April Idea of the Month: Shopping Centers and Dividend Growth

By Travis Johnson, Stock Gumshoe, April 20, 2011

This time around I thought I’d get into some more detail for you on a stock I’ve written about before, and which I own personally — but I think it’s underappreciated given its potential for inflation protection and dividend growth. April’s Idea of the Month is shares of Retail Opportunity Investments Corp (ROIC).

That ROIC might sound nice and familiar too — a new entry in the “too cute” ticker parade (ROIC being, for MBA geeks, Return On Invested Capital, often used as one of the tools in valuing a business). It’s basically a shopping center REIT (they call them “necessity-based retail properties”) with some strong similarities to Realty Income (O) and Kimco Realty (KIM) in terms of sector focus, but it’s far smaller and is effectively a startup, just building its portfolio. The closest comparison in terms of size and portfolio might be someone like Acadia Realty Trust (AKR), which is east coast-focused on similar types of properties (ROIC is all west coast, at least so far), or the smaller Agree Realty (ADC), though both are established and leveraged already and, I expect, have some properties with challenging legacy valuations.

I initially wrote about ROIC about a month and a half ago for a Motley Fool tease, and it sounded interesting then. Interesting enough that I picked up some warrants on the stock, and later also added some shares when I had cash available in a tax-deferred account (this is a REIT, so dividends are fully taxed as income and it’s therefore particularly well-suited for tax-deferral vehicles like 401k or IRA accounts).

The warrants are an interesting component of valuing ROIC stock, they trade at ROICW and give the right to purchase shares at $12 before October 2014 — and there are a lot of them, so exercising those warrants would almost double ROIC’s market cap, but it would also give them a lot of cash to use for acquisitions. It’s unclear how ROIC will manage around the warrants, but a fair number of them are held by management so it would be surprising if they aggressively tried to keep the share price down to devalue the warrants (by, for example, paying out large return of capital dividends). Clearly, the warrants are speculation that ROIC will continue to lever up using debt, will significantly increase the dividend over the next three years (more than doubling the ...

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