated basis, cash flows from operations for the same period totaled approximately$77.5 million . For the six months endedJune 30, 2021 , dividends paid and payable to stockholders totaled approximately$26.4 million . Additionally, for the six months endedJune 30, 2021 , the distributions paid and payable from theOperating Partnership to the non-controlling interest OP Unitholders totaled approximately$1.9 million . On a consolidated basis, cash flows from operations for the same period totaled approximately$66.7 million .
Potential future sources of capital include equity issuances and distributions
from the
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Liquidity and Capital Resources of the
In this "Liquidity and Capital Resources of the
During the six months endedJune 30, 2022 , theOperating Partnership's primary source of cash was cash flow from operations, proceeds from borrowings under its credit facility, and cash contributed by ROIC from the issuance of common stock. As ofJune 30, 2022 , theOperating Partnership has determined that it has adequate capital to meet its debt obligations and operating expenses for the next twelve months.The Operating Partnership has an unsecured term loan (the "term loan") with several banks under which the lenders agreed to provide a$300.0 million unsecured term loan facility. EffectiveDecember 20, 2019 , theOperating Partnership entered into the First Amendment to First Amended and Restated Term Loan Agreement (as amended, the "Term Loan Agreement") pursuant to which the maturity date of the term loan was extended fromSeptember 8, 2022 toJanuary 20, 2025 , without further options for extension. The Term Loan Agreement also provides that theOperating Partnership 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. Borrowings under the Term Loan Agreement accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of theOperating Partnership , plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds forU.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 Operating Partnership has an unsecured revolving credit facility (the "credit facility") with several banks. EffectiveDecember 20, 2019 , theOperating Partnership entered into the First Amendment to Second Amended and Restated Credit Agreement (as amended, the "Credit Facility Agreement") pursuant to which the borrowing capacity under the credit facility is$600.0 million and the maturity date of the credit facility was extended fromSeptember 8, 2021 toFebruary 20, 2024 , with two six-month extension options, which may be exercised by theOperating Partnership upon satisfaction of certain conditions including the payment of extension fees. Additionally, the Credit Facility Agreement contains an accordion feature, which allows theOperating Partnership to increase the borrowing capacity under the credit facility up to an aggregate of$1.2 billion , subject to lender consents and other conditions. Borrowings under the Credit Facility Agreement accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of theOperating Partnership , plus, as applicable, (i) 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 byKeyBank, National Association as its "prime rate," and (c) the Eurodollar Rate plus 0.90%. Additionally, theOperating Partnership is obligated to pay a facility fee at a rate based on the credit rating level of theOperating Partnership , 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 Agreement. As ofJune 30, 2022 ,$300.0 million and$46.0 million were outstanding under the term loan and credit facility, respectively. The weighted average interest rate on the term loan during the three and six months endedJune 30, 2022 was 1.8% and 1.5%, respectively. As discussed in Note 9 of the accompanying financial statements, the Company uses interest rate swaps to manage its interest rate risk and accordingly, the swapped interest rate on the term loan is 3.0%. The maturity date of the current outstanding swaps isAugust 31, 2022 , and accordingly, the notional amounts will become unhedged effectiveSeptember 1, 2022 . The weighted average interest rate on the credit facility during the three and six months endedJune 30, 2022 was 1.7% and 1.6%, respectively. The Company had no available borrowings under the term loan atJune 30, 2022 . The Company had$554.0 million available to borrow under the credit facility atJune 30, 2022 . Further, theOperating Partnership issued$250.0 million aggregate principal amount of unsecured senior notes in each ofDecember 2017 ,December 2014 andDecember 2013 and$200.0 million aggregate principal amount of unsecured senior notes inSeptember 2016 , (collectively, the "Senior Notes") each of which were fully and unconditionally guaranteed by the Company. - 39 - --------------------------------------------------------------------------------
The key terms of the
Aggregate Issue Date and
Principal Amount Interest Accrual Contractual
Senior Notes (in thousands) Date Maturity Date Interest Rate FirstInterest Payment Interest Payments Due
June 15 and December
Senior Notes Due 2027 $ 250,000 December 15, 2017 December 15, 2027 4.19 %
March 22 and
Senior Notes Due 2026 $ 200,000 September 22, 2016 September 22, 2026 3.95 %
June 15 and December
Senior Notes Due 2024 $ 250,000 December 3, 2014 December 15, 2024 4.00 %
June 15 and December
Senior Notes Due 2023 $ 250,000 December 9, 2013 December 15, 2023 5.00 % The Operating Partnership's debt agreements contain customary representations, financial and other covenants, and its ability to borrow under these agreements is subject to its compliance with financial covenants and other restrictions on an ongoing basis. The Company was in compliance with such covenants atJune 30, 2022 . While theOperating Partnership generally intends to hold its assets as long term investments, certain of its investments may be sold in order to manage theOperating 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.
The Company has investment grade credit ratings from Moody's Investors Service
(Baa2),
Cash Flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands):
Six Months Ended June 30,
2022 2021
Net Cash Provided by (Used in):
Operating Activities $ 77,480 $ 66,740
Investing Activities $ (89,235) $ 3,079
Financing Activities $ 3,754 $ (29,444)
Net Cash Flows from:
Operating Activities
Net cash flows provided by operating activities amounted to approximately $77.5
million in the six months ended June 30, 2022 , compared to approximately $66.7
million in the comparable period in 2021. This increase of approximately $10.7
million during the six months ended June 30, 2022 is primarily due to the
increase in property operating income of approximately $11.3 million and the
timing of collections and payments of working capital accounts.
Investing Activities
Net cash flows used in investing activities amounted to approximately$89.2 million in the six months endedJune 30, 2022 , compared to net cash flows provided by investing activities of approximately$3.1 million in the comparable period in 2021. This decrease of approximately$92.3 million for the six months endedJune 30, 2022 is primarily due to an increase in investments in real estate of approximately$60.2 million , the decrease in proceeds from the sale of real estate of approximately$25.3 million and an increase in payments for improvements to properties of approximately$7.3 million . - 40 - --------------------------------------------------------------------------------
Financing Activities
Net cash flows provided by financing activities amounted to approximately$3.8 million in the six months endedJune 30, 2022 , compared to net cash flows used in financing activities of approximately$29.4 million in the comparable period in 2021. This increase of approximately$33.2 million for the six months endedJune 30, 2022 is primarily due to the net increase in borrowings on the credit facility of$94.0 million , offset by the increase in dividends and distributions paid to common shareholders and OP Unitholders of approximately$26.9 million , the increase in principal repayments on mortgages of approximately$23.5 million and the decrease in proceeds from the sale of common stock of approximately$9.6 million . Material Cash Requirements
The following table represents the Company's known contractual and other
short-term (i.e., the next twelve months) and long-term (i.e., beyond the next
twelve months) obligations as of
Short-Term Long-Term Total
Material cash requirements: Mortgage Notes Payable Principal (1)$ 674 $ 60,389 $
61,063
Mortgage Notes Payable Interest 2,494 3,861 6,355 Term loan (2) - 300,000 300,000 Credit facility (3) - 46,000 46,000 Senior Notes Due 2027 (4) 10,475 297,138 307,613 Senior Notes Due 2026 (4) 7,900 227,650 235,550 Senior Notes Due 2024 (4) 10,000 265,000 275,000 Senior Notes Due 2023 (4) 12,500 256,250 268,750 Operating lease obligations 1,337 35,032 36,369 Total$ 45,380 $ 1,491,320 $ 1,536,700 __________________ (1)Does not include unamortized mortgage premium of approximately$396,000 as ofJune 30, 2022 . (2)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 as ofJune 30, 2022 which was 3.0%, inclusive of the swap agreements the Company has entered into. (3)For the purpose of the above table, the Company has assumed that borrowings under the credit facility accrue interest at the interest rate on the credit facility as ofJune 30, 2022 which was 2.1% (4)Represents payments of interest only in the short-term and payments of both principal and interest in the long-term. The short-term and long-term liquidity requirements of the Company, including theOperating Partnership and its subsidiaries, consist primarily of the material cash requirements set forth above, dividends expected to be paid to the Company's stockholders, capital expenditures and capital required for acquisitions.
The Company, including the
Historically, the Company, including theOperating Partnership and its subsidiaries, has financed its long-term liquidity requirements through operating cash flows, borrowings under the credit facility and term loan, debt refinancings, new debt, equity offerings and other capital market transactions, and/or the disposition of assets. The Company expects to continue doing so in the future. However, there can be no assurance that these sources will always be available to the Company when needed, or on terms the Company desires or that the future requirements of the Company will not be materially higher than the Company currently expects.
The Company has committed approximately
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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.
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 help manage 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.
Under the term loan, several banks acting as lenders have agreed to provide up to$300.0 million of borrowing capacity. EffectiveDecember 20, 2019 , the Company entered into the Term Loan Agreement pursuant to which the maturity date of the term loan was extended fromSeptember 8, 2022 toJanuary 20, 2025 , without further options for extension. 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. Under the credit facility, several banks acting as lenders have agreed to provide up to$600.0 million of borrowing capacity. EffectiveDecember 20, 2019 , the Company entered into the Credit Facility Agreement pursuant to which the maturity date of the credit facility was extended fromSeptember 8, 2021 toFebruary 20, 2024 , with two six-month extension options, which may be exercised by theOperating Partnership upon satisfaction of certain conditions including the payment of extension fees. Additionally, the Credit Facility Agreement contains an accordion feature, which allows theOperating Partnership to increase the borrowing capacity under the credit facility up to an aggregate of$1.2 billion , subject to lender consents and other conditions. Further, theOperating Partnership issued$250.0 million aggregate principal amount of unsecured senior notes in each ofDecember 2017 ,December 2014 andDecember 2013 and$200.0 million aggregate principal amount of unsecured senior notes inSeptember 2016 , each of which were fully and unconditionally guaranteed by the Company. The Company may borrow on a non-recourse basis at the corporate level orOperating 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 from operations, borrowings under the credit facility, the assumption of existing mortgage debt, the issuance of OP Units, equity and debt offerings, and the potential sale of existing assets. 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. - 42 - --------------------------------------------------------------------------------
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 theOperating Partnership , and indirectly to ROIC through distributions toRetail 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 payU.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 .
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