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Author: Reitnut Big red star, 1000 posts Top Favorite Fools Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77361  
Subject: More on ROIC Date: 3/17/2013 9:52 PM
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I normally spend time on our Board on Sunday afternoons, but didn't get to do so today due to a board meeting for our local Golden Rescue organization. But, because I have written so much on ROIC, I wanted to post on it today. Here are a few thoughts:

Friday’s ROIC announcement on the exercise (and repurchase) of warrants was very good news, and the market reacted appropriately and positively.

First, some quick history. ROIC issued about 50MM warrants prior to its reorganization as a REIT several years ago, expiring in October 2014 and exercisable at $12 per share. ROIC’s stock began to underperform when it crossed the $12 mark, as investors became concerned about per share FFO and AFFO dilution that would be caused by a doubling of the shares outstanding as a result of the warrant exercises. Also, there was worry about 50MM warrant shares overhanging the market upon exercise.

So, recently, we have seen shareholder angst about what, if anything, Mr. Tanz and his Board would do about these warrants. Well over a year ago, management stated that they were considering some actions to address the warrants issue, but little happened until February of this year, when it was announced that an original shareholder exercised 8MM warrants on a cashless basis, and that another half million warrants were also exercised. But the stock continued to just run in place until very recently, as there was apparently skepticism that nothing of substance would take place until we got closer to October 2014. Would the company have to raise equity by selling new shares to fund acquisitions in order to avoid a big spike in its leverage ratio?

But, with Friday’s announcement, we learned that about 55% of the warrants have now been exercised or repurchased by the Company, and so the overhang and the dilution issues are much less concerning.

The only negative in the recent news is that FFO/AFFO per share will be somewhat diluted because of the additional shares outstanding. Many investors value REIT stocks on the basis of this metric.

But there are many positives. The exercises, at $12 per share, will increase ROIC’s NAV per share (NAV was previously estimated at something like $11.25 per share). Thus those who value a REIT stock on the basis of NAV, plus or minus a premium or discount, will conclude that ROIC’s “warranted value” should be higher.

Second, the actual shares overhang that could depress the stock price will be reduced by 55%.

Third, the exercises provide ROIC with equity capital; this will be used to fund acquisitions that will produce cash flow - perhaps enough to keep FFO/AFFO per share dilution modest.

Finally – and this could be the biggest positive – the news could bring in many new investors, principally of the institutional type, who previously didn’t want to try to determine the market effects of all those outstanding warrants. We need to remember that these types of investors are performance-oriented, and may have been reluctant to invest in an underperforming REIT stock. This factor is, of course, an intangible, but shouldn’t be ignored.

What is ROIC stock worth today? I believe it is now reasonably valued relative to its strip center peers, on the basis of both P/AFFO ratios and NAV premiums. The future price action in ROIC stock may be largely dependent upon whether Tanz and his associates can continue to find really good acquisition opportunities in off-market transactions by taking advantage of prior relationships, as well as all the macro forces that determine the prices of equities generally.

I would tell anyone who doesn’t own ROIC to buy some now and, over time, to build above market-weighted positions. Operationally and from a capital deployment perspective, the company continues to perform very well.

Ralph
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