Real Estate Updates, Earnings and Warrants, Plus a Guest Commentary

by Travis Johnson, Stock Gumshoe | May 3, 2013 10:08 am

A few Friday File notes as we prepare for the Value Investing Congress

The portion of my brain that’s dedicated to our weekly missives to the Irregulars is on standby, waiting to see if there’s anything of interest to share with you on Monday and Tuesday of next week during the Value Investing Congress in Las Vegas (if you’ve shelled out your $4,500 to be at the Congress too, drop me an email — The least I can do is buy you a drink).

But we do like to make sure you’ve always got plenty to read, of course, so even though I’m again writing to you from an airplane (more successfully this time), we’ve prepared some extra content for you.

We’re featuring a guest column from a longtime reader today, Myron Martin, and we’ll let him share his thoughts with you once a month for a few months and see if folks are interested in seeing his musings continue. You can see that commentary here[1], special for the Irregulars (if you lost your username or password, just contact us[2]) — this time he actually expresses some interest in a few stocks we’ve covered this week from the teaser world, though I expect that probably won’t happen very often. Myron and I have differing opinions about lots of things, but I’m always curious to see what kinds of small cap and junior stocks he’s exploring — he writes about a few different ideas and sectors today, but he tends to focus on the little junior mining stocks. Juniors make my head hurt, but that I know many of you are interested in hearing more about them, so hopefully Myron’s musings on this stuff will be of interest.

Here’s what I’ve got to share for now as I fly westward:

I’ve written several times about Retail Opportunity Investments Corp (ROIC), which has been one of our better investments, and the ROIC Warrants, which have been shoot-out-the-lights good since we covered them last year. I’ve been a bit concerned about what might happen with the stock in the short term after they absorb the impact of a large number of warrant exercises hitting the stock with a higher share count, but it turns out it’s not having a particularly severe impact on their guidance so far.

The report for the first quarter was more or less as expected, funds from operations at 19 cents per share and a continuing dividend of 15 cents per share per quarter for now (they raised it in March, so I wasn’t expecting another dividend raise just yet — though another raise later this year is quite possible).

And here’s how the guidance for the full year changed as a result of the warrants that have so far been exercised (they’re not adjusting for the still large number of warrants outstanding, so that’s still an open question) …

Before the big wave of warrant exercises and buybacks, February:


ROIC currently estimates FFO for 2013 will be within the range of $0.80 to $0.85 per diluted share, and net income will be within the range of $0.12 to $0.14 per diluted share. The following table provides a reconciliation of GAAP net income to FFO. (In thousands, except per share amounts)

And after the warrant exercises and buybacks, May:

Based on ROIC’s results for the first quarter of 2013 and taking into account the warrants retired to date, ROIC currently estimates FFO for 2013 will be within the range of $0.77 to $0.82 per diluted share, and net income will be within the range of $0.14 to $0.16 per diluted share.

I expect that share count will go up further, because they’ll either settle more of the warrants or more of the warrants will be exercised as investors gradually swap into the common stock to get the dividends if they think the capital gains will slow, but there’s no guarantee of that happening quickly — we’ve still got over a year before the Fall 2014 expiration of the warrants.

Their net income and depreciation have gone up considerably thanks to their purchases of some new shopping centers, and they have very manageable debt levels still thanks, in part, to the cash from those warrant exercises, so there’s nothing to be particularly concerned about from the company — and the shares have reflected that, reacting very little to this quarterly release. That per-share FFO guidance drop is only 3%, so it’s not hitting the stock as much as I feared it might.

So what to do if you’re holding the warrants with a big paper profit? Or with the stock, for that matter?

In my case I’m going to sell the remainder of my warrants and move that cash into more common shares to let them start compounding this 4% and growing dividend — I like the company, I think management is doing very well, I like the acquisitions they’re making of grocery-anchored shopping centers, and I think they’ll continue to spit out a solid and growing dividend and provide solid compounding returns from here … but I’m not entirely confident that they won’t hit a hiccup over the next year or so that drops the share price by 15-20% (or a broader market selloff that would have similar impact on the shares), and if that happens the value of the warrants would be cut by more than 50% (the warrants give the right to buy the stock for $12 before October 23, 2014. So I’m giving up more dramatic potential gains (the warrants could easily gain another couple hundred percent if things continue to come up roses for ROIC over the next 18 months) in order to settle in for dividends and more downside protection. Your mileage may vary, of course, and I wouldn’t necessarily urge you to be as conservative as I’m being with these gains, many advisors will tell you to let your winners ride, but downdrafts do hit warrants much harder than the common equity — ROIC could fall to $12 quite feasibly, which would be a 15-20% drop and certainly unpleasant, but if that happens when we’re close to expiration ROICW could easily fall to zero (if the stock is below the strike price on the expiration date, the warrant is worthless).

If you’re interested in buying warrants, I think it’s getting riskier to get involved with ROIC Warrants now as we come closer to expiration — but the TARP Warrants that give us five more years (or more) of exposure to some financial stocks are still in many cases a very solid speculation. I still like the two I wrote about a couple weeks ago in our last Idea of the Month piece[3].

You can check out Myron’s column for the Irregulars here[4] if you’re interested, and I’ll be writing again just for the Irregulars early next week as I report from the Value Investing Congress and, hopefully, share some interesting and nicely-priced ideas for you. There’s at least one newsletter guy presenting this time around (Chris Mayer), so I’ll be curious to see that, but there’s a long list of great money managers who will be presenting interesting-sounding ideas, so stay tuned.

And if all else fails, I’ll be in Las Vegas so my Idea of the Month might just be … split your eights, double down on that eleven, and, if all else fails, bet it all on black.

Have a great weekend!

  1. You can see that commentary here:
  2. just contact us:
  3. wrote about a couple weeks ago in our last Idea of the Month piece:
  4. check out Myron’s column for the Irregulars here:

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