Retail Opportunity Investments Corp Is Making an Enormous Purchase

The folks at Retail Opportunity Investments Corp  hit the ground running in 2014, quickly committing to over $112 million in shopping center acquisitions by the end of the first quarter. But they were only just getting started.

One of ROIC's 56 shopping centers, Credit: Retail Opportunity Investments

Retail Opportunity Investments kicked off this week by announcing the pending purchase California-based Fallbrook Shopping Center for $210 million in cash from General Growth Properties . Moreover, Retail Opportunity Investments states the deal will be immediately accretive to both net income and funds from operations -- the latter of which effectively measures its cash flow from operations -- and is expected to close before the end of this quarter. This also increases Retail Opportunity Investments' unencumbered -- or free from debt -- gross leasable area to 87%. 

This is huge...
To get a sense of just how big this $210 million acquisition is, remember we're talking about a small-cap real estate investment trust with a total market capitalization of just $1.20 billion. As of March 31, 2014, Retail Opportunity Investments already owned 56 shopping centers totaling 6 million square feet. Fallbrook alone has approximately 1.12 million square feet of gross leaseable area.

But that's not to say these are completely uncharted waters for Retail Opportunity Investments management. After all, CEO Stuart Tanz did previously guide Pan Pacific Retail from its $146 million IPO in 1997 all the way to its $4.1 billion acquisition by Kimco Realty  in 2006. Kimco's then-CEO (and now executive chairman) Milton Cooper commented at the time "We feel very good about the quality and long-term prospects for the neighborhood shopping centers in Pan Pacific's portfolio."

...but still fits like a glove
Lucky for ROIC investors, Tanz has only continued his trend of focusing on high-quality properties to build up Retail Opportunity Investments, and Fallbrook Shopping Center appears to be no exception.

Specifically, Fallbrook sits in a densely populated, affluent community in West Hills with an average household income of roughly $100,000 per year. It also boasts a 98% lease rate, of which 96% are national retailers and two-thirds are investment-grade rated. And for long-term focused investors, 87% of the space is already occupied by anchor tenants with an average remaining lease term of 12 years. 

Finally, Fallbrook features three grocery locations including a Ralph's, a Trader Joe's, and a Sprouts Farmer's Market, which meshes nicely with Retail Opportunity Investments' usual preference for finding necessity-based shopping centers anchored by national or regional supermarkets. Given Fallbook's relative size, it's no wonder Retail Opportunity Investment's press release this morning states "We look forward to integrating Fallbrook into our portfolio, as one of our flagship properties."

Is there a catch?
This in mind, we still don't have much data on Fallbrook's profitability. As a result, investors will want to keep their eyes peeled for related SEC filings to dig up more specific numbers.

We also don't know exactly why General Growth Properties is selling. But given Tanz's past methodical approach to conservatively maintaining his ROIC's balance sheet, I shouldn't think he'd be willing to take the dive into such a large shopping center -- however high-quality it might be -- if it meant paying General Growth Properties an unreasonable premium. In the end, I still think shareholders should be excited by Retail Opportunity Investments' long-term direction.

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Steve Symington owns shares of Retail Opportunity Investments. The Motley Fool recommends Retail Opportunity Investments. The Motley Fool owns shares of Retail Opportunity Investments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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