Warrant Picture Changes

Checking in on our Real Estate warrants

By Travis Johnson, Stock Gumshoe, March 18, 2013

Retail Opportunity Investments Corp (ROIC) made a quiet announcement on Friday that helped to juice the shares a bit later in the day, as the week closed. They have apparently been doing behind-the-scenes negotiations with warrant holders in an effort to continue to work through the warrant overhang that’s been impacting the stock price — and they’ve also had an unusually large number of warrants exercised in just a few months, so now more than half of the warrants are gone.

The announcement is here if you’d like to see it — they had already negotiated a cashless exercise of the warrants held by founding investors a couple months back, but they have now announced that about 20 million more warrants have been exercised or disposed of by negotiated settlement. 12.5 million were exercised, so that means 12.5 million new shares exist now and the company has considerably more cash as a result ($12 per share is the exercise price, so that’s about $150 million), and 7.5 million were bought back in negotiations with warrant holders for about $10 million in cash.

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That leaves roughly 21 million warrants outstanding with a $12 strike price and October 2014 expiration, and it means that now that a big chunk of the warrants are gone and company management is working through them with some apparent strategy, we can worry a bit less. But there’s also a question mark out there as to how investors will react once the dilution of the warrants starts to hit the financials — ROIC is still underleveraged compared to many REITs, and now they have even more cash to invest, so that’s a positive for a CEO with a nose for deals like Stuart Tanz, but in the next couple of quarters the FFO per share (REIT measurement that’s similar to earnings per share for a non-REIT stock) is going to look worse thanks to the larger share count. Here’s what Tanz said in the press release:

“Notwithstanding being fully on track with executing our 2013 business plan, and excited to have the additional equity capital to invest, the timing of receiving the capital will undoubtedly impact our near-term earnings and FFO per share results. Accordingly, we expect to adjust our 2013 earnings and FFO per share guidance when we announce our first quarter results, currently scheduled for May 2, 2013.”

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