PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Balance Sheets
(In thousands, except share data)
| | | June 30, 2018 (unaudited) | | December 31, 2017 | June 30, 2019 (unaudited) | | December 31, 2018 |
ASSETS | |
| | |
| |
| | |
|
Real Estate Investments: | |
| | |
| |
| | |
|
Land | $ | 898,436 |
| | $ | 878,797 |
| $ | 887,080 |
| | $ | 894,240 |
|
Building and improvements | 2,265,760 |
| | 2,230,600 |
| 2,257,777 |
| | 2,266,232 |
|
| 3,164,196 |
| | 3,109,397 |
| 3,144,857 |
| | 3,160,472 |
|
Less: accumulated depreciation | 295,602 |
| | 260,115 |
| 359,090 |
| | 329,207 |
|
| | 2,785,767 |
| | 2,831,265 |
|
Mortgage note receivable | | 13,250 |
| | — |
|
Real Estate Investments, net | 2,868,594 |
| | 2,849,282 |
| 2,799,017 |
| | 2,831,265 |
|
Cash and cash equivalents | 10,958 |
| | 11,553 |
| 7,488 |
| | 6,076 |
|
Restricted cash | 1,420 |
| | 5,412 |
| 1,554 |
| | 1,373 |
|
Tenant and other receivables, net | 42,095 |
| | 43,257 |
| 44,304 |
| | 46,832 |
|
Deposits | — |
| | 500 |
| |
Acquired lease intangible assets, net | 78,246 |
| | 82,778 |
| 66,285 |
| | 72,109 |
|
Prepaid expenses | 1,600 |
| | 2,853 |
| 1,479 |
| | 4,194 |
|
Deferred charges, net | 36,150 |
| | 37,167 |
| 30,323 |
| | 33,857 |
|
Other | 10,606 |
| | 6,396 |
| 18,519 |
| | 7,365 |
|
Total assets | $ | 3,049,669 |
| | $ | 3,039,198 |
| $ | 2,968,969 |
| | $ | 3,003,071 |
|
| | | | | | |
LIABILITIES AND EQUITY | |
| | |
| |
| | |
|
Liabilities: | |
| | |
| |
| | |
|
Term loan | $ | 298,942 |
| | $ | 298,816 |
| $ | 299,201 |
| | $ | 299,076 |
|
Credit facility | 189,259 |
| | 140,329 |
| 149,120 |
| | 153,689 |
|
Senior Notes | 940,762 |
| | 940,086 |
| 942,145 |
| | 941,449 |
|
Mortgage notes payable | 97,884 |
| | 107,915 |
| 88,019 |
| | 88,511 |
|
Acquired lease intangible liabilities, net | 173,911 |
| | 178,984 |
| 154,059 |
| | 166,146 |
|
Accounts payable and accrued expenses | 14,580 |
| | 18,638 |
| 15,287 |
| | 15,488 |
|
Tenants’ security deposits | 6,997 |
| | 6,771 |
| 7,118 |
| | 7,065 |
|
Other liabilities | 18,213 |
| | 18,018 |
| 39,426 |
| | 23,219 |
|
Total liabilities | 1,740,548 |
| | 1,709,557 |
| 1,694,375 |
| | 1,694,643 |
|
| | | | | | |
Commitments and contingencies |
|
| |
|
|
|
| |
|
|
| | | | | | |
Equity: | |
| | |
| |
| | |
|
Preferred stock, $0.0001 par value 50,000,000 shares authorized; none issued and outstanding | — |
| | — |
| — |
| | — |
|
Common stock, $0.0001 par value, 500,000,000 shares authorized; 112,719,459 and 112,347,451 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively | 11 |
| | 11 |
| |
Common stock, $0.0001 par value, 500,000,000 shares authorized; 114,307,789 and 113,992,837 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | | 11 |
| | 11 |
|
Additional paid-in capital | 1,415,286 |
| | 1,412,590 |
| 1,443,165 |
| | 1,441,080 |
|
Dividends in excess of earnings | (236,570 | ) | | (210,490 | ) | (280,488 | ) | | (256,438 | ) |
Accumulated other comprehensive income | 7,235 |
| | 1,856 |
| |
Accumulated other comprehensive (loss) income | | (4,327 | ) | | 3,561 |
|
Total Retail Opportunity Investments Corp. stockholders’ equity | 1,185,962 |
| | 1,203,967 |
| 1,158,361 |
| | 1,188,214 |
|
Non-controlling interests | 123,159 |
| | 125,674 |
| 116,233 |
| | 120,214 |
|
Total equity | 1,309,121 |
| | 1,329,641 |
| 1,274,594 |
| | 1,308,428 |
|
Total liabilities and equity | $ | 3,049,669 |
| | $ | 3,039,198 |
| $ | 2,968,969 |
| | $ | 3,003,071 |
|
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(In thousands, except share data)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | | | | |
| | |
| | | | | |
| | |
|
Base rents | $ | 55,050 |
| | $ | 50,528 |
| | $ | 110,427 |
| | $ | 102,007 |
| |
Recoveries from tenants | 16,471 |
| | 15,222 |
| | 32,632 |
| | 28,890 |
| |
Rental revenue | | $ | 71,821 |
| | $ | 71,521 |
| | $ | 147,188 |
| | $ | 143,059 |
|
Other income | 820 |
| | 890 |
| | 3,677 |
| | 1,643 |
| 1,109 |
| | 820 |
| | 1,795 |
| | 3,677 |
|
Total revenues | 72,341 |
| | 66,640 |
| | 146,736 |
| | 132,540 |
| 72,930 |
| | 72,341 |
| | 148,983 |
| | 146,736 |
|
| | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | |
Property operating | 11,017 |
| | 9,628 |
| | 21,495 |
| | 18,928 |
| 10,710 |
| | 11,017 |
| | 21,771 |
| | 21,495 |
|
Property taxes | 7,914 |
| | 7,647 |
| | 15,733 |
| | 14,715 |
| 7,832 |
| | 7,914 |
| | 16,070 |
| | 15,733 |
|
Depreciation and amortization | 25,331 |
| | 23,645 |
| | 50,548 |
| | 46,703 |
| 24,443 |
| | 25,331 |
| | 49,204 |
| | 50,548 |
|
General and administrative expenses | 3,990 |
| | 3,817 |
| | 7,521 |
| | 7,316 |
| 4,950 |
| | 3,990 |
| | 9,226 |
| | 7,521 |
|
Acquisition transaction costs | — |
| | 4 |
| | — |
| | 4 |
| |
Other expense | 274 |
| | 225 |
| | 343 |
| | 274 |
| 1,224 |
| | 274 |
| | 1,317 |
| | 343 |
|
Total operating expenses | 48,526 |
| | 44,966 |
| | 95,640 |
| | 87,940 |
| 49,159 |
| | 48,526 |
| | 97,588 |
| | 95,640 |
|
| | | | | | | | | | | | | | |
Gain on sale of real estate | | 180 |
| | — |
| | 2,818 |
| | — |
|
| | | | | | | | |
Operating income | 23,815 |
| | 21,674 |
| | 51,096 |
| | 44,600 |
| 23,951 |
| | 23,815 |
| | 54,213 |
| | 51,096 |
|
| | | | | | | | |
Non-operating expenses | | | | | |
| | |
| | | | | |
| | |
|
Interest expense and other finance expenses | (15,713 | ) | | (12,477 | ) | | (31,170 | ) | | (24,152 | ) | (15,605 | ) | | (15,713 | ) | | (31,284 | ) | | (31,170 | ) |
Net income | 8,102 |
| | 9,197 |
| | 19,926 |
| | 20,448 |
| 8,346 |
| | 8,102 |
| | 22,929 |
| | 19,926 |
|
Net income attributable to non-controlling interests | (763 | ) | | (888 | ) | | (1,885 | ) | | (1,969 | ) | (761 | ) | | (763 | ) | | (2,094 | ) | | (1,885 | ) |
Net Income Attributable to Retail Opportunity Investments Corp. | $ | 7,339 |
| | $ | 8,309 |
| | $ | 18,041 |
| | $ | 18,479 |
| $ | 7,585 |
| | $ | 7,339 |
| | $ | 20,835 |
| | $ | 18,041 |
|
| | | | | | | | | | | | | | |
Earnings per share – basic and diluted | $ | 0.06 |
| | $ | 0.08 |
| | $ | 0.16 |
| | $ | 0.17 |
| $ | 0.07 |
| | $ | 0.06 |
| | $ | 0.18 |
| | $ | 0.16 |
|
| | | | | | | | | | | | | | |
Dividends per common share | $ | 0.1950 |
| | $ | 0.1875 |
| | $ | 0.3900 |
| | $ | 0.3750 |
| $ | 0.1970 |
| | $ | 0.1950 |
| | $ | 0.3940 |
| | $ | 0.3900 |
|
| | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | $ | 8,102 |
| | $ | 9,197 |
| | $ | 19,926 |
| | $ | 20,448 |
| $ | 8,346 |
| | $ | 8,102 |
| | $ | 22,929 |
| | $ | 19,926 |
|
Other comprehensive income: | | | | | | | | |
Unrealized swap derivative gain (loss) arising during the period | 1,397 |
| | (64 | ) | | 4,787 |
| | 97 |
| |
Other comprehensive (loss) income: | | | | | | | | |
Unrealized swap derivative (loss) gain arising during the period | | (4,815 | ) | | 1,397 |
| | (7,423 | ) | | 4,787 |
|
Reclassification adjustment for amortization of interest expense included in net income | 174 |
| | 497 |
| | 592 |
| | 1,052 |
| (263 | ) | | 174 |
| | (465 | ) | | 592 |
|
Other comprehensive income | 1,571 |
| | 433 |
| | 5,379 |
| | 1,149 |
| |
Other comprehensive (loss) income | | (5,078 | ) | | 1,571 |
| | (7,888 | ) | | 5,379 |
|
Comprehensive income | 9,673 |
| | 9,630 |
| | 25,305 |
| | 21,597 |
| 3,268 |
| | 9,673 |
| | 15,041 |
| | 25,305 |
|
Comprehensive income attributable to non-controlling interests | (763 | ) | | (888 | ) | | (1,885 | ) | | (1,969 | ) | (761 | ) | | (763 | ) | | (2,094 | ) | | (1,885 | ) |
Comprehensive income attributable to Retail Opportunity Investments Corp. | $ | 8,910 |
| | $ | 8,742 |
| | $ | 23,420 |
| | $ | 19,628 |
| $ | 2,507 |
| | $ | 8,910 |
| | $ | 12,947 |
| | $ | 23,420 |
|
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated StatementStatements of Equity
(Unaudited)
(In thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Accumulated dividends in excess of earnings | | Accumulated other comprehensive income | | Non- controlling interests | | Equity |
| Shares | | Amount | | | | | |
Balance at December 31, 2017 | 112,347,451 |
| | $ | 11 |
| | $ | 1,412,590 |
| | $ | (210,490 | ) | | $ | 1,856 |
| | $ | 125,674 |
| | $ | 1,329,641 |
|
Shares issued under the Equity Incentive Plan | 373,861 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Shares withheld for employee taxes | (70,168 | ) | | — |
| | (1,400 | ) | | — |
| | — |
| | — |
| | (1,400 | ) |
Cancellation of restricted stock | (6,999 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | 3,419 |
| | — |
| | — |
| | — |
| | 3,419 |
|
Cash redemption for non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (560 | ) | | (560 | ) |
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | — |
| | (713 | ) | | — |
| | — |
| | 713 |
| | — |
|
Proceeds from the issuance of common stock | 75,314 |
| | | | 1,508 |
| | — |
| | — |
| | — |
| | 1,508 |
|
Registration expenditures | — |
| | — |
| | (118 | ) | | — |
| | — |
| | — |
| | (118 | ) |
Cash dividends ($0.39 per share) | — |
| | — |
| | — |
| | (43,961 | ) | | — |
| | (4,553 | ) | | (48,514 | ) |
Dividends payable to officers | — |
| | — |
| | — |
| | (160 | ) | | — |
| | — |
| | (160 | ) |
Net income attributable to Retail Opportunity Investments Corp. | — |
| | — |
| | — |
| | 18,041 |
| | — |
| | — |
| | 18,041 |
|
Net income attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 1,885 |
| | 1,885 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 5,379 |
| | — |
| | 5,379 |
|
Balance at June 30, 2018 | 112,719,459 |
| | $ | 11 |
| | $ | 1,415,286 |
| | $ | (236,570 | ) | | $ | 7,235 |
| | $ | 123,159 |
| | $ | 1,309,121 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Accumulated dividends in excess of earnings | | Accumulated other comprehensive income (loss) | | Non- controlling interests | | Equity |
| Shares | | Amount | | | | | |
Balance at December 31, 2018 | 113,992,837 |
| | $ | 11 |
| | $ | 1,441,080 |
| | $ | (256,438 | ) | | $ | 3,561 |
| | $ | 120,214 |
| | $ | 1,308,428 |
|
Shares issued under the Equity Incentive Plan | 445,022 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Shares withheld for employee taxes | (125,072 | ) | | — |
| | (1,986 | ) | | — |
| | — |
| | — |
| | (1,986 | ) |
Cancellation of restricted stock | (999 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | 1,651 |
| | — |
| | — |
| | — |
| | 1,651 |
|
Cash redemption for non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (1,246 | ) | | (1,246 | ) |
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | — |
| | 56 |
| | — |
| | — |
| | (56 | ) | | — |
|
Registration expenditures | — |
| | — |
| | (47 | ) | | — |
| | — |
| | | | (47 | ) |
Cash dividends ($0.1970 per share) | — |
| | — |
| | — |
| | (22,519 | ) | | — |
| | (2,247 | ) | | (24,766 | ) |
Dividends payable to officers | — |
| | — |
| | — |
| | 142 |
| | — |
| | — |
| | 142 |
|
Net income attributable to Retail Opportunity Investments Corp. | — |
| | — |
| | — |
| | 13,250 |
| | — |
| | — |
| | 13,250 |
|
Net income attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 1,333 |
| | 1,333 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (2,810 | ) | | — |
| | (2,810 | ) |
Balance at March 31, 2019 | 114,311,788 |
| | $ | 11 |
| | $ | 1,440,754 |
| | $ | (265,565 | ) | | $ | 751 |
| | $ | 117,998 |
| | $ | 1,293,949 |
|
Cancellation of restricted stock | (3,999 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | 1,852 |
| | — |
| | — |
| | 387 |
| | 2,239 |
|
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | — |
| | 592 |
| | — |
| | — |
| | (592 | ) | | — |
|
Registration expenditures | — |
| | — |
| | (33 | ) | | — |
| | — |
| | — |
| | (33 | ) |
Cash dividends ($0.1970 per share) | — |
| | — |
| | — |
| | (22,517 | ) | | — |
| | (2,247 | ) | | (24,764 | ) |
Dividends payable to officers | — |
| | — |
| | — |
| | 9 |
| | — |
| | (74 | ) | | (65 | ) |
Net income attributable to Retail Opportunity Investments Corp. | — |
| | — |
| | — |
| | 7,585 |
| | — |
| | — |
| | 7,585 |
|
Net income attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 761 |
| | 761 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (5,078 | ) | | — |
| | (5,078 | ) |
Balance at June 30, 2019 | 114,307,789 |
| | $ | 11 |
| | $ | 1,443,165 |
| | $ | (280,488 | ) | | $ | (4,327 | ) | | $ | 116,233 |
| | $ | 1,274,594 |
|
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Equity (continued)
(Unaudited)
(In thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Accumulated dividends in excess of earnings | | Accumulated other comprehensive income | | Non- controlling interests | | Equity |
| Shares | | Amount | | | | | |
Balance at December 31, 2017 | 112,347,451 |
| | $ | 11 |
| | $ | 1,412,590 |
| | $ | (210,490 | ) | | $ | 1,856 |
| | $ | 125,674 |
| | $ | 1,329,641 |
|
Shares issued under the 2009 Equity Incentive Plan | 373,861 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Shares withheld for employee taxes | (70,168 | ) | | — |
| | (1,400 | ) | | — |
| | — |
| | — |
| | (1,400 | ) |
Cancellation of restricted stock | (4,999 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | 1,428 |
| | — |
| | — |
| | — |
| | 1,428 |
|
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | — |
| | (191 | ) | | — |
| | — |
| | 191 |
| | — |
|
Proceeds from the issuance of common stock | 75,314 |
| | — |
| | 1,508 |
| | — |
| | — |
| | — |
| | 1,508 |
|
Registration expenditures | — |
| | — |
| | (48 | ) | | — |
| | — |
| | — |
| | (48 | ) |
Cash dividends ($0.1950 per share) | — |
| | — |
| | — |
| | (21,981 | ) | | — |
| | (2,277 | ) | | (24,258 | ) |
Dividends payable to officers | — |
| | — |
| | — |
| | (72 | ) | | — |
| | — |
| | (72 | ) |
Net income attributable to Retail Opportunity Investments Corp. | — |
| | — |
| | — |
| | 10,702 |
| | — |
| | — |
| | 10,702 |
|
Net income attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 1,122 |
| | 1,122 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 3,808 |
| | — |
| | 3,808 |
|
Balance at March 31, 2018 | 112,721,459 |
| | $ | 11 |
| | $ | 1,413,887 |
| | $ | (221,841 | ) | | $ | 5,664 |
| | $ | 124,710 |
| | $ | 1,322,431 |
|
Cancellation of restricted stock | (2,000 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | 1,991 |
| | — |
| | — |
| | — |
| | 1,991 |
|
Cash redemption for non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (560 | ) | | (560 | ) |
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | — |
| | (522 | ) | | — |
| | — |
| | 522 |
| | — |
|
Registration expenditures | — |
| | — |
| | (70 | ) | | — |
| | — |
| | — |
| | (70 | ) |
Cash dividends ($0.1950 per share) | — |
| | — |
| | — |
| | (21,980 | ) | | — |
| | (2,276 | ) | | (24,256 | ) |
Dividends payable to officers | — |
| | — |
| | — |
| | (88 | ) | | — |
| | — |
| | (88 | ) |
Net income attributable to Retail Opportunity Investments Corp. | — |
| | — |
| | — |
| | 7,339 |
| | — |
| | — |
| | 7,339 |
|
Net income attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 763 |
| | 763 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1,571 |
| | — |
| | 1,571 |
|
Balance at June 30, 2018 | 112,719,459 |
| | $ | 11 |
| | $ | 1,415,286 |
| | $ | (236,570 | ) | | $ | 7,235 |
| | $ | 123,159 |
| | $ | 1,309,121 |
|
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
| |
| | |
|
Net income | $ | 19,926 |
| | $ | 20,448 |
| $ | 22,929 |
| | $ | 19,926 |
|
Adjustments to reconcile net income to cash provided by operating activities: | |
| | |
| |
| | |
|
Depreciation and amortization | 50,548 |
| | 46,703 |
| 49,204 |
| | 50,548 |
|
Amortization of deferred financing costs and mortgage premiums, net | 926 |
| | 1,067 |
| 1,033 |
| | 926 |
|
Straight-line rent adjustment | (2,881 | ) | | (2,340 | ) | (1,726 | ) | | (2,881 | ) |
Amortization of above and below market rent | (7,218 | ) | | (9,319 | ) | (9,938 | ) | | (7,218 | ) |
Amortization relating to stock based compensation | 3,419 |
| | 2,873 |
| 3,890 |
| | 3,419 |
|
Provisions for tenant credit losses | 789 |
| | 979 |
| 1,274 |
| | 789 |
|
Other noncash interest expense | 1,070 |
| | 1,070 |
| 377 |
| | 1,070 |
|
Gain on sale of real estate | | (2,818 | ) | | — |
|
Change in operating assets and liabilities: | |
| | |
| |
| | |
|
Tenant and other receivables | 3,254 |
| | 535 |
| 2,060 |
| | 3,254 |
|
Prepaid expenses | 1,252 |
| | 2,150 |
| 2,673 |
| | 1,252 |
|
Accounts payable and accrued expenses | (2,925 | ) | | (1,393 | ) | (1,037 | ) | | (2,925 | ) |
Other assets and liabilities, net | (1,248 | ) | | 977 |
| (5,540 | ) | | (1,248 | ) |
Net cash provided by operating activities | 66,912 |
| | 63,750 |
| 62,381 |
| | 66,912 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | |
Investments in real estate | (39,176 | ) | | (168,672 | ) | — |
| | (39,176 | ) |
Proceeds from sale of real estate | | 16,305 |
| | — |
|
Improvements to properties | (21,662 | ) | | (18,760 | ) | (18,863 | ) | | (21,662 | ) |
Deposits on real estate acquisitions, net | 500 |
| | (5,000 | ) | — |
| | 500 |
|
Net cash used in investing activities | (60,338 | ) | | (192,432 | ) | (2,558 | ) | | (60,338 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| |
| | |
|
Principal repayments on mortgages | (10,493 | ) | | (8,498 | ) | (273 | ) | | (10,493 | ) |
Proceeds from draws on credit facility | 110,000 |
| | 193,000 |
| 43,000 |
| | 110,000 |
|
Payments on credit facility | (61,500 | ) | | (10,000 | ) | (48,000 | ) | | (61,500 | ) |
Redemption of OP Units | (560 | ) | | (150 | ) | (1,246 | ) | | (560 | ) |
Distributions to OP Unitholders | (4,553 | ) | | (4,349 | ) | (4,494 | ) | | (4,553 | ) |
Deferred financing and other costs | — |
| | (3 | ) | |
Proceeds from the sale of common stock | 1,508 |
| | — |
| — |
| | 1,508 |
|
Registration expenditures | (118 | ) | | (348 | ) | (65 | ) | | (118 | ) |
Dividends paid to common shareholders | (44,045 | ) | | (41,284 | ) | (45,166 | ) | | (44,045 | ) |
Common shares issued under the Equity Incentive Plan | — |
| | 43 |
| |
Shares withheld for employee taxes | (1,400 | ) | | (1,571 | ) | (1,986 | ) | | (1,400 | ) |
Net cash (used in) provided by financing activities | (11,161 | ) | | 126,840 |
| |
Net decrease in cash, cash equivalents and restricted cash | (4,587 | ) | | (1,842 | ) | |
Net cash used in financing activities | | (58,230 | ) | | (11,161 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 1,593 |
| | (4,587 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 16,965 |
| | 13,250 |
| 7,449 |
| | 16,965 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 12,378 |
| | $ | 11,408 |
| $ | 9,042 |
| | $ | 12,378 |
|
| | | | | | |
Other non-cash investing and financing activities: | | | | |
Issuance of OP Units in connection with acquisitions | $ | — |
| | $ | 3,559 |
| |
Other non-cash investing and financing activities increase (decrease): | | | | |
Intangible lease liabilities | $ | 925 |
| | $ | 14,355 |
| $ | — |
| | $ | 925 |
|
Interest rate swap asset | $ | 4,309 |
| | $ | 80 |
| $ | (4,931 | ) | | $ | 4,309 |
|
Interest rate swap liabilities | | $ | 3,335 |
| | $ | — |
|
Accrued real estate improvement costs | $ | (1,074 | ) | | $ | 2,822 |
| $ | 2,888 |
| | $ | 2,493 |
|
Redemption / exchange of OP Units | $ | — |
| | $ | 3,202 |
| |
Disposition of real estate through issuance of mortgage note | | $ | 13,250 |
| | $ | — |
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
Cash and cash equivalents | $ | 10,958 |
| | $ | 11,408 |
| $ | 7,488 |
| | $ | 10,958 |
|
Restricted cash | 1,420 |
| | — |
| 1,554 |
| | 1,420 |
|
Total cash, cash equivalents and restricted cash shown in Statements of Cash Flow | $ | 12,378 |
| | $ | 11,408 |
| |
Total cash, cash equivalents and restricted cash shown in Statements of Cash Flows | | $ | 9,042 |
| | $ | 12,378 |
|
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Balance Sheets
(In thousands)
| | | June 30, 2018 (unaudited) | | December 31, 2017 | June 30, 2019 (unaudited) | | December 31, 2018 |
ASSETS | |
| | |
| |
| | |
|
Real Estate Investments: | |
| | |
| |
| | |
|
Land | $ | 898,436 |
| | $ | 878,797 |
| $ | 887,080 |
| | $ | 894,240 |
|
Building and improvements | 2,265,760 |
| | 2,230,600 |
| 2,257,777 |
| | 2,266,232 |
|
| 3,164,196 |
| | 3,109,397 |
| 3,144,857 |
| | 3,160,472 |
|
Less: accumulated depreciation | 295,602 |
| | 260,115 |
| 359,090 |
| | 329,207 |
|
| | 2,785,767 |
| | 2,831,265 |
|
Mortgage note receivable | | 13,250 |
| | — |
|
Real Estate Investments, net | 2,868,594 |
| | 2,849,282 |
| 2,799,017 |
| | 2,831,265 |
|
Cash and cash equivalents | 10,958 |
| | 11,553 |
| 7,488 |
| | 6,076 |
|
Restricted cash | 1,420 |
| | 5,412 |
| 1,554 |
| | 1,373 |
|
Tenant and other receivables, net | 42,095 |
| | 43,257 |
| 44,304 |
| | 46,832 |
|
Deposits | — |
| | 500 |
| |
Acquired lease intangible assets, net | 78,246 |
| | 82,778 |
| 66,285 |
| | 72,109 |
|
Prepaid expenses | 1,600 |
| | 2,853 |
| 1,479 |
| | 4,194 |
|
Deferred charges, net | 36,150 |
| | 37,167 |
| 30,323 |
| | 33,857 |
|
Other | 10,606 |
| | 6,396 |
| 18,519 |
| | 7,365 |
|
Total assets | $ | 3,049,669 |
| | $ | 3,039,198 |
| $ | 2,968,969 |
| | $ | 3,003,071 |
|
| | | | | | |
LIABILITIES AND CAPITAL | |
| | |
| |
| | |
|
Liabilities: | |
| | |
| |
| | |
|
Term loan | $ | 298,942 |
| | $ | 298,816 |
| $ | 299,201 |
| | $ | 299,076 |
|
Credit facility | 189,259 |
| | 140,329 |
| 149,120 |
| | 153,689 |
|
Senior Notes | 940,762 |
| | 940,086 |
| 942,145 |
| | 941,449 |
|
Mortgage notes payable | 97,884 |
| | 107,915 |
| 88,019 |
| | 88,511 |
|
Acquired lease intangible liabilities, net | 173,911 |
| | 178,984 |
| 154,059 |
| | 166,146 |
|
Accounts payable and accrued expenses | 14,580 |
| | 18,638 |
| 15,287 |
| | 15,488 |
|
Tenants’ security deposits | 6,997 |
| | 6,771 |
| 7,118 |
| | 7,065 |
|
Other liabilities | 18,213 |
| | 18,018 |
| 39,426 |
| | 23,219 |
|
Total liabilities | 1,740,548 |
| | 1,709,557 |
| 1,694,375 |
| | 1,694,643 |
|
| | | | | | |
Commitments and contingencies |
|
| |
|
|
|
| |
|
|
| | | | | | |
Capital: | |
| | |
| |
| | |
|
Partners’ capital, unlimited partnership units authorized: | |
| | |
| |
| | |
|
ROIC capital | 1,178,727 |
| | 1,202,111 |
| 1,162,688 |
| | 1,184,653 |
|
Limited partners’ capital | 123,159 |
| | 125,674 |
| 116,233 |
| | 120,214 |
|
Accumulated other comprehensive income | 7,235 |
| | 1,856 |
| |
Accumulated other comprehensive (loss) income | | (4,327 | ) | | 3,561 |
|
Total capital | 1,309,121 |
| | 1,329,641 |
| 1,274,594 |
| | 1,308,428 |
|
Total liabilities and capital | $ | 3,049,669 |
| | $ | 3,039,198 |
| $ | 2,968,969 |
| | $ | 3,003,071 |
|
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(In thousands, except unit data)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | | | | |
| | |
| | | | | |
| | |
|
Base rents | $ | 55,050 |
| | $ | 50,528 |
| | $ | 110,427 |
| | $ | 102,007 |
| |
Recoveries from tenants | 16,471 |
| | 15,222 |
| | 32,632 |
| | 28,890 |
| |
Rental revenue | | $ | 71,821 |
| | $ | 71,521 |
| | $ | 147,188 |
| | $ | 143,059 |
|
Other income | 820 |
| | 890 |
| | 3,677 |
| | 1,643 |
| 1,109 |
| | 820 |
| | 1,795 |
| | 3,677 |
|
Total revenues | 72,341 |
| | 66,640 |
| | 146,736 |
| | 132,540 |
| 72,930 |
| | 72,341 |
| | 148,983 |
| | 146,736 |
|
| | | | | | | | | | | | | | |
Operating expenses | | | | | |
| | |
| | | | | |
| | |
|
Property operating | 11,017 |
| | 9,628 |
| | 21,495 |
| | 18,928 |
| 10,710 |
| | 11,017 |
| | 21,771 |
| | 21,495 |
|
Property taxes | 7,914 |
| | 7,647 |
| | 15,733 |
| | 14,715 |
| 7,832 |
| | 7,914 |
| | 16,070 |
| | 15,733 |
|
Depreciation and amortization | 25,331 |
| | 23,645 |
| | 50,548 |
| | 46,703 |
| 24,443 |
| | 25,331 |
| | 49,204 |
| | 50,548 |
|
General and administrative expenses | 3,990 |
| | 3,817 |
| | 7,521 |
| | 7,316 |
| 4,950 |
| | 3,990 |
| | 9,226 |
| | 7,521 |
|
Acquisition transaction costs | — |
| | 4 |
| | — |
| | 4 |
| |
Other expense | 274 |
| | 225 |
| | 343 |
| | 274 |
| 1,224 |
| | 274 |
| | 1,317 |
| | 343 |
|
Total operating expenses | 48,526 |
| | 44,966 |
| | 95,640 |
| | 87,940 |
| 49,159 |
| | 48,526 |
| | 97,588 |
| | 95,640 |
|
| | | | | | | | |
Gain on sale of real estate | | 180 |
| | — |
| | 2,818 |
| | — |
|
| | | | | | | | | | | | | | |
Operating income | 23,815 |
| | 21,674 |
| | 51,096 |
| | 44,600 |
| 23,951 |
| | 23,815 |
| | 54,213 |
| | 51,096 |
|
| | | | | | | | | | | | | | |
Non-operating expenses | | | | | |
| | |
| | | | | |
| | |
|
Interest expense and other finance expenses | (15,713 | ) | | (12,477 | ) | | (31,170 | ) | | (24,152 | ) | (15,605 | ) | | (15,713 | ) | | (31,284 | ) | | (31,170 | ) |
Net Income Attributable to Retail Opportunity Investments Partnership, LP | $ | 8,102 |
| | $ | 9,197 |
| | $ | 19,926 |
| | $ | 20,448 |
| $ | 8,346 |
| | $ | 8,102 |
| | $ | 22,929 |
| | $ | 19,926 |
|
| | | | | | | | | | | | | | |
Earnings per unit - basic and diluted | $ | 0.06 |
| | $ | 0.08 |
| | $ | 0.16 |
| | $ | 0.17 |
| $ | 0.07 |
| | $ | 0.06 |
| | $ | 0.18 |
| | $ | 0.16 |
|
| | | | | | | | | | | | | | |
Distributions per unit | $ | 0.1950 |
| | $ | 0.1875 |
| | $ | 0.3900 |
| | $ | 0.3750 |
| $ | 0.1970 |
| | $ | 0.1950 |
| | $ | 0.3940 |
| | $ | 0.3900 |
|
| | | | | | | | | | | | | | |
Comprehensive income: | | | | | |
| | |
| | | | | |
| | |
|
Net income attributable to Retail Opportunity Investments Partnership, LP | $ | 8,102 |
| | $ | 9,197 |
| | $ | 19,926 |
| | $ | 20,448 |
| $ | 8,346 |
| | $ | 8,102 |
| | $ | 22,929 |
| | $ | 19,926 |
|
Other comprehensive income: | | | | | |
| | |
| |
Unrealized swap derivative gain (loss) arising during the period | 1,397 |
| | (64 | ) | | 4,787 |
| | 97 |
| |
Other comprehensive (loss) income: | | | | | | |
| | |
|
Unrealized swap derivative (loss) gain arising during the period | | (4,815 | ) | | 1,397 |
| | (7,423 | ) | | 4,787 |
|
Reclassification adjustment for amortization of interest expense included in net income | 174 |
| | 497 |
| | 592 |
| | 1,052 |
| (263 | ) | | 174 |
| | (465 | ) | | 592 |
|
Other comprehensive income | 1,571 |
| | 433 |
| | 5,379 |
| | 1,149 |
| |
Other comprehensive (loss) income | | (5,078 | ) | | 1,571 |
| | (7,888 | ) | | 5,379 |
|
Comprehensive income attributable to Retail Opportunity Investments Partnership, LP | $ | 9,673 |
| | $ | 9,630 |
| | $ | 25,305 |
| | $ | 21,597 |
| $ | 3,268 |
| | $ | 9,673 |
| | $ | 15,041 |
| | $ | 25,305 |
|
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated StatementStatements of Partners’ Capital
(Unaudited)
(In thousands, except unit data)
|
| | | | | | | | | | | | | | | | | | | | | |
| Limited Partner’s Capital (1) | | ROIC Capital (2) | | Accumulated other comprehensive income | | |
| Units | | Amount | | Units | | Amount | | | Capital |
Balance at December 31, 2017 | 11,678,991 |
| | $ | 125,674 |
| | 112,347,451 |
| | $ | 1,202,111 |
| | $ | 1,856 |
| | $ | 1,329,641 |
|
OP units issued under the Equity Incentive Plan | — |
| | — |
| | 373,861 |
| | — |
| | — |
| | — |
|
OP Units withheld for employee taxes | — |
| | — |
| | (70,168 | ) | | (1,400 | ) | | — |
| | (1,400 | ) |
Cancellation of OP Units | — |
| | — |
| | (6,999 | ) | | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | — |
| | 3,419 |
| | — |
| | 3,419 |
|
Cash redemption of OP Units | (30,889 | ) | | (560 | ) | | — |
| | — |
| | — |
| | (560 | ) |
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | 713 |
| | — |
| | (713 | ) | | — |
| | — |
|
Issuance of OP Units in connection with sale of common stock | — |
| | — |
| | 75,314 |
| | 1,508 |
| | — |
| | 1,508 |
|
Registration expenditures | — |
| | — |
| | — |
| | (118 | ) | | — |
| | (118 | ) |
Cash distributions ($0.39 per unit) | — |
| | (4,553 | ) | | — |
| | (43,961 | ) | | — |
| | (48,514 | ) |
Distributions payable to officers | — |
| | — |
| | — |
| | (160 | ) | | — |
| | (160 | ) |
Net income attributable to Retail Opportunity Investments Partnership, LP | — |
| | 1,885 |
| | — |
| | 18,041 |
| | — |
| | 19,926 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 5,379 |
| | 5,379 |
|
Balance at June 30, 2018 | 11,648,102 |
| | $ | 123,159 |
| | 112,719,459 |
| | $ | 1,178,727 |
| | $ | 7,235 |
| | $ | 1,309,121 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| Limited Partner’s Capital (1) | | ROIC Capital (2) | | Accumulated other comprehensive income (loss) | | |
| Units | | Amount | | Units | | Amount | | | Capital |
Balance at December 31, 2018 | 11,477,041 |
| | $ | 120,214 |
| | 113,992,837 |
| | $ | 1,184,653 |
| | $ | 3,561 |
| | $ | 1,308,428 |
|
OP units issued under the Equity Incentive Plan | — |
| | — |
| | 445,022 |
| | — |
| | — |
| | — |
|
OP Units withheld for employee taxes | — |
| | — |
| | (125,072 | ) | | (1,986 | ) | | — |
| | (1,986 | ) |
Cancellation of OP Units | — |
| | — |
| | (999 | ) | | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | — |
| | 1,651 |
| | — |
| | 1,651 |
|
Cash redemption of OP Units | (70,000 | ) | | (1,246 | ) | | — |
| | — |
| | — |
| | (1,246 | ) |
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | (56 | ) | | — |
| | 56 |
| | — |
| | — |
|
Registration expenditures | — |
| | | | — |
| | (47 | ) | | — |
| | (47 | ) |
Cash distributions ($0.1970 per unit) | — |
| | (2,247 | ) | | — |
| | (22,519 | ) | | — |
| | (24,766 | ) |
Distributions payable to officers | — |
| | — |
| | — |
| | 142 |
| | — |
| | 142 |
|
Net income attributable to Retail Opportunity Investments Partnership, LP | — |
| | 1,333 |
| | — |
| | 13,250 |
| | — |
| | 14,583 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (2,810 | ) | | (2,810 | ) |
Balance at March 31, 2019 | 11,407,041 |
| | $ | 117,998 |
| | 114,311,788 |
| | $ | 1,175,200 |
| | $ | 751 |
| | $ | 1,293,949 |
|
Cancellation of OP Units | — |
| | — |
| | (3,999 | ) | | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | 387 |
| | — |
| | 1,852 |
| | — |
| | 2,239 |
|
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | (592 | ) | | — |
| | 592 |
| | — |
| | — |
|
Registration expenditures | — |
| | — |
| | — |
| | (33 | ) | | — |
| | (33 | ) |
Cash distributions ($0.1970 per unit) | — |
| | (2,247 | ) | | — |
| | (22,517 | ) | | — |
| | (24,764 | ) |
Distributions payable to officers | — |
| | (74 | ) | | — |
| | 9 |
| | — |
| | (65 | ) |
Net income attributable to Retail Opportunity Investments Partnership, LP | — |
| | 761 |
| | — |
| | 7,585 |
| | — |
| | 8,346 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (5,078 | ) | | (5,078 | ) |
Balance at June 30, 2019 | 11,407,041 |
| | $ | 116,233 |
| | 114,307,789 |
| | $ | 1,162,688 |
| | $ | (4,327 | ) | | $ | 1,274,594 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statements of Partners’ Capital (continued)
(Unaudited)
(In thousands, except unit data)
|
| | | | | | | | | | | | | | | | | | | | | |
| Limited Partner’s Capital (1) | | ROIC Capital (2) | | Accumulated other comprehensive income | | |
| Units | | Amount | | Units | | Amount | | | Capital |
Balance at December 31, 2017 | 11,678,991 |
| | $ | 125,674 |
| | 112,347,451 |
| | $ | 1,202,111 |
| | $ | 1,856 |
| | $ | 1,329,641 |
|
OP units issued under the 2009 Equity Incentive Plan | — |
| | — |
| | 373,861 |
| | — |
| | — |
| | — |
|
OP Units withheld for employee taxes | — |
| | — |
| | (70,168 | ) | | (1,400 | ) | | — |
| | (1,400 | ) |
Cancellation of OP Units | — |
| | — |
| | (4,999 | ) | | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | — |
| | 1,428 |
| | — |
| | 1,428 |
|
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | 191 |
| | — |
| | (191 | ) | | — |
| | — |
|
Issuance of OP Units in connection with sale of common stock | — |
| | — |
| | 75,314 |
| | 1,508 |
| | — |
| | 1,508 |
|
Registration expenditures | — |
| | — |
| | — |
| | (48 | ) | | — |
| | (48 | ) |
Cash distributions ($0.1950 per unit) | — |
| | (2,277 | ) | | — |
| | (21,981 | ) | | — |
| | (24,258 | ) |
Distributions payable to officers | — |
| | — |
| | — |
| | (72 | ) | | — |
| | (72 | ) |
Net income attributable to Retail Opportunity Investments Partnership, LP | — |
| | 1,122 |
| | — |
| | 10,702 |
| | — |
| | 11,824 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 3,808 |
| | 3,808 |
|
Balance at March 31, 2018 | 11,678,991 |
| | $ | 124,710 |
| | 112,721,459 |
| | $ | 1,192,057 |
| | $ | 5,664 |
| | $ | 1,322,431 |
|
Cancellation of OP Units | — |
| | — |
| | (2,000 | ) | | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | — |
| | 1,991 |
| | — |
| | 1,991 |
|
Cash redemption of OP Units | (30,889 | ) | | (560 | ) | | — |
| | — |
| | — |
| | (560 | ) |
Adjustment to non-controlling interests ownership in Operating Partnership | — |
| | 522 |
| | — |
| | (522 | ) | | — |
| | — |
|
Registration expenditures | — |
| | — |
| | — |
| | (70 | ) | | — |
| | (70 | ) |
Cash distributions ($0.1950 per unit) | — |
| | (2,276 | ) | | — |
| | (21,980 | ) | | — |
| | (24,256 | ) |
Distributions payable to officers | — |
| | — |
| | — |
| | (88 | ) | | — |
| | (88 | ) |
Net income attributable to Retail Opportunity Investments Partnership, LP | — |
| | 763 |
| | — |
| | 7,339 |
| | — |
| | 8,102 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1,571 |
| | 1,571 |
|
Balance at June 30, 2018 | 11,648,102 |
| | $ | 123,159 |
| | 112,719,459 |
| | $ | 1,178,727 |
| | $ | 7,235 |
| | $ | 1,309,121 |
|
| |
(1) | Consists of limited partnership interests held by third parties. |
| |
(2) | Consists of general and limited partnership interests held by ROIC. |
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statements of Cash Flow
(Unaudited)
(In thousands) | | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
| |
| | |
|
Net income | $ | 19,926 |
| | $ | 20,448 |
| $ | 22,929 |
| | $ | 19,926 |
|
Adjustments to reconcile net income to cash provided by operating activities: | |
| | |
| |
| | |
|
Depreciation and amortization | 50,548 |
| | 46,703 |
| 49,204 |
| | 50,548 |
|
Amortization of deferred financing costs and mortgage premiums, net | 926 |
| | 1,067 |
| 1,033 |
| | 926 |
|
Straight-line rent adjustment | (2,881 | ) | | (2,340 | ) | (1,726 | ) | | (2,881 | ) |
Amortization of above and below market rent | (7,218 | ) | | (9,319 | ) | (9,938 | ) | | (7,218 | ) |
Amortization relating to stock based compensation | 3,419 |
| | 2,873 |
| 3,890 |
| | 3,419 |
|
Provisions for tenant credit losses | 789 |
| | 979 |
| 1,274 |
| | 789 |
|
Other noncash interest expense | 1,070 |
| | 1,070 |
| 377 |
| | 1,070 |
|
Gain on sale of real estate | | (2,818 | ) | | — |
|
Change in operating assets and liabilities: | |
| | |
| |
| | |
|
Tenant and other receivables | 3,254 |
| | 535 |
| 2,060 |
| | 3,254 |
|
Prepaid expenses | 1,252 |
| | 2,150 |
| 2,673 |
| | 1,252 |
|
Accounts payable and accrued expenses | (2,925 | ) | | (1,393 | ) | (1,037 | ) | | (2,925 | ) |
Other assets and liabilities, net | (1,248 | ) | | 977 |
| (5,540 | ) | | (1,248 | ) |
Net cash provided by operating activities | 66,912 |
| | 63,750 |
| 62,381 |
| | 66,912 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| | | |
|
Investments in real estate | (39,176 | ) | | (168,672 | ) | — |
| | (39,176 | ) |
Proceeds from sale of real estate | | 16,305 |
| | — |
|
Improvements to properties | (21,662 | ) | | (18,760 | ) | (18,863 | ) | | (21,662 | ) |
Deposits on real estate acquisitions, net | 500 |
| | (5,000 | ) | — |
| | 500 |
|
Net cash used in investing activities | (60,338 | ) | | (192,432 | ) | (2,558 | ) | | (60,338 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| |
| | |
|
Principal repayments on mortgages | (10,493 | ) | | (8,498 | ) | (273 | ) | | (10,493 | ) |
Proceeds from draws on credit facility | 110,000 |
| | 193,000 |
| 43,000 |
| | 110,000 |
|
Payments on credit facility | (61,500 | ) | | (10,000 | ) | (48,000 | ) | | (61,500 | ) |
Redemption of OP Units | (560 | ) | | (150 | ) | (1,246 | ) | | (560 | ) |
Deferred financing and other costs | — |
| | (3 | ) | |
Proceeds from the issuance of OP Units in connection with issuance of common stock | 1,508 |
| | — |
| — |
| | 1,508 |
|
Registration expenditures | (118 | ) | | (348 | ) | (65 | ) | | (118 | ) |
Distributions to OP Unitholders | (48,598 | ) | | (45,633 | ) | (49,660 | ) | | (48,598 | ) |
Issuance of OP Units under the Equity Incentive Plan | — |
| | 43 |
| |
OP Units withheld for employee taxes | (1,400 | ) | | (1,571 | ) | (1,986 | ) | | (1,400 | ) |
Net cash (used in) provided by financing activities | (11,161 | ) | | 126,840 |
| |
Net decrease in cash, cash equivalents and restricted cash | (4,587 | ) | | (1,842 | ) | |
Net cash used in financing activities | | (58,230 | ) | | (11,161 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 1,593 |
| | (4,587 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 16,965 |
| | 13,250 |
| 7,449 |
| | 16,965 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 12,378 |
| | $ | 11,408 |
| $ | 9,042 |
| | $ | 12,378 |
|
| | | | | | |
Other non-cash investing and financing activities: | |
| | |
| |
Issuance of OP Units in connection with acquisitions | $ | — |
| | $ | 3,559 |
| |
Other non-cash investing and financing activities increase (decrease): | | |
| | |
|
Intangible lease liabilities | $ | 925 |
| | $ | 14,355 |
| $ | — |
| | $ | 925 |
|
Interest rate swap asset | $ | 4,309 |
| | $ | 80 |
| $ | (4,931 | ) | | $ | 4,309 |
|
Interest rate swap liabilities | | $ | 3,335 |
| | $ | — |
|
Accrued real estate improvement costs | $ | (1,074 | ) | | $ | 2,822 |
| $ | 2,888 |
| | $ | 2,493 |
|
Redemption / exchange of OP Units | $ | — |
| | $ | 3,202 |
| |
Disposition of real estate through issuance of mortgage note | | $ | 13,250 |
| | $ | — |
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
Cash and cash equivalents | $ | 10,958 |
| | $ | 11,408 |
| $ | 7,488 |
| | $ | 10,958 |
|
Restricted cash | 1,420 |
| | — |
| 1,554 |
| | 1,420 |
|
Total cash, cash equivalents and restricted cash shown in Statements of Cash Flow | $ | 12,378 |
| | $ | 11,408 |
| |
Total cash, cash equivalents and restricted cash shown in Statements of Cash Flows | | $ | 9,042 |
| | $ | 12,378 |
|
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
Business
Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”), is a fully integrated and self-managed real estate investment trust (“REIT”). ROIC specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers on the west coast of the United States anchored by supermarkets and drugstores.
ROIC is organized in a traditional umbrella partnership real estate investment trust (“UpREIT”) format pursuant to which Retail Opportunity Investments GP, LLC, its wholly-owned subsidiary, serves as the general partner of, and ROIC conducts substantially all of its business through, its operating partnership subsidiary, Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), together with its subsidiaries. Unless otherwise indicated or unless the context requires otherwise, all references to the “Company”, “we,” “us,” “our,” or “our company” refer to ROIC together with its consolidated subsidiaries, including the Operating Partnership.
With the approval of its stockholders, ROIC reincorporated as a Maryland corporation on June 2, 2011. ROIC began operations as a Delaware corporation, known as NRDC Acquisition Corp., which was incorporated on July 10, 2007, for the purpose of acquiring assets or operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination. On October 20, 2009, ROIC’s stockholders and warrantholders approved, among other things, the steps to be taken by ROIC to continue its business as a corporation that has elected to qualify as a REIT for U.S. federal income tax purposes.
ROIC’s only material asset is its ownership of direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, which is the sole general partner of the Operating Partnership. As a result, ROIC does not conduct business itself, other than acting as the parent company and issuing equity from time to time. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by ROIC, which are contributed to the Operating Partnership, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) or through the issuance of operating partnership units (“OP Units”) of the Operating Partnership.
Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-18, Restricted Cash. ASU No. 2016-18 requires companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Additionally, ASU No. 2016-18 requires a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. ASU No. 2016-18 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all periods presented. The Company adopted ASU No. 2018-16 effective January 1, 2018. The adoption of ASU No. 2016-18 impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.
In February 2016, the FASB issued ASU No. 2016-2, “Leases.” ASU No. 2016-2 is expected to resultresulted in the recognition of a right-to-use asset and related liability to account for future obligations under ground lease agreements for which the Company is the lessee. As of June 30, 2018, the remaining contractual payments under ground lease agreements aggregated approximately $41.1 million. In addition, this ASU No. 2016-2 will requirerequires that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained willare no longer be capitalized as initial direct costs and instead will beare expensed as incurred.
As a lessor, under current accounting standards, the Company recognizes rental revenue from its operating leases on a straight-line basis over the respective lease terms. The Company commences recognition of rental revenue at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property. Under current accounting standards, tenant recoveries related to payments of real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses are considered lease components. The Company recognizes these tenant recoveries as
revenue when services are rendered in an amount equal to the related operating expenses incurred that are recoverable under the terms of the applicable lease.
Under ASU No. 2016-2, each lease agreement will be evaluated to identify the lease components and nonlease components at lease inception. The total consideration in the lease agreement will be allocated to the lease and nonlease components based on their relative standalone selling prices. Lessors will continue to recognize the lease revenue component using an approach that is substantially equivalent to existing guidance for operating leases (straight-line basis). In JanuaryJuly 2018, the FASB issued a proposedan amendment to ASU No. 2016-2 that would allowallows lessors to elect, as a practical expedient, not to allocate the total consideration to lease and nonlease components based on their relative standalone selling prices. If adopted, thisThis practical expedient will allowallows lessors to elect a combined single lease component presentation if (i) the timing and pattern of the revenue recognition of the combined single lease component is the same, and (ii) the related lease component and, the combined single lease component would be classified as an operating lease.
The amendment also provides a transition option that permits the application of the new guidance as of the adoption date rather than to all periods presented. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
The Company plans to adoptadopted the provisions of ASU No. 2016-2 effective January 1, 2019 using the modified retrospective approach.approach and accordingly, recognized a lease liability of approximately $18.0 million, which is included in Other liabilities on the accompanying balance sheet, and a related right-to-use asset of approximately $17.0 million, which is included in Other assets on the accompanying balance sheet, for all operating leases in which the Company is a lessee based on the present value of the minimum rental payments remaining as of the initial application date. The present value of the remaining lease payments was
calculated for each operating lease using each respective remaining lease term and a corresponding estimated incremental borrowing rate, which is the interest rate that the Company estimates it would have to pay to borrow on a collateralized basis over a similar term.
Based on its election of the package of practical expedients, the Company was not required to reassess whether any expired or existing contracts are or contain leases, reassess the lease classification for any expired or existing leases, or reassess initial direct costs for any existing leases. Accordingly, the Company’s ground lease agreements for which the Company is the lessee will continue to be accounted for as operating leases under the new standard. Further, the Company elected the practical expedient to account for both its lease and non-lease components as a combined single lease component and elected the optional transition method permitting January 1, 2019 to be its initial application date. Additionally, leasing payroll-related costs that are incurred regardless of whether leases are obtained are no longer capitalized as initial direct costs and instead are expensed as incurred. These costs amounted to approximately $277,000 and $611,000 during the three and six months ended June 30, 2018, respectively. Further, bad debt, which has previously been recorded in Property operating, has now been classified as a contra-revenue account in Rental revenue in the Company’s consolidated statements of operations and comprehensive income.
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Topics.” ASU No. 2016-13 requires companies to adopt a new approach to estimating credit losses on certain types of financial instruments, such as trade and other receivables and loans. The standard requires entities to estimate a lifetime expected credit loss for most financial instruments, including trade receivables. ASU 2016-13 will be effective for the Company beginning on January 1, 2020, with early adoption permitted. The Company continues to evaluate the impact this pronouncement will have on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-9, “Revenue from Contracts with Customers.” The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for reporting periods beginning after December 15, 2017. As discussed above, leases are specifically excluded from ASU No. 2014-9 and will be governed by the applicable lease codification; however, this update may have implications on certain variable payment terms included in lease agreements. Upon adoption of ASU No. 2016-2 in 2019, the Company may be required to classify its tenant recoveries into lease and nonlease components, whereby the nonlease components would be subject to ASU No. 2014-9, pending the resolution of the proposed amendment issued by the FASB in January 2018. Property services categorized as nonlease components that are reimbursed by the Company’s tenants may need to be presented on a net basis if it is determined that the Company holds an agent arrangement. The Company adopted the provisions of ASU No. 2014-9 effective January 1, 2018 using the modified retrospective approach. The Company evaluated the revenue recognition for all contracts within this scope under existing accounting standards and under ASU No. 2014-9 and confirmed that there were no differences in the amounts recognized or the pattern of recognition. Therefore, the adoption of ASU 2014-9 did not result in an adjustment to the Company’s retained earnings on January 1, 2018.
Principles of Consolidation
The accompanying consolidated financial statements are prepared on the accrual basis in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, the consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and the results of operations and cash flows for the periods presented. Results of operations for the three and six month periods ended June 30, 20182019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.2019. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017.2018.
The consolidated financial statements include the accounts of the Company and those of its subsidiaries, which are wholly-owned or controlled by the Company. Entities which the Company does not control through its voting interest and entities which are variable interest entities (“VIEs”), but where it is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.
The Company follows the FASB guidance for determining whether an entity is a VIE and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The Company has concluded that the Operating Partnership is a VIE, and because they have both the power and the rights to control the Operating Partnership, they are the primary beneficiary and are required to continue to consolidate the Operating Partnership.
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of
equity in the consolidated balance sheet and modify the presentation of net income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the disclosure of contingent assets and liabilities, the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods covered by the financial statements. The most significant assumptions and estimates relate to the purchase price allocations, depreciable lives, revenue recognition and the collectability of tenant receivables, other receivables, notes receivables, the valuation of performance-based restricted stock, stock options,LTIPs, and derivatives. Actual results could differ from these estimates.
Federal Income Taxes
The Company has elected to qualify as a REIT under Sections 856-860 of the Internal Revenue Code (the “Code”). Under those sections, a REIT that, among other things, distributes at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) and meets certain other qualifications prescribed by the Code, will not be taxed on that portion of its taxable income that is distributed. Although it may qualify as a REIT for U.S. federal income tax purposes, the Company is subject to state income or franchise taxes in certain states in which some of its properties are located. In addition, taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiary (“TRS”), if any, is fully subject to U.S. federal, state and local income taxes. For all periods from inception through September 26, 2013 the Operating Partnership had been an entity disregarded from its sole owner, ROIC, for U.S. federal income tax purposes and as such had not been subject to U.S. federal income taxes. Effective September 27, 2013, the Operating Partnership issued OP Units in connection with the acquisitions of two shopping centers. Accordingly, the Operating Partnership ceased being a disregarded entity and instead is being treated as a partnership for U.S. federal income tax purposes.
The Company follows the FASB guidance that defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The FASB also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company records interest and penalties relating to unrecognized tax benefits, if any, as interest expense. As of June 30, 2018,2019, the statute of limitations for the tax years 20142015 through and including 20162017 remain open for examination by the Internal Revenue Service (“IRS”) and state taxing authorities.
ROIC intends to make regular quarterly distributions to holders of its common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. ROIC intends to pay regular quarterly dividends to stockholders in an amount not less than its net taxable income, if and to the extent authorized by its board of directors. Before ROIC pays any dividend, whether for U.S. federal income tax purposes or otherwise, it must first meet both its operating requirements and its debt service on debt. If ROIC’s cash available for distribution is less than its net taxable income, it could be required to sell assets or borrow funds to make cash distributions or it may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
Real Estate Investments
All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred. The Company expenses transaction costs associated with business combinations and unsuccessful property asset acquisitions in the period incurred and capitalizes transaction costs associated with successful property asset acquisitions. During the six months ended June 30, 20182019 and 2017,2018, capitalized costs related to the improvement or replacement of real estate properties were approximately $20.6$21.1 million and $21.6$20.6 million, respectively.
The Company evaluates each acquisition of real estate to determine if the acquired property meets the definition of a business and needs to be accounted for as a business combination. Under ASU No. 2017-1, the Company first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If this threshold is met, the acquired property does not meet the definition of a business and is accounted for as an asset acquisition. The Company expects that acquisitions of real estate properties will not meet the revised definition of a business because
substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets).
The Company recognizes the acquisition of real estate properties, including acquired tangible assets (consisting of land, buildings and improvements), and acquired intangible assets and liabilities (consisting of above-market and below-market leases and acquired in-place leases) 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). The relative fair values used to allocate the cost of an asset acquisition are determined using the same methodologies and assumptions the Company utilizes to determine fair value in a business combination.
Acquired lease intangible assets include above-market leases and acquired in-place leases, and acquired lease intangible liabilities represent below-market leases, in the accompanying consolidated balance sheets. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management’s determination of the relative fair values of these assets. In valuing an acquired property’s intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, and estimates of lost rental revenue during the expected lease-up periods based on management’s evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs. Leasing commissions, legal and other related costs (“lease origination costs”) are classified as deferred charges in the accompanying consolidated balance sheets.
The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant. Above-market and below-market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of acquisition. Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The value of the above-market and below-market leases is amortized to base rental income, over the terms of the respective leases including option periods, if applicable. The value of in-place leases areis 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 expenses transaction costs associated with business combinations and unsuccessful property asset acquisitions in the period incurred and capitalizes transaction costs associated with successful property asset acquisitions. In conjunction with the Company’s pursuit and acquisition of real estate investments, the Company did not expense any acquisition transaction costs during the three and six months ended June 30, 2019 or 2018.
Sales of real estate are recognized only when it is determined that the Company will collect substantially all of the consideration to which it is entitled, possession and other attributes of ownership have been transferred to the buyer and the Company has no significant continuing involvement. The application of these criteria can be complex and requires the Company to make assumptions. Management has determined that all of these criteria were met for all real estate sold during the periods presented.
Asset Impairment
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to aggregate future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value. Management does not believe that the value of any of the Company’s real estate investments was impaired at June 30, 2019 or December 31, 2018.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed the federally insured limit by the Federal Deposit Insurance Corporation. The Company has not experienced any losses related to these balances.
Restricted Cash
The terms of the Company’s mortgage loans payable may require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established and is not available to fund other property-level or Company-level obligations.
Revenue Recognition
Management has determined that all of the Company’s leases with its various tenants are operating leases. Rental income is generally recognized based on the terms of leases entered into with tenants. In those instances in which the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition and lease incentive amortization when possession or control of the space is turned over to the tenant for tenant work to begin. Minimum rental income from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Percentage rent is recognized when a specific tenant’s sales breakpoint is achieved. PropertyPrior to January 1, 2019, the Company considered property operating expense recoveries from tenants of common area maintenance, real estate taxes and other recoverable costs are recognized inas lease components. Effective January 1, 2019, each lease agreement is evaluated to identify the periodlease and nonlease components at lease inception. The Company elected the single component practical expedient, which allows lessors to elect a combined single lease component presentation if (i) the timing and pattern of the revenue recognition of the combined single lease component is the same, and (ii) the related expenseslease component and, the combined single lease component would be classified as an operating lease. As a result of this assessment, rental revenues and tenant recoveries from the lease of real estate assets are incurred.accounted for as a single component. Lease incentives are amortized as a reduction of rental revenue over the respective tenant lease terms.
Termination fees (included in otherOther income in the consolidated statements of operations and comprehensive income) are fees that the Company has agreed to accept in consideration for permitting certain tenants to terminate their lease prior to the contractual expiration date. The Company recognizes termination fees when the following conditions are met: (a) the termination agreement is executed; (b) the termination fee is determinable; (c) all landlord services pursuant to the terminated lease have been rendered; and (d) collectability of the termination fee is assured. Interest income is recognized as it is earned. Gains or losses on disposition of properties are recorded when the criteria for recognizing such gains or losses have been met.
The Company must make estimates as to the collectability of its accounts receivable related to base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes accounts receivable by considering tenant creditworthiness, current economic trends, and changes in tenants’ payment patterns when evaluating the adequacy of the allowance for doubtful accounts receivable. The Company also provides an allowance for future credit losses of the deferred straight-line rents receivable. The provision for doubtful accounts at June 30, 20182019 and December 31, 20172018 was approximately $6.7$7.8 million and $6.4$6.9 million, respectively.
Depreciation and Amortization
The Company uses the straight-line method for depreciation and amortization. Buildings are depreciated over the estimated useful lives which the Company estimates to be 39-40 years. Property improvements are depreciated over the estimated useful lives that range from 10 to 20 years. Furniture and fixtures are depreciated over the estimated useful lives that range from 3 to 10 years. Tenant improvements are amortized over the shorter of the life of the related leases or their useful life.
Deferred Leasing and Internal Capitalized Leasing Costs
Costs incurred in obtaining tenant leases (principally leasing commissions and acquired lease origination costs) are amortized ratably over the life of the tenant leases. The amortization of deferred leasing costs is included in Depreciation and amortization in the Consolidated Statementsconsolidated statements of Operations. The Company currently capitalizes a portion of payroll-related costs related to its leasing personnel associated with new leasesoperations and lease renewals. These costs are amortized over the life of the respective leases. During the three months ended June 30, 2018 and 2017, the Company capitalized approximately $277,000 and $258,000, respectively. During the six months ended June 30, 2018 and 2017, the Company capitalized approximately $611,000 and $570,000, respectively.comprehensive income.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and tenant receivables. The Company places its cash and cash equivalents in excess of insured amounts with high quality financial institutions. The Company performs ongoing credit evaluations of its tenants and requires tenants to provide security deposits.
Earnings Per Share
Basic earnings per share (“EPS”) excludes the impact of dilutive shares and is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock and then shared in the earnings of the Company.
For the three and six months ended June 30, 20182019 and 2017,2018, basic EPS was determined by dividing net income allocable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. Net income during the applicable period is also allocated to the time-based unvested restricted stock as these grants are entitled to receive dividends and are therefore considered a participating security. Time-based unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders other than the holders of time-based unvested restricted stock. The performance-based restricted stock awards outstanding under the Equity Incentive Plan described in Note 7 are excluded from the basic EPS calculation, as these units are not participating securities until they vest.
The following table sets forth the reconciliation between basic and diluted EPS for ROIC (in thousands, except share data):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Net income | $ | 8,102 |
| | $ | 9,197 |
| | $ | 19,926 |
| | $ | 20,448 |
| $ | 8,346 |
| | $ | 8,102 |
| | $ | 22,929 |
| | $ | 19,926 |
|
Less income attributable to non-controlling interests | (763 | ) | | (888 | ) | | (1,885 | ) | | (1,969 | ) | (761 | ) | | (763 | ) | | (2,094 | ) | | (1,885 | ) |
Less earnings allocated to unvested shares | (100 | ) | | (80 | ) | | (201 | ) | | (160 | ) | (113 | ) | | (100 | ) | | (227 | ) | | (201 | ) |
Net income available for common stockholders, basic | $ | 7,239 |
| | $ | 8,229 |
| | $ | 17,840 |
| | $ | 18,319 |
| $ | 7,472 |
| | $ | 7,239 |
| | $ | 20,608 |
| | $ | 17,840 |
|
Numerator: | | | | | |
| | |
| | | | | |
| | |
|
Net income | $ | 8,102 |
| | $ | 9,197 |
| | $ | 19,926 |
| | $ | 20,448 |
| $ | 8,346 |
| | $ | 8,102 |
| | $ | 22,929 |
| | $ | 19,926 |
|
Less earnings allocated to unvested shares | (100 | ) | | (80 | ) | | (201 | ) | | (160 | ) | (113 | ) | | (100 | ) | | (227 | ) | | (201 | ) |
Net income available for common stockholders, diluted | $ | 8,002 |
| | $ | 9,117 |
| | $ | 19,725 |
| | $ | 20,288 |
| $ | 8,233 |
| | $ | 8,002 |
| | $ | 22,702 |
| | $ | 19,725 |
|
Denominator: | | | | | |
| | |
| | | | | |
| | |
|
Denominator for basic EPS – weighted average common equivalent shares | 112,165,453 |
| | 109,267,356 |
| | 112,164,205 |
| | 109,247,194 |
| 113,680,670 |
| | 112,165,453 |
| | 113,680,670 |
| | 112,164,205 |
|
OP units | 11,672,244 |
| | 11,680,311 |
| | 11,675,599 |
| | 11,625,048 |
| 11,407,041 |
| | 11,672,244 |
| | 11,426,378 |
| | 11,675,599 |
|
Restricted stock awards – performance-based | 257,821 |
| | 159,526 |
| | 227,811 |
| | 150,613 |
| |
Performance-based restricted stock awards and LTIP Units | | 273,996 |
| | 257,821 |
| | 255,574 |
| | 227,811 |
|
Stock options | 109,471 |
| | 130,741 |
| | 110,323 |
| | 133,314 |
| 96,525 |
| | 109,471 |
| | 95,491 |
| | 110,323 |
|
Denominator for diluted EPS – weighted average common equivalent shares | 124,204,989 |
| | 121,237,934 |
| | 124,177,938 |
| | 121,156,169 |
| 125,458,232 |
| | 124,204,989 |
| | 125,458,113 |
| | 124,177,938 |
|
Earnings Per Unit
The following table sets forth the reconciliation between basic and diluted earnings per unit for the Operating Partnership (in thousands, except unit data):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | | | | |
| | |
|
Net income | $ | 8,346 |
| | $ | 8,102 |
| | $ | 22,929 |
| | $ | 19,926 |
|
Less earnings allocated to unvested shares | (113 | ) | | (100 | ) | | (227 | ) | | (201 | ) |
Net income available to unitholders, basic and diluted | $ | 8,233 |
| | $ | 8,002 |
| | $ | 22,702 |
| | $ | 19,725 |
|
Denominator: | | | | | |
| | |
|
Denominator for basic earnings per unit – weighted average common equivalent units | 125,087,711 |
| | 123,837,697 |
| | 125,107,048 |
| | 123,839,804 |
|
Performance-based restricted stock awards and LTIP Units | 273,996 |
| | 257,821 |
| | 255,574 |
| | 227,811 |
|
Stock options | 96,525 |
| | 109,471 |
| | 95,491 |
| | 110,323 |
|
Denominator for diluted earnings per unit – weighted average common equivalent units | 125,458,232 |
| | 124,204,989 |
| | 125,458,113 |
| | 124,177,938 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | | | | |
| | |
|
Net income | $ | 8,102 |
| | $ | 9,197 |
| | $ | 19,926 |
| | $ | 20,448 |
|
Less earnings allocated to unvested shares | (100 | ) | | (80 | ) | | (201 | ) | | (160 | ) |
Net income available to unitholders, basic and diluted | $ | 8,002 |
| | $ | 9,117 |
| | $ | 19,725 |
| | $ | 20,288 |
|
Denominator: | | | | | |
| | |
|
Denominator for basic earnings per unit – weighted average common equivalent units | 123,837,697 |
| | 120,947,667 |
| | 123,839,804 |
| | 120,872,242 |
|
Restricted stock awards – performance-based | 257,821 |
| | 159,526 |
| | 227,811 |
| | 150,613 |
|
Stock options | 109,471 |
| | 130,741 |
| | 110,323 |
| | 133,314 |
|
Denominator for diluted earnings per unit – weighted average common equivalent units | 124,204,989 |
| | 121,237,934 |
| | 124,177,938 |
| | 121,156,169 |
|
Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is more fully described in Note 7.
The Company accounts for its stock-based compensation plansplan based on the FASB guidance which requires that compensation expense be recognized based on the fair value of the stock awards less estimated forfeitures. Restricted stock grants vest based upon the completion of a service period (“time-based restricted stock grants”) and/or the Company meeting certain established market-specificmarket-indexed financial performance criteria (“performance-based restricted stock grants”). Time-based grants are valued according to the market price for the Company’s common stock at the date of grant. For performance-based restricted stock grants, a Monte Carlo valuation model is used, taking into account the underlying contingency risks associated with the performance criteria. It is the Company’s policy to grant options with an exercise price equal to the quoted closing market price of stock on the grant date.
The Company has made certain separate awards in the form of units of limited partnership interests in its Operating Partnership called LTIP Units. The LTIP Units are subject to such conditions and restrictions as the compensation committee may determine, including continued employment or service, achievement of pre-established operational performance goals and market-indexed performance criteria. For the LTIP Units subject to market-indexed performance criteria (the “marked-indexed LTIP Units”), a Monte Carlo valuation model is used, taking into account the underlying contingency risks associated with the performance criteria. All other LTIP Units (the “operational LTIP Units”) are valued according to the market price of the Company’s common stock at the date of grant.
Awards of stock options, time-based restricted stock grants and time-based grants of stockoperational LTIP Units are expensed as compensation on a straight-line basis over the vestingrequisite service period. Depending on the terms of the agreement, certain awardsAwards of performance-based grantsrestricted stock and market-indexed LTIP Units are expensed as compensation under the accelerated attribution method while certain are expensed as compensation on a straight-line basis over the vesting period. All awards of performance-based grantsand are recognized in income regardless of the results of the performance criteria.
Derivatives
The Company records all derivatives on the balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged forecasted transactions in a cash flow hedge. When the Company terminates a derivative for which cash flow hedging was being
applied, the balance, which was recorded in Other Comprehensive Incomecomprehensive income, is amortized to interest expense over the remaining contractual term of the swapderivative as long as the hedged forecasted transactions continue to be probable of occurring. The Company includes cash payments made to terminate interest rate swapsderivatives as an operating activity on the statement of cash flows, given the nature of the underlying cash flows that the derivative was hedging.
Segment Reporting
The Company’s primary business is the ownership, management, and redevelopment of retail real estate properties. The Company reviews operating and financial information for each property on an individual basis and therefore, each property represents an individual operating segment. The Company evaluates financial performance using property operating income, defined as operating revenues (base rent and recoveries from tenants), less property and related expenses (property operating expenses and property taxes). The Company has aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities including the fact that they are operated using consistent business strategies, are typically located in major metropolitan areas, and have similar tenant mixes.
Reclassifications
Certain reclassifications have been made to the prior period consolidated financial statements and notes to conform to the current year presentation. In connection with the adoption of ASU No. 2016-2 and the Company’s practical expedient election to have a combined single lease component presentation, the Company combined Base rents and Recoveries from tenants into a single line item, Rental revenues, in its consolidated statements of operations and comprehensive income.
2. Real Estate Investments
The following real estate investment transactions have occurred during the six months ended June 30, 2018.2019.
Property Asset AcquisitionsDispositions
On February 23, 2018,15, 2019, the Company acquired the property known as Stadiumsold Vancouver Market Center, a non-core shopping center located in Tacoma, Washington, within the Seattle metropolitan area, for an adjusted purchaseVancouver, Washington. The sales price of approximately $19.3 million. Stadium Center is approximately 49,000 square feet and is anchored by Thriftway Supermarket. The property was acquired with borrowings under the credit facility and restricted cash that was previously held by a qualified intermediary for the acquisition of a replacement property$17.0 million, less costs to sell, resulted in a tax-free exchange under Section 1031 of the Code.
On May 18, 2018, the Company acquired the property known as King City Plaza located in King City, Oregon, within the Portland metropolitan area, for an adjusted purchase pricenet proceeds of approximately $15.7$16.0 million. King City Plaza isThe Company recorded a gain on sale of real estate of approximately 63,000 square feet and is anchored by Grocery Outlet Supermarket. The property was acquired with borrowings under the credit facility.
Any reference to the number of properties and square footage are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of its financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
The financial information set forth below summarizes the Company’s purchase price allocation for the properties acquired$2.6 million during the six months ended June 30, 2018 (in thousands).2019 related to this property disposition.
|
| | | |
| June 30, 2018 |
Assets | |
|
Land | $ | 5,657 |
|
Building and improvements | 33,100 |
|
Acquired lease intangible asset | 821 |
|
Deferred charges | 523 |
|
Assets acquired | $ | 40,101 |
|
| |
Liabilities | |
|
Acquired lease intangible liability | $ | 925 |
|
Liabilities assumed | $ | 925 |
|
On May 1, 2019, the Company sold Norwood Shopping Center, a non-core shopping center located in Sacramento, California for a sales price of $13.5 million. In connection with the sale of this property, the Company entered into a $13.3 million mortgage note with the buyer. The following table summarizesmortgage note is a four year interest only note whereby the operating results included in the Company’s historical consolidated statementinterest rate increases 1% annually from 3% to 6%. The Company recorded a gain on sale of operations forreal estate of approximately $180,000 during the three and six months ended June 30, 2018, for the properties acquired during the six months ended June 30, 2018 (in thousands).2019 related to this property disposition.
|
| | | | | | | |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
Statement of operations: | | | |
Revenues | $ | 570 |
| | $ | 716 |
|
Net income attributable to Retail Opportunity Investments Corp. | $ | 161 |
| | $ | 238 |
|
3. Tenant Leases
Space in the Company’s shopping centers is leased to various tenants under operating leases that usually grant tenants renewal options and generally provide for additional rents based on certain operating expenses as well as tenants’ sales volume.
Future minimum rents to be received under non-cancellable leases as of June 30, 20182019 are summarized as follows (in thousands):
|
| | | |
| Minimum Rents |
Remaining 2019 | $ | 101,075 |
|
2020 | 191,841 |
|
2021 | 171,702 |
|
2022 | 146,176 |
|
2023 | 117,442 |
|
Thereafter | 460,488 |
|
Total minimum lease payments | $ | 1,188,724 |
|
|
| | | |
| Minimum Rents |
Remaining 2018 | $ | 100,884 |
|
2019 | 190,202 |
|
2020 | 169,284 |
|
2021 | 146,710 |
|
2022 | 120,783 |
|
Thereafter | 490,078 |
|
Total minimum lease payments | $ | 1,217,941 |
|
4. Mortgage Notes Payable, Credit Facilities and Senior Notes
ROIC does not hold any indebtedness. All debt is held directly or indirectly by the Operating Partnership; however, ROIC has guaranteed the Operating Partnership’s term loan, unsecured revolving credit facility, carve-out guarantees on property-level debt, and the Senior Notes. Costs incurred in obtaining long-term financing are amortized ratably over the related debt agreement. The
amortization of deferred financing costs is included in Interest expense and other finance expenses in the Consolidated Statementsconsolidated statements of Operations.operations and comprehensive income.
Mortgage Notes Payable
On February 1, 2018, the Company repaid in full the Santa Teresa Village mortgage note related to Santa Teresa Village for a total of approximately $10.1 million, without penalty, in accordance with the prepayment provisions of the note.
The mortgage notes payable collateralized by respective properties and assignment of leases at June 30, 20182019 and December 31, 2017,2018, respectively, were as follows (in thousands):
|
| | | | | | | | | | | | | |
Property | | Maturity Date | | Interest Rate | | June 30, 2019 | | December 31, 2018 |
Casitas Plaza Shopping Center | | June 2022 | | 5.320 | % | | $ | 7,081 |
| | $ | 7,158 |
|
Riverstone Marketplace | | July 2022 | | 4.960 | % | | 17,854 |
| | 18,050 |
|
Fullerton Crossroads | | April 2024 | | 4.728 | % | | 26,000 |
| | 26,000 |
|
Diamond Hills Plaza | | October 2025 | | 3.550 | % | | 35,500 |
| | 35,500 |
|
| | | | |
| | $ | 86,435 |
| | $ | 86,708 |
|
Mortgage premiums | | |
| | 1,834 |
| | 2,074 |
|
Net unamortized deferred financing costs | | |
| | (250 | ) | | (271 | ) |
Total mortgage notes payable | | |
| | $ | 88,019 |
| | $ | 88,511 |
|
|
| | | | | | | | | | | | |
Property | Maturity Date | | Interest Rate | | June 30, 2018 | | December 31, 2017 |
Santa Teresa Village | February 2018 | | 6.20 | % | | — |
| | 10,138 |
|
Magnolia Shopping Center | October 2018 | | 5.50 | % | | 8,855 |
| | 8,951 |
|
Casitas Plaza Shopping Center | June 2022 | | 5.32 | % | | 7,234 |
| | 7,307 |
|
Riverstone Marketplace | July 2022 | | 4.96 | % | | 18,238 |
| | 18,424 |
|
Fullerton Crossroads | April 2024 | | 4.73 | % | | 26,000 |
| | 26,000 |
|
Diamond Hills Plaza | October 2025 | | 3.55 | % | | 35,500 |
| | 35,500 |
|
| | | |
| | $ | 95,827 |
| | $ | 106,320 |
|
Mortgage premiums | | | |
| | 2,354 |
| | 1,921 |
|
Net unamortized deferred financing costs | | | |
| | (297 | ) | | (326 | ) |
Total mortgage notes payable | | | |
| | $ | 97,884 |
| | $ | 107,915 |
|
Term Loan and Credit Facility
The carrying values of the Company’s term loan (the “term loan”) were as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Term loan | $ | 300,000 |
| | $ | 300,000 |
|
Net unamortized deferred financing costs | (799 | ) | | (924 | ) |
Term loan | $ | 299,201 |
| | $ | 299,076 |
|
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Term loan | $ | 300,000 |
| | $ | 300,000 |
|
Net unamortized deferred financing costs | (1,058 | ) | | (1,184 | ) |
Term loan | $ | 298,942 |
| | $ | 298,816 |
|
On September 29, 2015, the Company entered into an unsecured term loan agreement under which the lenders agreed to provide a $300.0 million unsecured term loan facility. Effective September 8, 2017, the Company entered into a First Amended and Restated Term Loan Agreement (the “Term Loan Agreement”) pursuant to which the maturity date of the term loan was extended from January 31, 2019 to September 8, 2022, 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. 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 the Company, plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the relevant period (the “Eurodollar Rate”), or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the rate of interest announced by KeyBank National Association as its “prime rate,” and (c) the Eurodollar Rate plus 1.10%.
The carrying values of the Company’s unsecured revolving credit facility were as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Credit facility | $ | 151,000 |
| | $ | 156,000 |
|
Net unamortized deferred financing costs | (1,880 | ) | | (2,311 | ) |
Credit facility | $ | 149,120 |
| | $ | 153,689 |
|
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Credit facility | $ | 192,000 |
| | $ | 143,500 |
|
Net unamortized deferred financing costs | (2,741 | ) | | (3,171 | ) |
Credit facility | $ | 189,259 |
| | $ | 140,329 |
|
The Operating Partnership has an unsecured revolving credit facility with several banks. Effective September 8, 2017, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Facility Agreement”) pursuant to which the borrowing capacity under the credit facility was increased from $500.0 million to $600.0 million. The maturity date of the credit facility was extended from January 31, 2019 to September 8, 2021, with two six-month extension options, which may be exercised by the Operating Partnership upon satisfaction of certain conditions including the payment of extension fees. Additionally, the credit facility contains an accordion feature, which allows the Operating 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 accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of the Company, plus, as applicable, (i) the Eurodollar Rate, or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the rate of interest announced by KeyBank National Association as its “prime rate,” and (c) the Eurodollar Rate plus 1.00%. Additionally, the Operating Partnership is obligated to pay a facility fee at a rate based on the credit rating level of the Company, currently 0.20%, and a fronting fee at a rate of 0.125% per year with respect to each letter of credit issued under the credit facility. The Company has investment grade credit ratings from Moody’s Investors Service (Baa2) and Standard & Poor’s Ratings Services (BBB-).
Both the term loan and credit facility contain customary representations, financial and other covenants. The Operating Partnership’s ability to borrow under the term loan and credit facility is subject to its compliance with financial covenants and other restrictions on an ongoing basis. The Operating Partnership was in compliance with such covenants at June 30, 2018.2019.
As of June 30, 2018,2019, $300.0 million and $192.0$151.0 million were outstanding under the term loan and credit facility, respectively. The weighted average interest rate on the term loan during both the three and six months ended June 30, 20182019 was 3.0%3.6%. As discussed in Note 9 of the accompanying financial statements, the Company uses interest rate swaps to manage its interest rate risk and 2.9%, respectively.accordingly, the swapped interest rate on the term loan is 3.1%. The weighted average interest rate on the credit facility during both the three and six months ended June 30, 20182019 was 2.9% and 2.8%3.5%. The Company had no available borrowings under the term loan at June 30, 2018.2019. The Company had $408.0$449.0 million available to borrow under the credit facility at June 30, 2018.2019.
Senior Notes Due 2027
The carrying value of the Company’s unsecured Senior Notes Due 2027 is as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Principal amount | $ | 250,000 |
| | $ | 250,000 |
|
Net unamortized deferred financing costs | (1,061 | ) | | (1,123 | ) |
Senior Notes Due 2027 | $ | 248,939 |
| | $ | 248,877 |
|
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Principal amount | $ | 250,000 |
| | $ | 250,000 |
|
Net unamortized deferred financing costs | (1,186 | ) | | (1,249 | ) |
Senior Notes Due 2027 | $ | 248,814 |
| | $ | 248,751 |
|
On November 10, 2017, the Operating Partnership entered into a Note Purchase Agreement which provided for the issuance of $250.0 million principal amount of 4.19% Senior Notes Due 2027 (the “Senior Notes Due 2027”) in a private placement effective December 15, 2017. The Senior Notes Due 2027 pay interest on June 15 and December 15 of each year, commencing on June 15, 2018, and mature on December 15, 2027, unless prepaid earlier by the Operating Partnership. The Operating Partnership’s performance of the obligations under the Note Purchase Agreement, including the payment of any outstanding indebtedness thereunder, are guaranteed, jointly and severally, by ROIC. The net proceeds were used to reduce borrowings under the credit facility. The interest expense recognized on the Senior Notes Due 2027 during the three and six months ended June 30, 2018 included approximately $2.6 million and $5.2 million, respectively, for the contractual coupon interest.
In connection with the issuance of the Senior Notes Due 2027, the Company incurred approximately $1.3 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2027.
Senior Notes Due 2026
The carrying value of the Company’s unsecured Senior Notes Due 2026 is as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Principal amount | $ | 200,000 |
| | $ | 200,000 |
|
Net unamortized deferred financing costs | (205 | ) | | (219 | ) |
Senior Notes Due 2026 | $ | 199,795 |
| | $ | 199,781 |
|
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Principal amount | $ | 200,000 |
| | $ | 200,000 |
|
Net unamortized deferred financing costs | (234 | ) | | (248 | ) |
Senior Notes Due 2026 | $ | 199,766 |
| | $ | 199,752 |
|
On July 26, 2016, the Operating Partnership entered into a Note Purchase Agreement, as amended, which provided for the issuance of $200.0 million principal amount of 3.95% Senior Notes Due 2026 (the “Senior Notes Due 2026”) in a private placement effective September 22, 2016. The Senior Notes Due 2026 pay interest on March 22 and September 22 of each year, commencing on March
22, 2017, and mature on September 22, 2026, unless prepaid earlier by the Operating Partnership. The Operating Partnership’s performance of the obligations under the Note Purchase Agreement, including the payment of any outstanding indebtedness thereunder, are guaranteed, jointly and severally, by ROIC. The interest expense recognized on the Senior Notes Due 2026 during the three months ended June 30, 2018 and 2017 included approximately $2.0 million for the contractual coupon interest. The interest expense recognized on the Senior Notes Due 2026 during the six months ended June 30, 2018 and 2017 included approximately $3.9 million for the contractual coupon interest.
In connection with the issuance of the Senior Notes Due 2026, the Company incurred approximately $283,000 of deferred financing costs which are being amortized over the term of the Senior Notes Due 2026.
Senior Notes Due 2024
The carrying value of the Company’s unsecured Senior Notes Due 2024 is as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Principal amount | $ | 250,000 |
| | $ | 250,000 |
|
Unamortized debt discount | (2,084 | ) | | (2,252 | ) |
Net unamortized deferred financing costs | (1,204 | ) | | (1,314 | ) |
Senior Notes Due 2024 | $ | 246,712 |
| | $ | 246,434 |
|
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Principal amount | $ | 250,000 |
| | $ | 250,000 |
|
Unamortized debt discount | (2,417 | ) | | (2,578 | ) |
Net unamortized deferred financing costs | (1,424 | ) | | (1,535 | ) |
Senior Notes Due 2024 | $ | 246,159 |
| | $ | 245,887 |
|
On December 3, 2014, the Operating Partnership completed a registered underwritten public offering of $250.0 million aggregate principal amount of 4.000% Senior Notes due 2024 (the “Senior Notes Due 2024”), fully and unconditionally guaranteed by ROIC. The Senior Notes Due 2024 pay interest semi-annually on June 15 and December 15, commencing on June 15, 2015, and mature on December 15, 2024, unless redeemed earlier by the Operating Partnership. The Senior Notes Due 2024 are the Operating Partnership’s senior unsecured obligations that rank equally in right of payment with the Operating Partnership’s other unsecured indebtedness, and effectively junior to (i) all of the indebtedness and other liabilities, whether secured or unsecured, and any preferred equity of the Operating Partnership’s subsidiaries, and (ii) all of the Operating Partnership’s indebtedness that is secured by its assets, to the extent of the value of the collateral securing such indebtedness outstanding. ROIC fully and unconditionally guaranteed the Operating Partnership’s obligations under the Senior Notes Due 2024 on a senior unsecured basis, including the due and punctual payment of principal of, and premium, if any, and interest on, the notes, whether at stated maturity, upon acceleration, notice of redemption or otherwise. The guarantee is a senior unsecured obligation of ROIC and ranks equally in right of payment with all other senior unsecured indebtedness of ROIC. ROIC’s guarantee of the Senior Notes Due 2024 is effectively subordinated in right of payment to all liabilities, whether secured or unsecured, and any preferred equity of its subsidiaries (including the Operating Partnership and any entity ROIC accounts for under the equity method of accounting). The interest expense recognized for the contractual coupon interest on the Senior Notes Due 2024 during the three months ended June 30, 2018 and 2017 was $2.5 million. The interest expense recognized for the accretion of the debt discount on the Senior Notes Due 2024 during the three months ended June 30, 2018 and 2017 was approximately $81,000 and $78,000, respectively. The interest expense recognized for the contractual coupon interest on the Senior Notes Due 2024 during the six months ended June 30, 2018 and 2017 was $5.0 million. The interest expense recognized for the accretion of the debt discount on the Senior Notes Due 2024 during the six months ended June 30, 2018 and 2017 was approximately $161,000 and $155,000, respectively.
In connection with the Senior Notes Due 2024 offering, the Company incurred approximately $2.2 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2024.
Senior Notes Due 2023
The carrying value of the Company’s unsecured Senior Notes Due 2023 is as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Principal amount | $ | 250,000 |
| | $ | 250,000 |
|
Unamortized debt discount | (2,129 | ) | | (2,339 | ) |
Net unamortized deferred financing costs | (1,172 | ) | | (1,304 | ) |
Senior Notes Due 2023 | $ | 246,699 |
| | $ | 246,357 |
|
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Principal amount | $ | 250,000 |
| | $ | 250,000 |
|
Unamortized debt discount | (2,542 | ) | | (2,737 | ) |
Net unamortized deferred financing costs | (1,435 | ) | | (1,567 | ) |
Senior Notes Due 2023 | $ | 246,023 |
| | $ | 245,696 |
|
On December 9, 2013, the Operating Partnership completed a registered underwritten public offering of $250.0 million aggregate principal amount of 5.000% Senior Notes due 2023 (the “Senior Notes Due 2023”), fully and unconditionally guaranteed by ROIC. The Senior Notes Due 2023 pay interest semi-annually on June 15 and December 15, commencing on June 15, 2014, and mature on December 15, 2023, unless redeemed earlier by the Operating Partnership. The Senior Notes Due 2023 are the Operating Partnership’s senior unsecured obligations that rank equally in right of payment with the Operating Partnership’s other unsecured indebtedness, and effectively junior to (i) all of the indebtedness and other liabilities, whether secured or unsecured, and any preferred equity of the Operating Partnership’s subsidiaries, and (ii) all of the Operating Partnership’s indebtedness that is secured by its assets, to the extent of the value of the collateral securing such indebtedness outstanding. ROIC fully and unconditionally guaranteed the Operating Partnership’s obligations under the Senior Notes Due 2023 on a senior unsecured basis, including the due and punctual payment of principal of, and premium, if any, and interest on, the notes, whether at stated maturity, upon acceleration, notice of redemption or otherwise. The guarantee is a senior unsecured obligation of ROIC and will rank equally in right of payment with all other senior unsecured indebtedness of ROIC. ROIC’s guarantee of the Senior Notes Due 2023 is effectively subordinated in right of payment to all liabilities, whether secured or unsecured, and any preferred equity of its subsidiaries (including the Operating Partnership and any entity ROIC accounts for under the equity method of accounting). The interest expense recognized for the contractual coupon interest on the Senior Notes Due 2023 during the three months ended June 30, 2018 and 2017 was $3.1 million. The interest expense recognized for the accretion of the debt discount on the Senior Notes Due 2023 during the three months ended June 30, 2018 and 2017 was approximately $100,000 and $95,000, respectively.
The interest expense recognized for the contractual coupon interest on the Senior Notes Due 2023 during the six months ended June 30, 2018 and 2017 was $6.3 million. The interest expense recognized for the accretion of the debt discount on the Senior Notes Due 2023 during the six months ended June 30, 2018 and 2017 was approximately $195,000 and $188,000, respectively.
In connection with the Senior Notes Due 2023 offering, the Company incurred approximately $2.6 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2023.
5. Preferred Stock of ROIC
ROIC is authorized to issue 50,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. As of June 30, 20182019 and December 31, 2017,2018, there were no shares of preferred stock outstanding.
6. Common Stock of ROIC
ATM
On May 1, 2018, the Company entered into five separate Sales Agreements (the “Sales Agreements”) with each of Capital One Securities, Inc., Jefferies LLC, KeyBanc Capital Markets Inc., Raymond James & Associates, Inc., and Robert W. Baird & Co. Incorporated (each individually, an “Agent” and collectively, the “Agents”) pursuant to which ROIC may sell, from time to time, shares of ROIC’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $250.0 million through the Agents either as agents or principals. In addition, on April 30, 2018, the Company terminated sales agreements with Jefferies, KeyBanc and Raymond James, dated as of September 19, 2014 and with Baird, dated as of May 23, 2016 (the “Prior Sales Agreements”), which the Company entered into in connection with its prior “at the market” offering.
During the threesix months ended June 30, 2018,2019, ROIC did not sell any shares under the Sales Agreements. DuringSince the six months endedSales Agreements were entered into through June 30, 2018,2019, ROIC has sold a total of 75,3141,251,376 shares of common stock under the Prior Sales Agreements, which resulted in gross proceeds of approximately $1.5$24.2 million and commissions of approximately $19,000$242,000 paid to the agents.Agents.
Stock Repurchase Program
On July 31, 2013, the Company’s board of directors authorized a stock repurchase program to repurchase up to a maximum of $50.0 million of the Company’s common stock. During the six months ended June 30, 2018,2019, the Company did not repurchase any shares of common stock under this program.
7. Stock Compensation for ROIC
ROIC follows the FASB guidance related to stock compensation which establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of the employer’s stock. The guidance also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.
In 2009, the Company adopted the 2009 Equity Incentive Plan. The 2009 Equity Incentive Plan provided for grants of restricted common stock and stock option awards up to an aggregate of 7.5% of the issued and outstanding shares of ROIC’s common stock at the time of the award, subject to a ceiling of 4,000,000 shares. The Company’s 2018 Annual Meeting of Stockholders was held on April 25, 2018 at which the stockholders of the Company approved the Company’s Amended and Restated 2009 Equity Incentive Plan (the “Equity Incentive Plan”). The types of awards that may be granted under the Equity Incentive Plan include stock options, restricted shares, share appreciation rights, phantom shares, dividend equivalent rights and other equity-based awards. The Equity Incentive Plan has a fungible unit system that counts the number of shares of the Company’s common stock used in the issuance of full-value awards, such as restricted shares and LTIP Units, differently than the number of shares of common stock used in the issuance of stock options. A total of 22,500,000 Fungible Units (as defined in the Equity Incentive Plan) are reserved for grant under the Equity Incentive Plan and the Fungible Unit-to-full-value award conversion ratio is 6.25 to 1.0. The Equity Incentive Plan will expire on April 25, 2028. Any available shares that had not been granted under the 2009 Equity Incentive Plan were rolled over and made available for issuance under the Equity Incentive Plan.
The Company has made certain awards in the form of a separate series of units of limited partnership interests in its Operating Partnership called LTIP Units, which can be granted either as free-standing awards or in tandem with other awards under the Equity Incentive Plan. The LTIP Units are subject to such conditions and restrictions as the compensation committee may determine, including continued employment or service, achievement of pre-established operational performance goals and market-indexed performance criteria. Upon the occurrence of specified events and subject to the satisfaction of applicable vesting conditions, LTIP Units (after conversion into OP Units, in accordance with the Partnership Agreement) are ultimately redeemable for cash or for unregistered shares of ROIC common stock, at the option of ROIC, on a one-for-one basis.
Restricted Stock
During the six months ended June 30, 2018,2019, ROIC awarded 514,972354,161 shares of time-based restricted common stock under the Equity Incentive Plan, of which 180,200 shares are performance-based grants and the remainder of the shares are time-based grants. The performance-based grants vest based on pre-defined market-specific performance criteria with a vesting date on January 1, 2021.Plan.
A summary of the status of ROIC’s non-vested restricted stock awards as of June 30, 2018,2019, and changes during the six months ended June 30, 20182019 are presented below:
|
| | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2018 | 1,002,835 |
| | $ | 16.88 |
|
Granted | 354,161 |
| | $ | 17.20 |
|
Vested | (364,913 | ) | | $ | 19.06 |
|
Forfeited | (35,287 | ) | | $ | 12.67 |
|
Non-vested at June 30, 2019 | 956,796 |
| | $ | 16.55 |
|
|
| | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2017 | 781,467 |
| | $ | 18.14 |
|
Granted | 514,972 |
| | $ | 15.85 |
|
Vested | (274,608 | ) | | $ | 18.46 |
|
Forfeited | (16,998 | ) | | $ | 17.60 |
|
Non-vested at June 30, 2018 | 1,004,833 |
| | $ | 16.89 |
|
LTIP Units
During the six months ended June 30, 2019, ROIC awarded 187,279 LTIP Units under the Equity Incentive Plan. The LTIP Units vest based on both pre-defined operational and market-indexed performance criteria with a vesting date on January 1, 2022. The LTIP Units were issued at a weighted average grant date fair value of $16.27.
For the three months ended June 30, 20182019 and 2017,2018, the amounts charged to expenses for all stock-based compensation arrangements totaled approximately $2.0$2.2 million and $1.7$2.0 million, respectively. For the six months ended June 30, 20182019 and 2017,2018, the amounts charged to expenses for all stock-based compensation arrangements totaled approximately $3.4$3.9 million and $2.9$3.4 million, respectively.
8. Capital of the Operating Partnership
As of June 30, 2018,2019, the Operating Partnership had 124,367,561125,714,830 OP Units outstanding. ROIC owned an approximate 90.6%90.9% partnership interest in the Operating Partnership at June 30, 2018,2019, or 112,719,459114,307,789 OP Units. The remaining 11,648,10211,407,041 OP Units are owned by other limited partners. A share of ROIC’s common stock and an OP unit have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership.
As of June 30, 2018,2019, subject to certain exceptions, holders are able to redeem their OP Units, at the option of ROIC, for cash or for unregistered shares of ROIC common stock on a one-for-one basis. If cash is paid in the redemption, the redemption price is equal to the average closing price on the NASDAQ Stock Market for shares of ROIC’s common stock over the ten consecutive trading days immediately preceding the date a redemption notice is received by ROIC.
During the six months ended June 30, 2018,2019, ROIC received noticesa notice of redemption for a total of 30,88970,000 OP Units. ROIC elected to redeem the OP Units in cash, and accordingly, a total of $560,000approximately $1.2 million was paid during the six months ended June 30, 20182019 to the holdersholder of the respective OP Units. In accordance with the Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, the redemption values werevalue was calculated based on the average closing price of ROIC’s common stock on the NASDAQ Stock Market for the ten consecutive trading days immediately preceding the date of receipt of the noticesnotice of redemption.
The redemption value of outstanding OP Units owned by the limited partners as of June 30, 2018,2019, not including ROIC, had such units been redeemed at June 30, 2018,2019, was approximately $223.1$196.5 million, calculated based on the average closing price of ROIC’s common stock on the NASDAQ Stock Market for the ten consecutive trading days immediately preceding June 30, 2018,2019, which amounted to $19.15$17.23 per share.
Retail Opportunity Investments GP, LLC, ROIC’s wholly-owned subsidiary, is the sole general partner of the Operating Partnership, and as the parent company, ROIC has the full and complete authority over the Operating Partnership’s day-to-day management and control. As the sole general partner of the Operating Partnership, ROIC effectively controls the ability to issue common stock of ROIC upon redemption of any OP Units. The redemption provisions that permit ROIC to settle the redemption of OP Units in either cash or common stock, in the sole discretion of ROIC, are further evaluated in accordance with applicable accounting guidance to determine whether temporary or permanent equity classification on the balance sheet is appropriate. The Company evaluated this guidance, including the ability, in its sole discretion, to settle in unregistered shares of common stock, and determined that the OP Units meet the requirements to qualify for presentation as permanent equity.
9. Fair Value of Financial Instruments
The Company follows the FASB guidance that defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies as discussed in Note 1. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts realizable upon disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
The carrying values of cash and cash equivalents, restricted cash, tenant and other receivables, deposits, prepaid expenses, other assets, accounts payable and accrued expenses are reasonable estimates of their fair values because of the short-term nature of these instruments. The carrying values of the term loan and credit facility are deemed to be at fair value since the outstanding debt is directly tied to monthly LIBOR contracts. The fair value of the outstanding Senior Notes Due 2027 and Senior Notes Due 2026 at June 30, 20182019 was approximately $229.9$244.6 million and $182.5$193.3 million, respectively, calculated using significant inputs which are not observable in the market. The fair value of the outstanding Senior Notes Due 2024 and Senior Notes Due 2023 at June 30, 20182019 was approximately $235.7$254.2 million and $253.5$265.9 million, respectively, based on inputs not quoted on active markets, but corroborated by market data, or Level 2. Assumed mortgage notes payable were recorded at their fair value at the time they were assumed. The Company’s outstanding mortgage notes payable were estimated to have a fair value of approximately $93.5$87.1 million with an interest rate range of 4.4% to 5.3% and a weighted average interest rate of 4.7%4.0% as of June 30, 2018.2019. These fair value measurements fall within level 3 of the fair value hierarchy.
Derivative and Hedging Activities
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The following is a summary of the terms of the Company’s interest rate swaps as of June 30, 20182019 (in thousands):
|
| | | | | | | | |
Swap Counterparty | | Notional Amount | | Effective Date | | Maturity Date |
Bank of Montreal | | $ | 100,000 |
| | 12/29/2017 | | 8/31/2022 |
U.S. Bank | | $ | 100,000 |
| | 12/29/2017 | | 8/31/2022 |
Regions Bank | | $ | 50,000 |
| | 1/31/2019 | | 8/31/2022 |
Royal Bank of Canada | | $ | 50,000 |
| | 1/31/2019 | | 8/31/2022 |
|
| | | | | | | | |
Swap Counterparty | | Notional Amount | | Effective Date | | Maturity Date |
Bank of Montreal | | $ | 50,000 |
| | 1/29/2016 | | 1/31/2019 |
Regions Bank | | $ | 50,000 |
| | 2/29/2016 | | 1/31/2019 |
Bank of Montreal | | $ | 100,000 |
| | 12/29/2017 | | 8/31/2022 |
U.S. Bank | | $ | 100,000 |
| | 12/29/2017 | | 8/31/2022 |
The changes in the fair value of derivatives that are designated as cash flow hedges are recorded in accumulated other comprehensive income (“AOCI”) and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
The Company incorporated credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparties’ non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contract for the effect of non-performance risk, the Company considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of June 30, 2018,2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
|
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
June 30, 2019: | |
| | |
| | |
| | |
|
Liabilities | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | (3,914 | ) | | $ | — |
| | $ | (3,914 | ) |
| | | | | | | |
December 31, 2018: | |
| | |
| | |
| | |
|
Assets | |
| | |
| | |
| | |
|
Derivative financial instruments | $ | — |
| | $ | 4,931 |
| | $ | — |
| | $ | 4,931 |
|
Liabilities | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | (580 | ) | | $ | — |
| | $ | (580 | ) |
|
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
June 30, 2018: | |
| | |
| | |
| | |
|
Assets | |
| | |
| | |
| | |
|
Derivative financial instruments | $ | — |
| | $ | 8,630 |
| | $ | — |
| | $ | 8,630 |
|
| | | | | | | |
December 31, 2017: | |
| | |
| | |
| | |
|
Assets | |
| | |
| | |
| | |
|
Derivative financial instruments | $ | — |
| | $ | 4,321 |
| | $ | — |
| | $ | 4,321 |
|
Amounts paid, or received, to cash settle interest rate derivatives prior to their maturity date are recorded in AOCI at the cash settlement amount, and will be reclassified to interest expense as interest expense is recognized on the hedged debt. During the next twelve months, the Company estimates that $1.1 million$816,000 will be reclassified as a non-cash increase to interest expense.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of June 30, 20182019 and December 31, 2017,2018, respectively (in thousands):
|
| | | | | | | | | | |
Derivatives designed as hedging instruments | | Balance sheet location | | June 30, 2019 Fair Value | | December 31, 2018 Fair Value |
Interest rate products | | Other assets | | $ | — |
| | $ | 4,931 |
|
Interest rate products | | Other liabilities | | $ | (3,914 | ) | | $ | (580 | ) |
|
| | | | | | | | | | |
Derivatives designed as hedging instruments | | Balance sheet location | | June 30, 2018 Fair Value | | December 31, 2017 Fair Value |
Interest rate products | | Other assets | | $ | 8,630 |
| | $ | 4,321 |
|
Derivatives in Cash Flow Hedging Relationships
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and six months ended June 30, 20182019 and 2017,2018, respectively (in thousands).
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Amount of (loss) gain recognized in OCI on derivatives | $ | (4,815 | ) | | $ | 1,397 |
| | $ | (7,423 | ) | | $ | 4,787 |
|
Amount of loss (gain) reclassified from AOCI into interest | $ | 263 |
| | $ | (174 | ) | | $ | 465 |
| | $ | (592 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Amount of gain (loss) recognized in OCI on derivatives | $ | 1,397 |
| | $ | (64 | ) | | $ | 4,787 |
| | $ | 97 |
|
Amount of gain reclassified from AOCI into interest | $ | 174 |
| | $ | 497 |
| | $ | 592 |
| | $ | 1,052 |
|
10. Commitments and Contingencies
In the normal course of business, from time to time, the Company is involved in legal actions relating to the ownership and operations of its properties. In management’s opinion, the liabilities, if any, that ultimately may result from such legal actions are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.
The Company has signed several ground leases in which the Company is the lessee for the land beneath all or a portion of the buildings for certain properties. In accordance with ASU 2016-02, the Company recorded a right-of-use asset and related lease liability for these ground leases as of January 1, 2019. As of June 30, 2019, the Company’s weighted average remaining lease term is approximately 37.9 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.2%. Rent expense under the Company’s ground leases was approximately $394,000 and $393,000 for the three months ended June 30, 2019 and 2018, respectively and approximately $806,000 and $771,000 for the six months ended June 30, 2019 and 2018, respectively.
The following table represents a reconciliation of the Company’s undiscounted future minimum annual lease payments under operating leases to the lease liability as of June 30, 20182019 (in thousands):
|
| | | |
| Operating Leases |
Remaining 2019 | $ | 641 |
|
2020 | 1,287 |
|
2021 | 1,282 |
|
2022 | 1,304 |
|
2023 | 1,330 |
|
Thereafter | 33,939 |
|
Total undiscounted future minimum lease payments | 39,783 |
|
Future minimum lease payments, discount | (21,932 | ) |
Lease liability | $ | 17,851 |
|
|
| | | |
| Operating Leases |
Remaining 2018 | $ | 636 |
|
2019 | 1,278 |
|
2020 | 1,286 |
|
2021 | 1,283 |
|
2022 | 1,304 |
|
Thereafter | 35,347 |
|
Total minimum lease payments | $ | 41,134 |
|
Tax Protection Agreements
In connection with certain acquisitions from September 2013 through March 2017, the Company entered into Tax Protection Agreements with certain limited partners of the Operating Partnership. The Tax Protection Agreements require the Company, subject to certain exceptions, to indemnify the respective sellers receiving OP Units against certain tax liabilities incurred by them, as calculated pursuant to the respective Tax Protection Agreements, for a period of 12 years (with respect to Tax Protection Agreements entered into in September 2013) or 10 years (with respect to Tax Protection Agreements entered into from December 2014 through March 2017) from the date of the Tax Protection Agreements. If the Company were to trigger the tax protection provisions under these agreements, the Company would be required to pay damages in the amount of the taxes owed by these limited partners (plus additional damages in the amount of the taxes incurred as a result of such payment).
Legal Settlement
During the three months ended June 30, 2019, the Company reached an agreement through mediation for an ongoing lawsuit to settle for approximately $1.4 million and accordingly, recorded a $950,000 charge to Other expense in the consolidated statements of operations during the three and six months ended June 30, 2019.
11. Related Party Transactions
The Company has entered into several lease agreements with an officer of the Company, whereby pursuant to the lease agreements, the Company is provided the use of storage space. For the three months ended June 30, 20182019 and 2017,2018, the Company incurred approximately $19,000$21,000 and $13,000,$19,000, respectively, of expenses relating to the agreements. For the six months ended June 30, 20182019 and 2017,2018, the Company incurred approximately $34,000$42,000 and $26,000,$34,000, respectively, of expenses relating to the agreements. These expenses were included in generalGeneral and administrative expenses in the accompanying consolidated statements of operations.operations and comprehensive income.
12. Subsequent Events
On July 25, 2018,24, 2019, ROIC’s board of directors declared a cash dividend on its common stock and a distribution on the Operating Partnership’s OP Units of $0.1950$0.1970 per share and per OP Unit, payable on September 27, 201826, 2019 to holders of record on September 13, 2018.12, 2019.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words “believes,” “anticipates,” “projects,” “should,” “estimates,” “expects,” and similar expressions are intended to identify forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and in Section 21F of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Actual results may differ materially due to uncertainties including:
•our ability to identify and acquire retail real estate that meet our investment standards in our markets;
•the level of rental revenue we achieve from our assets;
•the market value of our assets and the supply of, and demand for, retail real estate in which we invest;
•the state of the U.S. economy generally, or in specific geographic regions;
•the impact of economic conditions on our business;
the conditions in the local markets in which we operate and our concentration in those markets, as well as changes in national economic and market conditions;
•consumer spending and confidence trends;
our ability to enter into new leases or to renew leases with existing tenants at the properties we own or acquire at favorable rates;
•our ability to anticipate changes in consumer buying practices and the space needs of tenants;
•the competitive landscape impacting the properties we own or acquire and their tenants;
•our relationships with our tenants and their financial condition and liquidity;
•our ability to continue to qualify as a real estate investment trust for U.S. federal income tax (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 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 from
those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Overview
Retail Opportunity Investments Corp. (“ROIC”) is organized in an UpREIT format pursuant to which Retail Opportunity Investments GP, LLC, its wholly-owned subsidiary, serves as the general partner of, and ROIC conducts substantially all of its business through, its operating partnership, Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), together with its subsidiaries. ROIC reincorporated as a Maryland corporation on June 2, 2011. ROIC has elected to be taxed as a REIT, for U.S. federal income tax purposes, commencing with the year ended December 31, 2010.
ROIC commenced operations in October 2009 as a fully integrated and self-managed REIT, and as of June 30, 2018,2019, ROIC owned an approximate 90.6%90.9% partnership interest and other limited partners owned the remaining approximate 9.4%9.1% partnership interest in the Operating Partnership. ROIC specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers on the west coast of the United States, anchored by supermarkets and drugstores.
As of June 30, 2018,2019, the Company’s portfolio consisted of 9390 properties (92(89 retail and one office) totaling approximately 10.610.2 million square feet of gross leasable area (“GLA”). As of June 30, 2018,2019, the Company’s totalretail portfolio was approximately 96.7%97.9% leased. During the six months ended June 30, 2018,2019, the Company leased or renewed a total of 690,000631,000 square feet in its portfolio. The Company has committed approximately $10.0 million, or $54.44$62.35 per square foot, in tenant improvements, including building improvements, for new leases that occurred during the six months ended June 30, 2018.2019. The Company has committed approximately $393,000,$484,000, or $2.13$3.01 per square foot, in leasing commissions, for the new leases that occurred during the six months ended June 30, 2018.2019. The Company has committed approximately $624,000,$1.1 million, or $1.23$2.24 per square foot, in tenant improvements, including building improvements, for the renewed leases that occurred during the six months ended June 30, 2018.2019. Leasing commission commitments for renewed leases were not material for the six months ended June 30, 2018.2019.
Subsequent Events
On July 25, 2018,24, 2019, ROIC’s board of directors declared a cash dividend on its common stock and a distribution on the Operating Partnership’s OP Units of $0.1950$0.1970 per share and per OP Unit, payable on September 27, 201826, 2019 to holders of record on September 13, 2018.12, 2019.
Results of Operations
At June 30, 2018,2019, the Company had 9390 properties (92(89 retail and one office), all of which are consolidated in the accompanying financial statements. The Company believes, because of the location of the properties in densely populated areas, the nature of its investments provides for relatively stable revenue flows even during difficult economic times. The Company has a strong capital structure with manageable debt as of June 30, 2018.2019. The Company expects to continue to actively explore acquisition opportunities consistent with its business strategy.
Property operating income is a non-GAAP financial measure of performance. The Company defines property operating income as operating revenues (base rent and recoveries from tenants), less property and related expenses (property operating expenses and property taxes). Property operating income excludes general and administrative expenses, depreciation and amortization, acquisition transaction costs, other expense, interest expense, gains and losses from property acquisitions and dispositions, extraordinary items, tenant improvements and leasing commissions. Other REITs may use different methodologies for calculating property operating income, and accordingly, the Company’s property operating income may not be comparable to other REITs.
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 June 30, 20182019 compared to the three months ended June 30, 2017.2018.
Property Operating Income
The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to consolidated property operating income for the three months ended June 30, 20182019 and 20172018 (in thousands).
| | | | Three Months Ended June 30, | | Three Months Ended June 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
Operating income per GAAP | Operating income per GAAP | $ | 23,815 |
| | $ | 21,674 |
| Operating income per GAAP | $ | 23,951 |
| | $ | 23,815 |
|
Plus: | Depreciation and amortization | 25,331 |
| | 23,645 |
| Depreciation and amortization | 24,443 |
| | 25,331 |
|
| General and administrative expenses | 3,990 |
| | 3,817 |
| General and administrative expenses | 4,950 |
| | 3,990 |
|
| Acquisition transaction costs | — |
| | 4 |
| Other expense | 1,224 |
| | 274 |
|
| Other expenses | 274 |
| | 225 |
| |
Less: | | Gain on sale of real estate | (180 | ) | | — |
|
Property operating income | Property operating income | $ | 53,410 |
| | $ | 49,365 |
| Property operating income | $ | 54,388 |
| | $ | 53,410 |
|
The following comparison for the three months ended June 30, 20182019 compared to the three months ended June 30, 2017,2018, makes reference to the effect of the same-center properties. Same-center properties, which totaled 8287 of the Company’s 9390 properties as of June 30, 2018,2019, 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 buildingheadquarters and one shopping center that is currently lined upunder contract to be sold and is slated for new multi-family development and is no longer being managed as a retail asset.
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, 20182019 related to the 8287 same-center properties owned by the Company during the entirety of both the three months ended June 30, 20182019 and 20172018 and consolidated into the Company’s financial statements during such periods (in thousands).
| | | | Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2019 |
| | Same-Center | | Non Same-Center | | Total | | Same-Center | | Non Same-Center | | Total |
Operating income per GAAP | $ | 25,593 |
| | $ | (1,778 | ) | | $ | 23,815 |
| |
Operating income (loss) per GAAP | | Operating income (loss) per GAAP | $ | 29,260 |
| | $ | (5,309 | ) | | $ | 23,951 |
|
Plus: | Depreciation and amortization | 22,637 |
| | 2,694 |
| | 25,331 |
| Depreciation and amortization | 23,927 |
| | 516 |
| | 24,443 |
|
| General and administrative expenses (1) | — |
| | 3,990 |
| | 3,990 |
| General and administrative expenses (1) | — |
| | 4,950 |
| | 4,950 |
|
| Other expenses (1) | — |
| | 274 |
| | 274 |
| Other expenses (1) | — |
| | 1,224 |
| | 1,224 |
|
Less: | | Gain on sale of real estate | — |
| | (180 | ) | | (180 | ) |
Property operating income | Property operating income | $ | 48,230 |
| | $ | 5,180 |
| | $ | 53,410 |
| Property operating income | $ | 53,187 |
| | $ | 1,201 |
| | $ | 54,388 |
|
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, 20172018 related to the 8287 same-center properties owned by the Company during the entirety of both the three months ended June 30, 20182019 and 20172018 and consolidated into the Company’s financial statements during such periods (in thousands).