RETAIL OPPORTUNITY INVESTMENTS CORP. The following discussion should be read in conjunction with theRetail Opportunity Investments Corp. Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. The Company makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Annual Report on Form 10-K entitled "Statements Regarding Forward-Looking Information." Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Annual Report on Form 10-K entitled "Risk Factors."
Overview
The Company 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 commenced operations inOctober 2009 as a fully integrated and self-managed REIT, and as ofDecember 31, 2021 , 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 ofDecember 31, 2021 , the Company's portfolio consisted of 90 properties (89 retail and one office) totaling approximately 10.2 million square feet of GLA. As ofDecember 31, 2021 , the Company's retail portfolio was approximately 97.5% leased. During the year endedDecember 31, 2021 , the Company leased and renewed approximately 448,000 and 979,000 square feet, respectively, in its portfolio.
The table below provides a reconciliation of beginning of year vacant space to
end of year vacant space for its retail portfolio as of
Vacant Space Square Footage
Vacant space at December 31, 2020 322,538
Square footage vacated 145,294
Vacant space in acquired properties 12,211
Vacant space in sold properties (29,599)
Square footage leased (201,336)
Vacant space at December 31, 2021 249,108
The Company has committed approximately $21.5 million , or $47.93 per square
foot, in tenant improvements, including building and site improvements, for new
leases that occurred during the year ended December 31, 2021 . The Company has
committed approximately $1.5 million , or $3.25 per square foot, in leasing
commissions for the new leases that occurred during the year ended December 31,
2021 . Additionally, the Company has committed approximately $766,000 , or $0.78
per square foot, in tenant improvements, including building and site
improvements, for the renewed leases that occurred during the year ended
December 31, 2021 . Leasing commission commitments for renewed leases were not
material for the year ended December 31, 2021 .
Impact of COVID-19
The spread of COVID-19 has 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. Local, state and federal authorities have taken preventative measures to alleviate the public health crisis and these preventative measures have affected the operations of the Company's tenant base to varying degrees depending on the category and location of the tenant. For example, following the COVID-19 outbreak, grocery stores, pharmacies and retail stores were generally permitted to remain open and operational (with capacity limitations in the case of certain retail stores), restaurants in certain states such asCalifornia ,Washington , andOregon were generally limited to take-out and delivery services and outdoor-dining 36 -------------------------------------------------------------------------------- only or subject to capacity limitations when indoor dining was permitted, and bars, movie theaters, gyms and salons in certain states and counties were generally forced to close indoor operations for periods of time. Even as efforts to contain the pandemic, including vaccinations, have made progress, there is substantial uncertainty about the nature and degree of the continued effects of COVID-19 over time, including whether customers will re-engage with tenants to the extent they have in the past. The Company derives revenues primarily from rents and reimbursement payments received from tenants under leases at the Company's properties. 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 impacts 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. In addition, the trend toward online shopping for goods and services that accelerated during the COVID-19 pandemic may continue and could result in a permanent decrease in spending levels at brick-and-mortar commercial establishments. The factors described above, as well as additional factors that the Company may not currently be aware of, could materially negatively impact the Company's ability to collect rent and could lead to increases in rent relief requests from tenants, termination of leases by tenants, tenant bankruptcies, decreases in demand for retail space at the Company's properties, difficulties in accessing capital, impairment of the Company's long-lived assets and other impacts that could materially and adversely affect the Company's business, results of operations, financial condition and ability to pay distributions to stockholders. As is believed to be the case with retail landlords across theU.S. , the Company has 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$11.1 million of contractual amounts billed. As ofDecember 31, 2021 , approximately$5.6 million of such deferral amounts have been rebilled in accordance with the underlying agreements, of which approximately$4.8 million , or approximately 85.4%, has been collected. The Company has evaluated and continues to evaluate rent relief requests on a case-by-case basis. Not all tenant requests have resulted or will ultimately result 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. The Company's financial results for the year endedDecember 31, 2021 have been impacted by the COVID-19 pandemic resulting in reductions in property operating income and its non-GAAP performance measures from changes in projected uncollectible rental revenue. The comparability of the Company's results of operations for the year endedDecember 31, 2021 to future periods may be impacted by the effects of the outbreak of the COVID-19 pandemic.
Results of Operations
AtDecember 31, 2021 , the Company had 90 properties (89 retail and one office), all of which are consolidated in the accompanying financial statements. The Company believes, because the properties are located in densely populated areas and are leased to retailers that provide necessity-based, non-discretionary goods and services, the nature of its investments provides for relatively stable revenue flows. The Company has a strong capital structure with manageable debt as ofDecember 31, 2021 . 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 (rental revenue and other income), less property and related expenses (property operating expenses and property taxes). Property operating income excludes general and administrative expenses, mortgage interest income, 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. 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. 37 --------------------------------------------------------------------------------
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.
For the Company's discussion related to the results of operations and liquidity and capital resources for fiscal year 2019, including certain comparisons of results for fiscal year 2020 to fiscal year 2019, please refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in its fiscal 2020 Form 10-K, filed with theSecurities and Exchange Commission onFebruary 24, 2021 .
Results of Operations for the year 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 years endedDecember 31, 2021 and 2020 (in thousands): Year Ended December 31, 2021 2020 Operating income per GAAP$ 114,895 $ 94,447 Plus: Depreciation and amortization 92,929 97,731 General and administrative expenses 19,654 16,755 Other expense 860 843 Less: Gain on sale of real estate (22,340) - Property operating income$ 205,998 $ 209,776 The following comparison for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , makes reference to the effect of the same-center properties. Same-center properties, which totaled 85 of the Company's 90 properties as ofDecember 31, 2021 , 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 year endedDecember 31, 2021 related to the 85 same-center properties owned by the Company during the entirety of both the years endedDecember 31, 2021 and 2020 and consolidated into the Company's financial statements during such periods (in thousands): Year Ended December 31, 2021 Same-Center Non Same-Center Total Operating income per GAAP$ 110,599 $ 4,296$ 114,895 Plus: Depreciation and amortization 89,063 3,866 92,929 General and administrative expenses (1) - 19,654 19,654 Other expense (1) - 860 860 Less: Gain on sale of real estate - (22,340) (22,340) Property operating income$ 199,662 $ 6,336$ 205,998 ______________________
(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 properties.
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The table below provides a reconciliation of consolidated operating income in
accordance with GAAP to property operating income for the year ended
December 31, 2020 related to the 85 same-center properties owned by the Company
during the entirety of both the years ended December 31, 2021 and 2020 and
consolidated into the Company's financial statements during such periods (in
thousands):
Year Ended December 31, 2020
Same-Center Non Same-Center Total
Operating income (loss) per GAAP $ 109,344 $ (14,897) $ 94,447
Plus: Depreciation and amortization 93,735 3,996 97,731
General and administrative expenses (1) - 16,755 16,755
Other expense (1) - 843 843
Property operating income $ 203,079 $ 6,697 $ 209,776
______________________
(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 properties.
During the year endedDecember 31, 2021 , the Company generated property operating income of approximately$206.0 million compared to property operating income of$209.8 million generated during the year endedDecember 31, 2020 , representing a decrease of approximately$3.8 million . The property operating income for the 85 same-center properties decreased approximately$3.4 million primarily due to the accelerated recognition of below-market lease intangible liabilities resulting from two lease terminations in the year endedDecember 31, 2020 of approximately$7.4 million offset by a decrease in estimated uncollectible rental revenue in the year endedDecember 31, 2021 .
Depreciation and amortization
The Company incurred depreciation and amortization expenses of approximately$92.9 million during the year endedDecember 31, 2021 compared to$97.7 million incurred during the year endedDecember 31, 2020 . Depreciation expense decreased approximately$4.8 million primarily as a result of tenant turnover during the year endedDecember 31, 2020 where values ascribed to leases in place upon acquisition of properties in prior years were disposed of.
General and administrative expenses
The Company incurred general and administrative expenses of approximately$19.7 million during the year endedDecember 31, 2021 compared to$16.8 million incurred during the year endedDecember 31, 2020 . General and administrative expenses increased approximately$2.9 million primarily as a result of an increase in compensation-related expenses during the year endedDecember 31, 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 year endedDecember 31, 2021 related to this property disposition. OnAugust 12, 2021 , the Company soldGreen Valley Station , a shopping center located inSacramento, California . The sales price of$15.1 million , less costs to sell, resulted in net proceeds of approximately$14.4 million . The Company recorded a gain on sale of real estate of approximately$5.5 million during the year endedDecember 31, 2021 related to this property disposition. Additionally, onSeptember 28, 2021 , the Company soldMills Shopping Center , a shopping center located inSacramento, California . The sales price of$28.8 million , less costs to sell, resulted in net proceeds of approximately$28.4 million . The Company recorded a gain on sale of real estate of approximately$7.4 million during the year endedDecember 31, 2021 related to this property disposition. The Company recorded no such gains on sale during the year endedDecember 31, 2020 .
Interest expense and other finance expenses
The Company incurred approximately$57.5 million of interest expense and other finance expenses during the year endedDecember 31, 2021 compared to approximately$59.7 million incurred during the year endedDecember 31, 2020 . Interest 39 --------------------------------------------------------------------------------
expense and other finance expenses decreased approximately
Funds From Operations
Funds from operations ("FFO"), is a widely-recognized non-GAAP financial measure
for REITs that the Company believes when considered with financial statements
presented in accordance with GAAP, provides additional and useful means to
assess its financial performance. FFO is frequently used by securities analysts,
investors and other interested parties to evaluate the performance of REITs,
most of which present FFO along with net income as calculated in accordance with
GAAP.
The Company computes FFO in accordance with the "White Paper" on FFO published
by the National Association of Real Estate Investment Trusts ("NAREIT"), which
defines FFO as net income attributable to common stockholders (determined in
accordance with GAAP) excluding gains or losses from debt restructuring, sales
of depreciable property, and impairments, plus real estate related depreciation
and amortization, and after adjustments for partnerships and unconsolidated
joint ventures.
However, FFO:
•does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); and
•should not be considered an alternative to net income as an indication of our performance.
FFO as defined by the Company may not be comparable to similarly titled items reported by other REITs due to possible differences in the application of the NAREIT definition used by such REITs. The table below provides a reconciliation of net income applicable to stockholders in accordance with GAAP to FFO for the years endedDecember 31, 2021 and 2020 (in thousands): Year Ended December 31, 2021 2020 Net income attributable to ROIC$ 53,508 $ 32,014 Plus: Depreciation and amortization 92,929
97,731
Less: Gain on sale of real estate (22,340) - Funds from operations - basic 124,097
129,745
Net income attributable to non-controlling interests 3,852
2,707
Funds from operations - diluted$ 127,949
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,
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.
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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.
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 years ended
December 31, 2021 and 2020. The table makes reference to the effect of the
same-center properties. Same-center properties, which totaled 85 of the
Company's 90 properties as of December 31, 2021 , 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):
Year Ended December 31,
2021 2020
GAAP operating income $ 114,895 $ 94,447
Depreciation and amortization 92,929 97,731
General and administrative expenses 19,654 16,755
Other expense 860 843
Gain on sale of real estate (22,340) -
Straight-line rent (959) (1,079)
Amortization of above- and below-market rent (8,795) (17,654)
Property revenues and other expenses (1) (768) (484)Total Company cash NOI 195,476 190,559 Non same-center cash NOI (6,089) (6,736) Same-center cash NOI$ 189,387 $ 183,823 ______________________
(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 year endedDecember 31, 2021 , the Company generated same-center cash NOI of approximately$189.4 million compared to same-center cash NOI of approximately$183.8 million generated during the year endedDecember 31, 2020 , representing a 3.0% increase. This increase is primarily due to a decrease in projected uncollectible rental revenue, offset by an increase in operating expenses.
Critical Accounting Estimates
Critical accounting estimates 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 estimates 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 the Company'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.
As discussed above, the COVID-19 pandemic has impacted states and cities where
the Company's tenants operate their businesses and where the Company's
properties are located, and accordingly, our tenants may be unable to operate
their businesses, maintain profitability and make timely rental payments to the
Company under their leases.
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 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 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 39-40 years Property Improvements 10-20 years Furniture/Fixtures 3-10 years 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. For example, as a result of the COVID-19 pandemic, certain of the Company's tenants may be unable to make timely rental payments to the Company under their leases which could impact our cash flows. The worsening of estimated future cash flows could result in the recognition of an impairment charge on certain of the Company's long-lived assets. Management does not believe that the value of any of the Company's real estate investments was impaired atDecember 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 the Company 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 the Operating 43 --------------------------------------------------------------------------------
Partnership to distribute such portion of its available cash as the Company may
in its discretion determine, in the manner provided in the
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. The primary cash requirement of the Company is its payment of dividends to its stockholders. During the year endedDecember 31, 2021 , the Company's primary sources of cash were distributions from theOperating Partnership and proceeds from the issuance of common stock. As ofDecember 31, 2021 , 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 (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 year endedDecember 31, 2021 , ROIC sold a total of 3,788,035 shares under the Sales Agreements, which resulted in gross proceeds of approximately$69.6 million and commissions of approximately$696,000 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 year endedDecember 31, 2021 , dividends paid and payable to stockholders totaled approximately$61.8 million . Additionally, for the year endedDecember 31, 2021 , distributions paid and payable from theOperating Partnership to the non-controlling interest OP Unitholders totaled approximately$4.4 million . On a consolidated basis, cash flows from operations for the same period totaled approximately$136.3 million . For the year endedDecember 31, 2020 , dividends paid to stockholders totaled approximately$23.4 million . Additionally, for the year endedDecember 31, 2020 , theOperating Partnership made distributions of approximately$2.2 million to the non-controlling interest OP Unitholders. On a consolidated basis, cash flows from operations for the same period totaled approximately$106.7 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 year endedDecember 31, 2021 , theOperating Partnership's primary source of cash was cash flow from operations, proceeds from the sale of real estate and cash contributed by ROIC from the issuance of common stock. As ofDecember 31, 2021 , theOperating Partnership has determined that it has adequate working capital to meet its debt obligations and operating expenses for the next twelve months.The Operating Partnership has an unsecured term loan agreement 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 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 ofDecember 31, 2021 ,$300.0 million was outstanding under the term loan and there were no borrowings outstanding under the credit facility. The weighted average interest rates on the term loan and the credit facility during the year endedDecember 31, 2021 were 1.1% and 1.0%, respectively. As discussed in Note 11 of the accompanying financial statements, theOperating Partnership uses interest rate swaps to manage its interest rate risk and accordingly, the swapped interest rate on the term loan is 3.0%. The Company had no available borrowings under the term loan atDecember 31, 2021 . The Company had$600.0 million available to borrow under the credit facility atDecember 31, 2021 . 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. 45 --------------------------------------------------------------------------------
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. As a result of the COVID-19 pandemic's impact on the Company's business, in 2020 theOperating Partnership entered into temporary waiver amendments for one of the covenants contained in its debt agreements. The amendments adjusted the criteria for properties eligible to be included in the unencumbered asset pool used for purposes of calculating the consolidated unencumbered leverage ratio. The temporary waiver period expiredApril 1, 2021 and the Company was in compliance with such covenants atDecember 31, 2021 . 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) andS&P Global Ratings (BBB-) and the Company's investment grade rating from Fitch Ratings was upgraded to BBB from BBB- inJanuary 2022 . As discussed above, many of the Company's tenants and their operations have been, and may continue to be, adversely impacted by the COVID-19 pandemic. As a result, certain tenants may be unable to meet their obligations to the Company in full or at all, which could reduce the Company's cash flows and impact the Company's ability to continue paying dividends to its stockholders at expected levels. The Company intends to continue to operate its business in a manner that will allow it to qualify as a REIT, including maintaining compliance with taxable income distribution requirements.
Cash Flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands):
Year Ended December 31,
2021 2020
Net Cash Provided by (Used in):
Operating activities $ 136,332 $ 106,660
Investing activities $ (103,645) $ (28,474)
Financing activities $ (23,960) $ (77,008)
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Net Cash Flows from:
Operating Activities
Increase in cash flows provided by operating activities from 2020 to 2021:
Net cash flows provided by operating activities amounted to approximately$136.3 million during the year endedDecember 31, 2021 , compared to approximately$106.7 million in the comparable period in 2020. This increase of approximately$29.7 million during the year endedDecember 31, 2021 is primarily due to the decrease in accounts receivable and related timing of collections and payments of working capital accounts, offset by a decrease in property operating income of approximately$3.8 million .
Investing Activities
Increase in cash flows used in investing activities from 2020 to 2021:
Net cash flows used in investing activities amounted to approximately$103.6 million during the year endedDecember 31, 2021 , compared to approximately$28.5 million in the comparable period in 2020. This increase of approximately$75.2 million during the year endedDecember 31, 2021 is primarily due to the increase in investments in real estate of approximately$125.5 million , the increase in payments for improvements to properties of approximately$9.7 million and the decrease in repayments on mortgage notes of approximately$8.0 million , offset by an increase in proceeds from the sale of real estate of approximately$68.0 million . Financing Activities
Decrease in cash flows used in financing activities from 2020 to 2021:
Net cash flows used in financing activities amounted to approximately$24.0 million during the year endedDecember 31, 2021 , compared to approximately$77.0 million in the comparable period in 2020. This decrease of approximately$53.0 million for the year endedDecember 31, 2021 is primarily due to the increase in proceeds from the sale of common stock of approximately$69.6 million and the decrease in repurchase of common stock of approximately$8.8 million , offset by the increase in dividend and distribution payments of approximately$17.0 million and the net increase in payments on the credit facility of$12.0 million . 47 --------------------------------------------------------------------------------
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) $ 24,133 $ 60,731 $ 84,864
Mortgage Notes Payable Interest 3,170 5,100 8,270
Term loan (2) - 300,000 300,000
Senior Notes Due 2027 (3) 10,475 302,375 312,850
Senior Notes Due 2026 (3) 7,900 231,600 239,500
Senior Notes Due 2024 (3) 10,000 270,000 280,000
Senior Notes Due 2023 (3) 12,500 262,500 275,000
Operating lease obligations 1,320 35,704 37,024
Total $ 69,498 $ 1,468,010 $ 1,537,508
__________________
(1)Does not include unamortized mortgage premium of approximately $632,000 as of
December 31, 2021 .
(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 of
December 31, 2021 which was 3.0%, inclusive of the swap agreements the Company
has entered into.
(3)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
the Operating 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 its 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$22.3 million and$1.5 million in tenant improvements (including building and site improvements) and leasing commissions, respectively, for the new leases and renewals that occurred during the year endedDecember 31, 2021 . 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 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
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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.
The Company has an unsecured term loan agreement with several banks under which the lenders agreed to provide a$300.0 million unsecured term loan facility. EffectiveDecember 20, 2019 , the Company 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 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 Operating Partnership has an unsecured revolving credit facility with several banks. EffectiveDecember 20, 2019 , the Company 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. 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 its 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.
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. 49
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