Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2018
 
OR
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number 001-33749

RETAIL OPPORTUNITY INVESTMENTS CORP.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
(Exact name of registrant as specified in its charter)
Maryland (Retail Opportunity Investments Corp.)
Delaware (Retail Opportunity Investments Partnership, LP)
(State or other jurisdiction of
incorporation or organization)
 
26-0500600 (Retail Opportunity Investments Corp.)
94-2969738 (Retail Opportunity Investments Partnership, LP)
(I.R.S. Employer
Identification No.)
 
11250 El Camino Real, Suite 200
San Diego, California
(Address of principal executive
offices)
92130
(Zip code)
(858) 677-0900
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
Retail Opportunity Investments Corp.
Yes [X]    No [_]
 
Retail Opportunity Investments Partnership, LP
Yes [X]    No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Retail Opportunity Investments Corp.
Yes [X]    No [_]
 
Retail Opportunity Investments Partnership, LP
Yes [X]    No [_]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 

Retail Opportunity Investments Corp.
Large accelerated filer [X]
Accelerated filer [_]
Non-accelerated filer [_]
(Do not check if a smaller
reporting company)
Smaller reporting company [_]
Emerging growth company [_]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]
 
Retail Opportunity Investments Partnership, LP
Large accelerated filer [_]
Accelerated filer [_]
Non-accelerated filer [X]
(Do not check if a smaller
reporting company)
Smaller reporting company [_]
Emerging growth company [_]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Retail Opportunity Investments Corp.
Yes [_]    No [X]
 
Retail Opportunity Investments Partnership, LP
Yes [_]    No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 112,720,459 shares of common stock, par value $0.0001 per share, of Retail Opportunity Investments Corp. outstanding as of April 20, 2018.
 




EXPLANATORY PARAGRAPH
 
This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2018 of Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”), and Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), of which ROIC is the parent company and general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “the Company,” “we,” “us,” “our,” or “our company” refer to ROIC together with its consolidated subsidiaries, including the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “the Operating Partnership” refer to Retail Opportunity Investments Partnership, LP together with its consolidated subsidiaries.
 
ROIC operates as a real estate investment trust and as of March 31, 2018, ROIC owned an approximate 90.6% partnership interest and other limited partners owned the remaining 9.4% partnership interest in the Operating Partnership. 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.
 
The Company believes that combining the quarterly reports on Form 10-Q of ROIC and the Operating Partnership into a single report will result in the following benefits:
 
facilitate a better understanding by the investors of ROIC and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;

remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both ROIC and the Operating Partnership; and

create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

Management operates ROIC and the Operating Partnership as one enterprise. The management of ROIC and the Operating Partnership are the same.
 
There are a few differences between ROIC and the Operating Partnership, which are reflected in the disclosures in this report. The Company believes it is important to understand the differences between ROIC and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. ROIC is a real estate investment trust, whose 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 of the Operating Partnership 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”).
 
Non-controlling interests is the primary area of difference between the Consolidated Financial Statements for ROIC and the Operating Partnership. The OP Units in the Operating Partnership that are not owned by ROIC are accounted for as partners’ capital in the Operating Partnership’s financial statements and as non-controlling interests in ROIC’s financial statements. Accordingly, this report presents the Consolidated Financial Statements for ROIC and the Operating Partnership separately, as required, as well as Earnings Per Share / Earnings Per Unit and Capital of the Operating Partnership.
 
This report also includes separate Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 4. Controls and Procedures sections and separate Chief Executive Officer and Chief Financial Officer certifications for each of ROIC and the Operating Partnership as reflected in Exhibits 31 and 32.





TABLE OF CONTENTS

 
 





PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements


RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Balance Sheets
(In thousands, except share data) 
 
March 31, 2018
(unaudited)
 
December 31, 2017
ASSETS
 

 
 

Real Estate Investments:
 

 
 

Land
$
896,573

 
$
878,797

Building and improvements
2,238,793

 
2,230,600

 
3,135,366

 
3,109,397

Less:  accumulated depreciation
275,708

 
260,115

Real Estate Investments, net
2,859,658

 
2,849,282

Cash and cash equivalents
13,012

 
11,553

Restricted cash
1,998

 
5,412

Tenant and other receivables, net
43,560

 
43,257

Deposits
500

 
500

Acquired lease intangible assets, net
81,262

 
82,778

Prepaid expenses
2,941

 
2,853

Deferred charges, net
37,151

 
37,167

Other
9,641

 
6,396

Total assets
$
3,049,723

 
$
3,039,198

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Term loan
$
298,879

 
$
298,816

Credit facility
156,544

 
140,329

Senior Notes
940,422

 
940,086

Mortgage notes payable
98,201

 
107,915

Acquired lease intangible liabilities, net
177,212

 
178,984

Accounts payable and accrued expenses
30,607

 
18,638

Tenants’ security deposits
6,919

 
6,771

Other liabilities
18,508

 
18,018

Total liabilities
1,727,292

 
1,709,557

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity:
 

 
 

Preferred stock, $.0001 par value 50,000,000 shares authorized; none issued and outstanding

 

Common stock, $0.0001 par value, 500,000,000 shares authorized; 112,721,459 and 112,347,451 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
11

 
11

Additional paid-in capital
1,413,887

 
1,412,590

Dividends in excess of earnings
(221,841
)
 
(210,490
)
Accumulated other comprehensive income
5,664

 
1,856

Total Retail Opportunity Investments Corp. stockholders’ equity
1,197,721

 
1,203,967

Non-controlling interests
124,710

 
125,674

Total equity
1,322,431

 
1,329,641

Total liabilities and equity
$
3,049,723

 
$
3,039,198


See accompanying notes to consolidated financial statements.

- 1 -



RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(In thousands, except share data)

 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 

 
 

Base rents
$
55,377

 
$
51,479

Recoveries from tenants
16,161

 
13,668

Other income
2,857

 
753

Total revenues
74,395

 
65,900

 
 
 
 
Operating expenses
 
 
 
Property operating
10,478

 
9,300

Property taxes
7,819

 
7,068

Depreciation and amortization
25,217

 
23,058

General and administrative expenses
3,531

 
3,499

Other expense
69

 
49

Total operating expenses
47,114

 
42,974

 
 
 
 
Operating income
27,281

 
22,926

Non-operating expenses
 

 
 

Interest expense and other finance expenses
(15,457
)
 
(11,675
)
Net income
11,824

 
11,251

Net income attributable to non-controlling interests
(1,122
)
 
(1,081
)
Net Income Attributable to Retail Opportunity Investments Corp.
$
10,702

 
$
10,170

 
 
 
 
Earnings per share  basic and diluted
$
0.09

 
$
0.09

 
 
 
 
Dividends per common share
$
0.1950

 
$
0.1875

 
 
 
 
Comprehensive income:
 
 
 
Net income
$
11,824

 
$
11,251

Other comprehensive income:
 
 
 
Unrealized swap derivative gain arising during the period
3,390

 
161

Reclassification adjustment for amortization of interest expense included in net income
418

 
555

Other comprehensive income
3,808

 
716

Comprehensive income
15,632

 
11,967

Comprehensive income attributable to non-controlling interests
(1,122
)
 
(1,081
)
Comprehensive income attributable to Retail Opportunity Investments Corp
$
14,510

 
$
10,886


See accompanying notes to consolidated financial statements.


- 2 -



RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statement of Equity
(Unaudited)
(In thousands, except share data)
 
Common Stock
 
Additional
paid-in capital
 
Accumulated dividends in excess of earnings
 
Accumulated
other
comprehensive
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 Plan
373,861

 

 

 

 

 

 

Shares withheld for employee taxes
(70,168
)
 

 
(1,400
)
 

 

 

 
(1,400
)
Cancellation of restricted stock
(4,999
)
 

 

 

 

 

 

Stock based compensation expense

 

 
1,428

 

 

 

 
1,428

Adjustment to non-controlling interests ownership in Operating Partnership

 

 
(191
)
 

 

 
191

 

Proceeds from the issuance of common stock
75,314

 
 
 
1,508

 

 

 

 
1,508

Registration expenditures

 

 
(48
)
 

 

 

 
(48
)
Cash dividends ($0.1950 per share)

 

 

 
(21,981
)
 

 
(2,277
)
 
(24,258
)
Dividends payable to officers

 

 

 
(72
)
 

 

 
(72
)
Net income attributable to Retail Opportunity Investments Corp.

 

 

 
10,702

 

 

 
10,702

Net income attributable to non-controlling interests

 

 

 

 

 
1,122

 
1,122

Other comprehensive income

 

 

 

 
3,808

 

 
3,808

Balance at March 31, 2018
112,721,459

 
$
11

 
$
1,413,887

 
$
(221,841
)
 
$
5,664

 
$
124,710

 
$
1,322,431

 

See accompanying notes to consolidated financial statements.

- 3 -



RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
11,824

 
$
11,251

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Depreciation and amortization
25,217

 
23,058

Amortization of deferred financing costs and mortgage premiums, net
449

 
532

Straight-line rent adjustment
(1,471
)
 
(1,066
)
Amortization of above and below market rent
(4,075
)
 
(6,049
)
Amortization relating to stock based compensation
1,428

 
1,217

Provisions for tenant credit losses
323

 
636

Other noncash interest expense
535

 
535

Change in operating assets and liabilities:
 

 
 

Tenant and other receivables
845

 
304

Prepaid expenses
(89
)
 
837

Accounts payable and accrued expenses
9,701

 
7,416

Other assets and liabilities, net
(264
)
 
980

Net cash provided by operating activities
44,423

 
39,651

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Investments in real estate
(19,337
)
 
(88,187
)
Improvements to properties
(8,441
)
 
(7,337
)
Deposits on real estate acquisitions, net

 
(2,000
)
Net cash used in investing activities
(27,778
)
 
(97,524
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal repayments on mortgages
(10,317
)
 
(189
)
Proceeds from draws on credit facility
45,000

 
99,000

Payments on credit facility
(29,000
)
 
(10,000
)
Distributions to OP Unitholders
(2,277
)
 
(2,099
)
Deferred financing and other costs

 
(3
)
Proceeds from the sale of common stock
1,508

 

Registration expenditures
(48
)
 
(256
)
Dividends paid to common shareholders
(22,066
)
 
(20,709
)
Common shares issued under the 2009 Plan

 
43

Shares withheld for employee taxes
(1,400
)
 
(1,571
)
Net cash (used in) provided by financing activities
(18,600
)
 
64,216

Net (decrease) increase in cash, cash equivalents and restricted cash
(1,955
)
 
6,343

Cash, cash equivalents and restricted cash at beginning of period
16,965

 
13,250

Cash, cash equivalents and restricted cash at end of period
$
15,010

 
$
19,593

 
 
 
 
Other non-cash investing and financing activities:
 
 
 
Issuance of OP Units in connection with acquisitions
$

 
$
3,559

Intangible lease liabilities
$

 
$
1,118

Interest rate swap asset
$
3,273

 
$
181

Accrued real estate improvement costs
$
2,196

 
$
1,531

 

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 statement of cash flows:
 
Three Months Ended March 31,
 
2018
 
2017
Cash and cash equivalents
$
13,012

 
$
19,430

Restricted cash
1,998

 
163

Total cash, cash equivalents and restricted cash shown in Statements of Cash Flow
$
15,010

 
$
19,593


See accompanying notes to consolidated financial statements.

- 4 -




RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Balance Sheets
(In thousands)

 
March 31, 2018
(unaudited)
 
December 31, 2017
ASSETS
 

 
 

Real Estate Investments:
 

 
 

Land
$
896,573

 
$
878,797

Building and improvements
2,238,793

 
2,230,600

 
3,135,366

 
3,109,397

Less:  accumulated depreciation
275,708

 
260,115

Real Estate Investments, net
2,859,658

 
2,849,282

Cash and cash equivalents
13,012

 
11,553

Restricted cash
1,998

 
5,412

Tenant and other receivables, net
43,560

 
43,257

Deposits
500

 
500

Acquired lease intangible assets, net
81,262

 
82,778

Prepaid expenses
2,941

 
2,853

Deferred charges, net
37,151

 
37,167

Other
9,641

 
6,396

Total assets
$
3,049,723

 
$
3,039,198

 
 
 
 
LIABILITIES AND CAPITAL
 

 
 

Liabilities:
 

 
 

Term loan
$
298,879

 
$
298,816

Credit facility
156,544

 
140,329

Senior Notes
940,422

 
940,086

Mortgage notes payable
98,201

 
107,915

Acquired lease intangible liabilities, net
177,212

 
178,984

Accounts payable and accrued expenses
30,607

 
18,638

Tenants’ security deposits
6,919

 
6,771

Other liabilities
18,508

 
18,018

Total liabilities
1,727,292

 
1,709,557

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Capital:
 

 
 

Partners’ capital, unlimited partnership units authorized:
 

 
 

ROIC capital
1,192,057

 
1,202,111

Limited partners’ capital
124,710

 
125,674

Accumulated other comprehensive income
5,664

 
1,856

Total capital
1,322,431

 
1,329,641

Total liabilities and capital
$
3,049,723

 
$
3,039,198

 
See accompanying notes to consolidated financial statements.


- 5 -



RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(In thousands, except unit data)

 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 

 
 

Base rents
$
55,377

 
$
51,479

Recoveries from tenants
16,161

 
13,668

Other income
2,857

 
753

Total revenues
74,395

 
65,900

 
 
 
 
Operating expenses
 

 
 

Property operating
10,478

 
9,300

Property taxes
7,819

 
7,068

Depreciation and amortization
25,217

 
23,058

General and administrative expenses
3,531

 
3,499

Other expense
69

 
49

Total operating expenses
47,114

 
42,974

 
 
 
 
Operating income
27,281

 
22,926

 
 
 
 
Non-operating expenses
 

 
 

Interest expense and other finance expenses
(15,457
)
 
(11,675
)
Net Income Attributable to Retail Opportunity Investments Partnership, LP
$
11,824

 
$
11,251

 
 
 
 
Earnings per unit - basic and diluted
$
0.09

 
$
0.09

 
 
 
 
Distributions per unit
$
0.1950

 
$
0.1875

 
 
 
 
Comprehensive income:
 

 
 

Net income attributable to Retail Opportunity Investments Partnership, LP
$
11,824

 
$
11,251

Other comprehensive income:
 

 
 

Unrealized swap derivative gain arising during the period
3,390

 
161

Reclassification adjustment for amortization of interest expense included in net income
418

 
555

Other comprehensive income
3,808

 
716

Comprehensive income attributable to Retail Opportunity Investments Partnership, LP
$
15,632

 
$
11,967


See accompanying notes to consolidated financial statements.
 

- 6 -



RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statement of Partners’ Capital
(Unaudited)
(In thousands, except unit data) 

 
Limited Partner’s Capital (1)
 
ROIC Capital (2)
 
Accumulated
other
comprehensive
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 Plan

 

 
373,861

 

 

 

OP Units withheld for employee taxes

 

 
(70,168
)
 
(1,400
)
 

 
(1,400
)
Cancellation of OP Units

 

 
(4,999
)
 

 

 

Stock based compensation expense

 

 

 
1,428

 

 
1,428

Adjustment to non-controlling interests ownership in Operating Partnership

 
191

 

 
(191
)
 

 

Issuance of OP Units in connection with sale of common stock

 

 
75,314

 
1,508

 

 
1,508

Registration expenditures

 

 

 
(48
)
 

 
(48
)
Cash distributions ($0.1950 per unit)

 
(2,277
)
 

 
(21,981
)
 

 
(24,258
)
Distributions payable to officers

 

 

 
(72
)
 

 
(72
)
Net income attributable to Retail Opportunity Investments Partnership, LP

 
1,122

 

 
10,702

 

 
11,824

Other comprehensive income

 

 

 

 
3,808

 
3,808

Balance at March 31, 2018
11,678,991

 
$
124,710

 
112,721,459

 
$
1,192,057

 
$
5,664

 
$
1,322,431

 
_________________________________
(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.


- 7 -



RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
11,824

 
$
11,251

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Depreciation and amortization
25,217

 
23,058

Amortization of deferred financing costs and mortgage premiums, net
449

 
532

Straight-line rent adjustment
(1,471
)
 
(1,066
)
Amortization of above and below market rent
(4,075
)
 
(6,049
)
Amortization relating to stock based compensation
1,428

 
1,217

Provisions for tenant credit losses
323

 
636

Other noncash interest expense
535

 
535

Change in operating assets and liabilities:
 

 
 

Tenant and other receivables
845

 
304

Prepaid expenses
(89
)
 
837

Accounts payable and accrued expenses
9,701

 
7,416

Other assets and liabilities, net
(264
)
 
980

Net cash provided by operating activities
44,423

 
39,651

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 

Investments in real estate
(19,337
)
 
(88,187
)
Improvements to properties
(8,441
)
 
(7,337
)
Deposits on real estate acquisitions, net

 
(2,000
)
Net cash used in investing activities
(27,778
)
 
(97,524
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal repayments on mortgages
(10,317
)
 
(189
)
Proceeds from draws on credit facility
45,000

 
99,000

Payments on credit facility
(29,000
)
 
(10,000
)
Deferred financing and other costs

 
(3
)
Proceeds from the issuance of OP Units in connection with issuance of common stock
1,508

 

Registration expenditures
(48
)
 
(256
)
Distributions to OP Unitholders
(24,343
)
 
(22,808
)
Issuance of OP Units under the 2009 Plan

 
43

OP Units withheld for employee taxes
(1,400
)
 
(1,571
)
Net cash (used in) provided by financing activities
(18,600
)
 
64,216

Net (decrease) increase in cash, cash equivalents and restricted cash
(1,955
)
 
6,343

Cash, cash equivalents and restricted cash at beginning of period
16,965

 
13,250

Cash, cash equivalents and restricted cash at end of period
$
15,010

 
$
19,593

 
 
 
 
Other non-cash investing and financing activities:
 

 
 

Issuance of OP Units in connection with acquisitions
$

 
$
3,559

Intangible lease liabilities
$

 
$
1,118

Interest rate swap asset
$
3,273

 
$
181

Accrued real estate improvement costs
$
2,196

 
$
1,531

 

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 statement of cash flows:
 
Three Months Ended March 31,
 
2018
 
2017
Cash and cash equivalents
$
13,012

 
$
19,430

Restricted cash
1,998

 
163

Total cash, cash equivalents and restricted cash shown in Statements of Cash Flow
$
15,010

 
$
19,593


See accompanying notes to consolidated financial statements.

- 8 -



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.
 
With the approval of its stockholders, ROIC reincorporated as a Maryland corporation on June 2, 2011. ROIC began operations as a Delaware corporation, known as NRDC Acquisition Corp., which was incorporated on July 10, 2007, for the purpose of acquiring assets or operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination. On October 20, 2009, ROIC’s stockholders and warrantholders approved, among other things, the steps to be taken by ROIC to continue its business as a corporation that has elected to qualify as a REIT for U.S. federal income tax purposes.
 
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.
 
Recent Accounting Pronouncements
 
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-18, Restricted Cash. ASU No. 2016-18 requires companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Additionally, ASU No. 2016-18 requires a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. ASU No. 2016-18 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all periods presented. The Company adopted ASU No. 2018-16 effective January 1, 2018. The adoption of ASU No. 2016-18 impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.

In February 2016, the FASB issued ASU No. 2016-2, “Leases.” ASU No. 2016-2 is expected to result 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. As of March 31, 2018, the remaining contractual payments under ground lease agreements aggregated approximately $41.5 million. In addition, ASU No. 2016-2 will require 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 will no longer be capitalized as initial direct costs and instead will be expensed as incurred.

As a lessor, under current accounting standards, the Company recognizes rental revenue from its operating leases on a straight-line basis over the respective lease terms. The Company commences recognition of rental revenue at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property.  Under current accounting standards, tenant recoveries related to payments of real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses are considered lease components. The Company recognizes these tenant recoveries as

- 9 -



revenue when services are rendered in an amount equal to the related operating expenses incurred that are recoverable under the terms of the applicable lease.

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 January 2018, the FASB issued a proposed amendment to ASU No. 2016-2 that would allow 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. If adopted, this practical expedient will allow 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 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 plans to adopt the provisions of ASU No. 2016-2 effective January 1, 2019 using the modified retrospective approach. The Company continues to evaluate the impact this pronouncement will have on the Company’s consolidated financial statements.
 
In May 2014, the FASB issued ASU No. 2014-9, “Revenue from Contracts with Customers.” The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for reporting periods beginning after December 15, 2017. As discussed above, leases are specifically excluded from ASU No. 2014-9 and will be governed by the applicable lease codification; however, this update may have implications on certain variable payment terms included in lease agreements. Upon adoption of ASU No. 2016-2 in 2019, the Company may be required to classify its tenant recoveries into lease and nonlease components, whereby the nonlease components would be subject to ASU No. 2014-9, pending the resolution of the proposed amendment issued by the FASB in January 2018. Property services categorized as nonlease components that are reimbursed by the Company’s tenants may need to be presented on a net basis if it is determined that the Company holds an agent arrangement. The Company adopted the provisions of ASU No. 2014-9 effective January 1, 2018 using the modified retrospective approach. The Company evaluated the revenue recognition for all contracts within this scope under existing accounting standards and under ASU No. 2014-9 and confirmed that there were no differences in the amounts recognized or the pattern of recognition. Therefore, the adoption of ASU 2014-9 did not result in an adjustment to the Company’s retained earnings on January 1, 2018.
 
Principles of Consolidation
 
The accompanying consolidated financial statements are prepared on the accrual basis in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. 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. Results of operations for the three month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017.

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

- 10 -



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 purchase price allocations, depreciable lives, revenue recognition and the collectability of tenant receivables, other receivables, notes receivables, the valuation of performance-based restricted stock, stock options, 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.  In addition, taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiary (“TRS”), if any, is fully subject to U.S. federal, state and local income taxes. 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 March 31, 2018, the statute of limitations for the tax years 2014 through and including 2016 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.

On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1, the “TCJA”) was signed into law, which makes significant changes to U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders. The Company continues to evaluate the impact the TCJA will have on its consolidated financial statements.
 
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. 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. During the three months ended March 31, 2018 and 2017, capitalized costs related to the improvement or replacement of real estate properties were approximately $10.6 million and $8.9 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

- 11 -



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 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 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 three months ended March 31, 2018 or 2017.
 
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. Management does not believe that the value of any of the Company’s real estate investments was impaired at March 31, 2018.
 
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.

- 12 -



 
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. Property operating expense recoveries from tenants of common area maintenance, real estate taxes and other recoverable costs are recognized in the period the related expenses are incurred. Lease incentives are amortized as a reduction of rental revenue over the respective tenant lease terms.
 
Termination fees (included in other 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 the termination fee is assured. 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, 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 provision for doubtful accounts at both March 31, 2018 and December 31, 2017 was approximately $6.4 million.
 
Depreciation and Amortization
 
The Company uses the straight-line method for depreciation and amortization. Buildings are depreciated over the estimated useful lives which the Company estimates to be 39-40 years. Property improvements are depreciated over the estimated useful lives that range from 10 to 20 years. Furniture and fixtures are depreciated over the 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 Internal Capitalized Leasing 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. The amortization of deferred leasing costs is included in Depreciation and amortization in the Consolidated Statements of Operations. The Company capitalizes a portion of payroll-related costs related to its leasing personnel associated with new leases and lease renewals. These costs are amortized over the life of the respective leases. During the three months ended March 31, 2018 and 2017, the Company capitalized approximately $334,000 and $312,000, respectively.
 
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 three months ended March 31, 2018 and 2017, 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

- 13 -



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 outstanding under the 2009 Plan described in Note 7 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):
 
Three Months Ended March 31,
 
2018
 
2017
Numerator:
 

 
 

Net income
$
11,824

 
$
11,251

Less income attributable to non-controlling interests
(1,122
)
 
(1,081
)
Less earnings allocated to unvested shares
(101
)
 
(80
)
Net income available for common stockholders, basic
$
10,601

 
$
10,090

Numerator:
 

 
 

Net income
$
11,824

 
$
11,251

Less earnings allocated to unvested shares
(101
)
 
(80
)
Net income available for common stockholders, diluted
$
11,723

 
$
11,171

Denominator:
 

 
 

Denominator for basic EPS – weighted average common equivalent shares
112,162,943

 
109,226,809

OP units
11,678,991

 
11,569,171

Restricted stock awards – performance-based
174,150

 
122,234

Stock options
111,206

 
135,837

Denominator for diluted EPS – weighted average common equivalent shares
124,127,290

 
121,054,051

 
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):
 
Three Months Ended March 31,
 
2018
 
2017
Numerator:
 

 
 

Net income
$
11,824

 
$
11,251

Less earnings allocated to unvested shares
(101
)
 
(80
)
Net income available to unitholders, basic and diluted
$
11,723

 
$
11,171

Denominator:
 

 
 

Denominator for basic earnings per unit – weighted average common equivalent units
123,841,934

 
120,795,980

Restricted stock awards – performance-based
174,150

 
122,234

Stock options
111,206

 
135,837

Denominator for diluted earnings per unit – weighted average common equivalent units
124,127,290

 
121,054,051

 
Stock-Based Compensation
 
The Company has a stock-based employee compensation plan, which is more fully described in Note 7.
 
The Company accounts for its stock-based compensation plans based on the FASB guidance which requires that compensation expense be recognized based on the fair value of the stock awards less estimated forfeitures.  Restricted stock grants vest based upon the completion of a service period (“time-based grants”) and/or the Company meeting certain established market-specific financial performance criteria (“performance-based grants”).  Time-based grants are valued according to the market price for the

- 14 -



Company’s common stock at the date of grant.  For performance-based grants, a Monte Carlo valuation model is used, taking into account the underlying contingency risks associated with the performance criteria.  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.  Awards of stock options and time-based grants of stock are expensed as compensation on a straight-line basis over the vesting period.  Depending on the terms of the agreement, certain awards of performance-based grants are expensed as compensation under the accelerated attribution method while certain are expensed as compensation on a straight-line basis over the vesting period. All awards of performance-based grants 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 swap as long as the hedged forecasted transactions continue to be probable of occurring. The Company includes cash payments made to terminate interest rate swaps 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.

Reclassifications
 
Certain reclassifications have been made to the prior period consolidated financial statements and notes to conform to the current year presentation. 

2. Real Estate Investments

The following real estate investment transactions have occurred during the three months ended March 31, 2018.
 
Property Asset Acquisitions
 
On February 23, 2018, the Company acquired the property known as Stadium Center located in Tacoma, Washington, within the Seattle metropolitan area, for an adjusted purchase price of approximately $19.3 million. Stadium Center is approximately 49,000 square feet and is anchored by Thriftway Supermarket. The property was acquired with borrowings under the credit facility and restricted cash that was previously held by a qualified intermediary for the acquisition of a replacement property in a tax-free exchange under Section 1031 of the Code.

Any reference to the number of properties and square footage are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of its financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
 

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The financial information set forth below summarizes the Company’s purchase price allocation for the properties acquired during the three months ended March 31, 2018 (in thousands).

 
March 31, 2018
Assets
 

Land
$
3,867

Building and improvements
15,470

Assets acquired
$
19,337

 
The following table summarizes the operating results included in the Company’s historical consolidated statement of operations for the three months ended March 31, 2018, for the properties acquired during the three months ended March 31, 2018 (in thousands).

 
Three Months Ended March 31, 2018
Statement of operations:
 
Revenues
$
145

Net income attributable to Retail Opportunity Investments Corp.
$
78


3. 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 March 31, 2018 are summarized as follows (in thousands):

 
Minimum Rents
Remaining 2018
$
147,768

2019
182,380

2020
161,502

2021
139,138

2022
113,478

Thereafter
469,005

Total minimum lease payments
$
1,213,271


4. 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.
 
Mortgage Notes Payable

On February 1, 2018, the Company repaid in full the Santa Teresa Village mortgage note related to Santa Teresa Village for a total of approximately $10.1 million, without penalty, in accordance with the prepayment provisions of the note.

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The mortgage notes payable collateralized by respective properties and assignment of leases at March 31, 2018 and December 31, 2017, respectively, were as follows (in thousands):

Property
Maturity Date
 
Interest Rate
 
March 31, 2018
 
December 31, 2017
Santa Teresa Village
February 2018
 
6.20
%
 

 
10,138

Magnolia Shopping Center
October 2018
 
5.50
%
 
8,903

 
8,951

Casitas Plaza Shopping Center
June 2022
 
5.32
%
 
7,271

 
7,307

Riverstone Marketplace
July 2022
 
4.96
%
 
18,329

 
18,424

Fullerton Crossroads
April 2024
 
4.73
%
 
26,000

 
26,000

Diamond Hills Plaza
October 2025
 
3.55
%
 
35,500

 
35,500

 
 
 
 

 
$
96,003

 
$
106,320

Mortgage premiums
 
 
 

 
2,509

 
1,921

Net unamortized deferred financing costs
 
 
 

 
(311
)
 
(326
)
Total mortgage notes payable
 
 
 

 
$
98,201

 
$
107,915

 
Term Loan and Credit Facility
 
The carrying values of the Company’s term loan (the “term loan”) were as follows (in thousands):

 
March 31, 2018
 
December 31, 2017
Term loan
$
300,000

 
$
300,000

Net unamortized deferred financing costs
(1,121
)
 
(1,184
)
Term loan
$
298,879

 
$
298,816

 
On September 29, 2015, the Company entered into an unsecured term loan agreement under which the lenders agreed to provide a $300.0 million unsecured term loan facility. Effective September 8, 2017, the Company entered into a First Amended and Restated Term Loan Agreement (the “Term Loan Agreement”) pursuant to which the maturity date of the term loan was extended from January 31, 2019 to September 8, 2022, 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 1.10%.
 
The carrying values of the Company’s unsecured revolving credit facility were as follows (in thousands):

 
March 31, 2018
 
December 31, 2017
Credit facility
$
159,500

 
$
143,500

Net unamortized deferred financing costs
(2,956
)
 
(3,171
)
Credit facility
$
156,544

 
$
140,329

 
The Operating Partnership has an unsecured revolving credit facility with several banks. Effective September 8, 2017, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Facility Agreement”) pursuant to which the borrowing capacity under the credit facility was increased from $500.0 million to $600.0 million. The maturity date of the credit facility was extended from January 31, 2019 to September 8, 2021, 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 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 accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of the

- 17 -



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 1.00%. 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. The Company has investment grade credit ratings from Moody’s Investors Service (Baa2) and Standard & Poor’s Ratings Services (BBB-).

Both the term loan and credit facility contain customary representations, financial and other covenants. The Operating Partnership’s ability to borrow under the term loan and credit facility is subject to its compliance with financial covenants and other restrictions on an ongoing basis. The Operating Partnership was in compliance with such covenants at March 31, 2018.
 
As of March 31, 2018, $300.0 million and $159.5 million were outstanding under the term loan and credit facility, respectively. The weighted average interest rate on the term loan during the three months ended March 31, 2018 was 2.7%. The weighted average interest rate on the credit facility during the three months ended March 31, 2018 was 2.6%. The Company had no available borrowings under the term loan at March 31, 2018. The Company had $440.5 million available to borrow under the credit facility at March 31, 2018.
 
Senior Notes Due 2027

The carrying value of the Company’s unsecured Senior Notes Due 2027 is as follows (in thousands):
 
 
March 31, 2018
 
December 31, 2017
Principal amount
$
250,000

 
$
250,000

Net unamortized deferred financing costs
(1,217
)
 
(1,249
)
Senior Notes Due 2027
$
248,783

 
$
248,751


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. The net proceeds were used to reduce borrowings under the credit facility. The interest expense recognized on the Senior Notes Due 2027 during the three months ended March 31, 2018 included approximately $2.6 million for the contractual coupon interest.

In connection with the issuance of the Senior Notes Due 2027, the Company incurred approximately $1.3 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2027.

Senior Notes Due 2026

The carrying value of the Company’s unsecured Senior Notes Due 2026 is as follows (in thousands):
 
 
March 31, 2018
 
December 31, 2017
Principal amount
$
200,000

 
$
200,000

Net unamortized deferred financing costs
(241
)
 
(248
)
Senior Notes Due 2026
$
199,759

 
$
199,752


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. The interest expense recognized on the Senior Notes Due 2026 during both the three months ended March 31, 2018 and 2017 included approximately $2.0 million for the contractual coupon interest.


- 18 -



In connection with the issuance of the Senior Notes Due 2026, the Company incurred approximately $283,000 of deferred financing costs which are being amortized over the term of the Senior Notes Due 2026.

Senior Notes Due 2024
 
The carrying value of the Company’s unsecured Senior Notes Due 2024 is as follows (in thousands):
 
 
March 31, 2018
 
December 31, 2017
Principal amount
$
250,000

 
$
250,000

Unamortized debt discount
(2,498
)
 
(2,578
)
Net unamortized deferred financing costs
(1,479
)
 
(1,535
)
Senior Notes Due 2024
$
246,023

 
$
245,887

 
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). The interest expense recognized for the contractual coupon interest on the Senior Notes Due 2024 during the both three months ended March 31, 2018 and 2017 was $2.5 million. The interest expense recognized for the accretion of the debt discount on the Senior Notes Due 2024 during the three months ended March 31, 2018 and 2017 was approximately $80,000 and $77,000, respectively.
 
In connection with the Senior Notes Due 2024 offering, the Company incurred approximately $2.2 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2024.
 
Senior Notes Due 2023
 
The carrying value of the Company’s unsecured Senior Notes Due 2023 is as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
Principal amount
$
250,000

 
$
250,000

Unamortized debt discount
(2,642
)
 
(2,737
)
Net unamortized deferred financing costs
(1,501
)
 
(1,567
)
Senior Notes Due 2023
$
245,857

 
$
245,696


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

- 19 -



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 interest expense recognized for the contractual coupon interest on the Senior Notes Due 2023 during both the three months ended March 31, 2018 and 2017 was $3.1 million. The interest expense recognized for the accretion of the debt discount on the Senior Notes Due 2023 during the three months ended March 31, 2018 and 2017 was approximately and $95,000 and $94,000, respectively.
 
In connection with the Senior Notes Due 2023 offering, the Company incurred approximately $2.6 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2023.

5. Preferred Stock of ROIC

ROIC 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 March 31, 2018 and December 31, 2017, there were no shares of preferred stock outstanding.

6. Common Stock of ROIC

ATM
 
On September 19, 2014, ROIC entered into three separate Sales Agreements (the “Original Sales Agreements”) with each of Jefferies LLC, KeyBanc Capital Markets Inc., and Raymond James & Associates, Inc. (each individually, an “Original Agent” and collectively, the “Original Agents”) pursuant to which ROIC may sell, from time to time, shares of ROIC’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $100.0 million through the Original Agents either as agents or principals. On May 23, 2016, ROIC entered into two additional sales agreements (the “Additional Sales Agreements”, and together with the Original Sales Agreements, the “Sales Agreements”) with each of Canaccord Genuity Inc. and Robert W. Baird & Co. Incorporated (the “Additional Agents”, and together with the Original Agents, the “Agents”) pursuant to which the Company may sell shares of ROIC’s common stock through the Additional Agents either as agents or principals. In addition, on February 21, 2018, the Company terminated the Additional Sales Agreement with Canaccord Genuity, Inc.

During the three months ended March 31, 2018, ROIC sold a total of 75,314 shares of common stock under the Sales Agreements, which resulted in gross proceeds of approximately $1.5 million and commissions of approximately $19,000 paid to the Agents. Since the Original Sales Agreements were entered into through March 31, 2018, ROIC has sold a total of 2,856,136 shares under the Sales Agreements, which resulted in gross proceeds of approximately $57.7 million and commissions of approximately $761,000 paid to the Agents.
 
Stock Repurchase Program
 
On July 31, 2013, the Company’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 three months ended March 31, 2018, the Company did not repurchase any shares of common stock under this program.

7. Stock Compensation 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 2009, ROIC adopted the 2009 Plan. The 2009 Plan provides for grants of restricted common stock and stock option awards up to an aggregate of 7.5% of the issued and outstanding shares of ROIC’s common stock at the time of the award, subject to a ceiling of 4,000,000 shares.
 
Restricted Stock
 
During the three months ended March 31, 2018, ROIC awarded 514,972 shares of restricted common stock under the 2009 Plan, of which 180,200 shares are performance-based grants and the remainder of the shares are time-based grants. The performance-based grants vest based on pre-defined market-specific performance criteria with a vesting date on January 1, 2021.
 

- 20 -



A summary of the status of ROIC’s non-vested restricted stock awards as of March 31, 2018, and changes during the three months ended March 31, 2018 are presented below:
 
Shares
 
Weighted Average Grant Date Fair Value
Non-vested at December 31, 2017
781,467

 
$
18.14

Granted
514,972

 
$
16.09

Vested
(274,608
)
 
$
18.46

Forfeited
(14,998
)
 
$
17.59

Non-vested at March 31, 2018
1,006,833

 
$
17.02

 
For the three months ended March 31, 2018 and 2017, the amounts charged to expenses for all stock-based compensation arrangements totaled approximately $1.4 million and $1.2 million, respectively.

8. Capital of the Operating Partnership

As of March 31, 2018, the Operating Partnership had 124,400,450 OP Units outstanding. ROIC owned an approximate 90.6% partnership interest in the Operating Partnership at March 31, 2018, or 112,721,459 OP Units. The remaining 11,678,991 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 March 31, 2018, 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.
 
The redemption value of outstanding OP Units owned by the limited partners as of March 31, 2018, not including ROIC, had such units been redeemed at March 31, 2018, was approximately $202.2 million, calculated based on the average closing price on the NASDAQ Stock Market of ROIC common stock for the ten consecutive trading days immediately preceding March 31, 2018, which amounted to $17.31 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.

9. 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

- 21 -



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 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 March 31, 2018 was approximately $232.3 million and $184.0 million, respectively, calculated using significant inputs which are not observable in the market. The fair value of the outstanding Senior Notes Due 2024 and Senior Notes Due 2023 at March 31, 2018 was approximately $241.4 million and $259.6 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 $93.9 million with an interest rate range of 4.3% to 5.3% and a weighted average interest rate of 4.7% as of March 31, 2018. These fair value measurements fall within level 3 of the fair value hierarchy.
 
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 interest rate swaps as of March 31, 2018 (in thousands):

Swap Counterparty
Notional Amount
 
Effective Date
 
Maturity Date
Bank of Montreal
$
50,000

 
1/29/2016
 
1/31/2019
Regions Bank
$
50,000

 
2/29/2016
 
1/31/2019
Bank of Montreal
$
100,000

 
12/29/2017
 
8/31/2022
U.S. Bank
$
100,000

 
12/29/2017
 
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

- 22 -



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 March 31, 2018, 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
March 31, 2018:
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

Derivative financial instruments
$

 
$
7,594

 
$

 
$
7,594

 
 
 
 
 
 
 
 
December 31, 2017:
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

Derivative financial instruments
$

 
$
4,321

 
$

 
$
4,321

 
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 $375,000 will be reclassified as a non-cash increase to interest expense.
 
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 March 31, 2018 and December 31, 2017, respectively (in thousands):

Derivatives designed as hedging instruments
 
Balance sheet location
 
March 31, 2018 Fair Value
 
December 31, 2017 Fair Value
Interest rate products
 
Other assets
 
$
7,594

 
$
4,321


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 three months ended March 31, 2018 and 2017, respectively (in thousands).

 
Three Months Ended March 31,
 
2018
 
2017
Amount of gain recognized in OCI on derivatives
$
3,390

 
$
161

Amount of gain reclassified from AOCI into interest
$
418

 
$
555




- 23 -



10. 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 following table represents the Company’s future minimum annual lease payments under operating leases as of March 31, 2018 (in thousands):
 
Operating Leases
Remaining 2018
$
954

2019
1,278

2020
1,286

2021
1,282

2022
1,304

Thereafter
35,347

Total minimum lease payments
$
41,451

 
Tax Protection Agreements
 
In connection with certain acquisitions in September 2013, 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, for a period of 12 years from closing, to indemnify the respective sellers receiving OP Units against certain tax liabilities incurred by them, as calculated pursuant to the respective Tax Protection Agreements. Further, in connection with certain acquisitions from December 2014 through March 2017, the Company entered into Tax Protection Agreements with certain limited partners of the Operating Partnership that require the Company, subject to certain exceptions, for a period of 10 years from closing, to indemnify the respective sellers receiving OP Units against certain tax liabilities incurred by them, as calculated pursuant to the respective 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).

11. 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 three months ended March 31, 2018 and 2017, the Company incurred approximately $15,000 and $13,000, respectively, of expenses relating to the agreements. These expenses were included in general and administrative expenses in the accompanying consolidated statements of operations.

12. Subsequent Events

On April 25, 2018, ROIC’s board of directors declared a cash dividend on its common stock and a distribution on the Operating Partnership’s OP Units of $0.1950 per share and per OP Unit, payable on June 28, 2018 to holders of record on June 14, 2018.


- 24 -



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words “believes,” “anticipates,” “projects,” “should,” “estimates,” “expects,” and similar expressions are intended to identify forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and in Section 21F of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Actual results may differ materially due to uncertainties including:
 
our ability to identify and acquire retail real estate that meet our investment standards in our markets;
the level of rental revenue we achieve from our assets;
the market value of our assets and the supply of, and demand for, retail real estate in which we invest;
the state of the U.S. economy generally, or in specific geographic regions;
the impact of economic conditions on our business;
the conditions in the local markets in which we operate and our concentration in those markets, as well as changes in national economic and market conditions;
consumer spending and confidence trends;
our ability to enter into new leases or to renew leases with existing tenants at the properties we own or acquire at favorable rates;
our ability to anticipate changes in consumer buying practices and the space needs of tenants;
the competitive landscape impacting the properties we own or acquire and their tenants;
our relationships with our tenants and their financial condition and liquidity;
our ability to continue to qualify as a real estate investment trust for U.S. federal income tax (a “REIT”);
our use of debt as part of our financing strategy and our ability to make payments or to comply with any covenants under our senior unsecured notes, our unsecured credit facilities or other debt facilities we currently have or subsequently obtain;
the level of our operating expenses, including amounts we are required to pay to our management team;
changes in interest rates that could impact the market price of our common stock and the cost of our borrowings; and
legislative and regulatory changes (including changes to laws governing the taxation of REITs).

Forward-looking statements are based on estimates as of the date of this report. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.
 
We caution that the foregoing list of factors is not all-inclusive. All subsequent written and oral forward-looking statements concerning us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We caution not to place undue reliance upon any forward-looking statements, which speak only as of the date made. We do not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based. Other sections of this report may include additional factors that could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from

- 25 -



those contained in any forward-looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Overview
 
Retail Opportunity Investments Corp. (“ROIC”) 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 (the “Operating Partnership”), together with its subsidiaries. ROIC reincorporated as a Maryland corporation on June 2, 2011. ROIC has elected to be taxed as a REIT, for U.S. federal income tax purposes, commencing with the year ended December 31, 2010.
 
ROIC commenced operations in October 2009 as a fully integrated and self-managed REIT, and as of March 31, 2018, ROIC owned an approximate 90.6% partnership interest and other limited partners owned the remaining approximate 9.4% 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 March 31, 2018, the Company’s portfolio consisted of 92 properties (91 retail and one office) totaling approximately 10.5 million square feet of gross leasable area (“GLA”). As of March 31, 2018, the Company’s portfolio was approximately 97.4% leased. During the three months ended March 31, 2018, the Company leased or renewed a total of 424,000 square feet in its portfolio. The Company has committed approximately $4.2 million, or $49.14 per square foot, in tenant improvements, including building improvements, for new leases that occurred during the three months ended March 31, 2018. The Company has committed approximately $103,000, or $1.20 per square foot, in leasing commissions, for the new leases that occurred during the three months ended March 31, 2018. The Company has committed approximately $600,000, or $1.77 per square foot, in tenant improvements, including building improvements, for the renewed leases that occurred during the three months ended March 31, 2018. Leasing commission commitments for renewed leases were not material for the three months ended March 31, 2018.

Subsequent Events
 
On April 25, 2018, ROIC’s board of directors declared a cash dividend on its common stock and a distribution on the Operating Partnership’s OP Units of $0.1950 per share and per OP Unit, payable on June 28, 2018 to holders of record on June 14, 2018.

Results of Operations
 
At March 31, 2018, the Company had 92 properties (91 retail and one office), all of which are consolidated in the accompanying financial statements. The Company believes, because of the location of the properties in densely populated areas, the nature of its investments provides for relatively stable revenue flows even during difficult economic times. The Company has a strong capital structure with manageable debt as of March 31, 2018. 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 and recoveries from tenants), less property and related expenses (property operating expenses and property taxes). Property operating income 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 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 three months ended March 31, 2018 compared to the three months ended March 31, 2017.

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Property Operating Income
 
The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to consolidated property operating income for the three months ended March 31, 2018 and 2017 (in thousands).

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Operating income per GAAP
$
27,281

 
$
22,926

Plus:
Depreciation and amortization
25,217

 
23,058

 
General and administrative expenses
3,531

 
3,499

 
Other expenses
69

 
49

Property operating income
$
56,098

 
$
49,532

 
The following comparison for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, makes reference to the effect of the same-center properties. Same-center properties, which totaled 79 of the Company’s 92 properties as of March 31, 2018, 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 one shopping center that is currently lined up to be sold and is slated for new multi-family development and is no longer being managed as a retail asset.

The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to property operating income for the three months ended March 31, 2018 related to the 79 same-center properties owned by the Company during the entirety of both the three months ended March 31, 2018 and 2017 and consolidated into the Company’s financial statements during such periods (in thousands).

 
 
Three Months Ended March 31, 2018
 
 
Same-Center
 
Non Same-Center
 
Total
Operating income per GAAP
$
25,617

 
$
1,664

 
$
27,281

Plus:
Depreciation and amortization
21,792

 
3,425

 
25,217

 
General and administrative expenses (1)

 
3,531

 
3,531

 
Other expenses (1)

 
69

 
69

Property operating income
$
47,409

 
$
8,689

 
$
56,098

______________________
(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.

The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to property operating income for the three months ended March 31, 2017 related to the 79 same-center properties owned by the Company during the entirety of both the three months ended March 31, 2018 and 2017 and consolidated into the Company’s financial statements during such periods (in thousands).
 
 
 
Three Months Ended March 31, 2017
 
 
Same-Center
 
Non Same-Center
 
Total
Operating income (loss) per GAAP
$
26,283

 
$
(3,357
)
 
$
22,926

Plus:
Depreciation and amortization
22,488

 
570

 
23,058

 
General and administrative expenses (1)

 
3,499

 
3,499

 
Other expenses (1)

 
49

 
49

Property operating income
$
48,771

 
$
761

 
$
49,532

______________________
(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.

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During the three months ended March 31, 2018, the Company generated property operating income of approximately $56.1 million compared to property operating income of $49.5 million generated during the three months ended March 31, 2017. Property operating income increased by approximately $6.6 million during the three months ended March 31, 2018 primarily as a result of an increase in the number of properties owned by the Company in 2018 compared to 2017 as well as $2.2 million of lease settlement income received in connection with a property that is currently lined up to be sold and is slated for new multi-family development.  As of March 31, 2018, the Company owned 92 consolidated properties as compared to 84 properties at March 31, 2017. The newly acquired properties increased property operating income in the three months ended March 31, 2018 by approximately $7.9 million compared to the three months ended March 31, 2017. The property operating income for the 79 same-center properties decreased approximately $1.4 million primarily due to the decrease of $2.7 million accelerated recognition of a below-market lease intangible liability resulting from a lease termination in the three months ended March 31, 2017, offset by an increase in minimum rent.

Depreciation and amortization
 
The Company incurred depreciation and amortization expenses during the three months ended March 31, 2018 of approximately $25.2 million compared to $23.1 million incurred during the three months ended March 31, 2017. Depreciation and amortization expenses were higher in 2018 as a result of an increase in the number of properties owned by the Company in the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
 
General and administrative expenses
 
The Company incurred general and administrative expenses of approximately $3.5 million during both the three months ended March 31, 2018 and 2017.

Interest expense and other finance expenses
 
The Company incurred interest expense during the three months ended March 31, 2018 of approximately $15.5 million compared to approximately $11.7 million during the three months ended March 31, 2017. The increase of approximately $3.8 million was primarily due to the incremental increase in cost due to the Senior Notes Due 2027 issued in December 2017 and increased borrowings.

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 three months ended March 31, 2018 and 2017 (in thousands).
 

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Three Months Ended March 31,
 
2018
 
2017
Net income attributable to ROIC
$
10,702

 
$
10,170

Plus:  Depreciation and amortization
25,217

 
23,058

Funds from operations – basic
35,919

 
33,228

Net income attributable to non-controlling interests
1,122

 
1,081

Funds from operations – diluted
$
37,041

 
$
34,309

 
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 three months ended March 31, 2018 and 2017. The table makes reference to the effect of the same-center properties. Same-center properties, which totaled 79 of the Company’s 92 properties for the three months ended March 31, 2018, respectively, 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 one shopping center that is currently lined up to be sold and is slated for new multi-family development and is no longer being managed as a retail asset (in thousands).
 
 
Three Months Ended March 31,
 
2018
 
2017
GAAP operating income
$
27,281

 
$
22,926

Depreciation and amortization
25,217

 
23,058

General and administrative expenses
3,531

 
3,499

Other expense
69

 
49

Property revenues and other expenses (1)
(5,509
)
 
(6,889
)
Total Company cash NOI
50,589

 
42,643

Non same-center cash NOI
(7,737
)
 
(800
)
Same-center cash NOI
$
42,852

 
$
41,843

______________________
(1)
Includes straight-line rents, amortization of above and below-market lease intangibles, anchor lease termination fees, net of contractual amounts, and expense and recovery adjustments related to prior periods.

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During the three months ended March 31, 2018, the Company generated same-center cash NOI of approximately $42.9 million compared to same center cash NOI of approximately $41.8 million generated during the three months ended March 31, 2017, representing a 2.4% increase. This increase is primarily due to an increase in base rents and recoveries from tenants and a decrease in bad debt expense, offset by an increase in operating expenses.

Critical Accounting Policies
 
Critical accounting policies 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 policies 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 ROIC’s and the Operating Partnership’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 on 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 is subject to revision as these factors change and is 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.

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 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).  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

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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 (years)
39
40
 
 
 
 
 
 
Building Improvements (years)
10
20
 
 
 
 
 
 
Furniture/Fixtures (years)
3
10
 
 
 
 
 
 
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. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value. Management does not believe that the value of any of the Company’s real estate investments was impaired at March 31, 2018.

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 ROIC 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

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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 May 2016 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 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 three months ended March 31, 2018, the Company’s primary source of cash was distributions from the Operating Partnership. As of March 31, 2018, the Company has determined that it has adequate working capital to meet its dividend funding obligations for the next twelve months. 

During the year ended December 31, 2014, ROIC entered into three separate Sales Agreements (the “Original Sales Agreements”) with each of Jefferies LLC, KeyBanc Capital Markets Inc. and Raymond James & Associates, Inc. (each individually, an “Original Agent” and collectively, the “ Original Agents”) pursuant to which ROIC may sell, from time to time, shares of ROIC’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $100.0 million through the Original Agents either as agents or principals. On May 23, 2016, ROIC entered into two additional sales agreements (the “Additional Sales Agreements”, and together with the Original Sales Agreements, the “Sales Agreements”) with each of Canaccord Genuity Inc. and Robert W. Baird & Co. Incorporated (the “Additional Agents”, and together with the Original Agents, the “Agents”) pursuant to which the Company may sell shares of ROIC’s common stock through the Additional Agents either as agents or principals. In addition, on February 21, 2018, the Company terminated the Additional Sales Agreement with Canaccord Genuity, Inc.

During the three months ended March 31, 2018, ROIC sold a total of 75,314 shares of common stock under the Sales Agreements, which resulted in gross proceeds of approximately $1.5 million and commissions of approximately $19,000 paid to the Agents.
 
For the three months ended March 31, 2018, dividends paid to stockholders totaled approximately $22.1 million.  Additionally, for the three months ended March 31, 2018, the Operating Partnership made distributions of approximately $2.3 million to the non-controlling interest OP Unitholders. On a consolidated basis, cash flows from operations for the same period totaled approximately $44.4 million.  For the three months ended March 31, 2017, dividends paid to stockholders totaled approximately $20.7 million.  Additionally, for the three months ended March 31, 2017, the Operating Partnership made distributions of approximately $2.1 million to the non-controlling interest OP Unitholders. On a consolidated basis, cash flows from operations for the same period totaled approximately $39.7 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 three months ended March 31, 2018, the Operating Partnership’s primary sources of cash were (i) cash flow from operations and (ii) proceeds from bank borrowings under the credit facility. As of March 31, 2018, the Operating Partnership has determined that it has adequate working capital to meet its debt obligations and operating expenses for the next twelve months.
 
On September 29, 2015, the Company entered into a term loan agreement. Effective September 8, 2017, the Company entered into a First Amended and Restated Term Loan Agreement (the “Term Loan Agreement”) pursuant to which the maturity date of

- 32 -



the term loan was extended from January 31, 2019 to September 8, 2022, 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 1.10%. 

The Operating Partnership has an unsecured revolving credit facility with several banks. Effective September 8, 2017, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Facility Agreement”) pursuant to which the borrowing capacity under the credit facility was increased from $500.0 million to $600.0 million. The maturity date of the credit facility was extended from January 31, 2019 to September 8, 2021, 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 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 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 1.00%. 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.
 
Both the term loan and credit facility contain customary representations, financial and other covenants. The Operating Partnership’s ability to borrow under the credit facility and term loan is subject to its compliance with financial covenants and other restrictions on an ongoing basis. The Operating Partnership was in compliance with such covenants at March 31, 2018.

As of March 31, 2018, $300.0 million and $159.5 million were outstanding under the term loan and credit facility, respectively. The weighted average interest rate on the term loan during the three months ended March 31, 2018 was 2.7%. The weighted average interest rate on the credit facility during the three months ended March 31, 2018 was 2.6%. The Company had no available borrowings under the term loan at March 31, 2018. The Company had $440.5 million available to borrow under the credit facility at March 31, 2018.

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.
 
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.
 
Cash Flows 

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands):
 
 
Three Months Ended March 31,
 
2018
 
2017
Net Cash Provided by (Used in):
 

 
 

Operating Activities
$
44,423

 
$
39,651

Investing Activities
$
(27,778
)
 
$
(97,524
)
Financing Activities
$
(18,600
)
 
$
64,216

 
Net Cash Flows from:
 
Operating Activities

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Net cash flows provided by operating activities amounted to $44.4 million in the three months ended March 31, 2018, compared to $39.7 million