EDGAR 10-K Filing

Company CIK: 1577230
Filing Year: 2021
Filename: 1577230_10-K_2021_0001407623-21-000031.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”) commenced operations in October 2009 as a fully integrated, self-managed REIT. The Company 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 December 31, 2020, the Company’s portfolio consisted of 89 properties (88 retail and one office) totaling approximately 10.1 million square feet of gross leasable area (“GLA”). The Company 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 sole 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. As of December 31, 2020, ROIC owned an approximate 92.9% partnership interest and other limited partners owned the remaining 7.1% partnership interest in the Operating Partnership.
ROIC’s only material assets are its 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 through this subsidiary, acts as the sole general partner of the Operating Partnership. 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.
Investment Strategy
The Company seeks to acquire shopping centers located in densely populated, supply-constrained metropolitan markets on the west coast of the United States, which exhibit income and population growth and high barriers to entry. The Company’s senior management team has operated in the Company’s markets for over 30 years and has established an extensive network of relationships in these markets with key institutional and private property owners, brokers and financial institutions and other real estate operators. The Company’s in-depth local and regional market knowledge and expertise provides a distinct competitive advantage in identifying and accessing attractive acquisition opportunities, including properties that are not widely marketed.
The Company seeks to acquire high quality necessity-based community and neighborhood shopping centers anchored by national and regional supermarkets and drugstores that are well-leased, with stable cash flows. Additionally, the Company acquires shopping centers which it believes are candidates for attractive near-term re-tenanting or present other value-enhancement opportunities. Upon acquiring a shopping center, the Company normally commences leasing initiatives aimed at enhancing long-term value through re-leasing below market space and improving the tenant mix.
The Company derives revenues primarily from rents and reimbursement payments received from tenants under leases at the Company’s properties. The Company focuses on leasing to retailers that provide necessity-based, non-discretionary goods and services, catering to the basic and daily needs of the surrounding community, a majority of which are destination-based and therefore more resistant to competition from e-commerce than other types of retailers. The Company believes necessity-based retailers draw consistent, regular traffic to its shopping centers, which results in stronger sales for its tenants and a more consistent revenue base. Additionally, the Company seeks to maintain a strong and diverse tenant base with a balance of large, long-term leases to major national and regional retailers, including supermarkets, drugstores and discount stores, with small, shorter-term leases to a broad mix of national, regional and local retailers. The Company believes the long-term anchor tenants provide a reliable, stable base of rental revenue, while the shorter-term leases afford the Company the opportunity to drive rental growth, as well as the ongoing flexibility to adapt to evolving consumer trends.
The Company believes that the current market environment continues to present opportunities for it to further build its portfolio and add additional necessity-based community and neighborhood shopping centers that meet its investment profile. The Company’s long-term objective is to prudently build and maintain a diverse portfolio of necessity-based community and neighborhood shopping centers aimed at providing stockholders with sustainable, long-term growth and value through all economic cycles.
In implementing its investment strategy and selecting an asset for acquisition, the Company analyzes the fundamental qualities of the asset, the inherent strengths and weaknesses of its market, sub-market drivers and trends, and potential risks and risk mitigants facing the property. The Company believes that its acquisition process and operational expertise provide it with the capability to identify and properly underwrite investment opportunities.
The Company’s aim is to seek to provide diversification of assets, tenant exposures, lease terms and locations in its portfolio. In order to capitalize on the changing sets of investment opportunities that may be present in the various points of an economic cycle, the Company may expand or refocus its investment strategy. The Company’s investment strategy may be amended from time to time, if approved by its board of directors. The Company is not required to seek stockholder approval when amending its investment strategy.
Financing Activities
The Company employs prudent amounts of leverage and uses debt as a means of providing funds for the acquisition of its properties and the diversification of its portfolio. The Company seeks to primarily utilize unsecured debt in order to maintain liquidity and flexibility in its capital structure.
Term Loan and Credit Facility
The Company has an unsecured term loan agreement with several banks under which the lenders agreed to provide a $300.0 million unsecured term loan facility. Effective December 20, 2019, the Company entered into the First Amendment to First Amended and Restated Term Loan Agreement (as amended, the “Term Loan Agreement”) pursuant to which the maturity date of the term loan was extended from September 8, 2022 to January 20, 2025, 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 the Administrative Agent as its “prime rate,” and (c) the Eurodollar Rate plus 1.00%.
The Operating Partnership has an unsecured revolving credit facility with several banks. Effective December 20, 2019, the Company entered into the First Amendment to Second Amended and Restated Credit Agreement (as amended, the “Credit Facility Agreement”) pursuant to which the borrowing capacity under the credit facility is $600.0 million and the maturity date of the credit facility was extended from September 8, 2021 to February 20, 2024, 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 Agreement 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 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) 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 0.90%. 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 Agreement. The Company has investment grade credit ratings from Moody’s Investors Service (Baa2), S&P Global Ratings (BBB-) and Fitch Ratings (BBB-).
The Operating Partnership’s debt agreements contain customary representations, financial and other covenants, and its ability to borrow under these agreements is subject to its compliance with financial covenants and other restrictions on an ongoing basis. As a result of the COVID-19 pandemic’s impact on the Company’s business, the Operating Partnership entered into temporary waiver amendments for one of the covenants contained in its debt agreements. The amendments adjusted the criteria for properties eligible to be included in the unencumbered asset pool used for purposes of calculating the consolidated unencumbered leverage ratio. Following such amendments, the Operating Partnership is in compliance with all financial covenants in its debt agreements. The temporary waiver period expires subsequent to March 31, 2021.
As of December 31, 2020, $300.0 million and $48.0 million were outstanding under the term loan and credit facility, respectively. The weighted average interest rates on the term loan and the credit facility during the year ended December 31, 2020 were 1.6% and 1.4%, respectively. As discussed in Note 11 of the accompanying financial statements, the Company uses interest rate swaps to manage its interest rate risk and accordingly, the swapped interest rate on the term loan is 3.0%. The Company had no available borrowings under the term loan at December 31, 2020. The Company had $552.0 million available to borrow under the credit facility at December 31, 2020.
ATM Equity Offering
On February 20, 2020, the ROIC entered into an “at the market” sales agreement (the “Sales Agreement”) with each of (i) KeyBanc Capital Markets Inc., BTIG, LLC, BMO Capital Markets Corp., BofA Securities, Inc., Capital One Securities, Inc., Citigroup Global Markets Inc., Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc., Regions Securities LLC, Robert W. Baird & Co. Incorporated and Wells Fargo Securities, LLC (collectively, the “Agents”) and (ii) the Forward Purchasers (as defined below), pursuant to which ROIC may sell, from time to time, shares (any such shares, the “Primary Shares”) of ROIC’s common stock, par value $0.0001 per share (“Common Stock”), to or through the Agents and instruct certain of the Agents, acting as forward sellers (the “Forward Sellers”), to offer and sell borrowed shares (any such shares, “Forward Hedge Shares,” and collectively with the Primary Shares, the “Shares”) with the Shares to be sold under the Sales Agreement having an aggregate offering price of up to $500.0 million. Additionally, ROIC simultaneously terminated the sales agreements with Capital One Securities, Inc., Jefferies LLC, KeyBanc Capital Markets Inc., Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated, dated as of May 1, 2018 and as amended on April 29, 2019, which ROIC entered into in connection with its prior “at the market” offering.
The Sales Agreement contemplates that, in addition to the issuance and sale of Primary Shares to or through the Agents as principal or its sales agents, ROIC may enter into separate forward sale agreements with any of KeyBanc Capital Markets Inc., BMO Capital Markets Corp., BofA Securities, Inc., Citigroup Global Markets Inc., Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc. and Wells Fargo Securities, LLC or their respective affiliates (in such capacity, the “Forward Purchasers”). If ROIC enters into a forward sale agreement with any Forward Purchaser, ROIC expects that such Forward Purchaser or its affiliate will borrow from third parties and, through the relevant Forward Seller, sell a number of Forward Hedge Shares equal to the number of shares of Common Stock underlying the particular forward sale agreement, in accordance with the mutually accepted instructions related to such forward sale agreement. ROIC will not initially receive any proceeds from any sale of Forward Hedge Shares through a Forward Seller. ROIC expects to fully physically settle each particular forward sale agreement with the relevant Forward Purchaser on one or more dates specified by ROIC on or prior to the maturity date of that particular forward sale agreement by issuing shares of Common Stock (the “Confirmation Shares”), in which case ROIC expects to receive aggregate net cash proceeds at settlement equal to the number of shares of Common Stock underlying the particular forward sale agreement multiplied by the relevant forward sale price. However, ROIC may also elect to cash settle or net share settle a particular forward sale agreement, in which case ROIC may not receive any proceeds from the issuance of shares of Common Stock, and ROIC will instead receive or pay cash (in the case of cash settlement) or receive or deliver shares of Common Stock (in the case of net share settlement).
During the year ended December 31, 2020, ROIC did not sell any shares under the Sales Agreement.
The Company plans to finance future acquisitions through a combination of operating cashflow, borrowings under the credit facility, the assumption of existing mortgage debt, the issuance of equity securities including OP Units, equity and debt offerings, and the potential sale of existing assets.
Business Segments
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.
Regulation
The following discussion describes certain material U.S. federal laws and regulations that may affect the Company’s operations and those of its tenants. However, the discussion does not address state laws and regulations, except as otherwise indicated. These state laws and regulations, like the U.S. federal laws and regulations, could affect the Company’s operations and those of its tenants.
Generally, real estate properties are subject to various laws, ordinances and regulations. Changes in any of these laws or regulations, such as the Comprehensive Environmental Response and Compensation, and Liability Act of 1980, as amended, increase the potential liability for environmental conditions or circumstances existing or created by tenants or others on the properties. In addition, laws affecting development, construction, operation, upkeep, safety and taxation requirements may result in significant unanticipated expenditures, loss of real estate property sites or other impairments, which would adversely affect its cash flows from operating activities.
Under the Americans with Disabilities Act of 1990 (the “Americans with Disabilities Act”) all places of public accommodation are required to meet certain U.S. federal requirements related to access and use by disabled persons. A number of additional U.S. federal, state and local laws also exist that may require modifications to properties, or restrict certain further renovations thereof, with respect to access thereto by disabled persons. Noncompliance with the Americans with Disabilities Act could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature and in substantial capital expenditures. To the extent the Company’s properties are not in compliance, the Company may incur additional costs to comply with the Americans with Disabilities Act.
Property management activities are often subject to state real estate brokerage laws and regulations as determined by the particular real estate commission for each state.
Environmental Matters
Pursuant to U.S. federal, state and local environmental laws and regulations, a current or previous owner or operator of real property may be required to investigate, remove and/or remediate a release of hazardous substances or other regulated materials at or emanating from such property. Further, under certain circumstances, such owners or operators of real property may be held liable for property damage, personal injury and/or natural resource damage resulting from or arising in connection with such releases. Certain of these laws have been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The failure to properly remediate the property may also adversely affect the owner’s ability to lease, sell or rent the property or to borrow funds using the property as collateral.
In connection with the ownership, operation and management of the Company’s current properties and any properties that it may acquire and/or manage in the future, the Company could be legally responsible for environmental liabilities or costs relating to a release of hazardous substances or other regulated materials at or emanating from such property. In order to assess the potential for such liability, the Company conducts an environmental assessment of each property prior to acquisition and manages its properties in accordance with environmental laws while it owns or operates them. All of its leases contain a comprehensive environmental provision that requires tenants to conduct all activities in compliance with environmental laws and to indemnify the owner for any harm caused by the failure to do so. In addition, the Company has engaged qualified, reputable and adequately insured environmental consulting firms to perform environmental site assessments of its properties and is not aware of any environmental issues that are expected to materially impact the financial condition of the Company.
Competition
The Company believes that competition for the acquisition, operation and development of retail properties is highly fragmented. The Company competes with numerous owners, operators and developers for acquisitions and development of retail properties, including institutional investors, other REITs and other owner-operators of necessity-based community and neighborhood shopping centers, primarily anchored by supermarkets and drugstores, some of which own or may in the future own properties similar to the Company’s in the same markets in which its properties are located. The Company also faces competition in leasing available space to prospective tenants at its properties. The actual competition for tenants varies depending upon the characteristics of each local market (including current economic conditions) in which the Company owns and manages property. The Company believes that the principal competitive factors in attracting tenants in its market areas are location, demographics, price, the presence of anchor stores and the appearance of properties.
Many of the Company’s competitors are substantially larger and have considerably greater financial, marketing and other resources than the Company. Other entities may raise significant amounts of capital and may have investment objectives that overlap with those of the Company, which may create additional competition for opportunities to acquire assets. In the future, competition from these entities may reduce the number of suitable investment opportunities offered to the Company or increase the bargaining power of property owners seeking to sell. Further, as a result of their greater resources, such entities may have more flexibility than the Company does in their ability to offer rental concessions to attract tenants. If the Company’s competitors offer space at rental rates below current market rates, or below the rental rates the Company currently charges its tenants, the Company may lose potential tenants and it may be pressured to reduce its rental rates below those it currently charges in order to retain tenants when its tenants’ leases expire.
Employees and Human Capital Resources
As of December 31, 2020, the Company had 66 employees, including 17 maintenance employees at its shopping centers and three executive officers, one of whom is also a member of its board of directors. The Company believes that its talented and committed employees are the foundation of its success and supporting employees, tenants and communities is at the heart of the Company's business model.
Diversity and Inclusion. The Company values and advances a diverse and inclusive workplace and strives to create equal opportunities for all current and future employees. As an equal opportunity employer, the Company is committed to maintaining an equitable workplace that is free from discrimination or harassment on the basis of race, color, religion, sexual orientation, gender, gender identity or expression, national origin, age, disability, military or veteran status, genetic information, or other statuses protected by applicable federal, state, and local law.
The Company believes that its success is dependent upon the diverse backgrounds and perspectives of its employees and directors and strives to build a culture that is collaborative, diverse, supportive and inclusive. As of December 31, 2020, approximately 70% of the Company's employees were female. In 2020, the Company also adopted ESG metrics as part of its long-term incentive compensation plan that included holding diversity and inclusion training for employees annually as a performance metric.
Training and Education. The Company supports the continual development of its employees by providing educational and training opportunities to help advance their personal and professional growth and skills, including accounting and continuing education classes, professional certifications, software training and industry workshops and seminars.
Employee Wellness and Benefits. The physical and mental health and wellness of the Company's employees is paramount. The Company provides employees with competitive compensation and a wide range of benefits including comprehensive medical and dental insurance coverage, short and long term disability benefits, a 401(K) retirement program and matching, paid maternity, paternity and adoptive leave and vacation, sick and personal leave, flexible work arrangements, flexible savings accounts, and other benefits.
Community Engagement. The Company's properties provide essential services to the communities in which they are located and the Company understands that they play an important role in making these communities better places to live and work. The Company is committed to making a positive impact in its communities and engages in community activities such as hosting and/or sponsoring free or not-for-profit led community events at its properties throughout the year.
COVID-19 Health and Safety. The health and safety of the Company's employees and their families is a top priority, along with the health and safety of the Company's tenants and the communities they and the Company together serve. In response to the COVID-19 pandemic, by mid-March 2020, the Company had fully transitioned employees to working remotely and successfully executed its business continuity plan with no disruption to its core financial, operational, and IT systems. The Company also established new safety protocols and procedures at all of its properties, including increasing cleaning protocols, addressing the protection of tenants during cleaning, establishing physical distancing procedures, requiring facial coverings, providing personal protective equipment and cleaning supplies for employees who needed to be onsite, and adding an ultraviolet system to all HVAC units at the Company's offices. Further, the Company has been in constant communication with its tenants and has assisted tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020 or additional stimulus or relief packages implemented by local, state or federal governments. Additionally, in order to assist its tenants in remaining open and operating, the Company offered aid to expand outdoor operations (in accordance with state guidelines), utilizing shaded and broad sidewalk areas, existing courtyard space, and converting lawn and parking stalls into private, umbrellaed spaces for tenants to operate all while procuring key items needed to create outdoor usable spaces for tenants, including umbrellas, partitions, space heaters and wind barriers.
Additional information regarding our human capital programs and initiatives is available in our ESG Report, which can be found on our company website. Information on our website, including our ESG Report, is not incorporated by reference into this Annual Report on Form 10-K.
Available Information
The Company files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports with the Securities and Exchange Commission (the “SEC”). The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company’s website is www.roireit.net. The Company’s reports on Forms 10-K, 10-Q and 8-K, and all amendments to those reports are available free of charge on its Website as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. The contents of the Company’s website are not incorporated by reference herein.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Risks Related to COVID-19
The current pandemic of the novel coronavirus (COVID-19) is expected to continue to, and the future outbreak of other highly infectious or contagious diseases may, materially and adversely impact the businesses of many of the Company’s tenants and materially and adversely impact and disrupt the Company’s business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service the Company’s debt obligations, and the Company’s ability to pay dividends and other distributions to the Company’s stockholders.
The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets.
The COVID-19 pandemic has impacted states and cities where the Company’s tenants operate their businesses and where the Company’s properties are located, and local, state and federal authorities have taken preventative measures to alleviate the public health crisis including “shelter-in-place” or “stay-at-home” orders, mandatory business closures and restrictions on business operations, quarantines, restrictions on travel, restrictions on gatherings and social distancing practices. These containment measures, which in certain states and counties were relaxed or lifted for a period of time and subsequently reimposed, are affecting the operations of the Company’s tenant base to varying degrees depending on the category and location of the tenant. For example, grocery stores, pharmacies and retail stores have been generally permitted to remain open and operational (with capacity limitations in the case of certain retail stores), restaurants in certain states such as California, Washington and Oregon have been generally limited to take-out and delivery services and outdoor-dining only or subject to capacity limitations when indoor dining has been permitted, and bars, movie theaters, gyms and salons in certain states and counties have been generally forced to close indoor operations for periods of time. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed or lifted, whether restrictions that have been relaxed or lifted will be reimposed, or when or if customers will re-engage with tenants as they have in the past.
A number of the Company’s tenants operate service and retail businesses that require in-person interactions with their customers to generate revenues, and the spread of COVID-19 has decreased customers’ willingness to frequent certain of the Company’s tenants’ physical store locations and has led to a general increase in online consumer purchases through retail websites. There is no guarantee that this trend towards making purchases of both goods and services online will not continue in the future even after the abatement of the COVID-19 pandemic. A prolonged or permanent decrease in customer traffic could make it difficult for the Company to renew or re-lease the Company’s properties at lease rates equal to or above historical rates, and the Company could incur substantial tenant improvement and other leasing costs. In addition, there is uncertainty as to whether businesses of tenants that have closed, either voluntarily or by mandate, will reopen even after applicable restrictions are lifted. As of February 18, 2021 approximately 95.4% of the Company's tenants (based on Annualized Base Rent) are open and operating and approximately 4.6% of the Company's tenants are closed, and it is possible that additional tenants could close their businesses. The failure of tenants to reopen their businesses could have a material impact on occupancy levels at the Company’s properties, which could result in an increase in the number of co-tenancy claims if the occupancy at the Company’s properties falls below required thresholds. Further, one or more of the Company’s tenants may seek the protection of the bankruptcy laws as a result of the impact of the COVID-19 pandemic which could result in the termination of its lease causing a reduction in the Company’s income. Tenant bankruptcies may also make it more difficult for the Company to lease the remainder of the property or properties in which the bankrupt tenant operates and adversely impact the Company’s ability to successfully execute the Company’s re-leasing strategy.
The pandemic has resulted in a global slowdown of economic activity and a sustained downturn in the U.S. economy and reduced consumer spending as well as consumer activity at brick-and-mortar commercial establishments due to the prolonged existence and threat of the COVID-19 pandemic could impose an economic recession in the U.S. which could impact the Company’s tenants’ ability to meet their lease obligations due to poor operating results, lack of liquidity or other reasons and therefore decrease the revenue generated by the Company’s properties or the value of the Company’s properties. The Company’s ability to lease space and negotiate and maintain favorable rents could also be negatively impacted by a prolonged recession in the U.S. economy. Moreover, the demand for leasing space in the Company’s properties could substantially decline during a significant downturn in the U.S. economy which could result in a decline in the Company’s occupancy percentage and reduction in rental revenues.
As a result of these and other factors, certain of the Company’s tenants have experienced and continue to experience economic difficulties which may cause them to be unable to meet their obligations to the Company under their lease agreements in full, or at all. A number of the Company’s tenants have sought to modify such obligations and, during the year ended December 31, 2020, the Company entered into lease concessions that deferred approximately $6.2 million of contractual amounts billed. As
of December 31, 2020, approximately $1.1 million of such amount has been rebilled, of which approximately $959,000 has been collected. Tenants with whom the Company has entered into lease concessions may continue to seek additional relief, and additional tenants may seek modifications of such obligations in the future, resulting in increases in uncollectible receivables and reductions in rental income. During the year ended December 31, 2020, the Company experienced a higher rate of projected uncollectible rental revenue driven by changes in expectations of collectability for certain tenants given the impact of the COVID-19 pandemic to such tenants. As a result, the Company's allowance for doubtful accounts increased to approximately $18.6 million at December 31, 2020 compared to approximately $8.2 million at December 31, 2019. Further, in the event of any default by a tenant under its lease agreement, the Company might not be able to fully recover and/or experience delays and additional costs in enforcing the Company’s rights as landlord to recover amounts due to us under the terms of the lease agreement. Because substantially all of the Company’s income is derived from rentals of commercial real property, the Company’s business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service the Company’s debt obligations and the Company’s ability to pay dividends and other distributions to the Company’s stockholders would be adversely affected if a significant number of tenants are unable to meet their obligations to the Company.
In addition, the COVID-19 pandemic, or a future pandemic, could have material and adverse effects on the Company’s business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service the Company’s debt obligations and the Company’s ability to pay dividends and other distributions to the Company’s stockholders due to, among other factors:
•difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect the Company’s access to capital necessary to fund business operations or address maturing liabilities on a timely basis and the Company’s tenants’ abilities to fund their business operations and meet their obligations to the Company;
•the financial impact could negatively impact the Company’s ability to pay dividends to the Company’s stockholders;
•the financial impacts could negatively impact the Company’s future compliance with financial covenants of the Company’s credit facility and other debt agreements and could result in a default and potentially an acceleration of indebtedness, which non-compliance could also negatively impact the Company’s ability to make additional borrowings under the Company’s revolving credit facility or otherwise pay dividends to the Company’s stockholders;
•the worsening of estimated future cash flows due to a change in the Company’s plans, policies, or views of market and economic conditions as it relates to one or more of the Company’s adversely impacted properties could result in the recognition of substantial impairment charges imposed on the Company’s assets;
•the credit quality of the Company’s tenants could be negatively impacted and the Company may significantly increase the Company’s allowance for doubtful accounts;
•a general decline in business activity and demand for real estate transactions could adversely affect the Company’s ability or desire to grow the Company’s portfolio of properties, or to sell properties as part of the Company’s capital recycling strategy;
•difficulties completing the Company’s densification projects on a timely basis, on budget or at all; and
•the potential negative impact on the health of the Company’s personnel, particularly if a significant number of them are impacted.
The extent to which the COVID-19 pandemic continues to impact, or a future pandemic could impact, the Company’s operations and those of the Company’s tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of such pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic, but a prolonged outbreak as well as related mitigation efforts could continue to have a material impact on the Company’s revenues and could materially and adversely affect the Company’s business, results of operations and financial condition. Moreover, many risk factors set forth in this Annual Report on Form 10-K should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
Risks Related to the Company’s Business and Operations
There are risks relating to investments in real estate.
Real property investments are subject to varying degrees of risk. Real estate values are affected by a number of factors, including: changes in the general economic climate, local conditions (such as an oversupply of space or a reduction in demand for real estate in an area), the quality and philosophy of management, competition from other available space, the ability of the owner to provide adequate maintenance and insurance and to control variable operating costs, adverse weather conditions, natural disasters, terrorist activities and other factors in the areas in which the properties are located. Shopping centers, in particular, may be affected by changing perceptions of retailers or shoppers regarding the safety, convenience and attractiveness of the shopping center, increasing consumer purchases through online retail websites and catalogs, the ongoing consolidation in the retail sector and by the overall climate for the retail industry generally. Real estate values are also affected by such factors as government regulations, interest rate levels, the availability of financing and potential liability under, and changes in, environmental, zoning, tax and other laws. A significant portion of the Company’s income is derived from rental income from real property. The Company’s income, cash flow, results of operations, financial condition, liquidity and ability to service its debt obligations could be materially and adversely affected if a significant number of its tenants were unable to meet their obligations, or if it were unable to lease on economically favorable terms a significant amount of space in its properties. In the event of default by a tenant, the Company may experience delays in enforcing, and incur substantial costs to enforce, its rights as a landlord. In addition, certain significant expenditures associated with each equity investment (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment.
The Company operates in a highly competitive market and competition may limit its ability to acquire desirable assets and to attract and retain tenants.
The Company operates in a highly competitive market. The Company’s profitability depends, in large part, on its ability to acquire its assets at favorable prices and on trends impacting the retail industry in general, national, regional and local economic conditions, financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends. Many of the Company’s competitors are substantially larger and have considerably greater financial, marketing and other resources than it does. Other entities may raise significant amounts of capital and may have investment objectives that overlap with the Company’s. In addition, the properties that the Company acquires may face competition from similar properties in the same market, as well as from e-commerce websites. The presence of competitive alternatives affects the Company’s ability to lease space and the level of rents it can obtain. New construction, renovations and expansions at competing sites could also negatively affect the Company’s properties.
The Company may change any of its strategies, policies or procedures without stockholder consent, which could materially and adversely affect its business.
The Company may change any of its strategies, policies or procedures with respect to acquisitions, asset allocation, growth, operations, indebtedness, financing strategy and distributions, including those related to maintaining its REIT qualification, at any time without the consent of its stockholders, which could result in making acquisitions that are different from, and possibly riskier than, the types of acquisitions described in this Annual Report on Form 10-K. A change in the Company’s strategy may increase its exposure to real estate market fluctuations, financing risk, default risk and interest rate risk. Furthermore, a change in the Company’s asset allocation could result in the Company making acquisitions in asset categories different from those described in this Annual Report on Form 10-K. These changes could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
The Company’s directors are subject to potential conflicts of interest.
The Company’s executive officers and directors may face conflicts of interest. Except for Messrs. Tanz, Haines and Schoebel, none of the Company’s executive officers or directors are required to commit substantially all of their business time to the Company. Also, in the course of their other business activities, the Company’s directors may become aware of investment and business opportunities that may be appropriate for presentation to the Company as well as the other entities with which they are affiliated. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
As a result of multiple business affiliations, the Company’s non-management directors may have legal obligations relating to presenting opportunities to acquire one or more properties, portfolios or real estate-related debt investments to other entities. The Company’s non-management directors (including the Company’s non-executive Chairman) may present such opportunities to the other entities to which they owe pre-existing fiduciary duties before presenting such opportunities to the Company. In addition, conflicts of interest may arise when the Company’s board of directors evaluates a particular opportunity.
Capital markets and economic conditions can materially affect the Company’s financial condition, its results of operations and the value of its assets.
There are many factors that can affect the value of the Company’s assets, including the state of the capital markets and economy. Any reduction in available financing may materially and adversely affect the Company’s ability to achieve its financial objectives. Concern about the stability of the markets generally may limit the Company’s ability and the ability of its tenants to timely refinance maturing liabilities and access the capital markets to meet liquidity needs. Although the Company will factor in these conditions in acquiring its assets, its long term success depends in part on general economic conditions and the stability and dependability of the financing market for retail real estate. If the national economy or the local economies in which the Company operates were to experience uncertainty, or if general economic conditions were to worsen, the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders could be materially and adversely affected.
Bankruptcy or insolvency of tenants may decrease the Company’s revenues and available cash.
In the case of many retail properties, the bankruptcy or insolvency of a major tenant could cause the Company to suffer lower revenues and operational difficulties and could allow other tenants to exercise so-called “kick-out” clauses in their leases and terminate their lease or reduce their rents prior to the normal expiration of their lease terms. As a result, the bankruptcy or insolvency of major tenants could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
Inflation or deflation may materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and distributions to its stockholders.
Increased inflation could have a pronounced negative impact on the Company’s property operating expenses and general and administrative expenses, as these costs could increase at a rate higher than the Company’s rents. Inflation could also have an adverse effect on consumer spending which could impact the Company’s tenants’ sales and, in turn, the Company’s percentage rents, where applicable, and the willingness and ability of tenants to enter into or renew leases and/or honor their obligations under existing leases. Conversely, deflation could lead to downward pressure on rents and other sources of income.
Compliance or failure to comply with safety regulations and requirements could result in substantial costs.
The Company’s properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If the Company fails to comply with these requirements, it could incur fines or private damage awards. The Company does not know whether compliance with the requirements will require significant unanticipated expenditures that could affect its income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
The Company expects to acquire additional properties and this may create risks.
The Company expects to acquire additional properties consistent with its investment strategies. The Company may not, however, succeed in consummating desired acquisitions on time, within budget or at all. In addition, the Company may face competition in pursuing acquisition opportunities, which could result in increased acquisition costs. When the Company does pursue a project or acquisition, it may not succeed in leasing newly acquired properties at rents sufficient to cover its costs of acquisition. Difficulties in integrating acquisitions may prove costly or time-consuming and could result in poorer than anticipated performance. The Company may also abandon acquisition opportunities that it has begun pursuing and consequently fail to recover expenses already incurred. Furthermore, acquisitions of new properties will expose the Company to the liabilities of those properties, including, for example, liabilities for clean-up of disclosed or undisclosed environmental
contamination, claims by persons in respect of events transpiring or conditions existing before the Company’s acquisition and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of properties.
In the event we seek to redevelop existing properties, these projects could be subject to delays or other risks and might not yield the returns we anticipate, which would harm our financial condition and operating results.
The Company may selectively engage in redevelopment projects at certain of our properties. To the extent the Company enters into redevelopment projects, it will be subject to a number of risks that could negatively affect its return on investment, financial condition, results of operations and our ability to make distributions to stockholders, including, among others:
•higher than anticipated construction costs, including labor and material costs;
•delayed ability or inability to reach projected occupancy, rental rates, profitability, and investment return;
•timing delays due to weather, labor disruptions, zoning or other regulatory approvals, tenant decision delays, delays in anchor approvals of redevelopment plans, where required, acts of God (such as fires, significant storms, earthquakes or floods) and other factors outside our control, which might make a project less profitable or unprofitable, or delay profitability; and
•expenditure of money and time on projects that might be significantly delayed before stabilization.
If a project is unsuccessful, either because it is not meeting its expectations when operational or was not completed according to the project planning, the Company could lose its investment in the project or have to incur an impairment charge relating to the asset or development which could then adversely impact the Company’s financial condition and operating results.
The Company faces risks associated with the development and redevelopment of mixed-use commercial properties.
The Company may continue to expand its investment focus to include more complex mixed-use development and redevelopment projects that pose unique risks to the Company’s return on investment. Mixed-use projects refer to real estate projects that, in addition to retail space, may also include space for residential, office, hotel or other commercial purposes. The Company has less experience in developing and redeveloping and managing non-retail real estate than it does retail real estate. As a result, if a development or redevelopment project includes a non-retail use, the Company may seek to develop that component itself, sell the rights to that component to a third-party developer, or partner with a developer. The Company may be exposed not only to those risks typically associated with the development or redevelopment of retail real estate, but also to risks associated with developing, owning, operating or selling non-retail real estate, with which the Company has less experience, including but not limited to complex entitlement processes. These unique risks may adversely impact our return on investment in these mixed-use development or redevelopment projects. If the Company sells the non-retail components, the Company’s retail component may be impacted by the decisions made by the other owners, and actions of those occupying the non-retail spaces in these mixed-use properties. If the Company partners with a developer, the Company might be dependent upon the partner’s ability to perform and to agree on major decisions that impact the Company’s investment returns of the project. In addition, there is a risk that the non-retail developer may default on its obligations necessitating that the Company complete the other components itself, including providing necessary financing.
Factors affecting the general retail environment could adversely affect the financial condition of the Company’s retail tenants and the willingness of retailers to lease space in its shopping centers, and in turn, materially and adversely affect the Company.
The Company’s properties are focused on the retail real estate market. This means that the performance of the Company’s properties will be impacted by general retail market conditions, including the level of consumer spending and consumer confidence, the threat of terrorism and increasing competition from online retail websites and catalog companies. In addition, the retail business is highly competitive and our tenants may fail to differentiate their shopping experiences, create an attractive value proposition or execute their business strategies. Furthermore, the Company believes that the increase in digital and mobile technology usage has increased the speed of the transition from shopping at physical locations to web-based purchases and that its tenants may be negatively affected by these changing consumer spending habits. These conditions could adversely affect the financial condition of the Company’s retail tenants and the willingness and ability of retailers to lease space, or renew existing leases, in the Company’s shopping centers and to honor their obligations under existing leases, and in turn, materially and adversely affect the Company.
The Company’s growth depends on external sources of capital, which may not be available in the future.
In order to maintain its qualification as a REIT, the Company is required under the Code to annually distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. Because of these distribution requirements, the Company may not be able to fund all future capital needs, including acquisitions, from income from operations. After the Company invests its cash on hand, it expects to depend primarily on the credit facility and other external financing (including debt and equity financings) to fund the growth of its business. The Company’s access to debt or equity financing depends on the willingness of third parties to lend or make equity investments and on conditions in the capital markets generally. As a result of changing economic conditions, the Company may be limited in its ability to obtain additional financing or to refinance existing debt maturities on favorable terms or at all and there can be no assurances as to when financing conditions will improve.
The Company does not have a formal policy limiting the amount of debt it may incur and its board of directors may change its leverage policy without stockholder consent, which could result in a different risk profile.
Although the Company’s charter and bylaws do not limit the amount of indebtedness the Company can incur, the Company’s policy is to employ prudent amounts of leverage and use debt as a means of providing additional funds for the acquisition of its assets and the diversification of its portfolio. The amount of leverage the Company will deploy for particular investments will depend upon its management team’s assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the assets in its portfolio, the potential for losses, the availability and cost of financing the assets, the Company’s opinion of the creditworthiness of its financing counterparties, the health of the U.S. economy and commercial mortgage markets, the Company’s outlook for the level, slope and volatility of interest rates, the credit quality of the tenants occupying space at the Company’s properties, and the need for the Company to comply with financial covenants contained in the Company’s credit agreements. The Company’s board of directors may change its leverage policies at any time without the consent of its stockholders, which could result in an investment portfolio with a different risk profile.
The Company could be adversely affected if it or any of its subsidiaries are required to register as an investment company under the Investment Company Act of 1940 as amended (the “1940 Act”).
The Company conducts its operations so that neither it, nor the Operating Partnership nor any of the Company’s other subsidiaries, is required to register as investment companies under the 1940 Act. If the Company, the Operating Partnership or the Company’s other subsidiaries are required to register as an investment company but fail to do so, the unregistered entity would be prohibited from engaging in certain business, and criminal and civil actions could be brought against such entity. In addition, the contracts of such entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the entity and liquidate its business.
Real estate investments’ value and income fluctuate due to conditions in the general economy and the real estate business, which may materially and adversely affect the Company’s ability to service its debt and expenses.
The value of real estate fluctuates depending on conditions in the general and local economy and the real estate business. These conditions may also limit the Company’s revenues and available cash. The rents the Company receives and the occupancy levels at its properties may decline as a result of adverse changes in conditions in the general economy and the real estate business. If rental revenues and/or occupancy levels decline, the Company generally would expect to have less cash available to pay indebtedness and for distribution to its stockholders. In addition, some of the Company’s major expenses, including mortgage payments, real estate taxes and maintenance costs, generally do not decline when the related rents decline.
The lack of liquidity of the Company’s assets could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders, and could materially and adversely affect the Company’s ability to value and sell its assets.
Real estate investments are relatively difficult to buy and sell quickly. As a result, the Company expects many of its investments will be illiquid and if it is required to liquidate all or a portion of its portfolio quickly, it may realize significantly less than the value at which it had previously recorded its investments.
The Company depends on leasing space to tenants on economically favorable terms and collecting rent from tenants, some of whom may not be able to pay.
The Company’s financial results depend significantly on leasing space in its properties to tenants on economically favorable terms. In addition, as a substantial majority of the Company’s revenue comes from renting real property, the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders could be materially and adversely affected if a significant number of its tenants cannot pay their rent or if the Company is not able to maintain occupancy levels on favorable terms. If a tenant does not pay its rent, the Company may not be able to enforce its rights as landlord without delays and may incur substantial legal costs.
Some of the Company’s properties depend on anchor stores or major tenants to attract shoppers and could be materially and adversely affected by the loss of or a store closure by one or more of these tenants.
The Company’s shopping centers are primarily anchored by national and regional supermarkets and drug stores. The value of the retail properties the Company acquires could be materially and adversely affected if these tenants fail to comply with their contractual obligations, seek concessions in order to continue operations or cease their operations. Adverse economic conditions may result in the closure of existing stores by tenants which may result in increased vacancies at the Company’s properties. Any periods of significant vacancies for the Company’s properties could materially and adversely impact the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
Loss of revenues from major tenants could reduce the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
The Company derives significant revenues from anchor tenants such as Albertson’s/Safeway Supermarkets, Kroger Supermarkets and SaveMart Supermarkets. As of December 31, 2020, these tenants are the Company’s three largest tenants and accounted for 5.5%, 3.4% and 1.9%, respectively, of its annualized base rent on a pro-rata basis. The Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders could be materially and adversely affected by the loss of revenues in the event a major tenant becomes bankrupt or insolvent, experiences a downturn in its business, materially defaults on its leases, does not renew its leases as they expire, or renews at lower rental rates.
The Company’s inability to receive reimbursements of Common Area Maintenance (“CAM”) costs from tenants could adversely affect the Company’s cash flow.
CAM costs typically include allocable energy costs, repairs, maintenance and capital improvements to common areas, janitorial services, administrative, property and liability insurance costs and security costs. The Company may acquire properties with leases with variable CAM provisions that adjust to reflect inflationary increases or leases with a fixed CAM payment methodology which fixes its tenants’ CAM contributions. With respect to both variable and fixed payment methodologies, the amount of reimbursements for CAM costs that the Company is entitled to receive from its tenants pursuant to the terms of the respective lease agreements may be less than the actual CAM costs at the Company’s properties. The Company’s inability to recover or pass on CAM costs to its tenants, whether due to the terms of the Company’s leases or vacancies at the Company’s properties, could adversely affect the Company’s cash flow.
The Company may incur costs to comply with environmental laws.
The Company’s operations and properties are subject to various federal, state and local laws and regulations concerning the protection of the environment, including air and water quality, hazardous or toxic substances and health and safety. Under some environmental laws, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances released at a property. The owner or operator may also be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by those parties because of the contamination. These laws often impose liability without regard to whether the owner or operator knew of the release of the substances or caused the release. The presence of contamination or the failure to remediate contamination may impair the Company’s ability to sell or lease real estate or to borrow using the real estate as collateral. Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of asbestos-containing materials in the event of damage, demolition, renovation or remodeling and also govern emissions of and exposure to asbestos fibers in the air. The maintenance and removal of lead paint and certain electrical equipment containing
polychlorinated biphenyls (“PCBs”) and underground storage tanks are also regulated by federal and state laws. The Company is also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible individuals. The Company could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or tanks or related claims arising out of environmental contamination or human exposure to contamination at or from its properties. Identification of compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or compliance requirements could result in significant costs to the Company. Moreover, compliance with new laws or regulations such as those related to climate change, including compliance with “green” building codes, or more stringent laws or regulations or stricter interpretations of existing laws may require material expenditures by the Company.
The Company faces risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of its information technology (“IT”) networks and related systems.
The Company faces risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside the Company or persons with access to systems inside the Company, and other significant disruptions of the Company’s IT networks and related systems, including due to defects in design, equipment or system failures, human error and natural disasters. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The Company’s IT networks and related systems are essential to the operation of its business and its ability to perform day-to-day operations (including managing its building systems). There can be no assurance that the Company’s efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches or disruptions would not be successful or damaging. A security breach or other significant disruption involving the Company’s IT networks and related systems could materially and adversely impact the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
These risks require continuous and likely increasing attention and other resources from the Company to, among other actions, identify and quantify these risks, upgrade and expand our technologies, systems and processes to adequately address them and provide periodic training for the Company’s employees to assist them in detecting phishing, malware and other schemes. Such attention diverts time and other resources from other activities and there is no assurance that the Company’s efforts will be effective. Additionally, we rely on third-party service providers for certain aspects of the Company’s business. The Company can provide no assurance that the networks and systems that the Company’s third-party vendors have established or use will be effective. As the Company’s reliance on technology has increased, so have the risks posed to the Company’s information systems, both internal and those provided by the Company and third-party service providers.
In the normal course of business, the Company and its service providers collect and retain certain personal information provided by employees, tenants and vendors. The Company also relies extensively on computer systems to process transactions and manage its business. The Company can provide no assurance that the data security measures designed to protect confidential information on the Company’s systems established by the Company and the Company’s service providers will be able to prevent unauthorized access to this personal information or that attempted security breaches or disruptions would not be successful or damaging.
The Company’s business and operations would suffer in the event of system failures.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for the Company’s internal information technology systems, its systems are vulnerable to damage from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in the Company’s operations could result in a material disruption to its business. The Company may also incur additional costs to remedy damages caused by such disruptions.
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair the Company’s assets and have a material and adverse effect on its income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
The Company believes the risks associated with its business will be more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values. Declines in real estate values, among other factors, could result in a determination that the Company’s assets have been impaired. If the Company determines that an impairment has occurred, the Company would be required to make an adjustment to the net carrying value of the asset which could have an adverse effect on its results of operations in the period in which the impairment charge is recorded. Although the Company will take current economic conditions into account in acquiring its assets, the Company’s long term success, and the value of its assets, depends in part on general economic conditions and other factors beyond the Company’s control. If the national economy or the local economies in which the Company operates experience uncertainty, or if general economic conditions were to worsen, the value of the Company’s properties could decline, and the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders, could be materially and adversely affected.
Loss of key personnel could harm the Company’s operations.
The Company is dependent on the efforts of certain key personnel of its senior management team. While the Company has employment contracts with each of Messrs. Tanz, Haines and Schoebel, the loss of the services of any of these individuals could harm the Company’s operations and have a material and adverse effect on its income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
Under their employment agreements, certain members of the Company’s senior management team will have certain rights to terminate their employment and receive severance in connection with a change in control of the Company.
The Company’s employment agreements with each of Messrs. Tanz, Haines and Schoebel, which provide that, upon termination of his employment (i) by the applicable officer within 12 months following the occurrence of a change in control (as defined in the employment agreement), (ii) by the Company without cause (as defined in the employment agreement), (iii) by the applicable officer for good reason (as defined in the employment agreement), (iv) by non-renewal of the applicable officer’s employment agreement or (v) by reason of the applicable officer’s death or disability (as defined in the employment agreement), such executive officers would be entitled to certain termination or severance payments made by the Company (which may include a lump sum payment equal to defined percentages of annual salary and prior years’ average bonuses, paid in accordance with the terms and conditions of the respective agreement). In addition, the vesting of all his outstanding unvested equity-based incentives and awards would accelerate. These provisions make it costly to terminate their employment and could delay or prevent a transaction or a change in control of the Company that might involve a premium paid for shares of its common stock or otherwise be in the best interests of its stockholders.
Joint venture investments could be materially and adversely affected by the Company’s lack of sole decision-making authority or reliance on a joint venture partner’s financial condition.
The Company may enter into joint venture arrangements in the future. Investments in joint ventures involve risks that are not otherwise present with properties which the Company owns entirely. In a joint venture investment, the Company may not have exclusive control or sole decision-making authority over the development, financing, leasing, management and other aspects of these investments. As a result, the joint venture partner might have economic or business interests or goals that are inconsistent with the Company’s goals or interests, take action contrary to the Company’s interests or otherwise impede the Company’s objectives. Joint venture investments involve risks and uncertainties, including the risk of the joint venture partner failing to provide capital and fulfill its obligations, which may result in certain liabilities to the Company for guarantees and other commitments, the risk of conflicts arising between the Company and its partners and the difficulty of managing and resolving such conflicts, and the difficulty of managing or otherwise monitoring such business arrangements. The joint venture partner also might become insolvent or bankrupt, which may result in significant losses to the Company. Further, although the Company may own a controlling interest in a joint venture and may have authority over major decisions such as the sale or refinancing of investment properties, the Company may have fiduciary duties to the joint venture partners or the joint venture itself that may cause, or require, it to take or refrain from taking actions that it would otherwise take if it owned the investment properties outright. In addition, in the case of mixed-use redevelopment with a joint venture partner, the Company might be exposed to risks associated with developing, owning, operating or selling non-retail real estate, with which the Company has less experience than with the risks associated with retail real estate.
Uninsured losses or a loss in excess of insured limits could materially and adversely affect the Company.
The Company carries comprehensive general liability, fire, extended coverage, loss of rent insurance, and environmental liability where applicable on its properties, with policy specifications and insured limits customarily carried for similar properties. There are certain types of losses, such as losses resulting from wars or acts of God that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness, or other financial obligations or liabilities related to the property. Any loss of these types could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
The Company could be materially and adversely affected by poor market conditions where its properties are geographically concentrated.
The Company’s performance depends on the economic conditions in markets in which its properties are concentrated. During the year ended December 31, 2020, the Company’s properties in California, Washington and Oregon accounted for 62%, 26% and 12%, respectively, of its consolidated property operating income. The Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders could be materially and adversely affected by this geographic concentration if market conditions, such as an oversupply of space or a reduction in demand for real estate in an area, deteriorate in California, Washington and Oregon. Moreover, due to the geographic concentration of its properties, the Company may be disproportionately affected by general risks such as natural disasters, including major fires, floods and earthquakes, severe or inclement weather, and acts of terrorism should such developments occur in or near the markets in California, Washington and Oregon in which the Company’s properties are located.
Should the Company decide at some point in the future to expand into new markets, it may not be successful, which could materially and adversely affect its business, financial condition, liquidity and results of operations.
The Company’s properties are concentrated in California, Washington and Oregon. If the opportunity arises, the Company may explore acquisitions of properties in new markets inside or outside of these states. Each of the risks applicable to the Company’s ability to successfully acquire, integrate and operate properties in its current markets may also apply to its ability to successfully acquire, integrate and operate properties in new markets. In addition to these risks, the Company’s management team may not possess the same level of knowledge with respect to market dynamics and conditions of any new market in which the Company may attempt to expand, which could materially and adversely affect its ability to operate in any such markets. The Company may be unable to obtain the desired returns on its investments in these new markets, which could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
Risks Related to Financing
The Company’s term loan, credit facility and unsecured senior notes contain restrictive covenants relating to its operations, which could limit the Company’s ability to respond to changing market conditions and its ability to pay dividends and other distributions to its stockholders.
The Company’s term loan, credit facility and unsecured senior notes contain restrictive covenants. These or other limitations, including those that may apply to future Company borrowings, may materially and adversely affect the Company’s flexibility and its ability to achieve its operating plans and could result in the Company being limited in the amount of dividends and distributions it would be permitted to pay to its stockholders.
In addition, failure to comply with these covenants could cause a default under the applicable debt instrument, and the Company may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to the Company, or may be available only on unattractive terms.
Certain of the Company’s mortgage financing arrangements and other indebtedness contain provisions that could limit the Company’s operating flexibility.
The Company’s existing mortgage financing contains, and future mortgage financing may in the future contain, customary covenants and provisions that limit the Company’s ability to pre-pay such mortgages before their scheduled maturity date or to transfer the underlying asset. Additionally, the Company’s ability to satisfy prospective mortgage lenders’ insurance requirements may be materially and adversely affected if lenders generally insist upon greater insurance coverage against certain risks than is available to the Company in the marketplace or on commercially reasonable terms. In addition, because a mortgage is secured by a lien on the underlying real property, mortgage defaults subject the Company to the risk of losing the property through foreclosure.
The Company’s access to financing may be limited and thus its ability to potentially enhance its returns may be materially and adversely affected.
The Company intends, when appropriate, to employ prudent amounts of leverage and use debt as a means of providing additional funds for the acquisition of its assets and the diversification of its portfolio. As of December 31, 2020, the Company’s outstanding principal mortgage indebtedness was approximately $85.6 million, and the Company may incur significant additional debt to finance future acquisition and development activities. The credit facility consists of a $600.0 million unsecured revolving credit facility and the Company has a $300.0 million term loan, of which $48.0 million and $300.0 million, respectively, were outstanding as of December 31, 2020.
In addition, the Operating Partnership issued $250.0 million aggregate principal amount of unsecured senior notes in December 2017 (the “Senior Notes Due 2027”), $200.0 million aggregate principal amount of unsecured senior notes in September 2016 (the “Senior Notes Due 2026”), $250.0 million aggregate principal amount of unsecured senior notes in December 2014 (the “Senior Notes Due 2024”) and $250.0 million aggregate principal amount of unsecured senior notes in December 2013 (the “Senior Notes Due 2023” and collectively with the Senior Notes Due 2024, the Senior Notes Due 2026 and the Senior Notes Due 2027, the “unsecured senior notes”), each of which were fully and unconditionally guaranteed by ROIC.
The Company’s access to financing will depend upon a number of factors, over which it has little or no control, including:
•general market conditions;
•the market’s view of the quality of the Company’s assets;
•the market’s perception of the Company’s growth potential;
•the Company’s eligibility to participate in and access capital from programs established by the U.S. government;
•the Company’s current and potential future earnings and cash distributions; and
•the market price of the shares of the Company’s common stock.
Any reduction in available financing may materially and adversely affect the Company’s ability to achieve its financial objectives. Concern about the stability of the markets generally could adversely affect one or more private lenders and could cause one or more private lenders to be unwilling or unable to provide the Company with financing or to increase the costs of that financing. In addition, if regulatory capital requirements imposed on the Company’s private lenders change, they may be required to limit, or increase the cost of, financing they provide to the Company. In general, this could potentially increase the Company’s financing costs and reduce its liquidity or require it to sell assets at an inopportune time or price.
During times when interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, the Company may purchase certain properties for cash or equity securities, including OP Units, or a combination thereof. Consequently, depending on market conditions at the relevant time, the Company may have to rely more heavily on additional equity issuances, which may be dilutive to its stockholders, or on less efficient forms of debt financing that require a larger portion of its cash flow from operations, thereby reducing funds available for its operations, future business opportunities, cash distributions to its stockholders and other purposes. The Company cannot assure you that it will have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which may cause it to curtail its asset acquisition activities and/or dispose of assets, which could materially and adversely affect its income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
Increases in interest rates could increase the amount of the Company’s debt payments and materially and adversely affect its business, financial condition, liquidity and results of operations.
Interest the Company pays could reduce cash available for distributions. As of December 31, 2020, the Company had approximately $48.0 million and $300.0 million outstanding under the Company’s $600.0 million unsecured revolving credit facility and $300.0 million term loan, respectively, that bear interest at a variable rate. In addition, the Company may incur variable rate debt in the future, including mortgage debt, borrowings under the credit facility or new credit facilities. An increase in interest rates would increase the Company’s interest costs, which could adversely affect the Company’s cash flow, results of operations, ability to pay principal and interest on debt and pay dividends and other distributions to its stockholders, and reduce the Company’s access to capital markets. In addition, if the Company needs to repay existing debt during periods of rising interest rates, it may be required to incur additional indebtedness at higher rates. From time to time, the Company may enter into interest rate swap agreements and other interest rate hedging contracts with the intention of lessening the impact of rising interest rates. However, increased interest rates may increase the risk that the counterparties to such agreements may not be able to fulfill their obligations under these agreements, and there can be no assurance that these arrangements will be effective in reducing the Company’s exposure to interest rate changes. These risks could materially and adversely affect the Company’s cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders. The Company’s use of interest rate hedging arrangements to manage risk associated with interest rate volatility may expose the Company to additional risks, including a risk that a counterparty to a hedging arrangement may fail to honor its obligations or that the Company could be required to fund the Company’s contractual payment obligations under such arrangements in relatively large amounts or on short notice. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate the Company from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on the Company’s results of operations, liquidity and financial condition.
The replacement of LIBOR may affect the value of certain of our financial obligations and could affect the Company’s results of operations or financial condition.
In July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In December 2020, ICE Benchmark Association, the administrator of LIBOR, published a consultation regarding its intention to cease publication of US dollar LIBOR after June 2023. As of December 31, 2020, the Company had outstanding approximately $348.0 million of variable rate debt that was indexed LIBOR. The Company is unable to predict the timing or effect of any changes, any establishment of alternative reference rates or any other reforms to LIBOR or any replacement of LIBOR that may be enacted in the United States, the United Kingdom or elsewhere. Such changes, reforms or replacements relating to LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to the Company on our overall financial condition or results of operations.
Financing arrangements that the Company may use to finance its assets may require it to provide additional collateral or pay down debt.
The Company, when appropriate, uses traditional forms of financing including secured debt. In the event the Company utilizes such financing arrangements, they would involve the risk that the market value of its assets which are secured may decline in value, in which case the lender may, in connection with a refinancing, require it to provide additional collateral, provide additional equity, or to repay all or a portion of the funds advanced. The Company may not have the funds available to repay its debt or provide additional equity at that time, which would likely result in defaults unless it is able to raise the funds from alternative sources, which it may not be able to achieve on favorable terms or at all. Providing additional collateral or equity would reduce the Company’s liquidity and limit its ability to leverage its assets. If the Company cannot meet these requirements, the lender could accelerate the Company’s indebtedness, increase the interest rate on advanced funds and terminate its ability to borrow funds from them, which could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders. The providers of secured debt may also require the Company to maintain a certain amount of cash or set aside assets sufficient to maintain a specified liquidity position. As a result, the Company may not be able to leverage its assets as fully as it would choose which could reduce its return on assets. There can be no assurance that the Company will be able to utilize such arrangements on favorable terms, or at all.
A downgrade in the Company’s or the Operating Partnership’s credit ratings could materially adversely affect the Company’s business and financial condition.
The credit ratings assigned to the Company’s obligations or to the debt securities of the Operating Partnership could change based upon, among other things, the Company’s and the Operating Partnership’s results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies, and there can be no assurance that any rating will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, these credit ratings do not apply to the Company’s common stock and are not recommendations to buy, sell or hold any other securities. If any of the credit rating agencies that have rated the obligations of the Company or the debt securities of the Operating Partnership downgrades or lowers its credit ratings, or if any credit rating agency indicates that it has placed any such rating on a so-called “watch list” for a possible downgrading or lowering or otherwise indicates that its outlook for that rating is negative, it could have a material adverse effect on the Company’s costs and availability of capital, which could in turn materially and adversely impact the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay dividends and other distributions to its stockholders.
Risks Related to the Company’s Organization and Structure
The Company depends on dividends and distributions from its direct and indirect subsidiaries. The creditors of these subsidiaries are entitled to amounts payable to them by the subsidiaries before the subsidiaries may pay any dividends or distributions to the Company.
Substantially all of the Company’s assets are held through the Operating Partnership, which holds substantially all of the Company’s properties and assets through subsidiaries. The Operating Partnership’s cash flow is dependent on cash distributions to it by its subsidiaries, and in turn, substantially all of the Company’s cash flow is dependent on cash distributions to it by the Operating Partnership. The creditors of the Company’s direct and indirect subsidiaries are entitled to payment of that subsidiary’s obligations to them, when due and payable, before distributions may be made by that subsidiary to its common equity holders. Thus, the Operating Partnership’s ability to make distributions to the Company and therefore the Company’s ability to make distributions to its stockholders will depend on its subsidiaries’ ability first to satisfy their obligations to creditors and then to make distributions to the Operating Partnership.
In addition, the Company’s participation in any distribution of the assets of any of its direct or indirect subsidiaries upon the liquidation, reorganization or insolvency, is only after the claims of the creditors, including the holders of the unsecured senior notes and trade creditors are satisfied.
Certain provisions of Maryland law may limit the ability of a third party to acquire control of the Company.
Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for holders of the Company’s common stock or otherwise be in their best interests, including:
•“business combination” provisions that, subject to certain limitations, prohibit certain business combinations between the Company and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the Company’s shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special minimum price provisions and special stockholder voting requirements on these combinations; and
•“control share” provisions that provide that “control shares” of the Company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by the Company’s stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
However, the provisions of the MGCL relating to business combinations do not apply to business combinations that are approved or exempted by the Company’s board of directors prior to the time that the interested stockholder becomes an interested stockholder. In addition, the Company’s bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of the Company’s common stock. There can be no assurance that such exemption will not be amended or eliminated at any time in the future.
Additionally, Title 3, Subtitle 8 of the MGCL permits the Company’s board of directors, without stockholder approval and regardless of what is currently provided in the Company’s charter or bylaws, to take certain actions that may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium to the market price of its common stock or otherwise be in the stockholders’ best interests. These provisions of the MGCL permit the Company, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to adopt:
•a classified board;
•a two-thirds vote requirement for removing a director;
•a requirement that the number of directors be fixed only by vote of the board of directors;
•a requirement that a vacancy on the board be filled only by the remaining directors in office and (if the board is classified) for the remainder of the full term of the class of directors in which the vacancy occurred; and
•a majority requirement for the calling of a stockholder-requested special meeting of stockholders.
The authorized but unissued shares of preferred stock and the ownership limitations contained in the Company’s Charter may prevent a change in control.
The Company’s charter authorizes the Company to issue authorized but unissued shares of preferred stock. In addition, the Company’s charter provides that the Company’s board of directors has the power, without stockholder approval, to authorize the Company to issue any authorized but unissued shares of stock, to classify any unissued shares of preferred stock and to reclassify any unissued shares of common stock or previously-classified shares of preferred stock into other classes or series of stock. As a result, the Company’s board of directors may establish a series of shares of preferred stock or use such preferred stock to create a stockholder’s rights plan or so-called “poison pill” that could delay or prevent a transaction or a change in control that might involve a premium price for shares of the Company’s common stock or otherwise be in the best interests of the Company’s stockholders.
In addition, the Company’s charter contains restrictions limiting the ownership and transfer of shares of the Company’s common stock and other outstanding shares of capital stock. The relevant sections of the Company’s charter provide that, subject to certain exceptions, ownership of shares of the Company’s common stock by any person is limited to 9.8% by value or by number of shares, whichever is more restrictive, of the outstanding shares of common stock (the common share ownership limit), and no more than 9.8% by value or number of shares, whichever is more restrictive, of the outstanding capital stock (the aggregate share ownership limit). The common share ownership limit and the aggregate share ownership limit are collectively referred to herein as the “ownership limits.” These provisions will restrict the ability of persons to purchase shares in excess of the relevant ownership limits. The Company’s board of directors has established exemptions from this ownership limit which permit certain institutional investors to hold additional shares of the Company’s common stock. The Company’s board of directors may in the future, in its sole discretion, establish additional exemptions from this ownership limit.
The Company’s failure to qualify as a REIT would subject it to U.S. federal income tax and potentially increased state and local taxes, which would reduce the amount of cash available for distribution to its stockholders.
The Company intends to operate in a manner that will enable it to continue to qualify as a REIT for U.S. federal income tax purposes. The Company has not requested and does not intend to request a ruling from the U.S. Internal Revenue Service that it will continue to qualify as a REIT. The U.S. federal income tax laws governing REITs are complex. The complexity of these provisions and of the applicable U.S. Treasury Department regulations that have been promulgated under the Code (“Treasury Regulations”) is greater in the case of a REIT that holds assets through a partnership, such as the Company, and judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited. To qualify as a REIT, the Company must meet, on an ongoing basis, various tests regarding the nature of its assets and its income, the ownership of its outstanding shares, and the amount of its distributions. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the Company to qualify as a REIT. Thus, while the Company believes that it has operated and intends to continue to operate so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the Company’s circumstances, no assurance can be given that it has qualified or will continue to so qualify for any particular year.
If the Company fails to qualify as a REIT in any taxable year, and does not qualify for certain statutory relief provisions, it would be required to pay U.S. federal income tax on its taxable income, and distributions to its stockholders would not be deductible by it in determining its taxable income. In such a case, the Company might need to borrow money or sell assets in order to pay its taxes. The Company’s payment of income tax would decrease the amount of its income available for distribution to its stockholders. Furthermore, if the Company fails to maintain its qualification as a REIT, it would no longer be required to distribute substantially all of its net taxable income to its stockholders. In addition, unless the Company were eligible for certain statutory relief provisions, it would not be eligible to re-elect to qualify as a REIT for four taxable years following the year in which it failed to qualify as a REIT.
Failure to make required distributions would subject the Company to tax, which would reduce the cash available for distribution to its stockholders.
In order to qualify as a REIT, the Company must distribute to its stockholders each calendar year at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that the Company satisfies the 90% distribution requirement, but distributes less than 100% of its taxable income, it is subject to U.S. federal corporate income tax on its undistributed income. In addition, the Company will incur a 4% non-deductible excise tax on the amount, if any, by which its distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. The Company intends to distribute its net income to its stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid the 4% non-deductible excise tax.
The Company’s taxable income may exceed its net income as determined by the U.S. generally accepted accounting principles (“GAAP”) because, for example, realized capital losses will be deducted in determining its GAAP net income, but may not be deductible in computing its taxable income. In addition, the Company may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. For example, the Company may be required to accrue interest or other income on debt securities before it receives payments on such assets, and under certain circumstances the Company could also be required to accrue income on leases in advance of receiving cash payments under the terms of such leases. As a result of the foregoing, the Company may generate less cash flow than taxable income in a particular year. To the extent that the Company generates such non-cash taxable income in a taxable year, it may incur corporate income tax and the 4% non-deductible excise tax on that income if it does not distribute such income to stockholders in that year. In that event, the Company may be required to use cash reserves, incur debt or liquidate assets at rates or times that it regards as unfavorable or make a taxable distribution of its shares in order to satisfy the REIT 90% distribution requirement and to avoid U.S. federal corporate income tax and the 4% non-deductible excise tax in that year.
In order to qualify as a REIT, prior to the end of each taxable year, the Company is required to distribute any earnings and profits of any corporation acquired by the Company in certain tax-deferred transactions to the extent that such earnings accrued at a time when such corporation did not qualify as a REIT. The Company has entered into certain transactions involving the tax-deferred acquisition of target corporations. The Company believes that it did not inherit any earnings and profits of such target corporations attributable to any period that such corporations did not qualify as a REIT. However, no assurance can be provided in this regard, and if the Company were determined to have inherited and retained any such earnings and profits, the Company’s qualification as a REIT could be adversely impacted.
To maintain its REIT qualification, the Company may be forced to borrow funds during unfavorable market conditions.
In order to qualify as a REIT and avoid the payment of income and excise taxes, the Company may need to borrow funds on a short-term basis, or possibly on a long-term basis, to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from, among other things, a difference in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves or required debt amortization payments.
Even if the Company qualifies as a REIT, it may be required to pay certain taxes.
Even if the Company qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes on its income and assets, including taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. In addition, the Company may hold some of its assets through taxable REIT subsidiary (“TRS”) corporations. Any TRSs or other taxable corporations in which the Company owns an interest will be subject to U.S. federal, state and local corporate taxes. Furthermore, the Company has entered into certain transactions in which the Company has acquired target entities in tax-deferred transactions. To the extent that such entities had outstanding U.S. federal income tax or other tax liabilities, the Company would succeed to such liabilities. Payment of these taxes generally would decrease the cash available for distribution to the Company’s stockholders.
Legislative, regulatory or administrative changes could adversely affect the Company.
The U.S. federal income tax laws and regulations governing REITs and their stockholders, as well as the administrative interpretations of those laws and regulations, are constantly under review and may be changed at any time, possibly with retroactive effect. No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable to the Company and its stockholders may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax laws could adversely affect an investment in the Company’s common stock.
The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was signed into law on December 22, 2017, significantly changes U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders, and may lessen the relative competitive advantage of operating as a REIT rather than as a C corporation.
In certain circumstances, the Company may be liable for certain tax obligations of certain limited partners.
In certain circumstances, the Company may be liable for certain tax obligations of certain limited partners. The Company has entered into tax protection agreements under which it has agreed to minimize the tax consequences to certain limited partners resulting from the sale or other disposition of certain of the Company’s assets. The obligation to indemnify such limited partners against adverse tax consequences is expected to continue until 2027. The Company may enter into additional tax protection agreements in the future, which could extend the period of time during which the Company may be liable for tax obligations of certain limited partners. During the period of these obligations, the Company’s flexibility to dispose of the related assets will be limited. In addition, the amount of any indemnification obligations may be significant.
The Company cannot assure you of its ability to pay distributions in the future.
The Company intends to pay quarterly distributions and to make distributions to its stockholders in an amount such that it distributes all or substantially all of its REIT taxable income in each year, subject to certain adjustments. The Company’s ability to pay distributions may be materially and adversely affected by a number of factors, including the risk factors described in this Annual Report on Form 10-K. All distributions will be made, subject to Maryland law (or Delaware law, in the case of distributions by the Operating Partnership), at the discretion of the Company’s board of directors and will depend on the Company’s earnings, its financial condition, any debt covenants, maintenance of its REIT qualification and other factors as its board of directors may deem relevant from time to time. The Company believes that a change in any one of the following factors could materially and adversely affect its income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock and its ability to pay distributions to its stockholders:
•the profitability of the assets acquired;
•the Company’s ability to make profitable acquisitions;
•unforeseen expenses that reduce the Company’s cash flow;
•defaults in the Company’s asset portfolio or decreases in the value of its portfolio; and
•the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
The Company cannot assure you that it will achieve results that will allow it to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. In addition, some of the Company’s distributions may include a return of capital.
Our ability to attract and retain qualified members of our board of directors may be impacted due to new state laws, including recently enacted gender quotas.
In September 2018, California enacted SB 826 requiring public companies headquartered in California to maintain minimum female representation on their boards of directors as follows: by the end of 2019, at least one woman on its board, by the end of 2021, public company boards with five directors will be required to have at least two female directors, and public company boards with six or more directors will be required to have at least three female directors. In September 2020, California enacted AB 979 requiring public companies headquartered in California to maintain minimum underrepresented communities representation on their boards of directors as follows: by the end of 2021, at least one director from an underrepresented community, by the end of 2022, public company boards with more than four and fewer than nine members will be required to have at least two directors from underrepresented communities, and public company boards with nine or more members will be required to have at least three directors from underrepresented communities. Failure to achieve designated minimum levels in a timely manner exposes such companies to costly financial penalties and reputational harm. We cannot assure that we can recruit, attract and/or retain qualified members of the board and meet gender quotas as a result of the California law, which may cause certain investors to divert their holdings in our stock and expose us to penalties and/or reputational harm. These laws are the subject of ongoing litigation concerning their validity and it remains unclear as to whether these laws will ultimately be upheld.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company maintains its executive office at 11250 El Camino Real, Suite 200, San Diego, CA 92130.
As of December 31, 2020, the Company’s portfolio consisted of 89 properties (88 retail and one office) totaling approximately 10.1 million square feet of gross leasable area. As of December 31, 2020, the Company’s retail portfolio was approximately 96.8% leased. During the year ended December 31, 2020, the Company leased or renewed a total of approximately 1.2 million square feet in its portfolio. The Company has committed approximately $17.7 million, or $46.91 per square foot, in tenant improvements, including building and site improvements, for new leases that occurred during the year ended December 31, 2020. The Company has committed approximately $816,000, or $2.16 per square foot, in leasing commissions, for the new leases that occurred during the year ended December 31, 2020. Additionally, the Company has committed approximately $389,000, or $0.47 per square foot, in tenant improvements for renewed leases that occurred during the year ended December 31, 2020. Leasing commission commitments for renewed leases were not material for the year ended December 31, 2020.
The following table provides information regarding the Company’s retail properties as of December 31, 2020:
Property Year
Completed/ Renovated Year
Acquired Gross
Leasable
Sq. Feet Number
of
Tenants % Leased Principal Tenants
Southern California
Los Angeles metro area
Paramount Plaza 1966/2010 2009 95,062 15 100.0 % Grocery Outlet Supermarket, 99¢ Only Stores, Rite Aid Pharmacy
Claremont Promenade 1982/2011 2010 92,297 25 97.2 % Super King Supermarket
Gateway Village 2003/2005 2010 96,959 26 92.1 % Sprouts Market
Seabridge Marketplace 2006 2012 98,348 21 95.3 % Safeway (Vons) Supermarket
Glendora Shopping Center 1992/2012 2012 106,535 18 92.4 % Albertson’s Supermarket
Redondo Beach Plaza 1993/2004 2012 110,509 16 100.0 % Safeway (Vons) Supermarket, Petco
Diamond Bar Town Center 1981 2013 100,342 22 99.0 % Walmart Neighborhood Market, Crunch Fitness
Diamond Hills Plaza 1973/2008 2013 139,505 36 97.2 % H-Mart Supermarket
Plaza de la Canada 1968/2010 2013 100,425 13 100.0 % Gelson’s Supermarket, TJ Maxx, Rite Aid Pharmacy
Property Year
Completed/ Renovated Year
Acquired Gross
Leasable
Sq. Feet Number
of
Tenants % Leased Principal Tenants
Fallbrook Shopping Center 1966/1986/ 2003/2015 2014 755,299 45 98.8 % Sprouts Market, Trader Joe’s, Kroger (Ralph’s) Supermarket (1), TJ Maxx
Moorpark Town Center 1984/2014 2014 133,547 23 89.8 % Kroger (Ralph’s) Supermarket, CVS Pharmacy
Ontario Plaza 1997-1999 2015 150,149 24 94.4 % El Super Supermarket, Rite Aid Pharmacy
Park Oaks Shopping Center 1959/2005 2015 110,092 24 88.4 % Safeway (Vons) Supermarket, Dollar Tree
Warner Plaza 1973-1974/ 2016-2017 2015 110,918 63 91.1 % Sprouts Market, Kroger (Ralph’s) Supermarket (1), Rite Aid Pharmacy (1)
Magnolia Shopping Center 1962/1972/ 1987/2016 2016 116,360 22 85.9 % Kroger (Ralph’s) Supermarket
Casitas Plaza Shopping Center 1972/1982 2016 105,118 26 96.9 % Albertson’s Supermarket, CVS Pharmacy
Bouquet Center 1985 2016 148,903 27 95.5 % Safeway (Vons) Supermarket, CVS Pharmacy, Ross Dress For Less
North Ranch Shopping Center 1977-1990 2016 146,448 33 91.8 % Kroger (Ralph’s) Supermarket, Trader Joe’s, Rite Aid Pharmacy, Petco
The Knolls 2000/2016 2016 52,021 6 95.2 % Trader Joe’s, Pet Food Express
The Terraces 1958/1970/ 1989 2017 172,922 27 93.1 % Trader Joe’s, Marshall’s, LA Fitness
Orange County metro area
Santa Ana Downtown Plaza 1987/2010 2010 105,536 27 96.0 % Kroger (Food 4 Less) Supermarket, Marshall’s
Sycamore Creek 2008 2010 74,198 17 98.2 % Safeway (Vons) Supermarket, CVS Pharmacy (1)
Desert Springs Marketplace 1993-94 / 2013 2011 113,718 20 97.7 % Kroger (Ralph’s) Supermarket, Rite Aid Pharmacy
Cypress Center West 1970/1978 / 2014 2012 107,246 30 94.1 % Kroger (Ralph’s) Supermarket, Rite Aid Pharmacy
Harbor Place Center 1994 2012 119,836 10 98.8 % AA Supermarket, Ross Dress For Less, Autozone
5 Points Plaza 1961-62 / 2012 / 2015 2013 160,536 37 99.7 % Trader Joe’s
Peninsula Marketplace 2000 2013 95,416 13 97.4 % Kroger (Ralph’s) Supermarket, Planet Fitness
Fullerton Crossroads 1977/1997/ 2010-2011 2017 219,785 25 98.9 % Kroger (Ralph’s) Supermarket, Kohl’s, Jo-Ann Fabrics and Crafts
The Village at Nellie Gail Ranch 1897 / 2014-2015 2017 89,041 21 91.1 % Smart & Final Extra Supermarket
San Diego metro area
Marketplace Del Rio 1990/2004 2011 183,787 44 96.0 % Stater Brothers Supermarket, Walgreens
Renaissance Towne Centre 1991/2011 2011 53,272 27 87.0 % CVS Pharmacy
Euclid Plaza 1982/2012 2012 77,044 9 100.0 % Vallarta Supermarket, Walgreens
Bay Plaza 1986/2013 2012 73,324 29 98.0 % Seafood City Supermarket
Bernardo Heights Plaza 1983/2006 2013 37,729 5 100.0 % Sprouts Market
Hawthorne Crossings 1993/1999 2013 141,288 16 94.9 % Mitsuwa Supermarket, Ross Dress For Less, Staples
Creekside Plaza 1993/2005 2014 133,852 23 93.3 % Stater Brothers Supermarket, AMC Theatres
Northern California
San Francisco metro area
Pleasant Hill Marketplace 1980 2010 69,715 3 100.0 % Total Wine and More, Buy Buy Baby, Basset Furniture
Pinole Vista Shopping Center 1981/2012 2011/2018 135,962 28 99.1 % SaveMart (Lucky) Supermarket, Planet Fitness
Country Club Gate Center 1974/2012 2011 109,331 29 90.1 % SaveMart (Lucky) Supermarket, Rite Aid Pharmacy
Marlin Cove Shopping Center 1972/2001 2012 73,943 26 100.0 % 99 Ranch Market
The Village at Novato 2006 2012 20,081 4 100.0 % Trader Joe’s, Pharmaca Pharmacy
Property Year
Completed/ Renovated Year
Acquired Gross
Leasable
Sq. Feet Number
of
Tenants % Leased Principal Tenants
Santa Teresa Village 1974-79 / 2013 2012 127,888 33 94.6 % Grocery Outlet Supermarket, Dollar Tree, MedVet Silicon Valley
Granada Shopping Center 1962/1994 2013 71,525 15 100.0 % SaveMart (Lucky) Supermarket
Country Club Village 1995 2013 111,093 23 98.8 % Walmart Neighborhood Market, CVS Pharmacy
North Park Plaza 1997 2014 76,697 18 100.0 % H-Mart Supermarket
Winston Manor 1977/1988/ 2011/2015 2015 49,852 16 100.0 % Grocery Outlet Supermarket
Jackson Square 1972/1997 2015 114,220 15 99.1 % Safeway Supermarket, CVS Pharmacy, 24 Hour Fitness
Gateway Centre 1996 2015 112,553 25 96.6 % SaveMart (Lucky) Supermarket, Walgreens
Iron Horse Plaza 1998-1999 2015 61,915 11 100.0 % Lunardi’s Market
Monterey Center 2007 2016 25,626 9 93.7 % Trader Joe’s, Pharmaca Pharmacy
Santa Rosa Southside Shopping Center 1983-1984 2017 88,535 8 95.9 % REI, Cost Plus World Market, DSW
Monta Loma Plaza 1973/ 2009-2010 2017 48,078 11 100.0 % Safeway Supermarket
Sacramento metro area
Mills Shopping Center 1959/1996 2011 235,514 33 89.3 % Viva Supermarket, Ross Dress For Less (dd’s Discounts), Dollar Tree
Green Valley Station 2006/2007 2012 52,245 17 85.8 % CVS Pharmacy
Pacific Northwest
Seattle Metropolitan
Meridian Valley Plaza 1978/2011 2010 51,597 16 100.0 % Kroger (QFC) Supermarket
The Market at Lake Stevens 2000 2010 74,130 9 100.0 % Albertson’s (Haggen) Supermarket
Canyon Park Shopping Center 1980/2012 2011 123,592 24 100.0 % PCC Community Markets, Rite Aid Pharmacy, Petco
Hawks Prairie Shopping Center 1988/2012 2011 157,529 24 100.0 % Safeway Supermarket, Dollar Tree, Big Lots
The Kress Building 1924/2005 2011 74,616 6 69.2 % IGA Supermarket, TJMaxx
Gateway Shopping Center 2007 2012 104,298 18 93.9 % WinCo Foods (1), Rite Aid Pharmacy, Ross Dress For Less
Aurora Square 1980/1987 2012/2014 108,558 15 97.4 % Central Supermarket, Marshall’s
Canyon Crossing 2008-2009 2013 120,398 28 100.0 % Safeway Supermarket
Crossroads Shopping Center 1962/2004/ 2015 2010/2013 473,147 93 98.1 % Kroger (QFC) Supermarket, Bed Bath & Beyond, Dick’s Sporting Goods
Bellevue Marketplace 1971/1982/ 2017 2015 113,758 20 100.0 % Asian Family Market
Four Corner Square 1983/2015 2015 119,531 29 100.0 % Grocery Outlet Supermarket, Walgreens, Johnsons Home & Garden
Bridle Trails Shopping Center 1980/1984/ 1987 2016 110,640 32 100.0 % Grocery Outlet Supermarket, Bartell Drugs, Dollar Tree
PCC Community Markets Plaza 1981/2007 2017 34,459 1 100.0 % PCC Community Markets
Highland Hill Shopping Center 1956/1989/ 2006 2017 163,926 20 100.0 % Safeway Supermarket, LA Fitness, Dollar Tree, Petco
North Lynnwood Shopping Center 1963/1965/ 2003 2017 63,606 9 80.1 % Grocery Outlet Supermarket
Stadium Center 1926/2016 2018 48,888 7 100.0 % Thriftway Supermarket
Summerwalk Village 2014-2015 2019 60,379 10 98.0 % Walmart Neighborhood Market
Portland metro area
Happy Valley Town Center 2007 2010 138,397 37 100.0 % New Seasons Supermarket
Wilsonville Old Town Square 2011 2010/2012 49,937 19 100.0 % Kroger (Fred Meyer) Supermarket (1)
Cascade Summit Town Square 2000 2010 94,934 31 100.0 % Safeway Supermarket
Heritage Market Center 2000 2010 108,054 20 100.0 % Safeway Supermarket, Dollar Tree
Property Year
Completed/ Renovated Year
Acquired Gross
Leasable
Sq. Feet Number
of
Tenants % Leased Principal Tenants
Division Crossing 1992 2010 103,561 20 100.0 % Rite Aid Pharmacy, Ross Dress For Less, Ace Hardware
Halsey Crossing 1992 2010 99,428 18 98.0 % 24 Hour Fitness, Dollar Tree
Hillsboro Market Center 2001-2002 2011 156,021 22 99.3 % Albertson’s Supermarket, Dollar Tree, Ace Hardware
Robinwood Shopping Center 1980/2012 2013 70,831 16 100.0 % Walmart Neighborhood Market
Tigard Marketplace 1988/2005 2014 136,889 19 100.0 % H-Mart Supermarket, Bi-Mart
Wilsonville Town Center 1991/1996 2014 167,829 40 100.0 % Safeway Supermarket, Rite Aid Pharmacy, Dollar Tree
Tigard Promenade 1996 2015 88,043 16 100.0 % Safeway Supermarket
Sunnyside Village Square 1996-1997 2015 92,278 14 100.0 % Grocery Outlet Supermarket, Snap Fitness, Ace Hardware
Johnson Creek Center 2003/2009 2015 108,588 15 100.0 % Trader Joe’s, Walgreens, Sportsman’s Warehouse
Rose City Center 1993/2012 2016 60,680 3 100.0 % Safeway Supermarket
Division Center 1986-1987/ 2013-2014 2017 118,122 24 100.0 % Grocery Outlet Supermarket, Rite Aid Pharmacy, Petco
Riverstone Marketplace 2002-2004 2017 95,774 24 100.0 % Kroger (QFC) Supermarket
King City Plaza 1970/1980/ 1990 2018 62,676 16 90.0 % Grocery Outlet Supermarket
Total Properties 10,067,234 1,904 96.8 %
_______________
(1)Retailer is not a tenant of the Company.
As illustrated by the following tables, the Company’s shopping centers are substantially diversified by both tenant mix and by the staggering of its major tenant lease expirations. For the year ended December 31, 2020, no single tenant comprised more than 5.5% of the total annual base rent of the Company’s portfolio.
The following table sets forth a summary schedule of the Company’s ten largest tenants by percent of total annual base rent, as of December 31, 2020:
Tenant Number of Leases % of Total Annual
Base Rent (1)
Albertson’s/Safeway Supermarkets 18 5.5 %
Kroger Supermarkets 11 3.4 %
SaveMart Supermarkets 4 1.9 %
JP Morgan Chase 21 1.5 %
Rite Aid Pharmacy 12 1.4 %
Marshall’s / TJMaxx 6 1.3 %
Trader Joe’s 8 1.3 %
Sprouts Markets 4 1.3 %
Ross Dress For Less / dd’s Discounts 7 1.3 %
Grocery Outlet Supermarkets 9 1.2 %
100 20.1 %
___________________
(1)Annual base rent (“ABR”) is equal to the annualized cash rent for all leases in place as of December 31, 2020 (including initial cash rent for new leases).
The following table sets forth a summary schedule of the annual lease expirations for leases in place across the Company’s total retail portfolio at December 31, 2020 (dollars in thousands):
Year of Expiration Number of
Leases
Expiring (1)
Leased Square
Footage Annual Base
Rent (2)
Percent of Total ABR
2021 308 676,867 $ 19,067 8.9 %
2022 296 1,097,918 24,567 11.5 %
2023 312 1,491,433 33,384 15.6 %
2024 263 1,097,686 26,842 12.5 %
2025 254 1,241,924 26,311 12.2 %
2026 139 998,668 18,347 8.6 %
2027 72 337,222 8,100 3.7 %
2028 71 696,888 15,820 7.4 %
2029 56 576,637 12,568 5.8 %
2030 47 384,007 8,654 4.1 %
Thereafter 86 1,141,020 20,672 9.7 %
Total 1,904 9,740,270 $ 214,332 100 %
___________________
(1)Assumes no tenants exercise renewal options or cancellation options.
(2)Annual base rent is equal to the annualized cash rent for all leases in place as of December 31, 2020 (including initial cash rent for new leases).
The following table sets forth a summary schedule of the annual lease expirations for leases in place with the Company’s retail anchor tenants at December 31, 2020 (dollars in thousands). Anchor tenants are tenants with leases occupying at least 15,000 square feet or more.
Year of Expiration Number of
Leases
Expiring (1)
Leased Square
Footage Annual Base
Rent (2)
Percent of Total ABR
2021 4 103,663 $ 1,315 0.6 %
2022 16 494,010 6,207 2.9 %
2023 27 860,417 13,536 6.3 %
2024 15 505,124 8,415 3.9 %
2025 20 660,405 9,095 4.2 %
2026 18 655,780 8,346 3.9 %
2027 6 123,082 1,817 0.8 %
2028 14 514,446 9,360 4.4 %
2029 12 433,505 7,976 3.7 %
2030 7 267,773 4,181 2.0 %
Thereafter 24 854,982 12,977 6.1 %
Total 163 5,473,187 $ 83,225 38.8 %
____________________
(1)Assumes no tenants exercise renewal or cancellation options.
(2)Annual base rent is equal to the annualized cash rent for all leases in place as of December 31, 2020 (including initial cash rent for new leases).

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
In the normal course of business, from time to time, the Company is involved in routine legal actions incidental to its business of 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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ROIC Market Information
ROIC’s common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “ROIC”.
Holders
As of February 19, 2021, ROIC had 79 registered holders. Such information was obtained through the registrar and transfer agent.
Operating Partnership
As of December 31, 2020, the Operating Partnership had 47 registered holders, including Retail Opportunity Investments GP, LLC.
Stockholder Return Performance
The above graph compares the cumulative total return on the Company’s common stock with that of the Standard and Poor’s 500 Stock Index (“S&P 500”) and the National Association of Real Estate Investment Trusts Equity Index (“FTSE NAREIT Equity REITs”) from December 31, 2015 through December 31, 2020. The stock price performance graph assumes that an investor invested $100 in each of ROIC and the indices, and the reinvestment of any dividends. The comparisons in the graph are provided in accordance with the SEC disclosure requirements and are not intended to forecast or be indicative of the future performance of ROIC’s shares of common stock.
Period Ending
Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Retail Opportunity Investments Corp. $ 100.00 $ 122.23 $ 119.82 $ 99.52 $ 115.80 $ 89.29
S&P500 $ 100.00 $ 111.96 $ 136.40 $ 130.42 $ 171.49 $ 203.04
FTSE NAREIT Equity REITs $ 100.00 $ 108.63 $ 118.05 $ 113.28 $ 145.75 $ 138.28
Except to the extent that the Company specifically incorporates this information by reference, the foregoing Stockholder Return Performance information shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act. This information shall not otherwise be deemed filed under such Acts.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Retail Opportunity Investments Corp. Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. The Company makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Annual Report on Form 10-K entitled “Statements Regarding Forward-Looking Information.” Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Annual Report on Form 10-K entitled “Risk Factors.”
Overview
The Company 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, together with its subsidiaries.
ROIC commenced operations in October 2009 as a fully integrated and self-managed REIT, and as of December 31, 2020, ROIC owned an approximate 92.9% partnership interest and other limited partners owned the remaining 7.1% 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 December 31, 2020, the Company’s portfolio consisted of 89 properties (88 retail and one office) totaling approximately 10.1 million square feet of GLA. As of December 31, 2020, the Company’s retail portfolio was approximately 96.8% leased. During the year ended December 31, 2020, the Company leased and renewed approximately 378,000 and 831,000 square feet, respectively, in its portfolio.
The table below provides a reconciliation of beginning of year vacant space to end of year vacant space for its retail portfolio as of December 31, 2020:
Vacant Space Square Footage
Vacant space at December 31, 2019 212,909
Square footage vacated 258,017
Square footage leased (148,388)
Vacant space at December 31, 2020 322,538
The Company has committed approximately $17.7 million, or $46.91 per square foot, in tenant improvements, including building and site improvements, for new leases that occurred during the year ended December 31, 2020. The Company has committed approximately $816,000, or $2.16 per square foot, in leasing commissions for the new leases that occurred during the year ended December 31, 2020. Additionally, the Company has committed approximately $389,000, or $0.47 per square foot, in tenant improvements for renewed leases that occurred during the year ended December 31, 2020. Leasing commission commitments for renewed leases were not material for the year ended December 31, 2020.
Impact of COVID-19
The following discussion is intended to provide stockholders with certain information regarding the impacts of the COVID-19 pandemic on the Company’s business and management’s efforts to respond to those impacts. Unless otherwise specified, the statistical and other information regarding the Company’s portfolio and tenants are estimates based on information available to the Company as of February 18, 2021. As a result of the rapid development, fluidity and uncertainty surrounding this situation, the Company expects that such statistical and other information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on the Company’s business, operations, cash flows and financial condition for the year ended December 31, 2020 and future periods.
The spread of COVID-19 is having a significant impact on the global economy, the U.S. economy, the economies of the local markets throughout the west coast in which the Company’s properties are located, and the broader financial markets. Nearly every industry has been impacted directly or indirectly, and the U.S. retail market has come under severe pressure due to
numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel, restrictions on gatherings and social distancing practices. These containment measures, which in certain states and counties were relaxed or lifted for a period of time and subsequently reimposed, and then relaxed again, are affecting the operations of the Company’s tenant base to varying degrees depending on the category and location of the tenant. For example, grocery stores, pharmacies and retail stores have been generally permitted to remain open and operational (with capacity limitations in the case of certain retail stores), restaurants in certain states such as California, Washington and Oregon have been generally limited to take-out and delivery services and outdoor-dining only or subject to capacity limitations when indoor dining has been permitted, and bars, movie theaters, gyms and salons in certain states and counties have been generally forced to close indoor operations for periods of time. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed or lifted, whether restrictions that have been relaxed or lifted will be reimposed, or when or if customers will re-engage with tenants as they have in the past. The Company specializes in the ownership and management of necessity-based community and neighborhood shopping centers on the west coast of the United States, anchored by supermarkets and drugstores, and the Company’s portfolio and tenants have been impacted by these and other factors as follows:
•As of the date of this Annual Report on Form 10-K, all of the Company’s 88 retail shopping centers are open and operating in compliance with federal, state and local COVID-19 guidelines and mandates. All of the Company’s shopping centers feature necessity-based tenants, with 86 of the 88 properties anchored by grocery and/or drug stores.
•Approximately 95.4% of the Company’s tenants (based on Annualized Base Rent) are open and operating and approximately 4.6% of the Company’s tenants are currently closed.
•The Company has received payment of approximately 91.8% and 90.6% of contractual base rent billed for the fourth quarter of 2020 and three quarters ending December 31, 2020, respectively. As is believed to be the case with retail landlords across the U.S., the Company has received a number of rent relief requests from tenants, most often in the form of rent deferral requests. Through December 31, 2020, the Company has entered into lease concessions that deferred approximately $6.2 million of contractual amounts billed. As of December 31, 2020, approximately $1.1 million of such deferred amounts has been rebilled, of which approximately $959,000, or 88%, has been collected. The Company has evaluated and continues to evaluate rent relief requests on a case-by-case basis. Not all tenants requests have resulted or will ultimately result in concession agreements, nor is the Company foregoing its contractual rights under its lease agreements. See Note 1 of the accompanying consolidated financial statements for a discussion on how the Company accounts for COVID-19 related rent concessions.
The Company has taken a number of proactive measures to maintain the strength of its business and manage the impact of COVID-19 on the Company’s operations and liquidity, including the following:
•Along with the Company’s tenants and the communities they and the Company together serve, the health and safety of the Company’s employees and their families is a top priority. The Company has adapted its operations to protect employees, including by implementing a work from home policy, and the Company’s IT systems have enabled its team to work seamlessly.
•The Company is in constant communication with its tenants and has assisted tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020 or additional stimulus or relief packages implemented by local, state or federal governments.
•To enhance its liquidity position and maintain financial flexibility, the Company borrowed $130.0 million under its unsecured revolving credit facility during March and April and repaid this borrowing during the three months ended September 30, 2020.
•The Company currently has approximately $10.6 million in cash and cash equivalents, and an additional $567.0 million available under its unsecured revolving credit facility (excluding the facility’s $600.0 million accordion feature).
•The Company does not have any unsecured debt maturing until December 2023. Additionally, the Company does not have any near-term secured debt maturing, until approximately $23.1 million matures in mid-2022, and no secured debt maturing in 2023.
•The Company has taken proactive measures to manage costs related to the Company’s densification activities. There is currently no construction underway at the Company’s properties, and the only expenditures the Company is making at this time on these projects relate to obtaining entitlements. Other than limited pad development, the Company expects that the only material capital expenditures at the Company’s properties over the next year will be tenant improvements and/or other leasing costs associated with existing and new leases. The Company also canceled a previously pending acquisition.
•Given the uncertainty of the COVID-19 pandemic’s near and potential long-term impact on the Company’s business, and in order to preserve its liquidity position, the Company temporarily suspended quarterly dividend distributions and currently anticipates reinstating the distribution of quarterly cash dividends to stockholders in the first quarter of 2021. The Company intends to continue to operate its business in a manner that will allow it to qualify as a REIT, including maintaining compliance with taxable income distribution requirements.
The Company derives revenues primarily from rents and reimbursement payments received from tenants under leases at the Company’s properties. The Company’s operating results therefore depend materially on the ability of its tenants to make required rental payments. The extent to which the COVID-19 pandemic impacts the businesses of the Company’s tenants, and the Company’s operations and financial condition, will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and such containment measures, among others. While the extent of the outbreak and its impact on the Company, its tenants and the U.S. retail market is uncertain, a prolonged crisis could result in continued disruptions in the credit and financial markets, a rise in unemployment rates, decreases in consumer confidence and consumer spending levels and an overall worsening of global and U.S. economic conditions. In addition, the trend toward online shopping for goods and services that has accelerated during the COVID-19 pandemic may continue and result in a permanent decrease in spending levels at brick-and-mortar commercial establishments. The factors described above, as well as additional factors that the Company may not currently be aware of, could materially negatively impact the Company’s ability to collect rent and could lead to increases in rent relief requests from tenants, termination of leases by tenants, tenant bankruptcies, decreases in demand for retail space at the Company’s properties, difficulties in accessing capital, impairment of the Company’s long-lived assets and other impacts that could materially and adversely affect the Company’s business, results of operations, financial condition and ability to pay distributions to stockholders. See “Risk Factors.”
The Company’s financial results for the year ended December 31, 2020 have been significantly impacted by the COVID-19 pandemic resulting in reductions in property operating income and its non-GAAP performance measures from changes in projected uncollectible rental revenue. The comparability of the Company’s results of operations for the year ended December 31, 2020 to future periods may be significantly impacted by the effects of the outbreak of the COVID-19 pandemic.
Results of Operations
At December 31, 2020, the Company had 89 properties (88 retail and one office), all of which are consolidated in the accompanying financial statements. The Company believes, because the properties are located in densely populated areas and are leased to retailers that provide necessity-based, non-discretionary goods and services, the nature of its investments provides for relatively stable revenue flows. The Company has a strong capital structure with manageable debt as of December 31, 2020. 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, recoveries from tenants and other income), less property and related expenses (property operating expenses and property taxes). Property operating income excludes general and administrative expenses, mortgage interest income, depreciation and amortization, acquisition transaction costs, other expense, interest expense, gains and losses from property acquisitions and dispositions, equity in earnings from unconsolidated joint ventures, extraordinary items, and amortization of 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 year ended December 31, 2020 compared to the year ended December 31, 2019.
Property Operating Income
The table below provides a reconciliation of consolidated operating income in accordance with GAAP to consolidated property operating income for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
2020 2019
Operating income per GAAP $ 94,447 $ 115,370
Plus: Depreciation and amortization 97,731 97,559
General and administrative expenses 16,755 17,831
Other expense 843 1,405
Less: Gain on sale of real estate - (13,175)
Property operating income $ 209,776 $ 218,990
The following comparison for the year ended December 31, 2020 compared to the year ended December 31, 2019, makes reference to the effect of the same-center properties. Same-center properties, which totaled 87 of the Company’s 89 properties as of December 31, 2020, 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 headquarters.
The table below provides a reconciliation of consolidated operating income in accordance with GAAP to property operating income for the year ended December 31, 2020 related to the 87 same-center properties owned by the Company during the entirety of both the years ended December 31, 2020 and 2019 and consolidated into the Company’s financial statements during such periods (in thousands):
Year Ended December 31, 2020
Same-Center Non Same-Center Total
Operating income (loss) per GAAP $ 110,457 $ (16,010) $ 94,447
Plus: Depreciation and amortization 96,102 1,629 97,731
General and administrative expenses (1)
- 16,755 16,755
Other expense (1)
- 843 843
Property operating income $ 206,559 $ 3,217 $ 209,776
______________________
(1)For illustration purposes, general and administrative expenses and other expenses are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center properties.
The table below provides a reconciliation of consolidated operating income in accordance with GAAP to property operating income for the year ended December 31, 2019 related to the 87 same-center properties owned by the Company during the entirety of both the years ended December 31, 2020 and 2019 and consolidated into the Company’s financial statements during such periods (in thousands):
Year Ended December 31, 2019
Same-Center Non Same-Center Total
Operating income (loss) per GAAP $ 119,994 $ (4,624) $ 115,370
Plus: Depreciation and amortization 95,435 2,124 97,559
General and administrative expenses (1)
- 17,831 17,831
Other expense (1)
- 1,405 1,405
Less: Gain on sale of real estate - (13,175) (13,175)
Property operating income $ 215,429 $ 3,561 $ 218,990
______________________
(1)For illustration purposes, general and administrative expenses and other expenses are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center properties.
During the year ended December 31, 2020, the Company generated property operating income of approximately $209.8 million compared to property operating income of $219.0 million generated during the year ended December 31, 2019, a decrease of approximately $9.2 million. The property operating income for the 87 same-center properties decreased approximately $8.9 million primarily due to changes in projected uncollectible rental revenue resulting from the impacts of the COVID-19 pandemic, including government-mandated shutdowns of nonessential businesses and restrictions on business operations and a decrease in straight-line rental revenue recognized, slightly offset by an increase in the amortization of below-market lease intangible liabilities.
Depreciation and amortization
The Company incurred depreciation and amortization expenses during the year ended December 31, 2020 of approximately $97.7 million compared to $97.6 million incurred during the year ended December 31, 2019.
General and administrative expenses
The Company incurred general and administrative expenses during the year ended December 31, 2020 of approximately $16.8 million compared to $17.8 million incurred during the year ended December 31, 2019. General and administrative expenses decreased approximately $1.1 million primarily as a result of the decrease in legal fees related to a legal settlement that occurred during the year ended December 31, 2019 and a decrease in travel and convention-related expenses incurred during the year ended December 31, 2020 as a result of the COVID-19 pandemic.
Other expense
The Company incurred other expenses of approximately $843,000 during the year ended December 31, 2020 compared to $1.4 million during the year ended December 31, 2019. Other expense decreased approximately $562,000 primarily as a result of a $950,000 charge to Other expense during the year ended December 31, 2019 due to the Company settling a lawsuit for approximately $1.4 million with no such charges during the year ended December 31, 2020. This decrease was offset by an increase in expenses incurred during the year ended December 31, 2020 related to the Company’s environmental, social and governance initiatives.
Gain on sale of real estate
On February 15, 2019, the Company sold Vancouver Market Center, a non-core shopping center located in Vancouver, Washington. The sales price of $17.0 million, less costs to sell, resulted in net proceeds of approximately $16.0 million. The Company recorded a gain on sale of real estate of approximately $2.6 million during the year ended December 31, 2019 related to this property disposition. 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. The Company recorded a gain on sale of real estate of approximately $180,000 during the year ended December 31, 2019 related to this property disposition. On August 1, 2019, the
Company sold Morada Ranch, a non-core shopping center located in Stockton, California. The sales price of $30.0 million, less costs to sell, resulted in net proceeds of approximately $29.1 million. The Company recorded a gain on sale of real estate of approximately $10.4 million during the year ended December 31, 2019 related to this property disposition. The Company recorded no such gains on sale during the year ended December 31, 2020.
Interest expense and other finance expenses
During the year ended December 31, 2020, the Company incurred approximately $59.7 million of interest expense compared to approximately $61.7 million during the year ended December 31, 2019. Interest expense and other finance expenses decreased approximately $2.0 million primarily as a result of a decrease in the interest rates payable on the credit facility, offset by an increase in the amounts outstanding under the credit facility.
Results of Operations for the year ended December 31, 2019 compared to the year ended December 31, 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 years ended December 31, 2019 and 2018 (in thousands):
Year Ended December 31,
2019 2018
Operating income per GAAP $ 115,370 $ 109,254
Plus: Depreciation and amortization 97,559 100,838
General and administrative expenses 17,831 14,918
Other expense 1,405 478
Less: Gain on sale of real estate (13,175) (5,890)
Property operating income $ 218,990 $ 219,598
The following comparison for the year ended December 31, 2019 compared to the year ended December 31, 2018, makes reference to the effect of the same-center properties. Same-center properties, which totaled 85 of the Company’s 89 properties as of December 31, 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 headquarters.
The table below provides a reconciliation of consolidated operating income in accordance with GAAP to property operating income for the year ended December 31, 2019 related to the 85 same-center properties owned by the Company during the entirety of both the years ended December 31, 2019 and 2018 and consolidated into the Company’s financial statements during such periods (in thousands):
Year Ended December 31, 2019
Same-Center Non Same-Center Total
Operating income (loss) per GAAP $ 119,065 $ (3,695) $ 115,370
Plus: Depreciation and amortization 93,953 3,606 97,559
General and administrative expenses (1)
- 17,831 17,831
Other expense (1)
- 1,405 1,405
Less: Gain on sale of real estate - (13,175) (13,175)
Property operating income $ 213,018 $ 5,972 $ 218,990
______________________
(1)For illustration purposes, general and administrative expenses and other expenses are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center properties.
The table below provides a reconciliation of consolidated operating income in accordance with GAAP to property operating income for the year ended December 31, 2018 related to the 85 same-center properties owned by the Company during the entirety of both the years ended December 31, 2019 and 2018 and consolidated into the Company’s financial statements during such periods (in thousands):
Year Ended December 31, 2018
Same-Center Non Same-Center Total
Operating income (loss) per GAAP $ 111,189 $ (1,935) $ 109,254
Plus: Depreciation and amortization 96,292 4,546 100,838
General and administrative expenses (1)
- 14,918 14,918
Other expense (1)
- 478 478
Less: Gain on sale of real estate - (5,890) (5,890)
Property operating income $ 207,481 $ 12,117 $ 219,598
______________________
(1)For illustration purposes, general and administrative expenses and other expenses are included in non same-center because the Company does not allocate these types of expenses between same-center and non same-center properties.
During the year ended December 31, 2019, the Company generated property operating income of approximately $219.0 million compared to property operating income of $219.6 million generated during the year ended December 31, 2018, a decrease of approximately $608,000. The property operating income for the 85 same-center properties increased approximately $5.5 million primarily due to a $3.1 million increase due to the accelerated recognition of a below-market lease intangible liability resulting from a lease termination in the year ended December 31, 2019 and an increase in rental revenues, offset by a decrease in straight-line rent. The non same-center properties decreased property operating income in the year ended December 31, 2019 by approximately $6.1 million compared to the year ended December 31, 2018 primarily due to $2.2 million in lease settlement income received during the year ended December 31, 2018 for which there was none received during 2019 and property sales that occurred during the year ended December 31, 2019.
Depreciation and amortization
The Company incurred depreciation and amortization expenses during the year ended December 31, 2019 of approximately $97.6 million compared to $100.8 million incurred during the year ended December 31, 2018.
General and administrative expenses
The Company incurred general and administrative expenses during the year ended December 31, 2019 of approximately $17.8 million compared to $14.9 million incurred during the year ended December 31, 2018. General and administrative expenses increased approximately $2.9 million primarily as a result of the adoption, effective January 1, 2019, of ASU No. 2016-2 which requires that 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, an overall increase in compensation-related expenses and an increase in legal fees related to a legal settlement that occurred during the year ended December 31, 2019.
Other expense
The Company incurred other expenses of approximately $1.4 million during the year ended December 31, 2019 compared to $478,000 during the year ended December 31, 2018. During the year ended December 31, 2019, the Company settled an ongoing lawsuit for approximately $1.4 million and accordingly, recorded a $950,000 charge to Other expense in the consolidated statements of operations and comprehensive income during the year ended December 31, 2019.
Gain on sale of real estate
On February 15, 2019, the Company sold Vancouver Market Center, a non-core shopping center located in Vancouver, Washington. The sales price of $17.0 million, less costs to sell, resulted in net proceeds of approximately $16.0 million. The Company recorded a gain on sale of real estate of approximately $2.6 million during the year ended December 31, 2019 related to this property disposition. 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. The Company recorded a gain on sale of real estate of
approximately $180,000 during the year ended December 31, 2019 related to this property disposition. On August 1, 2019, the Company sold Morada Ranch, a non-core shopping center located in Stockton, California. The sales price of $30.0 million, less costs to sell, resulted in net proceeds of approximately $29.1 million. The Company recorded a gain on sale of real estate of approximately $10.4 million during the year ended December 31, 2019 related to this property disposition. On September 27, 2018, the Company sold Round Hill Square, a non-core shopping center located in Zephyr Cove, Nevada. The sales price of $28.0 million, less costs to sell, resulted in net proceeds of approximately $26.9 million. The Company recorded a gain on sale of real estate of approximately $5.9 million for the year ended December 31, 2018 related to this property disposition.
Interest expense and other finance expenses
During the year ended December 31, 2019, the Company incurred approximately $61.7 million of interest expense compared to approximately $62.1 million during the year ended December 31, 2018.
Funds From Operations
Funds from operations (“FFO”), is a widely-recognized non-GAAP financial measure for REITs that the Company believes when considered with financial statements presented in accordance with GAAP, provides additional and useful means to assess its financial performance. FFO is frequently used by securities analysts, investors and other interested parties to evaluate the performance of REITs, most of which present FFO along with net income as calculated in accordance with GAAP.
The Company computes FFO in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income attributable to common stockholders (determined in accordance with GAAP) excluding gains or losses from debt restructuring, sales of depreciable property, and impairments, plus real estate related depreciation and amortization, and after adjustments for partnerships and unconsolidated joint ventures.
However, FFO:
•does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); and
•should not be considered an alternative to net income as an indication of our performance.
FFO as defined by the Company may not be comparable to similarly titled items reported by other REITs due to possible differences in the application of the NAREIT definition used by such REITs.
The table below provides a reconciliation of net income applicable to stockholders in accordance with GAAP to FFO for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
Net income attributable to ROIC $ 32,014 $ 48,844 $ 42,736
Plus: Depreciation and amortization 97,731 97,559 100,838
Less: Gain on sale of real estate - (13,175) (5,890)
Funds from operations - basic 129,745 133,228 137,684
Net income attributable to non-controlling interests 2,707 4,839 4,405
Funds from operations - diluted $ 132,452 $ 138,067 $ 142,089
Cash Net Operating Income (“NOI”)
Cash NOI is a non-GAAP financial measure of the Company’s performance. The most directly comparable GAAP financial measure is operating income. The Company defines cash NOI as operating revenues (base rent and recoveries from tenants), less property and related expenses (property operating expenses and property taxes), adjusted for non-cash revenue and operating expense items such as straight-line rent and amortization of lease intangibles, debt-related expenses, and other adjustments. Cash NOI also 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 cash NOI, and accordingly, the Company’s cash NOI may not be comparable to other REITs.
Cash NOI is used by management internally to evaluate and compare the operating performance of the Company’s properties. The Company believes cash NOI provides useful information to investors regarding the Company’s financial condition and results of operations because it reflects only those cash income and expense items that are incurred at the property level, and when compared across periods, can be used to determine trends in earnings of the Company’s properties as this measure is not affected by non-cash revenue and expense recognition items, the cost of the Company’s 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 the Company’s ownership of properties. The Company believes the exclusion of these items from operating 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.
Cash NOI is a measure of the operating performance of the Company’s properties but does not measure the Company’s performance as a whole and is therefore not a substitute for net income or operating income as computed in accordance with GAAP.
Same-Center Cash NOI
The table below provides a reconciliation of same-center cash NOI to consolidated operating income in accordance with GAAP for the years ended December 31, 2020 and 2019. The table makes reference to the effect of the same-center properties. Same-center properties, which totaled 87 of the Company’s 89 properties as of December 31, 2020, 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 headquarters (in thousands):
Year Ended December 31,
2020 2019
GAAP operating income $ 94,447 $ 115,370
Depreciation and amortization 97,731 97,559
General and administrative expenses 16,755 17,831
Other expense 843 1,405
Gain on sale of real estate - (13,175)
Straight-line rent (1,079) (3,083)
Amortization of above- and below-market rent (17,654) (15,618)
Property revenues and other expenses (1)
(374) (142)
Total Company cash NOI 190,669 200,147
Non same-center cash NOI (3,248) (3,589)
Same-center cash NOI $ 187,421 $ 196,558
______________________
(1)Includes anchor lease termination fees, net of contractual amounts, if any, expense and recovery adjustments related to prior periods and other miscellaneous adjustments.
During the year ended December 31, 2020, the Company generated same-center cash NOI of approximately $187.4 million compared to same-center cash NOI of approximately $196.6 million generated during the year ended December 31, 2019, representing a 4.6% decrease. This decrease is primarily due to changes in projected uncollectible rental revenue resulting from the impacts of the COVID-19 pandemic, including government-mandated shutdowns of nonessential businesses and restrictions on business operations.
The table below provides a reconciliation of same-center cash NOI to consolidated operating income in accordance with GAAP for the years ended December 31, 2019 and 2018. The table makes reference to the effect of the same-center properties. Same-center properties, which totaled 85 of the Company’s 89 properties as of December 31, 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 headquarters (in thousands):
Year Ended December 31,
2019 2018
GAAP operating income $ 115,370 $ 109,254
Depreciation and amortization 97,559 100,838
General and administrative expenses 17,831 14,918
Other expense 1,405 478
Gain on sale of real estate (13,175) (5,890)
Straight-line rent (3,083) (5,380)
Amortization of above- and below-market rent (15,618) (13,965)
Property revenues and other expenses (1)
(269) (711)
Total Company cash NOI 200,020 199,542
Non same-center cash NOI (5,611) (11,889)
Same-center cash NOI $ 194,409 $ 187,653
______________________
(1)Includes anchor lease termination fees, net of contractual amounts, if any, expense and recovery adjustments related to prior periods and other miscellaneous adjustments.
During the year ended December 31, 2019, the Company generated same-center cash NOI of approximately $194.4 million compared to same-center cash NOI of approximately $187.7 million generated during the year ended December 31, 2018, representing a 3.6% increase. This increase is primarily due to an increase in base rents and recoveries from tenants.
Critical Accounting Estimates
Critical accounting estimates are those that are both important to the presentation of the Company’s financial condition and results of operations and require management’s most difficult, complex or subjective judgments. Set forth below is a summary of the accounting estimates that management believes are critical to the preparation of the consolidated financial statements. This summary should be read in conjunction with the more complete discussion of the Company’s accounting policies included in Note 1 to the Company’s consolidated financial statements.
Revenue Recognition
The Company records base rents on a straight-line basis over the term of each lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in Tenant and other receivables in the accompanying consolidated balance sheets. Most leases contain provisions that require tenants to reimburse a pro-rata share of real estate taxes and certain common area expenses. Adjustments are also made throughout the year to tenant and other receivables and the related cost recovery income based upon the Company’s best estimate of the final amounts to be billed and collected. In addition, the Company also provides an allowance for future credit losses in connection with the deferred straight-line rent receivable.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is established based on a quarterly analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivables, the payment history of the tenants or other debtors, the financial condition of the tenants and any guarantors and management’s assessment of their ability to meet their lease obligations, the basis for any disputes and the status of related negotiations, among other things. Management’s estimates of the required allowance are subject to revision as these factors change and are sensitive to the effects of economic and market conditions on tenants, particularly those at retail properties. Estimates are used to establish reimbursements from tenants for common area maintenance, real estate tax and insurance costs. The Company analyzes the balance of its estimated accounts receivable for real estate taxes, common area
maintenance and insurance for each of its properties by comparing actual recoveries versus actual expenses and any actual write-offs. Based on its analysis, the Company may record an additional amount in its allowance for doubtful accounts related to these items. In addition, the Company also provides an allowance for future credit losses in connection with the deferred straight-line rent receivable.
As discussed above, the COVID-19 pandemic has impacted states and cities where the Company’s tenants operate their businesses and where the Company’s properties are located, and accordingly, our tenants may be unable to operate their businesses, maintain profitability and make timely rental payments to the Company under their leases.
Real Estate Investments
Land, buildings, property improvements, furniture/fixtures and tenant improvements are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Renovations and/or replacements, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.
The Company recognizes the acquisition of real estate properties, including acquired tangible (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). 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 its evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs.
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 associated with the original lease term is amortized to rental income, over the terms of the respective leases. The value of in-place leases are 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 is required to make subjective assessments as to the useful life of its properties for purposes of determining the amount of depreciation. These assessments have a direct impact on the Company’s net income.
Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:
Buildings 39-40 years
Property Improvements 10-20 years
Furniture/Fixtures 3-10 years
Tenant Improvements Shorter of lease term or their useful life
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. The judgments regarding the existence of impairment indicators are based on factors such as operational
performance, market conditions, legal and environmental concerns, the Company’s intent and ability to hold the related asset, as well as any significant cost overruns on development properties. 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. As discussed above, as a result of the COVID-19 pandemic, certain of the Company’s tenants may be unable to operate their businesses, maintain profitability and make timely rental payments to the Company under their leases. Accordingly, the worsening of estimated future cash flows could result in the recognition of an impairment charge on certain of the Company’s long-lived assets. Management does not believe that the value of any of the Company’s real estate investments was impaired at December 31, 2020.
REIT Qualification Requirements
The Company has elected and qualified to be taxed as a REIT under the Code, and believes that it has been organized and has operated in a manner that will allow it to continue to qualify for taxation as a REIT under the Code.
The Company is subject to a number of operational and organizational requirements to qualify and then maintain qualification as a REIT. If the Company does not qualify as a REIT, its income would become subject to U.S. federal, state and local income taxes at regular corporate rates that would be substantial and the Company may not be permitted to re-elect to qualify as a REIT for four taxable years following the year that it failed to qualify as a REIT. The Company’s results of operations, liquidity and amounts distributable to stockholders would be significantly reduced if it failed to qualify as a REIT.
Liquidity and Capital Resources of the Company
In this “Liquidity and Capital Resources of the Company” section and in the “Liquidity and Capital Resources of the Operating Partnership” section, the term “the Company” refers to Retail Opportunity Investments Corp. on an unconsolidated basis, excluding the Operating Partnership.
The Company’s business is operated primarily through the Operating Partnership, of which the Company is the parent company, and which it consolidates for financial reporting purposes. Because the Company operates on a consolidated basis with the Operating Partnership, the section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
The Company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company. The Company itself does not hold any indebtedness other than guarantees of indebtedness of the Operating Partnership, and its only material assets are its ownership of direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, the sole general partner of the Operating Partnership. Therefore, the consolidated assets and liabilities and the consolidated revenues and expenses of the Company and the Operating Partnership are the same on their respective financial statements. However, all debt is held directly or indirectly by the Operating Partnership. The Company’s principal funding requirement is the payment of dividends on its common stock. The Company’s principal source of funding for its dividend payments is distributions it receives from the Operating Partnership.
As the parent company of the Operating Partnership, the Company, indirectly, has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control. The Company causes the Operating Partnership to distribute such portion of its available cash as the Company may in its discretion determine, in the manner provided in the Operating Partnership’s partnership agreement.
The Company is a well-known seasoned issuer with an effective shelf registration statement filed in April 2019 that allows the Company to register unspecified various classes of debt and equity securities. As circumstances warrant, the Company may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. Any proceeds from such equity issuances would be contributed to the Operating Partnership. The Operating Partnership may use the proceeds to acquire additional properties, pay down debt, and for general working capital purposes.
Liquidity is a measure of the Company’s ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain its assets and operations, make distributions to its stockholders and meet other general business needs. The liquidity of the Company is dependent on the Operating Partnership’s ability to make sufficient distributions to the Company. The primary cash requirement of the Company is its payment of dividends to its stockholders.
During the year ended December 31, 2020, the Company’s primary sources of cash were distributions from the Operating Partnership. As of December 31, 2020, the Company has determined that it has adequate working capital to meet its dividend funding obligations for the next twelve months.
For the year ended December 31, 2020, dividends paid to stockholders totaled approximately $23.4 million. Additionally, for the year ended December 31, 2020, the Operating Partnership made distributions of approximately $2.2 million to the non-controlling interest OP Unitholders. On a consolidated basis, cash flows from operations for the same period totaled approximately $106.7 million. For the year ended December 31, 2019, dividends paid to stockholders totaled approximately $90.8 million. Additionally, for the year ended December 31, 2019, the Operating Partnership made distributions of approximately $8.9 million to the non-controlling interest OP Unitholders. On a consolidated basis, cash flows from operations for the same period totaled approximately $132.0 million.
Potential future sources of capital include equity issuances and distributions from the Operating Partnership.
Liquidity and Capital Resources of the Operating Partnership
In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms the “Operating Partnership,” “we”, “our” and “us” refer to the Operating Partnership together with its consolidated subsidiaries or the Operating Partnership and the Company together with their respective consolidated subsidiaries, as the context requires.
During the year ended December 31, 2020, the Operating Partnership’s primary source of cash was cash flow from operations. As of December 31, 2020, the Operating Partnership has determined that it has adequate working capital to meet its debt obligations and operating expenses for the next twelve months.
The Company has an unsecured term loan agreement with several banks under which the lenders agreed to provide a $300.0 million unsecured term loan facility. Effective December 20, 2019, the Company entered into the First Amendment to First Amended and Restated Term Loan Agreement (as amended, the “Term Loan Agreement”) pursuant to which the maturity date of the term loan was extended from September 8, 2022 to January 20, 2025, 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 the Administrative Agent as its “prime rate,” and (c) the Eurodollar Rate plus 1.00%.
The Operating Partnership has an unsecured revolving credit facility with several banks. Effective December 20, 2019, the Company entered into the First Amendment to Second Amended and Restated Credit Agreement (as amended, the “Credit Facility Agreement”) pursuant to which the borrowing capacity under the credit facility is $600.0 million and the maturity date of the credit facility was extended from September 8, 2021 to February 20, 2024, 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 Agreement 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 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) 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 0.90%. 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 Agreement.
As of December 31, 2020, $300.0 million and $48.0 million were outstanding under the term loan and credit facility, respectively. The weighted average interest rates on the term loan and the credit facility during the year ended December 31, 2020 were 1.6% and 1.4%, respectively. As discussed in Note 11 of the accompanying financial statements, the Company uses interest rate swaps to manage its interest rate risk and accordingly, the swapped interest rate on the term loan is 3.0%. The Company had no available borrowings under the term loan at December 31, 2020. The Company had $552.0 million available to borrow under the credit facility at December 31, 2020.
During the year ended December 31, 2020, the Company obtained an investment grade credit rating from Fitch Ratings (BBB-).
Further, the Operating Partnership issued $250.0 million aggregate principal amount of unsecured senior notes in each of December 2017, December 2014 and December 2013 and $200.0 million aggregate principal amount of unsecured senior notes in September 2016, each of which were fully and unconditionally guaranteed by the Company.
The Operating Partnership’s debt agreements contain customary representations, financial and other covenants, and its ability to borrow under these agreements is subject to its compliance with financial covenants and other restrictions on an ongoing basis. As a result of the COVID-19 pandemic’s impact on the Company’s business, the Operating Partnership entered into temporary waiver amendments for one of the covenants contained in its debt agreements. The amendments adjusted the criteria for properties eligible to be included in the unencumbered asset pool used for purposes of calculating the consolidated unencumbered leverage ratio. Following such amendments the Operating Partnership is in compliance with all financial covenants in its debt agreements. The temporary waiver period expires subsequent to March 31, 2021.
While the Operating Partnership generally intends to hold its assets as long term investments, certain of its investments may be sold in order to manage the Operating Partnership’s interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of its investments, if any, cannot be predicted with any certainty.
As discussed above, the COVID-19 pandemic has adversely impacted states and cities where the Company’s tenants operate their businesses and where the Company’s properties are located. The COVID-19 pandemic could have a material adverse effect on the Company’s financial condition, results of operations and cash flows as the reduced economic activity severely impacts certain of the Company’s tenants’ businesses, financial condition and liquidity and may cause certain tenants to be unable to meet their obligations to the Company in full. Closures by the Company’s tenants of their stores could reduce the Company’s cash flows, which could impact the Company’s ability to continue paying dividends to its stockholders at expected levels. The Company intends to continue to operate its business in a manner that will allow it to qualify as a REIT, including maintaining compliance with taxable income distribution requirements.
Cash Flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands):
Year Ended December 31,
2020 2019 2018
Net Cash Provided by (Used in):
Operating activities $ 106,660 $ 132,039 $ 130,918
Investing activities $ (28,474) $ 12,402 $ (56,055)
Financing activities $ (77,008) $ (146,432) $ (84,379)
Net Cash Flows from:
Operating Activities
Decrease in cash flows provided by operating activities from 2019 to 2020:
Net cash flows provided by operating activities amounted to $106.7 million during the year ended December 31, 2020, compared to $132.0 million in the comparable period in 2019. This decrease of approximately $25.4 million during the the year ended December 31, 2020 is primarily due to a decrease in property operating income of approximately $9.2 million, and the increase in accounts receivable and related timing of collections and payments of working capital accounts.
Increase in cash flows provided by operating activities from 2018 to 2019:
Net cash flows provided by operating activities amounted to $132.0 million during the year ended December 31, 2019, which is materially consistent with $130.9 million during the year ended December 31, 2018.
Investing Activities
Increase in cash flows used in investing activities from 2019 to 2020:
Net cash flows used in investing activities amounted to $28.5 million during the year ended December 31, 2020, compared to net cash flows provided by investing activities of $12.4 million during the year ended December 31, 2019. During the year ended December 31, 2020, cash flows used in investing activities increased approximately $40.9 million, primarily due to the decrease in proceeds from the sale of real estate of approximately $58.9 million. This decrease in proceeds from the sale of real estate was offset by the decrease in investments in real estate of approximately $11.6 million and the increase in repayments on mortgage notes of approximately $7.8 million.
Increase in cash flows provided by investing activities from 2018 to 2019:
Net cash flows provided by investing activities amounted to $12.4 million during the year ended December 31, 2019, compared to net cash flows used in investing activities of approximately $56.1 million during the year ended December 31, 2018. During the year ended December 31, 2019, cash flows provided by investing activities increased approximately $68.5 million, primarily due to the decrease in investments in real estate of approximately $32.6 million, an increase in proceeds from the sale of real estate of approximately $32.1 million and a decrease in improvements to properties of approximately $4.1 million.
Financing Activities
Decrease in cash flows used in financing activities from 2019 to 2020:
Net cash flows used in financing activities amounted to $77.0 million during the year ended December 31, 2020, compared to $146.4 million during the year ended December 31, 2019. This decrease of approximately $69.4 million for the year ended December 31, 2020 is primarily due to the decrease in dividend and distribution payments of approximately $74.1 million, the net decrease in payments on the credit facility of $36.0 million, offset by the decrease in proceeds received from the sale of common stock of approximately $34.2 million.
Increase in cash flows used in financing activities from 2018 to 2019:
Net cash flows used in financing activities amounted to $146.4 million during the year ended December 31, 2019, compared to $84.4 million during the year ended December 31, 2018. This increase of approximately $62.1 million for the year ended December 31, 2019 is primarily due to the net increase in payments on the credit facility of $84.5 million, offset by the decrease in repayments on mortgages of approximately $19.1 million.
Contractual Obligations
The following table presents the Company’s operating lease obligations and the principal and interest amounts of the Company’s long-term debt maturing each year, including amortization of principal based on debt outstanding, at December 31, 2020 (in thousands):
2021 2022 2023 2024 2025 Thereafter Total
Contractual obligations:
Mortgage Notes Payable Principal (1)
$ 717 $ 24,132 $ 686 $ 26,708 $ 33,337 $ - $ 85,580
Mortgage Notes Payable Interest 3,737 3,170 2,482 1,627 991 - 12,007
Term loan (2)
- - - - 300,000 - 300,000
Credit facility (3)
- - - 48,000 - - 48,000
Senior Notes Due 2027 (4)
10,475 10,475 10,475 10,475 10,475 270,950 323,325
Senior Notes Due 2026 (4)
7,900 7,900 7,900 7,900 7,900 207,900 247,400
Senior Notes Due 2024 (5)
10,000 10,000 10,000 260,000 - - 290,000
Senior Notes Due 2023 (6)
12,500 12,500 262,500 - - - 287,500
Operating lease obligations 1,282 1,304 1,330 1,335 1,341 31,263 37,855
Total $ 46,611 $ 69,481 $ 295,373 $ 356,045 $ 354,044 $ 510,113 $ 1,631,667
__________________
(1)Does not include unamortized mortgage premium of approximately $1.1 million as of December 31, 2020.
(2)For the purpose of the above table, the Company has assumed that borrowings under the term loan accrue interest at the interest rate on the term loan as of December 31, 2020 which was 3.0%, inclusive of the swap agreements the Company has entered into.
(3)For the purpose of the above table, the Company has assumed that borrowings under the credit facility accrue interest at the interest rate on the credit facility as of December 31, 2020 which was 1.1%.
(4)Represents payments of interest only in years 2021 through 2025 and payments of both principal and interest thereafter.
(5)Represents payments of interest only in years 2021 through 2023 and payments of both principal and interest thereafter.
(6)Represents payments of interest only in years 2021 through 2022 and payments of both principal and interest thereafter.
The Company has committed approximately $18.1 million and $873,000 in tenant improvements (including building and site improvements) and leasing commissions, respectively, for the new leases and renewals that occurred during the year ended December 31, 2020. As of December 31, 2020, the Company did not have any capital lease obligations.
The Company has entered into several lease agreements with an officer of the Company. Pursuant to the lease agreements, the Company is provided the use of storage space.
Off-Balance Sheet Arrangements
As of December 31, 2020, the Company does not have any off-balance sheet arrangements.
Real Estate Taxes
The Company’s leases generally require the tenants to be responsible for a pro-rata portion of the real estate taxes.
Inflation
The Company’s long-term leases contain provisions to mitigate the adverse impact of inflation on its operating results. Such provisions include clauses entitling the Company to receive (a) scheduled base rent increases and (b) percentage rents based upon tenants’ gross sales which generally increase as prices rise. In addition, many of the Company’s non-anchor leases are for terms of less than ten years, which permits the Company to seek increases in rents upon renewal at then-current market rates if rents provided in the expiring leases are below then-existing market rates. Most of the Company’s leases require tenants to pay a share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.
Leverage Policies
The Company employs prudent amounts of leverage and uses debt as a means of providing additional funds for the acquisition of its properties and the diversification of its portfolio. The Company seeks to primarily utilize unsecured debt in order to maintain liquidity and flexibility in its capital structure.
The Company has an unsecured term loan agreement with several banks under which the lenders agreed to provide a $300.0 million unsecured term loan facility. Effective December 20, 2019, the Company entered into the First Amendment to First Amended and Restated Term Loan Agreement (as amended, the “Term Loan Agreement”) pursuant to which the maturity date of the term loan was extended from September 8, 2022 to January 20, 2025, 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. The Operating Partnership has an unsecured revolving credit facility with several banks. Effective December 20, 2019, the Company entered into the First Amendment to Second Amended and Restated Credit Agreement (as amended, the “Credit Facility Agreement”) pursuant to which the borrowing capacity under the credit facility is $600.0 million and the maturity date of the credit facility was extended from September 8, 2021 to February 20, 2024, 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 Agreement 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.
Further, the Operating Partnership issued $250.0 million aggregate principal amount of unsecured senior notes in each of December 2017, December 2014 and December 2013 and $200.0 million aggregate principal amount of unsecured senior notes in September 2016, each of which were fully and unconditionally guaranteed by the Company.
The Company may borrow on a non-recourse basis at the corporate level or Operating Partnership level. Non-recourse indebtedness means the indebtedness of the borrower or its subsidiaries is secured only by specific assets without recourse to other assets of the borrower or any of its subsidiaries. Even with non-recourse indebtedness, however, a borrower or its subsidiaries will likely be required to guarantee against certain breaches of representations and warranties such as those relating to the absence of fraud, misappropriation, misapplication of funds, environmental conditions and material misrepresentations. Because non-recourse financing generally restricts the lender’s claim on the assets of the borrower, the lender generally may only proceed against the asset securing the debt. This may protect the Company’s other assets.
The Company plans to evaluate each investment opportunity and determine the appropriate leverage on a case-by-case basis and also on a Company-wide basis. The Company may seek to refinance indebtedness, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase the investment.
The Company plans to finance future acquisitions through a combination of cash from operations, borrowings under its credit facility, the assumption of existing mortgage debt, the issuance of OP Units, equity and debt offerings, and the potential sale of existing assets. In addition, the Company may acquire retail properties indirectly through joint ventures with third parties as a means of increasing the funds available for the acquisition of properties.
Distributions
The Operating Partnership and ROIC intend to make regular quarterly distributions to holders of their OP Units and common stock, respectively. The Operating Partnership pays distributions to ROIC directly as a holder of units of the Operating Partnership, and indirectly to ROIC through distributions to Retail Opportunity Investments GP, LLC, a wholly owned subsidiary of ROIC. 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 its stockholders in an amount not less than its net taxable income, if and to the extent authorized by its board of directors. If ROIC’s cash available for distribution is less than its net taxable income, ROIC could be required to sell assets or borrow funds to make cash distributions or ROIC may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risk exposure is to changes in interest rates related to its debt. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company’s future financing requirements.
As of December 31, 2020, the Company had $348.0 million of variable rate debt outstanding. The Company has primarily used fixed-rate debt and forward starting interest rate swaps to manage its interest rate risk. See the discussion under Note 11, “Derivative and Hedging Activities,” to the accompanying consolidated financial statements for certain quantitative details related to the interest rate swaps.
The Company entered into interest rate swaps in order to economically hedge against the risk of rising interest rates that would affect the Company’s interest expense related to its future anticipated debt issuances as part of its overall borrowing program. The sensitivity analysis table presented below shows the estimated instantaneous parallel shift in the yield curve up and down by 50 and 100 basis points, respectively, on the clean market value of its interest rate derivatives as of December 31, 2020, exclusive of non-performance risk (in thousands):
Swap Notional Less 100 basis points Less 50 basis points December 31, 2020
Value Increase 50 basis points Increase 100 basis points
$100,000 $ (4,347) $ (3,523) $ (2,705) $ (1,898) $ (1,102)
$100,000 $ (4,347) $ (3,523) $ (2,705) $ (1,898) $ (1,102)
$50,000 $ (2,888) $ (2,473) $ (2,061) $ (1,654) $ (1,253)
$50,000 $ (2,891) $ (2,476) $ (2,064) $ (1,657) $ (1,256)
See Note 11 of the accompanying consolidated financial statements for a discussion on how the Company values derivative financial instruments. The Company calculates the value of its interest rate swaps based upon the present value of the future cash flows expected to be paid and received on each leg of the swap. The cash flows on the fixed leg of the swap are agreed to at inception and the cash flows on the floating leg of a swap change over time as interest rates change. To estimate the floating cash flows at each valuation date, the Company utilizes a forward curve which is constructed using LIBOR fixings, Eurodollar futures, and swap rates, which are observable in the market. Both the fixed and floating legs’ cash flows are discounted at market discount factors. For purposes of adjusting its derivative valuations, the Company incorporates the nonperformance risk for both itself and its counterparties to these contracts based upon management’s estimates of credit spreads, credit default swap spreads (if available) or IHS Markit ratings in order to derive a curve that considers the term structure of credit.
As a corporation that has elected to qualify as a REIT for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2010, ROIC’s future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The Company will be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make real estate-related debt investments. The Company’s interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, the Company expects to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. In addition, the Company can use derivative financial instruments to manage interest rate risk. The Company will not use derivatives for trading or speculative purposes and will only enter into contracts with major financial institutions based on their credit rating and other factors. Currently, the Company uses interest rate swaps to manage its interest rate risk. See Note 11 of the accompanying consolidated financial statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statement Schedule
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements of Retail Opportunity Investments Corp.:
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Consolidated Financial Statements of Retail Opportunity Investments Partnership, LP:
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Partners’ Capital
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedules
III Real Estate and Accumulated Depreciation
IV Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Retail Opportunity Investments Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Retail Opportunity Investments Corp. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 8 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of this critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of real estate investments
Description of the Matter At December 31, 2020, the Company’s real estate investments totaled $2.7 billion. As discussed in Note 1 of the consolidated financial statements, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the real estate investments are not expected to be recovered through future undiscounted cash flows. The Company did not identify any assets that were impaired at December 31, 2020.
Auditing management’s assessment of impairment is challenging due to the high degree of subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment and the related assessment of the severity of such indicators in determining whether a triggering event has occurred that requires the Company to evaluate the recoverability of the asset. The significant inputs used in the assessment included capitalization rates, current and estimated future cash flows associated with each property, which were based on market information including, where applicable, market rental rates, leasing trends, occupancy trends, expense ratios, and other quantitative and qualitative factors.
How We Addressed the Matter in Our Audit We obtained an understanding of management’s process to identify indicators of impairment, including the qualitative and quantitative analysis and related inputs and assumptions used in performing the analyses. We evaluated the design and tested the operating effectiveness of the controls that address the identification of indicators of impairment, in addition to controls around the quantitative assessment of impairment. For example, we tested controls over the Company’s process to estimate the fair value of its real estate assets and to assess the recoverability of each investment, including controls over management’s development and review of the significant inputs and assumptions described above used in the quantitative assessment.
Our testing of the Company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment were present at any given property by obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments. For example, we reviewed the bad debt reserves analysis and rent rolls for any tenants with large reserved balances or upcoming lease expirations, in addition to reviewing various industry market surveys that indicate potential tenants with deteriorating credit quality to determine if they occupied a substantial portion of any particular property.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2010
San Diego, California
February 24, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Retail Opportunity Investments Corp.
Opinion on Internal Control over Financial Reporting
We have audited Retail Opportunity Investments Corp.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Retail Opportunity Investments Corp. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Retail Opportunity Investments Corp. as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020 and the related notes and financial statement schedules listed in the Index at Item 8 and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting (Retail Opportunity Investments Corp). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Diego, California
February 24, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Partners of Retail Opportunity Investments Partnership, LP
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Retail Opportunity Investments Partnership, LP (the “Operating Partnership”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, Partners’ capital, and cash flows for each of the three years in the period ended December 31, 2020 and the related notes and financial statement schedules listed in the Index at Item 8 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Operating Partnership at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on the Operating Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Operating Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Operating Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of this critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of real estate investments
Description of the Matter At December 31, 2020, the Company’s real estate investments totaled $2.7 billion. As discussed in Note 1 of the consolidated financial statements, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the real estate investments are not expected to be recovered through future undiscounted cash flows. The Company did not identify any assets that were impaired at December 31, 2020.
Auditing management’s assessment of impairment is challenging due to the high degree of subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment and the related assessment of the severity of such indicators in determining whether a triggering event has occurred that requires the Company to evaluate the recoverability of the asset. The significant inputs used in the assessment included capitalization rates, current and estimated future cash flows associated with each property, which were based on market information including, where applicable, market rental rates, leasing trends, occupancy trends, expense ratios, and other quantitative and qualitative factors.
How We Addressed the Matter in Our Audit We obtained an understanding of management’s process to identify indicators of impairment, including the qualitative and quantitative analysis and related inputs and assumptions used in performing the analyses. We evaluated the design and tested the operating effectiveness of the controls that address the identification of indicators of impairment, in addition to controls around the quantitative assessment of impairment. For example, we tested controls over the Company’s process to estimate the fair value of its real estate assets and to assess the recoverability of each investment, including controls over management’s development and review of the significant inputs and assumptions described above used in the quantitative assessment.
Our testing of the Company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment were present at any given property by obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments. For example, we reviewed the bad debt reserves analysis and rent rolls for any tenants with large reserved balances or upcoming lease expirations, in addition to reviewing various industry market surveys that indicate potential tenants with deteriorating credit quality to determine if they occupied a substantial portion of any particular property.
/s/ Ernst & Young LLP
We have served as the Operating Partnership’s auditor since 2013
San Diego, California
February 24, 2021
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
2020 2019
ASSETS
Real Estate Investments:
Land $ 881,872 $ 879,540
Building and improvements 2,274,680 2,252,301
3,156,552 3,131,841
Less: accumulated depreciation 460,165 390,916
2,696,387 2,740,925
Mortgage note receivable 4,959 13,000
Real Estate Investments, net 2,701,346 2,753,925
Cash and cash equivalents 4,822 3,800
Restricted cash 1,814 1,658
Tenant and other receivables, net 58,756 45,821
Acquired lease intangible assets, net 50,110 59,701
Prepaid expenses 4,811 3,169
Deferred charges, net 22,893 27,652
Other assets 17,296 18,031
Total assets $ 2,861,848 $ 2,913,757
LIABILITIES AND EQUITY
Liabilities:
Term loan $ 298,524 $ 298,330
Credit facility 45,238 80,743
Senior Notes 943,655 942,850
Mortgage notes payable 86,509 87,523
Acquired lease intangible liabilities, net 125,796 144,757
Accounts payable and accrued expenses 17,687 17,562
Tenants’ security deposits 6,854 7,177
Other liabilities 46,426 42,987
Total liabilities 1,570,689 1,621,929
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; 118,085,155 and 116,496,016 shares issued and outstanding at December 31, 2020 and 2019, respectively
12 12
Additional paid-in capital 1,497,662 1,481,466
Dividends in excess of earnings (289,309) (297,998)
Accumulated other comprehensive loss (8,812) (4,132)
Total Retail Opportunity Investments Corp. stockholders’ equity 1,199,553 1,179,348
Non-controlling interests 91,606 112,480
Total equity 1,291,159 1,291,828
Total liabilities and equity $ 2,861,848 $ 2,913,757
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share data)
Year Ended December 31,
2020 2019 2018
Revenues
Rental revenue $ 280,388 $ 291,263 $ 289,601
Other income 3,726 3,777 6,197
Total revenues 284,114 295,040 295,798
Operating expenses
Property operating 41,050 43,662 43,851
Property taxes 33,288 32,388 32,349
Depreciation and amortization 97,731 97,559 100,838
General and administrative expenses 16,755 17,831 14,918
Other expense 843 1,405 478
Total operating expenses 189,667 192,845 192,434
Gain on sale of real estate - 13,175 5,890
Operating income 94,447 115,370 109,254
Non-operating expenses
Interest expense and other finance expenses (59,726) (61,687) (62,113)
Net income 34,721 53,683 47,141
Net income attributable to non-controlling interests (2,707) (4,839) (4,405)
Net Income Attributable to Retail Opportunity Investments Corp. $ 32,014 $ 48,844 $ 42,736
Earnings per share - basic and diluted $ 0.27 $ 0.42 $ 0.38
Dividends per common share $ 0.2000 $ 0.7880 $ 0.7800
Comprehensive income:
Net income $ 34,721 $ 53,683 $ 47,141
Other comprehensive (loss) income:
Unrealized swap derivative (loss) gain arising during the period (9,925) (7,348) 1,648
Reclassification adjustment for amortization of interest expense included in net income 4,572 (345) 57
Other comprehensive (loss) income: (5,353) (7,693) 1,705
Comprehensive income 29,368 45,990 48,846
Comprehensive income attributable to non-controlling interests (2,034) (4,839) (4,405)
Comprehensive income attributable to Retail Opportunity Investments Corp. $ 27,334 $ 41,151 $ 44,441
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Equity
(In thousands, except share data)
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, 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 397,861 - 269 - - - 269
Shares withheld for employee taxes (70,168) - (1,400) - - - (1,400)
Cancellation of restricted stock (8,997) - - - - - -
Stock based compensation expense - - 7,392 - - - 7,392
Cash redemption for non-controlling interests - - - - - (3,713) (3,713)
Adjustment to non-controlling interests ownership in Operating Partnership - - (2,904) - - 2,904 -
Proceeds from the issuance of common stock 1,326,690 - 25,703 - - - 25,703
Registration expenditures - - (570) - - - (570)
Cash dividends ($0.7800 per share)
- - - (88,417) - (9,056) (97,473)
Dividends payable to officers - - - (267) - - (267)
Net income attributable to Retail Opportunity Investments Corp. - - - 42,736 - - 42,736
Net income attributable to non-controlling interests - - - - - 4,405 4,405
Other comprehensive income - - - - 1,705 - 1,705
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 631,022 - 1,942 - - - 1,942
Shares withheld for employee taxes (125,072) - (1,986) - - - (1,986)
Cancellation of restricted stock (6,997) - - - - - -
Stock based compensation expense - - 7,352 - - 1,215 8,567
Redemption of OP Units 143,190 - 2,632 - - (2,632) -
Cash redemption for non-controlling interests - - - - - (5,043) (5,043)
Adjustment to non-controlling interests ownership in Operating Partnership - - (2,983) - - 2,983 -
Proceeds from the issuance of common stock 1,861,036 1 34,161 - - - 34,162
Registration expenditures - - (732) - - - (732)
Cash dividends ($0.7880 per share)
- - - (90,549) - (8,921) (99,470)
Dividends payable to officers - - - 145 - (175) (30)
Net income attributable to Retail Opportunity Investments Corp. - - - 48,844 - - 48,844
Net income attributable to non-controlling interests - - - - - 4,839 4,839
Other comprehensive loss - - - - (7,693) - (7,693)
Balance at December 31, 2019 116,496,016 $ 12 $ 1,481,466 $ (297,998) $ (4,132) $ 112,480 $ 1,291,828
Shares issued under the Equity Incentive Plan 428,170 - - - - - -
Shares withheld for employee taxes (128,614) - (2,272) - - - (2,272)
Cancellation of restricted stock (4,899) - - - - - -
Stock based compensation expense - - 8,098 - - 816 8,914
Redemption of OP Units 1,968,350 - 20,098 - - (20,098) -
Cash redemption for non-controlling interests - - - - - (1,999) (1,999)
Adjustment to non-controlling interests ownership in Operating Partnership - - (570) - - 570 -
Repurchase of common stock (673,868) - (8,846) - - - (8,846)
Registration expenditures - - (312) - - - (312)
Cash dividends ($0.2000 per share)
- - - (23,273) - (2,187) (25,460)
Dividends payable to officers - - - (52) - (10) (62)
Net income attributable to Retail Opportunity Investments Corp. - - - 32,014 - - 32,014
Net income attributable to non-controlling interests - - - - - 2,707 2,707
Other comprehensive loss - - - - (4,680) (673) (5,353)
Balance at December 31, 2020 118,085,155 $ 12 $ 1,497,662 $ (289,309) $ (8,812) $ 91,606 $ 1,291,159
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2020 2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 34,721 $ 53,683 $ 47,141
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 97,731 97,559 100,838
Amortization of deferred financing costs and mortgage premiums, net 2,219 2,076 1,899
Straight-line rent adjustment (1,079) (3,083) (5,380)
Amortization of above and below market rent (17,654) (15,618) (13,965)
Amortization relating to stock based compensation 8,914 8,567 7,392
Provisions for tenant credit losses 11,035 1,969 1,729
Other noncash interest expense 293 524 1,674
Gain on sale of real estate - (13,175) (5,890)
Change in operating assets and liabilities:
Tenant and other receivables (23,120) 543 (57)
Prepaid expenses (1,641) 962 (1,344)
Accounts payable and accrued expenses (1,096) 303 (1,622)
Other assets and liabilities, net (3,663) (2,271) (1,497)
Net cash provided by operating activities 106,660 132,039 130,918
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in real estate - (11,601) (44,195)
Proceeds from sale of real estate - 58,930 26,880
Improvements to properties (36,515) (35,177) (39,240)
Deposits on real estate acquisitions, net - - 500
Proceeds on repayment of mortgage note receivable 8,041 250 -
Net cash (used in) provided by investing activities (28,474) 12,402 (56,055)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on mortgages (577) (551) (19,612)
Proceeds from draws on credit facility 160,000 101,000 177,000
Payments on credit facility (196,000) (173,000) (164,500)
Redemption of OP Units (1,999) (5,043) (3,713)
Distributions to OP Unitholders (2,187) (8,921) (9,056)
Deferred financing and other costs (1,162) (2,804) -
Proceeds from the sale of common stock - 34,162 25,703
Repurchase of common stock (8,846) - -
Registration expenditures (567) (478) (570)
Dividends paid to common shareholders (23,398) (90,753) (88,500)
Common shares issued under the Equity Incentive Plan - 1,942 269
Shares withheld for employee taxes (2,272) (1,986) (1,400)
Net cash used in financing activities (77,008) (146,432) (84,379)
Net increase (decrease) in cash, cash equivalents and restricted cash 1,178 (1,991) (9,516)
Cash, cash equivalents and restricted cash at beginning of period 5,458 7,449 16,965
Cash, cash equivalents and restricted cash at end of period $ 6,636 $ 5,458 $ 7,449
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 statements of cash flows:
Year Ended December 31,
2020 2019 2018
Cash and cash equivalents $ 4,822 $ 3,800 $ 6,076
Restricted cash 1,814 1,658 1,373
Total cash, cash equivalents and restricted cash shown in Statements of Cash Flows $ 6,636 $ 5,458 $ 7,449
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Balance Sheets
(In thousands)
December 31,
2020 2019
ASSETS
Real Estate Investments:
Land $ 881,872 $ 879,540
Building and improvements 2,274,680 2,252,301
3,156,552 3,131,841
Less: accumulated depreciation 460,165 390,916
2,696,387 2,740,925
Mortgage note receivable 4,959 13,000
Real Estate Investments, net 2,701,346 2,753,925
Cash and cash equivalents 4,822 3,800
Restricted cash 1,814 1,658
Tenant and other receivables, net 58,756 45,821
Acquired lease intangible assets, net 50,110 59,701
Prepaid expenses 4,811 3,169
Deferred charges, net 22,893 27,652
Other assets 17,296 18,031
Total assets $ 2,861,848 $ 2,913,757
LIABILITIES AND CAPITAL
Liabilities:
Term loan $ 298,524 $ 298,330
Credit facility 45,238 80,743
Senior Notes 943,655 942,850
Mortgage notes payable 86,509 87,523
Acquired lease intangible liabilities, net 125,796 144,757
Accounts payable and accrued expenses 17,687 17,562
Tenants’ security deposits 6,854 7,177
Other liabilities 46,426 42,987
Total liabilities 1,570,689 1,621,929
Commitments and contingencies
Capital:
Partners’ capital, unlimited partnership units authorized:
ROIC capital 1,208,365 1,183,480
Limited partners’ capital 92,279 112,480
Accumulated other comprehensive loss (9,485) (4,132)
Total capital 1,291,159 1,291,828
Total liabilities and capital $ 2,861,848 $ 2,913,757
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statements of Operations and Comprehensive Income
(In thousands)
Year Ended December 31,
2020 2019 2018
Revenues
Rental revenue $ 280,388 $ 291,263 $ 289,601
Other income 3,726 3,777 6,197
Total revenues 284,114 295,040 295,798
Operating expenses
Property operating 41,050 43,662 43,851
Property taxes 33,288 32,388 32,349
Depreciation and amortization 97,731 97,559 100,838
General and administrative expenses 16,755 17,831 14,918
Other expense 843 1,405 478
Total operating expenses 189,667 192,845 192,434
Gain on sale of real estate - 13,175 5,890
Operating income 94,447 115,370 109,254
Non-operating expenses
Interest expense and other finance expenses (59,726) (61,687) (62,113)
Net Income Attributable to Retail Opportunity Investments Partnership, LP $ 34,721 $ 53,683 $ 47,141
Earnings per unit - basic and diluted $ 0.27 $ 0.42 $ 0.38
Distributions per unit $ 0.2000 $ 0.7880 $ 0.7800
Comprehensive income:
Net income attributable to Retail Opportunity Investments Partnership, LP $ 34,721 $ 53,683 $ 47,141
Other comprehensive (loss) income:
Unrealized swap derivative (loss) gain arising during the period (9,925) (7,348) 1,648
Reclassification adjustment for amortization of interest expense included in net income 4,572 (345) 57
Other comprehensive (loss) income: (5,353) (7,693) 1,705
Comprehensive income attributable to Retail Opportunity Investments Partnership, LP $ 29,368 $ 45,990 $ 48,846
See accompanying notes to consolidated financial statements.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statements of Partners’ Capital
(In thousands, except unit data)
Limited Partner’s Capital (1)
ROIC Capital (2)
Accumulated
other
comprehensive income (loss)
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 - - 397,861 269 - 269
OP Units withheld for employee taxes - - (70,168) (1,400) - (1,400)
Cancellation of OP Units - - (8,997) - - -
Stock based compensation expense - - - 7,392 - 7,392
Cash redemption of OP Units (201,950) (3,713) - - (3,713)
Adjustment to non-controlling interests ownership in Operating Partnership - 2,904 - (2,904) - -
Issuance of OP Units in connection with sale of common stock - - 1,326,690 25,703 - 25,703
Registration expenditures - - - (570) - (570)
Cash distributions ($0.7800 per unit)
- (9,056) - (88,417) - (97,473)
Distributions payable to officers - - - (267) - (267)
Net income attributable to Retail Opportunity Investments Partnership, LP - 4,405 - 42,736 - 47,141
Other comprehensive income - - - - 1,705 1,705
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 - - 631,022 1,942 - 1,942
OP Units withheld for employee taxes - - (125,072) (1,986) - (1,986)
Cancellation of OP Units - - (6,997) - - -
Stock based compensation expense - 1,215 - 7,352 - 8,567
Equity redemption of OP Units (143,190) (2,632) 143,190 2,632 - -
Cash redemption of OP Units (282,761) (5,043) - - - (5,043)
Adjustment to non-controlling interests ownership in Operating Partnership - 2,983 - (2,983) - -
Issuance of OP Units in connection with sale of common stock - - 1,861,036 34,162 - 34,162
Registration expenditures - - - (732) - (732)
Cash distributions ($0.7880 per unit)
- (8,921) - (90,549) - (99,470)
Distributions payable to officers - (175) - 145 - (30)
Net income attributable to Retail Opportunity Investments Partnership, LP - 4,839 - 48,844 - 53,683
Other comprehensive loss - - - - (7,693) (7,693)
Balance at December 31, 2019 11,051,090 $ 112,480 116,496,016 $ 1,183,480 $ (4,132) $ 1,291,828
OP Units issued under the Equity Incentive Plan - - 428,170 - - -
OP Units withheld for employee taxes - - (128,614) (2,272) - (2,272)
Cancellation of OP Units - - (4,899) - - -
Stock based compensation expense - 816 - 8,098 - 8,914
Equity redemption of OP Units (1,968,350) (20,098) 1,968,350 20,098 - -
Cash redemption of OP Units (116,657) (1,999) - - - (1,999)
Adjustment to non-controlling interests ownership in Operating Partnership - 570 - (570) - -
Repurchase of OP Units - - (673,868) (8,846) - (8,846)
Registration expenditures - - - (312) - (312)
Cash distributions ($0.2000 per unit)
- (2,187) - (23,273) - (25,460)
Distributions payable to officers - (10) - (52) - (62)
Net income attributable to Retail Opportunity Investments Partnership, LP - 2,707 - 32,014 - 34,721
Other comprehensive loss - - - - (5,353) (5,353)
Balance at December 31, 2020 8,966,083 $ 92,279 118,085,155 $ 1,208,365 $ (9,485) $ 1,291,159
(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 Flows
(In thousands)
Year Ended December 31,
2020 2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 34,721 $ 53,683 $ 47,141
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 97,731 97,559 100,838
Amortization of deferred financing costs and mortgage premiums, net 2,219 2,076 1,899
Straight-line rent adjustment (1,079) (3,083) (5,380)
Amortization of above and below market rent (17,654) (15,618) (13,965)
Amortization relating to stock based compensation 8,914 8,567 7,392
Provisions for tenant credit losses 11,035 1,969 1,729
Other noncash interest expense 293 524 1,674
Gain on sale of real estate - (13,175) (5,890)
Change in operating assets and liabilities:
Tenant and other receivables (23,120) 543 (57)
Prepaid expenses (1,641) 962 (1,344)
Accounts payable and accrued expenses (1,096) 303 (1,622)
Other assets and liabilities, net (3,663) (2,271) (1,497)
Net cash provided by operating activities 106,660 132,039 130,918
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in real estate - (11,601) (44,195)
Proceeds from sale of real estate - 58,930 26,880
Improvements to properties (36,515) (35,177) (39,240)
Deposits on real estate acquisitions, net - - 500
Proceeds on repayment of mortgage note receivable 8,041 250 -
Net cash (used in) provided by investing activities (28,474) 12,402 (56,055)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on mortgages (577) (551) (19,612)
Proceeds from draws on credit facility 160,000 101,000 177,000
Payments on credit facility (196,000) (173,000) (164,500)
Redemption of OP Units (1,999) (5,043) (3,713)
Deferred financing and other costs (1,162) (2,804) -
Proceeds from the issuance of OP Units in connection with issuance of common stock - 34,162 25,703
Repurchase of OP Units (8,846) - -
Registration expenditures (567) (478) (570)
Distributions to OP Unitholders (25,585) (99,674) (97,556)
Issuance of OP Units under the Equity Incentive Plan - 1,942 269
OP Units withheld for employee taxes (2,272) (1,986) (1,400)
Net cash used in financing activities (77,008) (146,432) (84,379)
Net increase (decrease) in cash, cash equivalents and restricted cash 1,178 (1,991) (9,516)
Cash, cash equivalents and restricted cash at beginning of period 5,458 7,449 16,965
Cash, cash equivalents and restricted cash at end of period $ 6,636 $ 5,458 $ 7,449
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 statements of cash flows:
Year Ended December 31,
2020 2019 2018
Cash and cash equivalents $ 4,822 $ 3,800 $ 6,076
Restricted cash 1,814 1,658 1,373
Total cash, cash equivalents and restricted cash shown in Statements of Cash Flows $ 6,636 $ 5,458 $ 7,449
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.
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.
Impact of COVID-19
On March 11, 2020, the novel coronavirus (“COVID-19”) was declared a pandemic (“COVID-19 pandemic”) by the World Health Organization as the disease spread throughout the world. The spread of COVID-19 is having a significant impact on the global economy, the U.S. economy, the economies of the local markets throughout the west coast in which the Company’s properties are located, and the broader financial markets. Nearly every industry has been impacted directly or indirectly, and the U.S. retail market has come under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel, restrictions on gatherings and social distancing practices. These containment measures, which in certain states and counties were relaxed or lifted for a period of time and subsequently reimposed, and then relaxed again, are affecting the operations of the Company’s tenant base to varying degrees depending on the category and location of the tenant. For example, grocery stores, pharmacies and retail stores are generally permitted to remain open and operational (with capacity limitations in the case of certain retail stores), restaurants in certain states such as California, Washington and Oregon have been generally limited to take-out and delivery services and outdoor-dining only or subject to capacity limitations when indoor dining has been permitted, and bars, movie theaters, gyms and salons in certain states and counties have been generally forced to close indoor operations for periods of time. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed or lifted, whether restrictions that have been relaxed or lifted will be reimposed, or when or if customers will re-engage with tenants as they have in the past.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-2, “Leases.” ASU No. 2016-2 resulted 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. In addition, this ASU requires 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 are no longer capitalized as initial direct costs and instead are expensed as incurred.
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 July 2018, the FASB issued an amendment to ASU No. 2016-2 that allows 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. This practical expedient 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 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 adopted the provisions of ASU No. 2016-2 effective January 1, 2019 using the modified retrospective approach and accordingly, recognized a lease liability of approximately $18.0 million, which is included in Other liabilities in the accompanying balance sheet, and a related right-to-use asset of approximately $17.0 million, which is included in Other assets in 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 $1.3 million during the year ended December 31, 2018. 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 No. 2016-13 was effective for reporting periods beginning on January 1, 2020. The Company adopted the provisions of ASU No. 2016-13 effective January 1, 2020, noting the pronouncement did not have a material impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848).” ASU No. 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the quarter ended March 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Principles of Consolidation
The accompanying consolidated financial statements are prepared on the accrual basis in accordance with GAAP. 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.
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 recoverability of assets to be held and used, purchase price allocations, depreciable lives, revenue recognition and the collectability of tenant receivables, other receivables, notes receivables, the valuation of performance-based restricted stock, LTIP Units (as defined below), 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. 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 December 31, 2020, the statute of limitations for the tax years 2016 through and including 2019 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. The Company intends to continue to operate its business in a manner that will allow it to qualify as a REIT, including maintaining compliance with taxable income distribution requirements.
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. During the years ended December 31, 2020 and 2019, capitalized costs related to the improvement or replacement of real estate properties were approximately $38.7 million and $38.0 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 is 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 years ended December 31, 2020, 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 controlling financial interest. 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. As discussed above, as a result of the COVID-19 pandemic, certain of the Company’s tenants may be unable to operate their businesses, maintain profitability and make timely rental payments to the Company under their leases. Accordingly, the worsening of estimated future cash flows could result in the recognition of an
impairment charge on certain of the Company’s long-lived assets. Management does not believe that the value of any of the Company’s real estate investments was impaired at December 31, 2020 or December 31, 2019.
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. Prior to January 1, 2019, the Company considered property operating expense recoveries from tenants of common area maintenance, real estate taxes and other recoverable costs as lease components. Effective January 1, 2019, each lease agreement is evaluated to identify the lease 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 lease 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 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 Other 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 substantially all of the termination fee is probable. 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, including the impact of the COVID-19 pandemic on tenants’ businesses, 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 allowance for doubtful accounts at December 31, 2020 and December 31, 2019 was approximately $18.6 million and $8.2 million, respectively.
During the year ended December 31, 2020, the Company experienced a higher rate of projected uncollectible rental revenue driven by changes in expectations of collectability for certain tenants given the impact of the COVID-19 pandemic to such tenants. Additionally, certain tenants experiencing economic difficulties during this pandemic have sought and may continue to seek current and future rent relief, which may be provided in the form of rent deferrals, rent abatements or other possible agreements. Under ASC 842, “Leases,” subsequent changes to lease payments that are not stipulated in the original lease contract are generally accounted for as lease modifications. Due to the number of lease contracts that would require analysis to determine, on a lease by lease basis, whether such a concession is required to be accounted for as a lease modification, the
FASB staff provided clarity as to an acceptable approach to accounting for lease concessions related to the effects of the COVID-19 pandemic. The FASB staff provided guidance that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under ASC 842 as though enforceable rights and obligations for those concessions existed in the existing lease contract, as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee, thereby not requiring entities to apply lease modification guidance to those contracts. The Company has elected not to account for such COVID-19 concessions as lease modifications. Through December 31, 2020, the Company has entered into lease concessions that deferred approximately $6.2 million of contractual amounts billed. As of December 31, 2020, approximately $1.1 million of such deferred amounts has been rebilled, of which approximately $959,000, or 88% has been collected. The Company has evaluated and continues to evaluate rent relief requests on a case-by-case basis. Not all tenants requests have resulted or will ultimately result in concession agreements, nor is the Company foregoing its contractual rights under its lease agreements.
Depreciation and Amortization
The Company uses the straight-line method for depreciation and amortization. Buildings are depreciated over estimated useful lives which the Company estimates to be 39-40 years. Property improvements are depreciated over estimated useful lives that range from 10 to 20 years. Furniture and fixtures are depreciated over 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 Financing 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. Costs incurred in obtaining long-term financing are amortized ratably over the related debt agreement. The amortization of deferred leasing and financing costs is included in Depreciation and amortization and Interest expense and other finance expenses, respectively, in the consolidated statements of operations and comprehensive income.
The unamortized balances of deferred leasing costs included in deferred charges in the Consolidated Balance Sheets as of December 31, 2020 that will be charged to future operations are as follows (in thousands):
Lease Origination Costs
2021 $ 4,918
2022 4,146
2023 3,291
2024 2,516
2025 2,070
Thereafter 5,952
$ 22,893
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 years ended December 31, 2020, 2019 and 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 and LTIP Units outstanding under the Equity Incentive Plan described in Note 8 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):
Year Ended December 31,
2020 2019 2018
Numerator:
Net income $ 34,721 $ 53,683 $ 47,141
Less income attributable to non-controlling interests (2,707) (4,839) (4,405)
Less earnings allocated to unvested shares (127) (453) (401)
Net income available for common stockholders, basic $ 31,887 $ 48,391 $ 42,335
Numerator:
Net income $ 34,721 $ 53,683 $ 47,141
Less earnings allocated to unvested shares (127) (453) (401)
Net income available for common stockholders, diluted $ 34,594 $ 53,230 $ 46,740
Denominator:
Denominator for basic EPS - weighted average common equivalent shares 116,731,930 114,177,528 112,645,490
OP units 9,785,334 11,334,408 11,626,312
Performance-based restricted stock awards and LTIP Units 106,434 206,100 183,683
Stock options 3,299 23,450 103,408
Denominator for diluted EPS - weighted average common equivalent shares 126,626,997 125,741,486 124,558,893
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):
Year Ended December 31,
2020 2019 2018
Numerator:
Net income $ 34,721 $ 53,683 $ 47,141
Less earnings allocated to unvested shares (127) (453) (401)
Net income available to unitholders, basic and diluted $ 34,594 $ 53,230 $ 46,740
Denominator:
Denominator for basic earnings per unit - weighted average common equivalent units 126,517,264 125,511,936 124,271,802
Performance-based restricted stock awards and LTIP Units 106,434 206,100 183,683
Stock options 3,299 23,450 103,408
Denominator for diluted earnings per unit - weighted average common equivalent units 126,626,997 125,741,486 124,558,893
Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is more fully described in Note 8.
The Company accounts for its stock-based compensation plan based on the FASB guidance which requires that compensation expense be recognized based on the fair value of the stock awards less forfeitures. Restricted stock grants vest based upon the completion of a service period (“time-based restricted stock grants”) and/or the Company meeting certain pre-established
operational performance goals and market-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 subject to market-indexed performance criteria, a Monte Carlo valuation model is used, taking into account the underlying contingency risks associated with the performance criteria. All other performance-based restricted stock grants are valued according to the market price of the Company’s common stock at the date of grant. 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 (“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, performance-based restricted stock subject to operational performance goals, and operational LTIP Units are expensed as compensation on a straight-line basis over the requisite service period. Awards of performance-based restricted stock subject to market-indexed performance criteria and market-indexed LTIP Units are expensed as compensation under the accelerated attribution method and 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 income, is amortized to interest expense over the remaining contractual term of the derivative as long as the hedged forecasted transactions continue to be probable of occurring. The Company includes cash payments made to terminate interest rate derivatives 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.
Consolidated Statements of Cash Flows - Supplemental Disclosures
The following tables provides supplemental disclosures related to the consolidated statements of cash flows (in thousands):
Year Ended December 31,
2020 2019 2018
Supplemental disclosure of cash activities:
Cash paid on gross receipts and income for federal and state purposes $ 324 $ 275 $ 291
Interest paid $ 57,276 $ 60,319 $ 60,494
Other non-cash investing and financing activities increase (decrease):
Intangible lease liabilities $ - $ 1,475 $ 1,680
Interest rate swap asset $ - $ (4,931) $ 610
Interest rate swap liabilities $ 5,646 $ 3,285 $ 580
Accrued real estate improvement costs $ 5,346 $ 3,222 $ 2,200
Equity redemption of OP Units $ 20,098 $ 2,632 $ -
Disposition of real estate through issuance of mortgage note $ - $ 13,250 $ -
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 Company did not have any real estate investment transactions during the year ended December 31, 2020.
The following real estate investment transactions occurred during the year ended December 31, 2019.
The Company evaluated the following acquisition and determined that substantially all of the fair value related to the acquisition was concentrated in a single identifiable asset. The Company allocated the total consideration for the acquisition to the individual assets and liabilities acquired on a relative fair value basis. All transaction costs incurred in the acquisition were capitalized.
Property Asset Acquisition in 2019
On December 13, 2019, the Company acquired the property known as Summerwalk Village located in Lacey, Washington, within the Seattle metropolitan area, for an adjusted purchase price of approximately $11.6 million. Summerwalk Village is approximately 58,000 square feet and is anchored by Walmart Neighborhood Market. The property was acquired with borrowings under the credit facility.
The financial information set forth below summarizes the Company’s purchase price allocation for the property acquired during the year ended December 31, 2019 (in thousands):
December 31, 2019
Assets
Land $ 4,261
Building and improvements 7,567
Acquired lease intangible asset 847
Deferred charges 401
Assets acquired $ 13,076
Liabilities
Acquired lease intangible liability $ (1,475)
Liabilities assumed $ (1,475)
Property Dispositions in 2019
During the year ended December 31, 2019, the Company sold four properties. The total sales price of approximately $74.1 million, less costs to sell, resulted in net proceeds of approximately $58.9 million. The Company recorded gains on sale of real estate of approximately $13.2 million during the year ended December 31, 2019 related to these property dispositions.
Any reference to square footage or occupancy is unaudited and outside the scope of our independent registered public accounting firm’s audit of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
3. Acquired Lease Intangibles
Intangible assets and liabilities as of December 31, 2020 and December 31, 2019 consisted of the following (in thousands):
December 31,
2020 2019
Assets:
In-place leases $ 69,178 $ 77,910
Accumulated amortization (30,061) (31,686)
Above-market leases 21,851 25,039
Accumulated amortization (10,858) (11,562)
Acquired lease intangible assets, net $ 50,110 $ 59,701
Liabilities:
Below-market leases $ 178,009 $ 198,272
Accumulated amortization (52,213) (53,515)
Acquired lease intangible liabilities, net $ 125,796 $ 144,757
For the years ended December 31, 2020, 2019 and 2018, the net amortization of acquired lease intangible assets and acquired lease intangible liabilities for above and below market leases was $17.7 million, $15.6 million and $14.0 million, respectively, which amounts are included in Rental revenue in the accompanying consolidated statements of operations and comprehensive income. For the years ended December 31, 2020, 2019 and 2018, the amortization of in-place leases was $7.7 million, $8.1 million and $11.4 million, respectively, which amounts are included in Depreciation and amortization in the accompanying consolidated statements of operations and comprehensive income.
The scheduled future amortization of acquired lease intangible assets as of December 31, 2020 is as follows (in thousands):
Year Ending December 31:
2021 $ 6,341
2022 5,284
2023 4,749
2024 4,209
2025 3,714
Thereafter 25,813
Total future amortization of acquired lease intangible assets $ 50,110
The scheduled future amortization of acquired lease intangible liabilities as of December 31, 2020 is as follows (in thousands):
Year Ending December 31:
2021 $ 10,590
2022 9,750
2023 9,010
2024 8,829
2025 8,420
Thereafter 79,197
Total future amortization of acquired lease intangible liabilities $ 125,796
4. 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 December 31, 2020 are summarized as follows (in thousands):
Year Ending December 31:
2021 $ 197,232
2022 175,968
2023 147,687
2024 117,362
2025 91,541
Thereafter 376,652
Total minimum lease payments $ 1,106,442
5. 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 statements of operations and comprehensive income.
Mortgage Notes Payable
The mortgage notes payable collateralized by respective properties and assignment of leases at December 31, 2020 and December 31, 2019, respectively, were as follows (in thousands, except interest rates):
Maturity Date Interest Rate December 31,
Property 2020 2019
Casitas Plaza Shopping Center June 2022 5.320 % $ 6,835 $ 7,001
Riverstone Marketplace July 2022 4.960 % 17,245 17,656
Fullerton Crossroads April 2024 4.728 % 26,000 26,000
Diamond Hills Plaza October 2025 3.550 % 35,500 35,500
85,580 86,157
Mortgage premiums 1,113 1,594
Net unamortized deferred financing costs (184) (228)
Total mortgage notes payable $ 86,509 $ 87,523
The combined aggregate principal maturities of mortgage notes payable during the next five years and thereafter are as follows (in thousands):
Principal Repayments Scheduled Amortization Mortgage Premium Total
2021 $ - $ 717 $ 481 $ 1,198
2022 23,129 1,003 344 24,476
2023 - 686 216 902
2024 26,000 708 72 26,780
2025 32,787 550 - 33,337
Total $ 81,916 $ 3,664 $ 1,113 $ 86,693
Term Loan and Credit Facility
The carrying values of the Company’s unsecured term loan (the “term loan”) were as follows (in thousands):
December 31,
2020 2019
Term loan $ 300,000 $ 300,000
Net unamortized deferred financing costs (1,476) (1,670)
Term loan $ 298,524 $ 298,330
The Company has an unsecured term loan agreement with several banks under which the lenders agreed to provide a $300.0 million unsecured term loan facility. Effective December 20, 2019, the Company entered into the First Amendment to First Amended and Restated Term Loan Agreement (as amended, the “Term Loan Agreement”) pursuant to which the maturity date of the term loan was extended from September 8, 2022 to January 20, 2025, 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 1.00%.
The carrying values of the Company’s unsecured revolving credit facility were as follows (in thousands):
December 31,
2020 2019
Credit facility $ 48,000 $ 84,000
Net unamortized deferred financing costs (2,762) (3,257)
Credit facility $ 45,238 $ 80,743
The Operating Partnership has an unsecured revolving credit facility with several banks. Effective December 20, 2019, the Company entered into the First Amendment to Second Amended and Restated Credit Agreement (as amended, the “Credit Facility Agreement”) pursuant to which the borrowing capacity under the credit facility is $600.0 million and the maturity date of the credit facility was extended from September 8, 2021 to February 20, 2024, 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 Agreement 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 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) 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 0.90%. 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 Agreement. The Company has investment grade credit ratings from Moody’s Investors Service (Baa2), S&P Global (BBB-) and Fitch Ratings (BBB-).
As of December 31, 2020, $300.0 million and $48.0 million were outstanding under the term loan and credit facility, respectively. The weighted average interest rates on the term loan and the credit facility during the year ended December 31, 2020 were 1.6% and 1.4%, respectively. As discussed in Note 11 of the accompanying financial statements, the Company uses interest rate swaps to manage its interest rate risk and accordingly, the swapped interest rate on the term loan is 3.0%. The Company had no available borrowings under the term loan at December 31, 2020. The Company had $552.0 million available to borrow under the credit facility at December 31, 2020.
Senior Notes Due 2027
The carrying value of the Company’s unsecured Senior Notes Due 2027 is as follows (in thousands):
December 31,
2020 2019
Principal amount $ 250,000 $ 250,000
Net unamortized deferred financing costs (1,226) (998)
Senior Notes Due 2027 $ 248,774 $ 249,002
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.
Senior Notes Due 2026
The carrying value of the Company’s unsecured Senior Notes Due 2026 is as follows (in thousands):
December 31,
2020 2019
Principal amount $ 200,000 $ 200,000
Net unamortized deferred financing costs (443) (191)
Senior Notes Due 2026 $ 199,557 $ 199,809
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.
Senior Notes Due 2024
The carrying value of the Company’s unsecured Senior Notes Due 2024 is as follows (in thousands):
December 31,
2020 2019
Principal amount $ 250,000 $ 250,000
Unamortized debt discount (1,557) (1,912)
Net unamortized deferred financing costs (873) (1,094)
Senior Notes Due 2024 $ 247,570 $ 246,994
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).
Senior Notes Due 2023
The carrying value of the Company’s unsecured Senior Notes Due 2023 is as follows (in thousands):
December 31,
2020 2019
Principal amount $ 250,000 $ 250,000
Unamortized debt discount (1,468) (1,915)
Net unamortized deferred financing costs (778) (1,040)
Senior Notes Due 2023 $ 247,754 $ 247,045
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 combined aggregate principal maturities of the Company’s unsecured senior notes payable during the next five years and thereafter are as follows (in thousands):
Principal Repayments
2021 $ -
2022 -
2023 250,000
2024 250,000
2025 -
Thereafter 450,000
Total $ 950,000
Deferred Financing Costs
The unamortized balances of deferred financing costs associated with the Company’s term loan, unsecured revolving credit facility, Senior Notes Due 2027, Senior Notes Due 2026, Senior Notes Due 2024, Senior Notes Due 2023, and mortgage notes payable included as a direct reduction from the carrying amount of the related debt instrument in the consolidated balance sheets as of December 31, 2020 that will be charged to future operations during the next five years and thereafter are as follows (in thousands):
Financing Costs
2021 $ 2,025
2022 2,022
2023 2,008
2024 983
2025 300
Thereafter 404
$ 7,742
The Operating Partnership’s debt agreements contain customary representations, financial and other covenants, and its ability to borrow under these agreements is subject to its compliance with financial covenants and other restrictions on an ongoing basis. As a result of the COVID-19 pandemic’s impact on the Company’s business, the Operating Partnership entered into temporary waiver amendments for one of the covenants contained in its debt agreements. The amendments adjusted the criteria for properties eligible to be included in the unencumbered asset pool used for purposes of calculating the consolidated unencumbered leverage ratio. Following such amendments the Operating Partnership is in compliance with all financial covenants in its debt agreements. The temporary waiver period expires subsequent to March 31, 2021.
6. Preferred Stock of ROIC
The Company 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 December 31, 2020 and December 31, 2019, there were no shares of preferred stock outstanding.
7. Common Stock of ROIC
ATM
On February 20, 2020, the ROIC entered into an “at the market” sales agreement (the “Sales Agreement”) with each of (i) KeyBanc Capital Markets Inc., BTIG, LLC, BMO Capital Markets Corp., BofA Securities, Inc., Capital One Securities, Inc., Citigroup Global Markets Inc., Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc., Regions Securities LLC, Robert W. Baird & Co. Incorporated and Wells Fargo Securities, LLC (collectively, the “Agents”) and (ii) the Forward Purchasers (as defined below), pursuant to which ROIC may sell, from time to time, shares (any such shares, the “Primary Shares”) of ROIC’s common stock, par value $0.0001 per share (“Common Stock”), to or through the Agents and instruct certain of the Agents, acting as forward sellers (the “Forward Sellers”), to offer and sell borrowed shares (any such shares, “Forward Hedge Shares,” and collectively with the Primary Shares, the “Shares”) with the Shares to be sold under the Sales Agreement having an aggregate offering price of up to $500.0 million. Additionally, ROIC simultaneously terminated the sales agreements with Capital One Securities, Inc., Jefferies LLC, KeyBanc Capital Markets Inc., Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated, dated as of May 1, 2018 and as amended on April 29, 2019, which ROIC entered into in connection with its prior “at the market” offering.
The Sales Agreement contemplates that, in addition to the issuance and sale of Primary Shares to or through the Agents as principal or its sales agents, ROIC may enter into separate forward sale agreements with any of KeyBanc Capital Markets Inc., BMO Capital Markets Corp., BofA Securities, Inc., Citigroup Global Markets Inc., Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc. and Wells Fargo Securities, LLC or their respective affiliates (in such capacity, the “Forward Purchasers”). If ROIC enters into a forward sale agreement with any Forward Purchaser, ROIC expects that such Forward Purchaser or its affiliate will borrow from third parties and, through the relevant Forward Seller, sell a number of Forward Hedge Shares equal to the number of shares of Common Stock underlying the particular forward sale agreement, in accordance with the mutually accepted instructions related to such forward sale agreement. ROIC will not initially receive any proceeds from any sale of Forward Hedge Shares through a Forward Seller. ROIC expects to fully physically settle each
particular forward sale agreement with the relevant Forward Purchaser on one or more dates specified by ROIC on or prior to the maturity date of that particular forward sale agreement by issuing shares of Common Stock (the “Confirmation Shares”), in which case ROIC expects to receive aggregate net cash proceeds at settlement equal to the number of shares of Common Stock underlying the particular forward sale agreement multiplied by the relevant forward sale price. However, ROIC may also elect to cash settle or net share settle a particular forward sale agreement, in which case ROIC may not receive any proceeds from the issuance of shares of Common Stock, and ROIC will instead receive or pay cash (in the case of cash settlement) or receive or deliver shares of Common Stock (in the case of net share settlement).
During the year ended December 31, 2020, ROIC did not sell any shares under the Sales Agreement.
Stock Repurchase Program
On July 31, 2013, ROIC’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 year ended December 31, 2020, the Company repurchased 673,868 shares of common stock under this program with a principal amount of approximately $8.8 million.
8. Stock Compensation and Other Benefit Plans 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 2018, the Company adopted 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.
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 year ended December 31, 2020, ROIC awarded 566,350 shares of restricted common stock under the Equity Incentive Plan, of which 192,238 shares are performance-based grants and the remainder of the shares are time-based grants. The performance-based grants vest based on both pre-defined operational and market-indexed performance criteria with a vesting date on January 1, 2023.
A summary of the status of the Company’s non-vested restricted stock awards as of December 31, 2020, and changes during the year ended December 31, 2020 are presented below:
Shares Weighted Average
Grant Date Fair Value
Non-vested as of December 31, 2019 954,797 $ 16.55
Granted 566,350 $ 17.21
Vested (372,061) $ 18.59
Forfeited (100,316) $ 14.32
Non-vested as of December 31, 2020 1,048,770 $ 16.39
As of December 31, 2020, there remained a total of approximately $8.3 million of unrecognized restricted stock compensation related to outstanding non-vested restricted stock grants awarded under the Equity Incentive Plan. Restricted stock compensation is expected to be expensed over a remaining weighted average period of 1.8 years (irrespective of achievement of the performance conditions). The total fair value of restricted stock that vested during the years ended December 31, 2020, 2019 and 2018 was $6.6 million, $5.8 million and $5.5 million, respectively.
LTIP Units
As of December 31, 2020, there remained a total of approximately $1.0 million of unrecognized compensation expense related to outstanding non-vested LTIP Units awarded under the Equity Incentive Plan. LTIP Unit compensation expense is expected to be expensed over a remaining weighted average period of 1.0 year.
Stock Based Compensation Expense
For the years ended December 31, 2020, 2019 and 2018, the amounts charged to expense for all stock based compensation totaled approximately $8.9 million, $8.6 million and $7.4 million, respectively.
Profit Sharing and Savings Plan
During 2011, the Company established a profit sharing and savings plan (the “401K Plan”), which permits eligible employees to defer a portion of their compensation in accordance with the Code. Under the 401K Plan, the Company made matching contributions on behalf of eligible employees. The Company made contributions to the 401K Plan of approximately $89,000, $87,000 and $86,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
9. Capital of the Operating Partnership
As of December 31, 2020, the Operating Partnership had 127,051,238 OP Units outstanding. ROIC owned an approximate 92.9% interest in the Operating Partnership at December 31, 2020, or 118,085,155 OP Units. The remaining 8,966,083 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 December 31, 2020, 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 year ended December 31, 2020, ROIC received notices of redemption for a total of 2,085,007 OP Units. ROIC elected to redeem 116,657 OP Units in cash, and accordingly, a total of approximately $2.0 million was paid during the year ended December 31, 2020 to the holder of the respective OP Units. In accordance with the Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, the redemption value of the OP Units 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 notice of redemption. ROIC elected to redeem the remaining 1,968,350 OP Units for shares of ROIC common stock on a one-for-one basis, and accordingly, 1,968,350 shares of ROIC common stock were issued.
The redemption value of outstanding OP Units owned by the limited partners as of December 31, 2020, not including ROIC, had such units been redeemed at December 31, 2020, was approximately $119.7 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 December 31, 2020, which amounted to $13.35 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.
10. 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 revolving 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 December 31, 2020 was approximately $245.6 million and $194.7 million, respectively, calculated using significant inputs which are not observable in the market, or Level 3. The fair value of the outstanding Senior Notes Due 2024 and Senior Notes Due 2023 at December 31, 2020 was approximately $264.0 million and $269.1 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 $86.2 million with a weighted average interest rate of 3.8% as of December 31, 2020. These fair value measurements fall within Level 3 of the fair value hierarchy.
11. 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 current interest rate swaps as of December 31, 2020 (in thousands):
Swap Counterparty Notional Amount Effective Date Maturity Date
Interest Rate Swap Agreements:
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
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 December 31, 2020, 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
December 31, 2020:
Liabilities
Derivative financial instruments $ - $ (9,511) $ - $ (9,511)
December 31, 2019:
Liabilities
Derivative financial instruments $ - $ (3,865) $ - $ (3,865)
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 $5.8 million will be reclassified as a non-cash increase to interest expense related to the Company’s four outstanding swap arrangements and its previously cash-settled swap arrangements.
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 December 31, 2020 and December 31, 2019, respectively (in thousands):
Derivatives designed as hedging instruments Balance sheet location December 31, 2020 Fair Value December 31, 2019 Fair Value
Interest rate products Other liabilities $ (9,511) $ (3,865)
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 years ended December 31, 2020, 2019, and 2018, respectively (in thousands):
Year Ended December 31,
2020 2019 2018
Amount of (loss) gain recognized in OCI on derivatives $ (9,925) $ (7,348) $ 1,648
Amount of loss (gain) reclassified from AOCI into interest $ 4,572 $ (345) $ 57
12. 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. As of December 31, 2020, the Company’s weighted average remaining lease term is approximately 37.0 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 $1.7 million, $1.6 million, and $1.9 million for the years ended December 31, 2020, 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 December 31, 2020 (in thousands):
Operating Leases
2021 $ 1,282
2022 1,304
2023 1,330
2024 1,335
2025 1,341
Thereafter 31,263
Total undiscounted future minimum lease payments 37,855
Future minimum lease payments, discount (20,550)
Lease liability $ 17,305
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 year ended December 31, 2019, the Company settled an ongoing lawsuit for approximately $1.4 million and accordingly, recorded a $950,000 charge to Other expense in the accompanying consolidated statements of operations and comprehensive income during the year ended December 31, 2019. There were no such settlements during the year ended December 31, 2020.
13. 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 years ended December 31, 2020, 2019, and 2018, the Company incurred approximately $84,000, $84,000 and $74,000, respectively, of expenses relating to the agreements which were included in General and administrative expenses in the accompanying consolidated statements of operations and comprehensive income.
14. Subsequent Events
On February 23, 2021, the Company’s board of directors declared a cash dividend on its common stock of $0.11 per share, payable on April 9, 2021 to holders of record on March 26, 2021.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2020
(in thousands)
Initial Cost to Company Cost Capitalized Subsequent to Acquisition Amount at Which Carried at Close of Period
Description and Location Encumbrances Land Building &
Improvements Land Building &
Improvements Land Building &
Improvements
Total (a) Accumulated Depreciation (b) (1)
Date of Acquisition
Paramount Plaza, CA $ - $ 6,347 $ 10,274 $ 629 $ 1,907 $ 6,976 $ 12,181 $ 19,157 $ 4,299 12/22/2009
Santa Ana Downtown Plaza, CA - 7,895 9,890 - 3,994 7,895 13,884 21,779 4,237 1/26/2010
Meridian Valley Plaza, WA - 1,881 4,795 - 1,951 1,881 6,746 8,627 2,395 2/1/2010
The Market at Lake Stevens, WA - 3,087 12,397 - 379 3,087 12,776 15,863 4,172 3/16/2010
Pleasant Hill Marketplace, CA - 6,359 6,927 - 1,592 6,359 8,519 14,878 3,133 4/8/2010
Happy Valley Town Center, OR - 11,678 27,011 - 5,132 11,678 32,143 43,821 9,787 7/14/2010
Cascade Summit Town Square, OR - 8,853 7,732 - (264) 8,853 7,468 16,321 2,524 8/20/2010
Heritage Market Center, WA - 6,595 17,399 - 854 6,595 18,253 24,848 5,343 9/23/2010
Claremont Promenade, CA - 5,975 1,019 183 4,210 6,158 5,229 11,387 2,956 9/23/2010
Sycamore Creek, CA - 3,747 11,584 - 422 3,747 12,006 15,753 4,278 9/30/2010
Gateway Village, CA - 5,917 27,298 - 1,209 5,917 28,507 34,424 8,228 12/16/2010
Division Crossing, OR - 3,706 8,327 4 5,663 3,710 13,990 17,700 5,156 12/22/2010
Halsey Crossing, OR (2)
- - 7,773 - 7,695 - 15,468 15,468 4,398 12/22/2010
Marketplace Del Rio,CA - 13,420 22,251 9 3,814 13,429 26,065 39,494 8,035 1/3/2011
Pinole Vista Shopping Center, CA - 12,894 35,689 - 7,865 12,894 43,554 56,448 8,979 1/6/2011 / 8/27/2018
Desert Springs Marketplace, CA - 8,517 18,761 443 5,897 8,960 24,658 33,618 6,704 2/17/2011
Mills Shopping Center, CA - 4,084 16,833 - 10,884 4,084 27,717 31,801 10,277 2/17/2011
Renaissance Towne Centre, CA - 8,640 13,848 - 2,386 8,640 16,234 24,874 4,211 8/3/2011
Country Club Gate Center, CA - 6,487 17,341 - 517 6,487 17,858 24,345 4,898 7/8/2011
Canyon Park Shopping Center, WA - 9,352 15,916 - 9,013 9,352 24,929 34,281 7,665 7/29/2011
Hawks Prairie Shopping Center, WA - 5,334 20,694 - 2,109 5,334 22,803 28,137 6,237 9/8/2011
The Kress Building, WA - 5,693 20,866 - 5,091 5,693 25,957 31,650 8,001 9/30/2011
Hillsboro Market Center, OR (2)
- - 17,553 - 4,668 - 22,221 22,221 6,008 11/23/2011
Gateway Shopping Center, WA (2)
- 6,242 23,462 - 732 6,242 24,194 30,436 6,038 2/16/2012
Euclid Plaza, CA - 7,407 7,753 - 2,933 7,407 10,686 18,093 3,637 3/28/2012
Green Valley Station, CA - 1,685 8,999 18 869 1,703 9,868 11,571 3,070 4/2/2012
Aurora Square, WA - 10,325 13,336 - 3,978 10,325 17,314 27,639 3,340 5/3/2012 / 5/22/2014
Marlin Cove Shopping Center, CA - 8,815 6,797 - 2,127 8,815 8,924 17,739 3,038 5/4/2012
Seabridge Marketplace, CA - 5,098 17,164 - 3,577 5,098 20,741 25,839 5,199 5/31/2012
The Village at Novato, CA - 5,329 4,412 - 2,215 5,329 6,627 11,956 1,269 7/24/2012
Glendora Shopping Center, CA - 5,847 8,758 - 121 5,847 8,879 14,726 2,565 8/1/2012
Wilsonville Old Town Square, OR - 4,181 15,394 - 2,221 4,181 17,615 21,796 4,039 8/1/2012
Initial Cost to Company Cost Capitalized Subsequent to Acquisition Amount at Which Carried at Close of Period
Description and Location Encumbrances Land Building &
Improvements Land Building &
Improvements Land Building &
Improvements
Total (a) Accumulated Depreciation (b) (1)
Date of Acquisition
Bay Plaza, CA - 5,454 14,857 75 1,138 5,529 15,995 21,524 3,863 10/5/2012
Santa Teresa Village, CA - 14,965 17,162 - 8,593 14,965 25,755 40,720 6,371 11/8/2012
Cypress Center West, CA - 15,480 11,819 125 1,649 15,605 13,468 29,073 3,694 12/7/2012
Redondo Beach Plaza, CA - 16,242 13,625 82 462 16,324 14,087 30,411 3,549 12/28/2012
Harbor Place Center, CA - 16,506 10,527 - 973 16,506 11,500 28,006 2,623 12/28/2012
Diamond Bar Town Center, CA - 9,540 16,795 - 3,603 9,540 20,398 29,938 6,166 2/1/2013
Bernardo Heights Plaza, CA - 3,192 8,940 - 798 3,192 9,738 12,930 2,571 2/6/2013
Canyon Crossing, WA - 7,941 24,659 - 2,538 7,941 27,197 35,138 7,392 4/15/2013
Diamond Hills Plaza, CA 35,500 15,458 29,353 - 2,156 15,458 31,509 46,967 6,623 4/22/2013
Granada Shopping Center, CA - 3,673 13,459 - 824 3,673 14,283 17,956 2,690 6/27/2013
Hawthorne Crossings, CA - 10,383 29,277 - 62 10,383 29,339 39,722 6,384 6/27/2013
Robinwood Shopping Center, OR - 3,997 11,317 18 934 4,015 12,251 16,266 2,981 8/23/2013
5 Points Plaza, CA - 17,920 36,965 - 4,059 17,920 41,024 58,944 8,929 9/27/2013
Crossroads Shopping Center, WA - 68,366 67,756 - 22,413 68,366 90,169 158,535 20,940 9/27/2013
Peninsula Marketplace, CA - 14,730 19,214 - 1,991 14,730 21,205 35,935 4,936 11/1/2013
Country Club Village, CA - 9,986 26,579 - 959 9,986 27,538 37,524 5,873 11/26/2013
Plaza de la Canada, CA (2)
- 10,351 24,819 - 1,324 10,351 26,143 36,494 5,445 12/13/2013
Tigard Marketplace, OR - 13,587 9,603 - 707 13,587 10,310 23,897 3,017 2/18/2014
Creekside Plaza, CA - 14,807 29,476 - 3,715 14,807 33,191 47,998 6,835 2/28/2014
North Park Plaza, CA - 13,593 17,733 - 2,822 13,593 20,555 34,148 3,646 4/30/2014
Fallbrook Shopping Center, CA (2)
- 21,232 186,197 83 8,547 21,315 194,744 216,059 37,600 6/13/2014
Moorpark Town Center, CA - 7,063 19,694 - 1,239 7,063 20,933 27,996 4,973 12/4/2014
Mission Foothill Marketplace Pads, CA - 3,996 11,051 - 397 3,996 11,448 15,444 1,760 12/4/2014
Wilsonville Town Center, OR - 10,334 27,101 - 805 10,334 27,906 38,240 5,490 12/11/2014
Park Oaks Shopping Center, CA - 8,527 38,064 - 564 8,527 38,628 47,155 7,134 1/6/2015
Ontario Plaza, CA - 9,825 26,635 - 1,441 9,825 28,076 37,901 5,616 1/6/2015
Winston Manor, CA - 10,018 9,762 - 1,913 10,018 11,675 21,693 2,515 1/7/2015
Jackson Square, CA - 6,886 24,558 - 1,145 6,886 25,703 32,589 4,530 7/1/2015
Tigard Promenade, OR - 9,844 10,843 - 236 9,844 11,079 20,923 1,862 7/28/2015
Sunnyside Village Square, OR - 4,428 13,324 - 3,003 4,428 16,327 20,755 3,388 7/28/2015
Gateway Centre, CA - 16,275 28,308 - 4,137 16,275 32,445 48,720 5,100 9/1/2015
Johnson Creek Center, OR - 9,009 22,534 - 1,386 9,009 23,920 32,929 4,182 11/9/2015
Iron Horse Plaza, CA - 8,187 39,654 11 2,638 8,198 42,292 50,490 6,162 12/4/2015
Bellevue Marketplace, WA - 10,488 39,119 - 10,360 10,488 49,479 59,967 7,186 12/10/2015
Four Corner Square, WA - 9,926 31,415 35 528 9,961 31,943 41,904 5,149 12/21/2015
Warner Plaza, CA - 16,104 60,188 - 9,825 16,104 70,013 86,117 10,642 12/31/2015
Magnolia Shopping Center, CA - 12,501 27,040 9 1,998 12,510 29,038 41,548 4,680 3/10/2016
Initial Cost to Company Cost Capitalized Subsequent to Acquisition Amount at Which Carried at Close of Period
Description and Location Encumbrances Land Building &
Improvements Land Building &
Improvements Land Building &
Improvements
Total (a) Accumulated Depreciation (b) (1)
Date of Acquisition
Casitas Plaza Shopping Center, CA 6,835 10,734 22,040 - 1,448 10,734 23,488 34,222 3,417 3/10/2016
Bouquet Center, CA - 10,040 48,362 8 707 10,048 49,069 59,117 6,890 4/28/2016
North Ranch Shopping Center, CA - 31,522 95,916 - 1,982 31,522 97,898 129,420 12,338 6/1/2016
Monterey Center, CA (2)
- 1,073 10,609 - 619 1,073 11,228 12,301 1,436 7/14/2016
Rose City Center, OR (2)
- 3,637 10,301 - (79) 3,637 10,222 13,859 1,284 9/15/2016
The Knolls, CA - 9,726 18,299 - 21 9,726 18,320 28,046 2,389 10/3/2016
Bridle Trails Shopping Center, WA - 11,534 20,700 - 9,337 11,534 30,037 41,571 3,699 10/17/2016
Torrey Hills Corporate Center, CA - 5,579 3,915 - 2,453 5,579 6,368 11,947 1,945 12/6/2016
PCC Community Markets Plaza, WA - 1,856 6,914 - 7 1,856 6,921 8,777 883 1/25/2017
The Terraces, CA - 18,378 37,103 - 1,506 18,378 38,609 56,987 4,526 3/17/2017
Santa Rosa Southside Shopping Center, CA - 5,595 24,453 - 7,061 5,595 31,514 37,109 2,804 3/24/2017
Division Center, OR - 6,917 26,098 - 2,324 6,917 28,422 35,339 3,337 4/5/2017
Highland Hill Shopping Center, WA - 10,511 37,825 46 251 10,557 38,076 48,633 4,241 5/9/2017
Monta Loma Plaza, CA - 18,226 11,113 - 118 18,226 11,231 29,457 1,123 9/19/2017
Fullerton Crossroads, CA 26,000 28,512 45,419 - 531 28,512 45,950 74,462 4,655 10/11/2017
Riverstone Marketplace, WA 17,245 5,113 27,594 - 571 5,113 28,165 33,278 2,723 10/11/2017
North Lynnwood Shopping Center, WA - 4,955 10,335 11 2,753 4,966 13,088 18,054 1,007 10/19/2017
The Village at Nellie Gail Ranch, CA - 22,730 22,578 - 1,680 22,730 24,258 46,988 2,332 11/30/2017
Stadium Center, WA - 1,699 17,229 35 76 1,734 17,305 19,039 1,328 2/23/2018
King City Plaza, OR - 5,161 10,072 - 60 5,161 10,132 15,293 901 5/18/2018
Summerwalk Village, WA - 4,312 7,567 34 1,494 4,346 9,061 13,407 294 12/13/2019
$ 85,580 $ 880,014 $ 2,022,117 $ 1,858 $ 252,563 $ 881,872 $ 2,274,680 $ 3,156,552 $ 460,165
a.RECONCILIATION OF REAL ESTATE - OWNED SUBJECT TO OPERATING LEASES (in thousands)
Year Ended December 31,
2020 2019 2018
Balance at beginning of period: $ 3,131,841 $ 3,160,472 $ 3,109,397
Property improvements during the year 38,913 37,985 40,300
Properties acquired during the year - 11,601 43,387
Properties sold during the year - (69,056) (24,427)
Assets written off during the year (14,202) (9,161) (8,185)
Balance at end of period: $ 3,156,552 $ 3,131,841 $ 3,160,472
b.RECONCILIATION OF ACCUMULATED DEPRECIATION (in thousands)
Year Ended December 31,
2020 2019 2018
Balance at beginning of period: $ 390,916 $ 329,207 $ 260,115
Depreciation expenses 83,774 82,419 81,107
Properties sold during the year - (10,775) (3,551)
Property assets fully depreciated and written off (14,525) (9,935) (8,464)
Balance at end of period: $ 460,165 $ 390,916 $ 329,207
(1)Depreciation and investments in building and improvements reflected in the consolidated statements of operations is calculated over the estimated useful life of the assets as follows:
Building: 39-40 years
Property Improvements: 10-20 years
(2)Property, or a portion thereof, is subject to a ground lease.
(3)The aggregate cost for Federal Income Tax Purposes for real estate was approximately $2.9 billion at December 31, 2020.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 2020
(in thousands)
a.RECONCILIATION OF MORTGAGE LOANS ON REAL ESTATE (in thousands)
Year Ended December 31,
2020 2019 2018
Balance at beginning of period: $ 13,000 $ - $ -
Mortgage loans acquired during the current period - 13,250 -
Repayments on mortgage note receivable (8,041) (250) -
Balance at end of period: $ 4,959 $ 13,000 $ -

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures (Retail Opportunity Investments Corp.)
ROIC maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, ROIC’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and its management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
ROIC’s Chief Executive Officer and Chief Financial Officer, based on their evaluation of ROIC’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as of the end of the period covered by this report, ROIC’s disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information relating to ROIC that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder.
During the year ended December 31, 2020, there was no change in ROIC’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, ROIC’s internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures (Retail Opportunity Investments Partnership, LP)
The Operating Partnership maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Operating Partnership’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and its management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Operating Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as of the end of the period covered by this report, the Operating Partnership’s disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information relating to the Operating Partnership that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder.
During the year ended December 31, 2020, there was no change in the Operating Partnership’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting (Retail Opportunity Investments Corp.)
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of ROIC’s management, including the Chief Executive Officer and Chief Financial Officer, ROIC conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2020 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on that evaluation, Management concluded that its internal control over financial reporting was effective as of December 31, 2020.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of internal control over financial reporting as of December 31, 2020, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which appears on page 57 of this Annual Report on Form 10-K.
Management’s Report on Internal Control over Financial Reporting (Retail Opportunity Investments Partnership, LP)
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of ROIC, the Operating Partnership conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2020 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on that evaluation, Management concluded that its internal control over financial reporting was effective as of December 31, 2020.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There was no change in ROIC’s or the Operating Partnership’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during its most recent quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item is hereby incorporated by reference to the material appearing in the Proxy Statement for the Company’s 2021 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2020.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information required by this Item is hereby incorporated by reference to the material appearing in the Proxy Statement for the Company’s 2021 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item is hereby incorporated by reference to the material appearing in the Proxy Statement for the Company’s 2021 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2020.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item is hereby incorporated by reference to the material appearing in the Proxy Statement for the Company’s 2021 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
Information required by this Item is hereby incorporated by reference to the material appearing in the Proxy Statement for the Company’s 2021 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedule
(a)(1) and (2) Financial Statements and Schedule
Please refer to the Index to Consolidated Financial Statements included under Part II, Item 8. Financial Statements and Supplementary Data.
(a)(3) Exhibits
2.1 Articles of Merger, by and between Retail Opportunity Investments Corp., a Delaware corporation, and Retail Opportunity Investments Corp., a Maryland corporation, as survivor, dated as of June 1, 2011 (2)
3.1 Articles of Amendment and Restatement (2)
3.2 Bylaws (2)
3.3 Second Amended and Restated Limited Partnership Agreement of Retail Opportunity Investments Partnership, LP, by and among Retail Opportunity Investments GP, LLC as general partner, Retail Opportunity Investments Corp. and the other limited partners thereto, dated as of September 27, 2013 (5)
3.4
Second Amendment to the Second Amended and Restated Limited Partnership Agreement of Retail Opportunity Investments Partnership, LP, dated as of December 4, 2015 (10)
3.5
Third Amendment to the Second Amended and Restated Limited Partnership Agreement of Retail Opportunity Investments Partnership, LP, dated as of December 10, 2015 (10)
3.6
Fourth Amendment to the Second Amended and Restated Limited Partnership Agreement of Retail Opportunity Investments Partnership, LP, dated as of December 31, 2015 (10)
3.7
Fifth Amendment to the Second Amended and Restated Limited Partnership Agreement of Retail Opportunity Investments Partnership, LP, dated as of March 10, 2016 (11)
3.8 Sixth Amendment to the Second Amended and Restated Limited Partnership Agreement of Retail Opportunity Investments Partnership, LP, dated as of March 24, 2017 (14)
3.9
Seventh Amendment to the Second Amended and Restated Limited Partnership Agreement of Retail Opportunity Investments Partnership, LP, dated as of October 11, 2017 (16)
4.1 Specimen Unit Certificate (1)
4.2 Specimen Common Stock Certificate (1)
4.3 Indenture, by and among Retail Opportunity Investments Corp., Retail Opportunity Investments Partnership, LP and Wells Fargo Bank, National Association, dated as of December 9, 2013 (6)
4.4 First Supplemental Indenture, by and among Retail Opportunity Investments Partnership, LP, Retail Opportunity Investments Corp. and Wells Fargo Bank, National Association, dated as of December 9, 2013 (6)
4.5 5.000% Senior Notes due 2023 of Retail Opportunity Investments Partnership, LP, guaranteed by Retail Opportunity Investments Corp., dated as of December 9, 2013 (7)
4.6 Second Supplemental Indenture, by and among Retail Opportunity Investments Partnership, LP, Retail Opportunity Investments Corp. and Wells Fargo Bank, National Association (including Form of 4.000% Senior Notes due 2024 of Retail Opportunity Investments Partnership, LP, guaranteed by Retail Opportunity Investments Corp.), dated as of December 3, 2014 (8)
4.7 Description of Securities (21)
10.1 2009 Equity Incentive Plan (1)
10.2 Amended and Restated 2009 Equity Incentive Plan (19)
10.3 Form of Restricted Stock Award Agreement under 2009 Equity Incentive Plan and Amended and Restated 2009 Equity Incentive Plan (1)
10.4 Form of Option Award Agreement under 2009 Equity Incentive Plan and Amended and Restated 2009 Equity Incentive Plan (1)
10.5 Letter Agreement, by and between Retail Opportunity Investments Corp. and Richard A. Baker, dated as of April 2, 2012 (3)
10.6 Letter Agreement, by and between Retail Opportunity Investments Corp. and Laurie Sneve, dated as of October 24, 2012 (4)
10.7 Tax Protection Agreement, by and among Retail Opportunity Investments Corp., Retail Opportunity Investments Partnership, LP and the protected partners identified therein, dated as of September 27, 2013 (5)
10.8 Tax Protection Agreement, by and among Retail Opportunity Investments Corp., Retail Opportunity Investments Partnership, LP and the protected partners identified therein, dated as of September 27, 2013 (5)
10.9 Registration Rights Agreement, by and among Retail Opportunity Investments Corp. and the holders named therein, dated as of September 27, 2013 (5)
10.10 Registration Rights Agreement, by and among Retail Opportunity Investments Corp. and the holders named therein, dated as of September 27, 2013 (5)
10.11 Tax Protection Agreement, by and among Retail Opportunity Investments Corp., Retail Opportunity Investments Partnership, LP and the protected partners identified therein, dated as of December 11, 2014 (9)
10.12 Registration Rights Agreement, by and among Retail Opportunity Investments Corp. and the holder named therein, dated as of December 11, 2014 (9)
10.13
Tax Protection Agreement, by and among Retail Opportunity Investments Corp., Retail Opportunity Investments Partnership, LP and the protected partners identified therein, dated as of December 4, 2015 (10)
10.14
Registration Rights Agreement, by and among Retail Opportunity Investments Corp. and the holders named therein, dated as of December 4, 2015 (10)
10.15
Tax Protection Agreement, by and among Retail Opportunity Investments Corp., Retail Opportunity Investments Partnership, LP and the protected partners identified therein, dated as of December 10, 2015 (10)
10.16
Registration Rights Agreement, by and among Retail Opportunity Investments Corp. and the holders named therein, dated as of December 10, 2015 (10)
10.17
Tax Protection Agreement, by and among Retail Opportunity Investments Corp., Retail Opportunity Investments Partnership, LP and the protected partner identified therein, dated as of December 31, 2015 (10)
10.18
Registration Rights Agreement, by and among Retail Opportunity Investments Corp. and the holder named therein, dated as of December 31, 2015 (10)
10.19
Tax Protection Agreement, by and among Retail Opportunity Investments Corp., Retail Opportunity Investments Partnership, LP and the protected partner identified therein, dated as of March 10, 2016 (11)
10.20
Registration Rights Agreement, by and among Retail Opportunity Investments Corp. and the holder named therein, dated as of March 10, 2016 (11)
10.21
Employment Agreement, dated as of March 21, 2017, by and between the Company and Stuart A. Tanz (13)
10.22
Employment Agreement, dated as of March 21, 2017, by and between the Company and Richard K. Schoebel (13)
10.23
Employment Agreement, dated as of March 21, 2017, by and between the Company and Michael B. Haines (13)
10.24 First Amended and Restated Term Loan Agreement, by and among Retail Opportunity Investments Corp., as the Parent Guarantor, Retail Opportunity Investments Partnership, LP, as the Borrower, KeyBank National Association, as Administrative Agent, BMO Capital Markets and Regions Bank, as Co-Syndication Agents, Capital One, National Association, as Documentation Agent, and the other lenders party thereto, dated as of September 8, 2017 (15)
10.25 First Amendment to First Amended and Restated Term Loan Agreement, by and among Retail Opportunity Investments Corp., as the Parent Guarantor, Retail Opportunity Investments Partnership, LP, as the Borrower, KeyBank National Association, as Administrative Agent, BMO Capital Markets and Regions Bank, as Co-Syndication Agents, Capital One, National Association, as Documentation Agent, and the other lenders party thereto, dated as of December 20, 2019 (20)
10.26 Second Amendment to First Amended and Restated Term Loan Agreement, dated as of July 29, 2020, by and among Retail Opportunity Investments Corp., as the Parent Guarantor, Retail Opportunity Investments Partnership, LP, as the Borrower, KeyBank National Association, as Administrative Agent, and the other lenders party thereto (23)
10.27
Second Amended and Restated Credit Agreement, by and among Retail Opportunity Investments Corp., as the guarantor, and Retail Opportunity Investments Partnership, LP, as the borrower, KeyBank National Association, as Administrative Agent, Swing Line Lender and L/C Issuer, PNC Bank National Association and U.S. Bank National Association, as Co-Syndication Agents and the other lenders party thereto, dated as of September 8, 2017 (15)
10.28
First Amendment to Second Amended and Restated Credit Agreement, by and among Retail Opportunity Investments Corp., as the guarantor, and Retail Opportunity Investments Partnership, LP, as the borrower, KeyBank National Association, as Administrative Agent, Swing Line Lender and L/C Issuer, PNC Bank National Association and U.S. Bank National Association, as Co-Syndication Agents and the other lenders party thereto, dated as of December 20, 2019 (20)
10.29 Second Amendment to Second Amended and Restated Credit Agreement, dated as of July 29, 2020, by and among Retail Opportunity Investments Corp., as the guarantor, and Retail Opportunity Investments Partnership, LP, as the borrower, KeyBank National Association, as Administrative Agent, and the other lenders party thereto (23)
10.30 Amended and Restated Note Purchase Agreement, dated as of September 22, 2016, by and among Retail Opportunity Investments Partnership, LP, Retail Opportunity Investments Corp and the purchasers named therein (12)
10.31 First Amendment, dated as of September 8, 2017 to the Amended and Restated Note Purchase Agreement, dated as of September 22, 2016, by and among Retail Opportunity Investments Partnership, LP, Retail Opportunity Investments Corp and the purchasers named therein (17)
10.32 Third Amendment, dated as of July 29, 2020 to the Amended and Restated Note Purchase Agreement, dated as of September 22, 2016, by and among Retail Opportunity Investments Partnership, LP, Retail Opportunity Investments Corp and the purchasers named therein (23)
10.33
Note Purchase Agreement, dated as of November 10, 2017, by and among Retail Opportunity Investments Partnership, LP, Retail Opportunity Investments Corp. and the purchasers named therein (18)
10.34
First Amendment, dated as of July 29, 2020 to the Note Purchase Agreement, dated as of November 10, 2017, by and among Retail Opportunity Investments Partnership, LP, Retail Opportunity Investments Corp and the purchasers named therein (23)
10.35
Sales Agreement, dated February 20, 2020, by and among the Company, the Operating Partnership, the Agents and the Forward Purchasers (22)
21.1*
List of Subsidiaries of Retail Opportunity Investments Corp.
23.1*
Consent of Ernst & Young LLP for Retail Opportunity Investments Corp.
23.2*
Consent of Ernst & Young LLP for Retail Opportunity Investments Partnership, LP
31.1*
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2*
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1**
Certifications pursuant to Section 1350
101 SCH Inline XBRL Taxonomy Extension Schema Document
101 CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF Inline Taxonomy Extension Definition Linkbase Document
101 LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101 PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 The cover page from this Annual Report on Form 10-K for the year ended December 31, 2019, formatted in Inline XBRL (and contained in Exhibit 101)
________________________
(1)Incorporated by reference to the Company’s current report on Form 8-K filed on October 26, 2009.
(2)Incorporated by reference to the Company’s current report on Form 8-K filed on June 3, 2011.
(3)Incorporated by reference to the Company’s current report on Form 8-K filed on April 5, 2012.
(4)Incorporated by reference to the Company’s current report on Form 8-K filed on January 3, 2013.
(5)Incorporated by reference to the Company’s current report on Form 8-K filed on October 2, 2013.
(6)Incorporated by reference to the Company’s current report on Form 8-K filed on December 9, 2013.
(7)Incorporated by reference to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013, filed on February 25, 2014.
(8)Incorporated by reference to the Company’s current report on Form 8-K filed on December 3, 2014.
(9)Incorporated by reference to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2014, filed on February 25, 2015.
(10)Incorporated by reference to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2015, filed on February 24, 2016.
(11)Incorporated by reference to the Company’s current report on Form 8-K filed on March 16, 2016.
(12)Incorporated by reference to the Company’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016 filed on October 26, 2016.
(13)Incorporated by reference to the Company’s current report on Form 8-K filed on March 24, 2017.
(14)Incorporated by reference to the Company’s quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2017 filed on April 27, 2017.
(15)Incorporated by reference to the Company’s current report on Form 8-K filed on September 13, 2017.
(16)Incorporated by reference to the Company’s current report on Form 8-K filed on October 17, 2017.
(17)Incorporated by reference to the Company’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2017 filed on October 25, 2017.
(18)Incorporated by reference to the Company’s current report on Form 8-K filed on November 13, 2017.
(19)Incorporated by reference to the Company’s current report on Form 8-K filed on May 1, 2018.
(20)Incorporated by reference to the Company’s current report on Form 8-K filed on December 27, 2019.
(21)Incorporated by reference to the Company’s annual report on Form 10-K filed on February 19, 2020.
(22)Incorporated by reference to the Company’s current report on Form 8-K filed on February 21, 2020.
(23)Incorporated by reference to the Company’s current report on Form 8-K filed on August 4, 2020.
* Filed herewith.
** Furnished with this report.
+ Unless otherwise noted, all exhibits have File No. 001-33479.