f10k_022514.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
 
or
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to         .
 
RETAIL OPPORTUNITY INVESTMENTS CORP.
 (Exact name of registrant as specified in its charter)
Commission file number:  001-33749
 
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
 (Exact name of registrant as specified in its charter)
Commission file number:  333-189057-01
 
Maryland (Retail Opportunity Investments Corp.)
Delaware (Retail Opportunity Investments Partnership, LP)
 (State or other jurisdiction of
incorporation or organization)
8905 Towne Centre Drive, Suite 108
San Diego, CA
(Address of principal executive offices)
26-0500600 (Retail Opportunity Investments Corp.)
94-2969738 (Retail Opportunity Investments Partnership, LP)
 (I.R.S. Employer
Identification No.)
92122
(Zip code)

Registrant’s telephone number, including area code:
(858) 677-0900
Securities Registered Pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $0.0001 par value per share
Warrants, exercisable for Common Stock at
an exercise price of $12.00 per share
Units, each consisting of one share of
Common Stock and one Warrant
 
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act:
 
Retail Opportunity Investments Corp.                                                   None
Retail Opportunity Investments Partnership, LP                                  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
 
 
Retail Opportunity Investments Corp.
Yes x No o
 
Retail Opportunity Investments Partnership, LP
Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  
 
 
Retail Opportunity Investments Corp.
Yes x No o
 
Retail Opportunity Investments Partnership, LP
Yes x No o
 

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 o
 
Retail Opportunity Investments Partnership, LP
Yes x No o
 
 
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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 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 o
 
Retail Opportunity Investments Partnership, LP
Yes x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 Retail Opportunity Investments Corp.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o

Retail Opportunity Investments Partnership, LP
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company o
 
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 o No x
 
Retail Opportunity Investments Partnership, LP
Yes o No x
 
The aggregate market value of the common equity held by non-affiliates of Retail Opportunity Investments Corp. as of June 30, 2013, the last business day of its most recently completed second fiscal quarter, was $983.1 million (based on the closing sale price of $13.90 per share of Retail Opportunity Investments Corp. common stock on that date as reported on the NASDAQ Global Select Market).

There is no public trading market for the operating partnership units of Retail Opportunity Investments Partnership, LP.  As a result the aggregate market value of common equity securities held by non-affiliates of this registrant cannot be determined.
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 72,699,074 shares of common stock, par value $0.0001 per share, of Retail Opportunity Investments Corp. outstanding as of February 20, 2014.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of Retail Opportunity Investments Corp.’s definitive proxy statement for its 2014 Annual Meeting, to be filed within 120 days after its fiscal year, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 
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EXPLANATORY PARAGRAPH

This report combines the annual reports on Form 10-K for the year ended December 31, 2013 of Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”), and Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”) of which Retail Opportunity Investments Corp. is the parent company and through its wholly owned subsidiary, acts as 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 Retail Opportunity Investments Partnership, LP.  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 (“REIT”) and as of December 31, 2013, ROIC owned an approximate 95.8% 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.  Through this subsidiary, ROIC has full and complete authority and control over the Operating Partnership’s business.

The Company believes that combining the annual reports on Form 10-K 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 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 REIT, whose only material assets are its direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, which is the sole general partner of the Operating Partnership.  As a result, ROIC does not conduct business itself, other than acting as the parent company and through Retail Opportunity Investments Partnership GP, LLC as the sole general partner of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Company conducts its business through the Operating Partnership, which is structured as a partnership with no publicly traded equity.  Except for net proceeds from warrant exercises and 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.

Noncontrolling interests is the primary 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 noncontrolling 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 Partnership.

This report also includes separate Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 9A. 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.
 
 
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RETAIL OPPORTUNITY INVESTMENTS CORP.
 
     
TABLE OF CONTENTS
 
     
   
Page
 
 
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Statements Regarding Forward-Looking Information
 
When used in this discussion and elsewhere in this Annual Report on Form 10-K, the words “believes,” “anticipates,” “projects,” “should,” “estimates,” “expects,” and similar expressions are intended to identify forward-looking statements with 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:
 
·  
the Company’s ability to identify and acquire retail real estate that meet its investment standards in its markets;
 
·  
the level of rental revenue and net interest income the Company achieves from its assets;
 
·  
the market value of the Company’s assets and the supply of, and demand for, retail real estate in which it invests;
 
·  
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 the Company operates and its concentration in those markets, as well as changes in national economic and market conditions;
 
·  
consumer spending and confidence trends;
 
·  
the Company’s ability to enter into new leases or to renew leases with existing tenants at the properties it owns or acquires at favorable rates;
 
·  
the Company’s ability to anticipate changes in consumer buying practices and the space needs of tenants;
 
·  
the competitive landscape impacting the properties the Company owns or acquires and their tenants;
 
·  
the Company’s relationships with its tenants and their financial condition and liquidity;
 
·  
ROIC’s ability to continue to qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes;
 
·  
the Company’s use of debt as part of its financing strategy and its ability to make payments or to comply with any covenants under its senior unsecured notes, its unsecured credit facilities or other debt facilities it currently has or subsequently obtains;
 
·  
the Company’s level of operating expenses, including amounts it is required to pay to its management team and to engage third party property managers;
 
·  
changes in interest rates that could impact the market price of ROIC’s common stock and the cost of the Company’s borrowings; and
 
·  
the exercise, or level of exercise, of ROIC’s warrants, exercisable for Common Stock at an exercise price of $12.00 per share (the “warrants”);
 
·  
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 Annual Report on Form 10-K.  The Company disclaims 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 Annual Report on Form 10-K.
 
 
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The risks included here are not exhaustive.  Other sections of this Annual Report on Form 10-K may include additional factors that could adversely affect the Company’s business and financial performance.  Moreover, the Company operates 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 the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from 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.
 
  PART I
 
In this Annual Report on Form 10-K, 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.
 
Item 1.  Business
 
Overview
 
Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”) commenced operations in October 2009 as a fully integrated, self-managed real estate investment trust (“REIT”), and as of December 31, 2013, ROIC owned an approximate 95.8% partnership interest and other limited partners owned the remaining 4.2% partnership interest in the Operating Partnership.  The Company specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers on the west coast of the United States, anchored by supermarkets and drugstores.  
 
From the commencement of its operations through December 31, 2013, the Company has completed approximately $1.3 billion of shopping center investments.  As of December 31, 2013, the Company’s portfolio consisted of 55 retail properties totaling approximately 5.9 million square feet of gross leasable area, or GLA.

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 sole general partner of, and ROIC conducts substantially all of its business through, its operating partnership, Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), together with its subsidiaries. Unless otherwise indicated or unless the context requires otherwise, all references to the “Company”, “we,” “us,” “our,” or “our company” refer to ROIC together with its consolidated subsidiaries, including the Operating Partnership.

ROIC’s only material assets are its direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, which is the sole general partner of the Operating Partnership. As a result, ROIC does not conduct business itself, other than acting as the parent company and through this subsidiary, acts as the sole general partner of the Operating Partnership.  The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from warrant exercises and equity issuances by ROIC, which are contributed to the Operating Partnership, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) or through the issuance of operating partnership units (“OP Units”) of the Operating Partnership.
 
Investment Strategy
 
The Company seeks to acquire shopping centers located in densely populated, supply-constrained metropolitan markets in the western and eastern regions of the United States, which exhibit income and population growth and high barriers to entry.  The Company’s senior management team has operated in the Company’s markets for over 25 years and has established an extensive network of relationships in these markets with key institutional and private property owners, brokers and financial institutions and other real estate operators.  The Company’s in-depth local and regional market knowledge and expertise provides a distinct competitive advantage in identifying and accessing attractive acquisition opportunities, including properties that are not widely marketed.
 
The Company seeks to acquire high quality necessity-based community and neighborhood shopping centers anchored by national and regional supermarkets and drugstores that are well-leased, with stable cash flows.  Additionally, the Company acquires shopping centers which it believes are candidates for attractive near-term retenanting or present other value-enhancement opportunities.
 
Upon acquiring a shopping center, the Company normally commences leasing initiatives aimed at enhancing long-term value through re-leasing below market space and improving the tenant mix.  The Company focuses on leasing to retailers that provide necessity-based, non-discretionary goods and services, catering to the basic and daily needs of the surrounding community.  The Company believes necessity-based retailers draw consistent, regular traffic to its shopping centers, which results in stronger sales for its tenants and a more consistent revenue base.  Additionally, the Company seeks to maintain a strong and diverse tenant base with a balance of large, long-term leases to major national and regional retailers, including supermarkets, drugstores and discount stores, with small, shorter-term leases to a broad mix of national, regional and local retailers.  The Company believes the long-term anchor tenants provide a reliable, stable base of rental revenue, while the shorter-term leases afford the Company the opportunity to drive rental growth, as well as the ongoing flexibility to adapt to evolving consumer trends.
 
 
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The Company believes that the current market environment continues to present opportunities for it to further build its portfolio and add additional necessity-based community and neighborhood shopping centers that meet its investment profile.  The Company’s long-term objective is to prudently build and maintain a diverse portfolio of necessity-based community and neighborhood shopping centers aimed at providing stockholders with sustainable, long-term growth and value through all economic cycles.
 
In implementing its investment strategy and selecting an asset for acquisition, the Company analyzes the fundamental qualities of the asset, the inherent strengths and weaknesses of its market, sub-market drivers and trends, and potential risks and risk mitigants facing the property.  The Company believes that its acquisition process and operational expertise provide it with the capability to identify and properly underwrite investment opportunities.
 
 The Company’s aim is to seek to provide diversification of assets, tenant exposures, lease terms and locations as its portfolio expands.  In order to capitalize on the changing sets of investment opportunities that may be present in the various points of an economic cycle, the Company may expand or refocus its investment strategy.  The Company’s investment strategy may be amended from time to time, if approved by its board of directors.  The Company is not required to seek stockholder approval when amending its investment strategy.
 
Transactions During 2013
 
Investing Activity

Property Acquisitions
 
On February 1, 2013, the Company acquired the property known as Diamond Bar Town Center located in Diamond Bar, California, within the Los Angeles metropolitan area, for a purchase price of approximately $27.4 million.  Diamond Bar Town Center is approximately 100,000 square feet and is anchored by a national grocer. The property was acquired with borrowings under the Company’s credit facility (as defined below under “Credit Facility and Term Loan”).
 
On February 6, 2013, the Company acquired the property known as Bernardo Heights Plaza in Rancho Bernardo, California, within the San Diego metropolitan area, for a purchase price of approximately $12.4 million. Bernardo Heights Plaza is approximately 38,000 square feet and is anchored by Sprouts Farmers Market. The property was acquired with cash of approximately $3.6 million and the assumption of an existing mortgage with a principal amount of approximately $8.9 million, and a fair value of approximately $9.7 million.
 
On April 15, 2013, the Company acquired the property known as Canyon Crossing Shopping Center located in Puyallup, Washington, within the Seattle metropolitan area, for a purchase price of approximately $35.0 million.  Canyon Crossing Shopping Center is approximately 121,000 square feet and is anchored by Safeway Supermarket. The property was acquired using borrowings under the Company’s credit facility.
 
On April 22, 2013, the Company acquired the property known as Diamond Hills Plaza located in Diamond Bar, California, within the Los Angeles metropolitan area, for a purchase price of approximately $48.0 million.  Diamond Hills Plaza is approximately 140,000 square feet and is anchored by an H Mart Supermarket and a Rite Aid Pharmacy. The property was acquired using borrowings under the Company’s credit facility.
 
On June 27, 2013, the Company acquired the property known as Hawthorne Crossings located in San Diego, California, for a purchase price of approximately $41.5 million.  Hawthorne Crossings is approximately 141,000 square feet and is anchored by Mitsuwa Supermarket, Ross Dress For Less and Staples.  The property was acquired using borrowings under the Company’s credit facility.
 
On June 27, 2013, the Company acquired the property known as Granada Shopping Center located in Livermore, California, for a purchase price of approximately $17.5 million.  Granada Shopping Center is approximately 69,000 square feet and is anchored by SaveMart (Lucky) Supermarket.  The property was acquired using borrowings under the Company’s credit facility.
 
On August 23, 2013, the Company acquired the property known as Robinwood Shopping Center located in West Linn, Oregon, for a purchase price of approximately $14.2 million.  Robinwood Shopping Center is approximately 71,000 square feet and is anchored by Walmart Neighborhood Market.  The property was acquired using borrowings under the Company’s credit facility.
 
On September 18, 2013, the Company acquired a parcel of land adjacent to one of its properties located in Pomona, California, for a purchase price of approximately $700,000.  The parcel of land was acquired using available cash on hand.
 
 
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On October 15, 2013, the Company acquired the property known as Peninsula Marketplace located in Huntington Beach, California, for a purchase price of approximately $35.9 million.  Peninsula Marketplace is approximately 95,000 square feet and is anchored by Kroger (Ralphs) Supermarket.  The property was acquired using borrowings under the Company’s credit facility.
 
On November 26, 2013, the Company acquired the property known as Country Club Village located in San Ramon, California, for a purchase price of approximately $30.9 million.  Country Club Village is approximately 111,000 square feet and is anchored by Walmart Neighborhood Market and CVS Pharmacy.  The property was acquired using borrowings under the Company’s credit facility.
 
On December 13, 2013, the Company acquired the property known as Plaza de la Canada located in La Canada Flintridge, California, for a purchase price of approximately $34.8 million.  Plaza de la Canada is approximately 100,000 square feet and is anchored by Gelson’s Supermarket, TJ Maxx and Rite Aid Pharmacy.  The property was acquired using borrowings under the Company’s credit facility.
 
Acquisitions of Property-Owning Entities
 
On September 27, 2013, the Company acquired the remaining 51% of the partnership interests in the Terranomics Crossroads Associates, LP from its joint venture partner.  The purchase of the remaining interest was funded through the issuance of 2,639,632 OP Units with a fair value of approximately $36.4 million and the assumption of a $49.6 million mortgage loan on the property.  Prior to the acquisition date, the Company accounted for its 49% interest in the Terranomics Crossroad Associates, LP as an equity method investment.  The acquisition-date fair value of the previous equity interest was $36.0 million and is included in the measurement of the consideration transferred.  The Company recognized a gain of $20.4 million as a result of remeasuring its prior equity interest in the venture held before the acquisition.  The gain is included in the line item Gain on consolidation of joint venture in the consolidated income statement.  The primary asset of Terranomics Crossroads Associates is Crossroads Shopping Center located in Bellevue, Washington, within the Seattle metropolitan area.  Crossroads Shopping Center is approximately 464,000 square feet and is anchored by Kroger (QFC) Supermarket, Sports Authority and Bed Bath and Beyond.
 
On September 27, 2013, the Company acquired 100% of the membership interests in SARM Five Points Plaza, LLC for an adjusted purchase price of approximately $52.6 million.  The primary asset of SARM Five Points Plaza, LLC is Five Points Plaza located in Huntington Beach, California.  Five Points Plaza is approximately 161,000 square feet and is anchored by Trader Joes, Old Navy and Pier 1.  The purchase of the membership interests was funded through approximately $43.6 million in cash using borrowings under the Company’s credit facility (of which approximately $17.2 million was used by the seller to pay off the existing financing) and the issuance of 650,631 OP Units with a fair value of approximately $9.0 million.
 
Property Dispositions
 
On June 5, 2013, the Company sold the Nimbus Village Shopping Center, a non-grocery anchored, non-core shopping center located in Rancho Cordova, California. The sales price of this property of approximately $6.3 million, less costs to sell, resulted in proceeds to the Company of approximately $5.6 million.  Accordingly, the Company recorded a loss on sale of property of approximately $714,000 for the year ended December 31, 2013, which has been included in discontinued operations.
 
Financing Activities
 
The Company employs prudent amounts of leverage and uses debt as a means of providing funds for the acquisition of its properties and the diversification of its portfolio.  The Company seeks to primarily utilize unsecured debt in order to maintain liquidity and flexibility in its capital structure.

Senior Notes Due 2023

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 in 2023 (the “Notes”), fully and unconditionally guaranteed by ROIC.  The Notes 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 Notes are part of 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 Notes 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 Notes 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).

 
8

 
Credit Facility and Term Loan
 
The Operating Partnership has a revolving credit facility (the “credit facility”) with several banks.  Previously, the credit facility provided for borrowings of up to $200.0 million.  Effective September 26, 2013, the Company entered into a third amendment to the amended and restated credit agreement pursuant to which the borrowing capacity was increased to $350.0 million.  Additionally, the credit facility contains an accordion feature, which was amended to allow the Operating Partnership to increase the facility amount up to an aggregate of $700.0 million, subject to lender consents and other conditions.  The maturity date of the credit facility has been extended by one year to August 29, 2017, subject to a further one-year extension option, which may be exercised by the Operating Partnership upon satisfaction of certain conditions.
 
The Operating Partnership has a term loan agreement (the “term loan”) with several banks.  The term loan provides for a loan of $200.0 million and contains an accordion feature, which allows the Operating Partnership to increase the facility amount up to an aggregate of $300.0 million subject to commitments and other conditions.  The maturity date of the term loan is August 29, 2017.
 
The Company obtained investment grade credit ratings from Moody’s Investors Service (Baa2) and Standard & Poor’s Ratings Services (BBB-) during the second quarter of 2013.  Prior to receiving such investment grade ratings, borrowings under the credit facility and term loan agreements (collectively, the “loan agreements”) accrued interest on the outstanding principal amount at a rate equal to an applicable rate based on the consolidated leverage ratio of the Company and its subsidiaries, plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds for dollar deposits for the relevant period (the “Eurodollar Rate”), or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the rate of interest announced by KeyBank National Association as its “prime rate,” and (c) the Eurodollar Rate plus 1.00% (the “Base Rate”).  Since receiving investment grade credit ratings from the two rating agencies, borrowings under the loan agreements accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of ROIC, plus, as applicable, (i) the Eurodollar Rate, or (ii) the Base Rate.  In addition, prior to receipt of such credit ratings, the Operating Partnership was obligated to pay an unused fee of (a) 0.35% of the undrawn balance if the total outstanding principal amount was less than 50% of the aggregate commitments or (b) 0.25% if the total outstanding principal amount was greater than or equal to 50% of the aggregate commitments, and a fronting fee at a rate of 0.125% per year with respect to each letter of credit issued under the agreements.  Subsequent to June 26, 2013, 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 agreements.  The loan agreements contain customary representations, financial and other covenants.  The Operating Partnership’s ability to borrow under the loan agreements 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 December 31, 2013.
 
As of December 31, 2013, $200.0 million and $56.9 million were outstanding under the term loan and credit facility, respectively.  The average interest rates on the term loan and credit facility during the twelve months ended December 31, 2013 were 1.6% and 1.5%, respectively.  The Company had $293.1 million available to borrow under the credit facility at December 31, 2013. The Company had no available borrowings under the term loan at December 31, 2013.
 
Mortgage Notes Payable
 
In addition, in connection with the acquisition of two properties, the Company assumed two mortgages with an unpaid aggregate principal amount as of December 31, 2013 of approximately $58.2 million.  Further, during the year ended December 31, 2013, the Company repaid the outstanding principal balance on the Gateway Village I and Gateway Village II mortgage note payables, totaling $13.4 million, without penalty, in accordance with the prepayment provisions of the notes.
 
ATM Equity Offering
 
During the year ended December 31, 2011, the Company entered into an ATM Equity OfferingSM Sales Agreement (“sales agreement”) with Merrill Lynch, Pierce, Fenner & Smith Incorporated to sell shares of the Company’s common stock, par value $0.0001 per share, having aggregate sales proceeds of $50.0 million from time to time, through an “at the market” equity offering program under which Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as sales agent and/or principal (“agent”).  During the year ended December 31, 2012 and 2011 the Company sold 3,051,445 and 131,800 shares respectively, under the sales agreement, which resulted in gross proceeds of approximately $37.8 million and $1.5 million, respectively and commissions of approximately $657,700 and $29,900, respectively,  paid to the agent. During the year ended December 31, 2013, the Company did not sell any shares under the sales agreement.  Through December 31, 2013, the Company has sold a total of 3,183,245 shares under the sales agreement, which resulted in gross proceeds of approximately $39.3 million and commissions of approximately $687,600 paid to the agent.
 
The Company plans to finance future acquisitions through a combination of cash, borrowings under its credit facilities, the assumption of existing mortgage debt, and equity and debt offerings, including possible exercises by the holders of the Company’s warrants.
 
Business Segments
 
The Company’s primary business is the ownership, management, and redevelopment of retail real estate properties.  The Company reviews operating and financing 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).  No individual property constitutes more than 10% of the Company’s revenues or property operating income, and the Company has no operations outside of the United States of America.  Therefore, 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.
 
 
9

 
Regulation
 
The following discussion describes certain material U.S. federal laws and regulations that may affect the Company’s operations and those of its tenants.  However, the discussion does not address state laws and regulations, except as otherwise indicated.  These state laws and regulations, like the U.S. federal laws and regulations, could affect the Company’s operations and those of its tenants.
 
Generally, real estate properties are subject to various laws, ordinances and regulations.  Changes in any of these laws or regulations, such as the Comprehensive Environmental Response and Compensation Liability Act, increase the potential liability for environmental conditions or circumstances existing or created by tenants or others on the properties.  In addition, laws affecting development, construction, operation, upkeep, safety and taxation requirements may result in significant unanticipated expenditures, loss of real estate property sites or other impairments, which would adversely affect its cash flows from operating activities.
 
Under the Americans with Disabilities Act of 1990 (the “Americans with Disabilities Act”) all places of public accommodation are required to meet certain U.S. federal requirements related to access and use by disabled persons.  A number of additional U.S. federal, state and local laws also exist that may require modifications to properties, or restrict certain further renovations thereof, with respect to access thereto by disabled persons.  Noncompliance with the Americans with Disabilities Act could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature and in substantial capital expenditures.  To the extent the Company’s properties are not in compliance, the Company may incur additional costs to comply with the Americans with Disabilities Act.
 
Property management activities are often subject to state real estate brokerage laws and regulations as determined by the particular real estate commission for each state.
 
Environmental Matters
 
Pursuant to U.S. federal, state and local environmental laws and regulations, a current or previous owner or operator of real property may be required to investigate, remove and/or remediate a release of hazardous substances or other regulated materials at or emanating from such property.  Further, under certain circumstances, such owners or operators of real property may be held liable for property damage, personal injury and/or natural resource damage resulting from or arising in connection with such releases.  Certain of these laws have been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility.  The failure to properly remediate the property may also adversely affect the owner’s ability to lease, sell or rent the property or to borrow funds using the property as collateral.
 
In connection with the ownership, operation and management of the Company’s current properties and any properties that it may acquire and/or manage in the future, the Company could be legally responsible for environmental liabilities or costs relating to a release of hazardous substances or other regulated materials at or emanating from such property.  In order to assess the potential for such liability, the Company conducts an environmental assessment of each property prior to acquisition and manages its properties in accordance with environmental laws while it owns or operates them.  All of its leases contain a comprehensive environmental provision that requires tenants to conduct all activities in compliance with environmental laws and to indemnify the owner for any harm caused by the failure to do so.  In addition, the Company has engaged qualified, reputable and adequately insured environmental consulting firms to perform environmental site assessments of its properties and is not aware of any environmental issues that are expected to materially impact the operations of any property.
 
Competition
 
The Company believes that competition for the acquisition, operation and development of retail properties is highly fragmented.  The Company competes with numerous owners, operators and developers for acquisitions and development of retail properties, including institutional investors, other REITs and other owner-operators of necessity-based community and neighborhood shopping centers, primarily anchored by supermarkets and drugstores, some of which own or may in the future own properties similar to the Company’s in the same markets in which its properties are located.  The Company also faces competition in leasing available space to prospective tenants at its properties.  Economic conditions have caused a greater than normal amount of space to be available for lease generally and in the markets in which the Company’s properties are located.  The actual competition for tenants varies depending upon the characteristics of each local market (including current economic conditions) in which the Company owns and manages property.  The Company believes that the principal competitive factors in attracting tenants in its market areas are location, demographics, price, the presence of anchor stores and the appearance of properties.
 
 
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Many of the Company’s competitors are substantially larger and have considerably greater financial, marketing and other resources than the Company.  Other entities may raise significant amounts of capital, and may have investment objectives that overlap with those of the Company, which may create additional competition for opportunities to acquire assets.  In the future, competition from these entities may reduce the number of suitable investment opportunities offered to the Company or increase the bargaining power of property owners seeking to sell.  Further, as a result of their greater resources, such entities may have more flexibility than the Company does in their ability to offer rental concessions to attract tenants.  If the Company’s competitors offer space at rental rates below current market rates, or below the rental rates the Company currently charges its tenants, the Company may lose potential tenants and it may be pressured to reduce its rental rates below those it currently charges in order to retain tenants when its tenants’ leases expire.
 
Employees
 
As of December 31, 2013, the Company had 61 employees, including four executive officers, one of whom is also a member of its board of directors.
 
Available Information
 
The Company files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports with the Securities and Exchange Commission (the “SEC”).  You may obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330.  The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  The Company’s website is www.roireit.net.  The Company’s reports on Forms 10-K, 10-Q and 8-K, and all amendments to those reports are available free of charge on its Website as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC.  The contents of the Company’s website are not incorporated by reference herein.

Item 1A.  Risk Factors
 
Risks Related to the Company’s Business and Operations
 
There are risks relating to investments in real estate.
 
Real property investments are subject to varying degrees of risk.  Real estate values are affected by a number of factors, including:  changes in the general economic climate, local conditions (such as an oversupply of space or a reduction in demand for real estate in an area), the quality and philosophy of management, competition from other available space, the ability of the owner to provide adequate maintenance and insurance and to control variable operating costs.  Shopping centers, in particular, may be affected by changing perceptions of retailers or shoppers regarding the safety, convenience and attractiveness of the shopping center, increasing consumer purchases through online retail websites and catalogs, the ongoing consolidation in the retail sector and by the overall climate for the retail industry generally.  Real estate values are also affected by such factors as government regulations, interest rate levels, the availability of financing and potential liability under, and changes in, environmental, zoning, tax and other laws.  A significant portion of the Company’s income is derived from rental income from real property.  The Company’s income, cash flow, results of operations, financial condition, liquidity and ability to service its debt obligations could be materially and adversely affected if a significant number of its tenants were unable to meet their obligations, or if it were unable to lease on economically favorable terms a significant amount of space in its properties.  In the event of default by a tenant, the Company may experience delays in enforcing, and incur substantial costs to enforce, its rights as a landlord.  In addition, certain significant expenditures associated with each equity investment (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment.
 
The Company operates in a highly competitive market and competition may limit its ability to acquire desirable assets and to attract and retain tenants.
 
The Company operates in a highly competitive market.  The Company’s profitability depends, in large part, on its ability to acquire its assets at favorable prices and on trends impacting the retail industry in general, national, regional and local economic conditions, financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.  Many of the Company’s competitors are substantially larger and have considerably greater financial, marketing and other resources than it does.  Other entities may raise significant amounts of capital, and may have investment objectives that overlap with the Company’s.  In addition, the properties that the Company acquires may face competition from similar properties in the same market.  At the time of the commencement of the Company’s operations, conditions in the capital markets and the credit markets reduced competitors’ ability to finance acquisitions.  As access to capital and credit have improved and the number of competitors operating in the Company’s markets have increased, the Company has faced increased competition for acquisition opportunities.  This competition may create additional competition for opportunities to acquire assets and to attract and retain tenants.

 
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The Company may change any of its strategies, policies or procedures without stockholder consent, which could materially and adversely affect its business.
 
The Company may change any of its strategies, policies or procedures with respect to acquisitions, asset allocation, growth, operations, indebtedness, financing strategy and distributions, including those related to maintaining its REIT qualification, at any time without the consent of its stockholders, which could result in making acquisitions that are different from, and possibly riskier than, the types of acquisitions described in this Annual Report on Form 10-K.  A change in the Company’s strategy may increase its exposure to real estate market fluctuations, financing risk, default risk and interest rate risk.  Furthermore, a change in the Company’s asset allocation could result in the Company making acquisitions in asset categories different from those described in this Annual Report on Form 10-K.  These changes could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
The Company’s directors are subject to potential conflicts of interest.
 
The Company’s executive officers and directors face conflicts of interest.  Except for Messrs. Tanz, Haines and Schoebel, none of the Company’s executive officers or directors are required to commit his full time to its affairs and, accordingly, they may have conflicts of interest in allocating management time among various business activities.  In addition, except for Mr. Tanz, each of the Company’s directors (including the Company’s non-Executive Chairman) is engaged in several other business endeavors.  In the course of their other business activities, the Company’s directors may become aware of investment and business opportunities that may be appropriate for presentation to the Company as well as the other entities with which they are affiliated.  They may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
 
As a result of multiple business affiliations, the Company’s non-management directors may have legal obligations relating to presenting opportunities to acquire one or more properties, portfolios or real estate-related debt investments to other entities.  The Company’s non-management directors (including the Company’s non-executive Chairman) may present such opportunities to the other entities to which they owe pre-existing fiduciary duties before presenting such opportunities to the Company.  In addition, conflicts of interest may arise when the Company’s board of directors evaluates a particular opportunity.
 
Capital markets and economic conditions can materially affect the Company’s financial condition, its results of operations and the value of its assets.
 
There are many factors that can affect the value of the Company’s assets, including the state of the capital markets and economy.  The recent economic downturn negatively affected consumer spending and retail sales, which adversely impacted the performance and value of retail properties in most regions in the United States.  In addition, loans backed by real estate were increasingly difficult to obtain and that difficulty, together with a tightening of lending policies, resulted in a significant contraction in the amount of debt available to fund retail properties.  Although the Company has recently seen a gradual improvement in the credit and real estate markets, any reduction in available financing may materially and adversely affect its ability to achieve its financial objectives.  Concern about the stability of the markets generally may limit the Company’s ability and the ability of its tenants to timely refinance maturing liabilities and access the capital markets to meet liquidity needs.  Although the Company will factor in these conditions in acquiring its assets, its long term success depends in part on improving economic conditions and the eventual return of a stable and dependable financing market for retail real estate.  If market conditions do not continue to improve, the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders could be materially and adversely affected.
 
Bankruptcy or insolvency of tenants may decrease the Company’s revenues and available cash.
 
In the case of many retail properties, the bankruptcy or insolvency of a major tenant could cause the Company to suffer lower revenues and operational difficulties, and could allow other tenants to exercise so-called “kick-out” clauses in their leases and terminate their lease or reduce their rents prior to the normal expiration of their lease terms.  As a result, the bankruptcy or insolvency of major tenants could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
Inflation or deflation may materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and distributions to its securityholders.
 
Increased inflation could have a pronounced negative impact on the Company’s property operating expenses and general and administrative expenses, as these costs could increase at a rate higher than the Company’s rents.  Inflation could also have an adverse effect on consumer spending which could impact the Company’s tenants’ sales and, in turn, the Company’s percentage rents, where applicable, and the willingness and ability of tenants to enter into or renew leases and/or honor their obligations under existing leases.  Conversely, deflation could lead to downward pressure on rents and other sources of income.
 
 
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Compliance or failure to comply with safety regulations and requirements could result in substantial costs.
 
The Company’s properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements.  If the Company fails to comply with these requirements, it could incur fines or private damage awards.  The Company does not know whether compliance with the requirements will require significant unanticipated expenditures that could affect its income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
The Company expects to acquire additional properties and this may create risks.
 
The Company expects to acquire additional properties consistent with its investment strategies.  The Company may not, however, succeed in consummating desired acquisitions on time or within budget.  In addition, the Company may face competition in pursuing acquisition opportunities, which could result in increased acquisition costs.  When the Company does pursue a project or acquisition, it may not succeed in leasing newly acquired properties at rents sufficient to cover its costs of acquisition.  Difficulties in integrating acquisitions may prove costly or time-consuming and could result in poorer than anticipated performance.  The Company may also abandon acquisition opportunities that it has begun pursuing and consequently fail to recover expenses already incurred.  Furthermore, acquisitions of new properties will expose the Company to the liabilities of those properties, including, for example, liabilities for clean-up of disclosed or undisclosed environmental contamination, claims by persons in respect of events transpiring or conditions existing before the Company’s acquisition and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of properties.
 
Factors affecting the general retail environment could adversely affect the financial condition of the Company’s retail tenants and the willingness of retailers to lease space in its shopping centers, and in turn, materially and adversely affect the Company.
 
The Company’s properties are focused on the retail real estate market.  This means that the performance of the Company’s properties will be impacted by general retail market conditions, including the level of consumer spending and consumer confidence, the threat of terrorism and increasing competition from online retail websites and catalog companies.  These conditions could adversely affect the financial condition of the Company’s retail tenants and the willingness and ability of retailers to lease space, or renew existing leases, in the Company’s shopping centers and to honor their obligations under existing leases, and in turn, materially and adversely affect the Company.
 
The Company’s growth depends on external sources of capital, which may not be available in the future.
 
In order to maintain its qualification as a REIT, the Company is required under the Internal Revenue Code of 1986, as amended (the “Code”), to annually distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain.  After the Company invests its cash on hand, it expects to depend primarily on its credit facilities and other external financing to fund the growth of its business (including debt and equity financings).  The Company’s access to debt or equity financing depends on the willingness of third parties to lend or make equity investments and on conditions in the capital markets generally.  As a result of changing economic conditions, the Company may be limited in its ability to obtain additional financing or to refinance existing debt maturities on favorable terms or at all and there can be no assurances as to when financing conditions will improve.
 
The Company does not have a formal policy limiting the amount of debt it may incur and its board of directors may change its leverage policy without stockholder consent, which could result in a different risk profile.
 
Although the Company’s Charter and Bylaws do not limit the amount of indebtedness the Company can incur, the Company’s policy is to employ prudent amounts of leverage and use debt as a means of providing additional funds for the acquisition of its assets and the diversification of its portfolio.  The amount of leverage the Company will deploy for particular investments in its assets will depend upon its management team’s assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the assets in its investment portfolio, the potential for losses, the availability and cost of financing the assets, the Company’s opinion of the creditworthiness of its financing counterparties, the health of the U.S. economy and commercial mortgage markets, the Company’s outlook for the level, slope and volatility of interest rates, the credit quality of the tenants occupying space at the Company’s properties, and the need for the Company to comply with financial covenants contained in the Company’s credit facilities.  The Company’s board of directors may change its leverage policies at any time without the consent of its stockholders, which could result in an investment portfolio with a different risk profile.
 
The Company could be adversely affected if it or any of its subsidiaries are required to register as an investment company under the Investment Company Act of 1940 as amended (the “1940 Act”).
 
The Company conducts its operations so that neither it, nor the Operating Partnership nor any of the Company’s other subsidiaries, is required to register as investment companies under the 1940 Act.  If the Company, the Operating Partnership or the Company’s other subsidiaries are required to register as an investment company but fail to do so, the unregistered entity would be prohibited from engaging in certain business, and criminal and civil actions could be brought against such entity.  In addition, the contracts of such entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the entity and liquidate its business.
 
 
13

 
Real estate investments’ value and income fluctuate due to conditions in the general economy and the real estate business, which may materially and adversely affect the Company’s ability to service its debt and expenses.
 
The value of real estate fluctuates depending on conditions in the general and local economy and the real estate business.  These conditions may also limit the Company’s revenues and available cash.  The rents the Company receives and the occupancy levels at its properties may decline as a result of adverse changes in conditions in the general economy and the real estate business.  If rental revenues and/or occupancy levels decline, the Company generally would expect to have less cash available to pay indebtedness and for distribution to its securityholders.  In addition, some of the Company’s major expenses, including mortgage payments, real estate taxes and maintenance costs, generally do not decline when the related rents decline.
 
The lack of liquidity of the Company’s assets could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders, and could materially and adversely affect the Company’s ability to value and sell its assets.
 
Real estate investments are relatively difficult to buy and sell quickly.  As a result, the Company expects many of its investments will be illiquid and if it is required to liquidate all or a portion of its portfolio quickly, it may realize significantly less than the value at which it had previously recorded its investments.
 
The Company depends on leasing space to tenants on economically favorable terms and collecting rent from tenants, some of whom may not be able to pay.
 
The Company’s financial results depend significantly on leasing space in its properties to tenants on economically favorable terms.  In addition, as a substantial majority of the Company’s revenue comes from renting of real property, the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders could be materially and adversely affected if a significant number of its tenants cannot pay their rent or if the Company is not able to maintain occupancy levels on favorable terms.  If a tenant does not pay its rent, the Company may not be able to enforce its rights as landlord without delays and may incur substantial legal costs.
 
Some of the Company’s properties depend on anchor stores or major tenants to attract shoppers and could be materially and adversely affected by the loss of or a store closure by one or more of these tenants.
 
The Company’s shopping centers are primarily anchored by national and regional supermarkets and drug stores.  The value of the retail properties the Company acquires could be materially and adversely affected if these tenants fail to comply with their contractual obligations, seek concessions in order to continue operations or cease their operations.  Adverse economic conditions may result in the closure of existing stores by tenants which may result in increased vacancies at the Company’s properties.  If there are periods of significant vacancies for the Company’s properties they could materially and adversely impact the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
Loss of revenues from major tenants could reduce the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
The Company derives significant revenues from anchor tenants such as Safeway, Inc., Kroger and Rite Aid Pharmacy.  As of December 31, 2013, these tenants are the Company’s three largest tenants and accounted for 5.0%, 3.3% and 2.6% respectively, of its annualized base rent on a pro-rata basis.  The Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders could be materially and adversely affected by the loss of revenues in the event a major tenant becomes bankrupt or insolvent, experiences a downturn in its business, materially defaults on its leases, does not renew its leases as they expire, or renews at lower rental rates.
 
The Company’s Common Area Maintenance (“CAM”) contributions may not allow it to recover the majority of its operating expenses from tenants.
 
CAM costs typically include allocable energy costs, repairs, maintenance and capital improvements to common areas, janitorial services, administrative, property and liability insurance costs and security costs.  The Company may acquire properties with leases with variable CAM provisions that adjust to reflect inflationary increases or leases with a fixed CAM payment methodology which fixes its tenants’ CAM contributions.  With respect to both variable and fixed payment methodologies, the amount of CAM charges the Company bills to its tenants may not allow it to recover or pass on all these operating expenses to tenants, which may reduce operating cash flow from its properties.  Such a reduction could result in a material and adverse effect on the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
 
14

 
The Company may incur costs to comply with environmental laws.
 
The Company’s operations and properties are subject to various federal, state and local laws and regulations concerning the protection of the environment, including air and water quality, hazardous or toxic substances and health and safety.  Under some environmental laws, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances released at a property.  The owner or operator may also be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by those parties because of the contamination.  These laws often impose liability without regard to whether the owner or operator knew of the release of the substances or caused the release.  The presence of contamination or the failure to remediate contamination may impair the Company’s ability to sell or lease real estate or to borrow using the real estate as collateral.  Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of asbestos-containing materials in the event of damage, demolition, renovation or remodeling and also govern emissions of and exposure to asbestos fibers in the air.  The maintenance and removal of lead paint and certain electrical equipment containing polychlorinated biphenyls (“PCBs”) and underground storage tanks are also regulated by federal and state laws.  The Company is also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible individuals.  The Company could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or tanks or related claims arising out of environmental contamination or human exposure to contamination at or from its properties.  Identification of compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or compliance requirements could result in significant costs to the Company.
 
The Company faces risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of its information technology (IT) networks and related systems.
 
The Company faces risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside the Company or persons with access to systems inside the Company, and other significant disruptions of the Company’s IT networks and related systems.  The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.  The Company’s IT networks and related systems are essential to the operation of its business and its ability to perform day-to-day operations (including managing its building systems), and, in some cases, may be critical to the operations of certain of its tenants.  There can be no assurance that the Company’s efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches or disruptions would not be successful or damaging.  A security breach or other significant disruption involving the Company’s IT networks and related systems could materially and adversely impact the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair the Company’s assets and have a material and adverse effect on its income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
The Company believes the risks associated with its business will be more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values.  Because the Company has only recently acquired assets, it is not burdened by the losses experienced by certain of its competitors as a result of the recent economic downturn and declines in real estate values with respect to properties acquired before the economic downturn.  Although it will take current economic conditions into account in acquiring its assets, the Company’s long term success depends in part on improving economic conditions and the eventual return of a stable and dependable financing market for retail real estate.  If the current challenging economic conditions persist or worsen, the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders, could be materially and adversely affected.
 
Loss of key personnel could harm the Company’s operations.
 
The Company is dependent on the efforts of certain key personnel of its senior management team.  While the Company has employment contracts with each of Messrs. Tanz, Haines and Schoebel, the loss of the services of any of these individuals could harm the Company’s operations and have a material and adverse effect on its income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
 
15

 
Under their employment agreements, certain members of the Company’s senior management team will have certain rights to terminate their employment and receive severance in connection with a change in control of the Company.
 
The Company’s employment agreements with each of Messrs. Tanz, Haines and Schoebel, which provide that, upon termination of his employment (i) by the applicable officer within 12 months following the occurrence of a change in control (as defined in the employment agreement), (ii) by the Company without cause (as defined in the employment agreement), (iii) by the applicable officer for good reason (as defined in the employment agreement), (iv) by non-renewal of the applicable officer’s employment agreement or (v) by reason of the applicable officer’s death or disability (as defined in the employment agreement), such executive officers would be entitled to certain termination or severance payments made by the Company (which may include a lump sum payment equal to defined percentages of annual salary and prior years’ average bonuses, paid in accordance with the terms and conditions of the respective agreement).  In addition, the vesting of all his outstanding unvested equity-based incentives and awards would accelerate.  These provisions make it costly to terminate their employment and could delay or prevent a transaction or a change in control of the Company that might involve a premium paid for shares of its common stock or otherwise be in the best interests of its stockholders.
 
Joint venture investments could be materially and adversely affected by the Company’s lack of sole decision-making authority or reliance on a joint venture partner’s financial condition.
 
The Company may enter into joint venture arrangements in the future.  Investments in joint ventures involve risks that are not otherwise present with properties which the Company owns entirely.  In this investment, the Company does not have exclusive control or sole decision-making authority over the development, financing, leasing, management and other aspects of these investments.  As a result, the joint venture partner might have economic or business interests or goals that are inconsistent with the Company’s goals or interests, take action contrary to the Company’s interests or otherwise impede the Company’s objectives.  The investment involves risks and uncertainties, including the risk of the joint venture partner failing to provide capital and fulfill its obligations, which may result in certain liabilities to the Company for guarantees and other commitments, the risk of conflicts arising between the Company and its partners and the difficulty of managing and resolving such conflicts, and the difficulty of managing or otherwise monitoring such business arrangements.  The joint venture partner also might become insolvent or bankrupt, which may result in significant losses to the Company.  Further, although the Company may own a controlling interest in a joint venture and may have authority over major decisions such as the sale or refinancing of investment properties, the Company may have fiduciary duties to the joint venture partners or the joint venture itself that may cause, or require, it to take or refrain from taking actions that it would otherwise take if it owned the investment properties outright.
 
Uninsured losses or a loss in excess of insured limits could materially and adversely affect the Company.
 
The Company carries comprehensive general liability, fire, extended coverage, loss of rent insurance, and environmental liability where applicable on its properties, with policy specifications and insured limits customarily carried for similar properties.  However, with respect to those properties where the leases do not provide for abatement of rent under any circumstances, the Company generally does not maintain loss of rent insurance.  In addition, there are certain types of losses, such as losses resulting from wars, terrorism or acts of God that generally are not insured because they are either uninsurable or not economically insurable.  Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property.  Any loss of these types could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
The Company could be materially and adversely affected by poor market conditions where its properties are geographically concentrated.
 
The Company’s performance depends on the economic conditions in markets in which its properties are concentrated.  During the year ended December 31, 2013, the Company’s properties in California, Oregon and Washington accounted for 66%, 13% and 21%, respectively, of its consolidated property operating income.  The Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders could be materially and adversely affected by this geographic concentration if market conditions, such as an oversupply of space or a reduction in demand for real estate in an area, deteriorate in California, Oregon and Washington.
 
Risks Related to Financing
 
The Company’s credit facilities and unsecured senior notes contain restrictive covenants relating to its operations, which could limit the Company’s ability to respond to changing market conditions and its ability to pay dividends and other distributions to its securityholders.
 
The Company’s credit facilities and unsecured senior notes contain restrictive covenants which are described in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations-Liquidity and Capital Resources”.  These or other limitations, including those that may apply to future company borrowings, may materially and adversely affect the Company’s flexibility and its ability to achieve its operating plans and could result in the Company being limited in the amount of dividends and distributions it would be permitted to pay to its securityholders.
 
 
16

 
In addition, failure to comply with these covenants could cause a default under the applicable debt instrument, and the Company may then be required to repay such debt with capital from other sources.  Under those circumstances, other sources of capital may not be available to the Company, or may be available only on unattractive terms.
 
Certain of the Company’s mortgage financing arrangements and other indebtedness contain provisions that could limit the Company’s operating flexibility.
 
The Company’s existing mortgage financing contains, and future mortgage financing may in the future contain, customary covenants and provisions that limit the Company’s ability to pre-pay such mortgages before their scheduled maturity date or to transfer the underlying asset. Additionally, the Company’s ability to satisfy prospective mortgage lenders’ insurance requirements may be materially and adversely affected if lenders generally insist upon greater insurance coverage against certain risks than is available to the Company in the marketplace or on commercially reasonable terms.  In addition, because a mortgage is secured by a lien on the underlying real property, mortgage defaults subject the Company to the risk of losing the property through foreclosure.
 
The Company’s access to financing may be limited and thus its ability to potentially enhance its returns may be materially and adversely affected.
 
The Company intends, when appropriate, to employ prudent amounts of leverage and use debt as a means of providing additional funds for the acquisition of its assets and the diversification of its portfolio.  To the extent market conditions improve and markets stabilize over time, the Company expects to increase its borrowing levels.  As of December 31, 2013, the Company’s outstanding mortgage indebtedness was approximately $113.4 million, and the Company may incur significant additional debt to finance future acquisition and development activities.  The Company’s credit facilities consist of a $350.0 million unsecured revolving credit facility and a $200.0 million term loan, of which $56.9 million and $200.0 million, respectively, were outstanding as of December 31, 2013.

In addition, the Operating Partnership issued $250.0 million aggregate principal amount of unsecured senior notes in December 2013 which were fully and unconditionally guaranteed by ROIC.
 
The Company’s access to financing will depend upon a number of factors, over which it has little or no control, including:
 
·  
general market conditions;
 
·  
the market’s view of the quality of the Company’s assets;
 
·  
the market’s perception of the Company’s growth potential;
 
·  
the Company’s eligibility to participate in and access capital from programs established by the U.S. government;
 
·  
the Company’s current and potential future earnings and cash distributions; and
 
·  
the market price of the shares of the Company’s common stock.
 
Although the Company has recently seen an improvement in the credit markets and real estate, any reduction in available financing may materially and adversely affect its ability to achieve its financial objectives.  Concern about the stability of the markets generally could adversely affect one or more private lenders and could cause one or more private lenders to be unwilling or unable to provide the Company with financing or to increase the costs of that financing.  In addition, if regulatory capital requirements imposed on the Company’s private lenders change, they may be required to limit, or increase the cost of, financing they provide to the Company.  In general, this could potentially increase the Company’s financing costs and reduce its liquidity or require it to sell assets at an inopportune time or price.
 
During times when interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, the Company has and may continue to purchase certain properties for cash.  Consequently, depending on market conditions at the relevant time, the Company may have to rely more heavily on additional equity issuances, which may be dilutive to its stockholders, or on less efficient forms of debt financing that require a larger portion of its cash flow from operations, thereby reducing funds available for its operations, future business opportunities, cash distributions to its securityholders and other purposes.  The Company cannot assure you that it will have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which may cause it to curtail its asset acquisition activities and/or dispose of assets, which could materially and adversely affect its income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
 
17

 
Interest rate fluctuations could reduce the income on the Company’s investments and increase its financing costs.
 
Changes in interest rates will affect the Company’s operating results as such changes will affect the interest it receives on any floating rate interest bearing investments it may then hold and the financing cost of its floating rate debt, as well as its interest rate swaps that it utilizes for hedging purposes.  There can be no guarantee that the financial condition of the counterparties with respect to the Company’s interest rate swaps will enable them to fulfill their obligations under these agreements.   These risks could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
Financing arrangements that the Company may use to finance its assets may require it to provide additional collateral or pay down debt.
 
The Company, when appropriate, uses traditional forms of financing including secured credit facilities.  In the event the Company utilizes such financing arrangements, they would involve the risk that the market value of its assets which are secured may decline in value, in which case the lender may, in connection with a refinancing of the credit facility, require it to provide additional collateral, provide additional equity, or to repay all or a portion of the funds advanced.  The Company may not have the funds available to repay its debt or provide additional equity at that time, which would likely result in defaults unless it is able to raise the funds from alternative sources, which it may not be able to achieve on favorable terms or at all.  Providing additional collateral or equity would reduce the Company’s liquidity and limit its ability to leverage its assets.  If the Company cannot meet these requirements, the lender could accelerate the Company’s indebtedness, increase the interest rate on advanced funds and terminate its ability to borrow funds from them, which could materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.  The providers of credit facilities may also require the Company to maintain a certain amount of cash or set aside assets sufficient to maintain a specified liquidity position.  As a result, the Company may not be able to leverage its assets as fully as it would choose which could reduce its return on assets.  There can be no assurance that the Company will be able to utilize such arrangements on favorable terms, or at all.

A downgrade in the Company’s or the Operating Partnership’s credit ratings could materially adversely affect the Company’s business and financial condition.
 
The credit ratings assigned to the Company’s obligations or to the debt securities of the Operating Partnership could change based upon, among other things, the Company’s and the Operating Partnership’s results of operations and financial condition.  These ratings are subject to ongoing evaluation by credit rating agencies, and there can be no assurance that any rating will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant.  Moreover, these credit ratings do not apply to the Company’s common stock and are not recommendations to buy, sell or hold any other securities.  If any of the credit rating agencies that have rated the obligations of the Company or the debt securities of the Operating Partnership downgrades or lowers its credit ratings, or if any credit rating agency indicates that it has placed any such rating on a so-called “watch list” for a possible downgrading or lowering or otherwise indicates that its outlook for that rating is negative, it could have a material adverse effect on the Company’s costs and availability of capital, which could in turn materially and adversely impact the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
Risks Related to the Company’s Organization and Structure
 
The Company depends on dividends and distributions from its direct and indirect subsidiaries.  The creditors and any preferred equity holders of these subsidiaries are entitled to amounts payable to them by the subsidiaries before the subsidiaries may pay any dividends or distributions to the Company.
 
Substantially all of the Company’s assets are held through the Operating Partnership, which holds substantially all of the Company’s properties and assets through subsidiaries.  The Operating Partnership’s cash flow is dependent on cash distributions to it by its subsidiaries, and in turn, substantially all of the Company’s cash flow is dependent on cash distributions to it by the Operating Partnership.  The creditors and any preferred equity holders of the Company’s direct and indirect subsidiaries are entitled to payment of that subsidiary’s obligations to them, when due and payable, before distributions may be made by that subsidiary to its common equity holders.  Thus, the Operating Partnership’s ability to make distributions to the Company and therefore the Company’s ability to make distributions to its stockholders will depend on its subsidiaries’ ability first to satisfy their obligations to creditors and any preferred equity holders and then to make distributions to the Operating Partnership.
 
In addition, the Company’s participation in any distribution of the assets of any of its direct or indirect subsidiaries upon the liquidation, reorganization or insolvency, is only after the claims of the creditors, including the holders of the unsecured senior notes and trade creditors, and preferred equity holders are satisfied.
 
Certain provisions of Maryland law may limit the ability of a third party to acquire control of the Company.
 
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for holders of the Company’s common stock or otherwise be in their best interests, including:
 
 
18

 
·  
“business combination” provisions that, subject to certain limitations, prohibit certain business combinations between the Company and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the Company’s shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special minimum price provisions and special stockholder voting requirements on these combinations; and
 
·  
“control share” provisions that provide that “control shares” of the Company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by the Company’s stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
 
However, the provisions of the MGCL relating to business combinations do not apply to business combinations that are approved or exempted by the Company’s board of directors prior to the time that the interested stockholder becomes an interested stockholder.  In addition, the Company’s Bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of the Company’s common stock.  There can be no assurance that such exemption will not be amended or eliminated at any time in the future.
 
Additionally, Title 3, Subtitle 8 of the MGCL permits the Company’s board of directors, without stockholder approval and regardless of what is currently provided in the Company’s charter or bylaws, to take certain actions that may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium to the market price of its common stock or otherwise be in the stockholders’ best interests.  These provisions of the MGCL permit the Company, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to adopt:
 
·  
a classified board;
 
·  
a two-thirds vote requirement for removing a director;
 
·  
a requirement that the number of directors be fixed only by vote of the board of directors;
 
·  
a requirement that a vacancy on the board be filled only by the remaining directors in office and (if the board is classified) for the remainder of the full term of the class of directors in which the vacancy occurred; and
 
·  
a majority requirement for the calling of a stockholder-requested special meeting of stockholders.
 
The authorized but unissued shares of preferred stock and the ownership limitations contained in the Company’s Charter may prevent a change in control.
 
The Charter authorizes the Company to issue authorized but unissued shares of preferred stock.  In addition, the Charter provides that the Company’s board of directors has the power, without stockholder approval, to authorize the Company to issue any authorized but unissued shares of stock, to classify any unissued shares of preferred stock and to reclassify any unissued shares of common stock or previously-classified shares of preferred stock into other classes or series of stock.  As a result, the Company’s board of directors may establish a series of shares of preferred stock or use such preferred stock to create a stockholder’s rights plan or so-called “poison pill” that could delay or prevent a transaction or a change in control that might involve a premium price for shares of the Company’s common stock or otherwise be in the best interests of the Company’s stockholders.
 
In addition, the Company’s Charter contains restrictions limiting the ownership and transfer of shares of the Company’s common stock and other outstanding shares of capital stock.  The relevant sections of the Company’s Charter provide that, subject to certain exceptions, ownership of shares of the Company’s common stock by any person is limited to 9.8% by value or by number of shares, whichever is more restrictive, of the outstanding shares of common stock (the common share ownership limit), and no more than 9.8% by value or number of shares, whichever is more restrictive, of the outstanding capital stock (the aggregate share ownership limit).  The common share ownership limit and the aggregate share ownership limit are collectively referred to herein as the “ownership limits.”  These provisions will restrict the ability of persons to purchase shares in excess of the relevant ownership limits.  The Company’s board of directors has established exemptions from this ownership limit which permit certain institutional investors to hold additional shares of the Company’s common stock.  The Company’s board of directors may in the future, in its sole discretion, establish additional exemptions from this ownership limit.
 
 
19

 
The Company’s failure to qualify as a REIT would subject it to U.S. federal income tax and potentially increased state and local taxes, which would reduce the amount of cash available for distribution to its stockholders.
 
The Company intends to operate in a manner that will enable it to continue to qualify as a REIT for U.S. federal income tax purposes.  The Company has not requested and does not intend to request a ruling from the IRS that it will continue to qualify as a REIT.  The U.S. federal income tax laws governing REITs are complex.  The complexity of these provisions and of the applicable U.S. Treasury Department regulations that have been promulgated under the Code (“Treasury Regulations”) is greater in the case of a REIT that holds assets through a partnership, and judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited.  To qualify as a REIT, the Company must meet, on an ongoing basis, various tests regarding the nature of its assets and its income, the ownership of its outstanding shares, and the amount of its distributions.  Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the Company to qualify as a REIT.  Thus, while the Company believes that it has operated and intends to continue to operate so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the Company’s circumstances, no assurance can be given that it has qualified or will continue to so qualify for any particular year.
 
If the Company fails to qualify as a REIT in any taxable year, and does not qualify for certain statutory relief provisions, it would be required to pay U.S. federal income tax on its taxable income, and distributions to its stockholders would not be deductible by it in determining its taxable income.  In such a case, the Company might need to borrow money or sell assets in order to pay its taxes.  The Company’s payment of income tax would decrease the amount of its income available for distribution to its stockholders.  Furthermore, if the Company fails to maintain its qualification as a REIT, it would no longer be required to distribute substantially all of its net taxable income to its stockholders.  In addition, unless the Company were eligible for certain statutory relief provisions, it would not be eligible to re-elect to qualify as a REIT for four taxable years following the year in which it failed to qualify as a REIT.
 
Failure to make required distributions would subject the Company to tax, which would reduce the cash available for distribution to its stockholders.
 
In order to qualify as a REIT, the Company must distribute to its stockholders each calendar year at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain.  To the extent that the Company satisfies the 90% distribution requirement, but distributes less than 100% of its taxable income, it is subject to U.S. federal corporate income tax on its undistributed income.  In addition, the Company will incur a 4% non-deductible excise tax on the amount, if any, by which its distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws.  The Company intends to distribute its net income to its stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid the 4% non-deductible excise tax.
 
The Company’s taxable income may exceed its net income as determined by the U.S. generally accepted accounting principles (“GAAP”) because, for example, realized capital losses will be deducted in determining its GAAP net income, but may not be deductible in computing its taxable income.  In addition, the Company may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets.  For example, the Company may be required to accrue interest income on mortgage loans or other types of debt securities or interests in debt securities before it receives any payments of interest or principal on such assets.  Similarly, some of the debt securities that the Company acquires may have been issued with original issue discount.  The Company will be required to report such original issue discount based on a constant yield method.  As a result of the foregoing, the Company may generate less cash flow than taxable income in a particular year.  To the extent that the Company generates such non-cash taxable income in a taxable year, it may incur corporate income tax and the 4% non-deductible excise tax on that income if it does not distribute such income to stockholders in that year.  In that event, the Company may be required to use cash reserves, incur debt or liquidate assets at rates or times that it regards as unfavorable or make a taxable distribution of its shares in order to satisfy the REIT 90% distribution requirement and to avoid U.S. federal corporate income tax and the 4% non-deductible excise tax in that year.
 
To maintain its REIT qualification, the Company may be forced to borrow funds during unfavorable market conditions.
 
In order to qualify as a REIT and avoid the payment of income and excise taxes, the Company may need to borrow funds on a short-term basis, or possibly on a long-term basis, to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings.  These borrowing needs could result from, among other things, a difference in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves or required debt amortization payments.
 
Even if the Company qualifies as a REIT, it may be required to pay certain taxes.
 
Even if the Company qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes on its income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure and state or local income, franchise, property and transfer taxes, including mortgage recording taxes.  In addition, the Company holds some of its assets through taxable REIT subsidiary (“TRS”) corporations.  Any TRSs or other taxable corporations in which the Company owns an interest will be subject to U.S. federal, state and local corporate taxes.  Payment of these taxes generally would materially and adversely affect the Company’s income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay dividends and other distributions to its securityholders.
 
 
20

 
Dividends payable by REITs generally do not qualify for the reduced tax rates on dividend income from regular corporations, which could materially and adversely affect the value of the Company’s shares or warrants.
 
The maximum U.S. federal income tax rate for certain qualified dividends payable to domestic stockholders that are individuals, trusts and estates is 20%.  Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income.  Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the Company’s shares.
 
The Company may be subject to adverse legislative or regulatory tax changes that could reduce the market price of its shares of common stock or warrants.
 
At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect.  The Company cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively.  The Company and its stockholders or warrantholders could be materially and adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.
 
In certain circumstances, the Company may be liable for certain tax obligations of certain limited partners.
 
In certain circumstances, the Company may be liable for certain tax obligations of certain limited partners.  The Company has entered into tax protection agreements under which it has agreed to minimize the tax consequences to certain limited partners resulting from the sale or other disposition of certain of the Company’s assets.  The obligation to indemnify such limited partners against adverse tax consequences is expected to continue until 2025.  During the period of these obligations, the Company’s flexibility to dispose of the related assets will be limited.  In addition, the indemnification obligations may be significant.

The Company cannot assure you of its ability to pay distributions in the future.
 
The Company intends to pay quarterly distributions and to make distributions to its stockholders in an amount such that it distributes all or substantially all of its REIT taxable income in each year, subject to certain adjustments.  The Company’s ability to pay distributions may be materially and adversely affected by a number of factors, including the risk factors described in this Annual Report on Form 10-K.  All distributions will be made, subject to Maryland law (or Delaware law, in the case of distributions by the Operating Partnership), at the discretion of the Company’s board of directors and will depend on the Company’s earnings, its financial condition, any debt covenants, maintenance of its REIT qualification and other factors as its board of directors may deem relevant from time to time.  The Company believes that a change in any one of the following factors could materially and adversely affect its income, cash flow, results of operations, financial condition, liquidity, the ability to service its debt obligations, the market price of its common stock or warrants and its ability to pay distributions to its securityholders:
 
·  
the profitability of the assets acquired;
 
·  
the Company’s ability to make profitable acquisitions;
 
·  
margin calls or other expenses that reduce the Company’s cash flow;
 
·  
defaults in the Company’s asset portfolio or decreases in the value of its portfolio; and
 
·  
the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
 
The Company cannot assure you that it will achieve results that will allow it to make a specified level of cash distributions or year-to-year increases in cash distributions in the future.  In addition, some of the Company’s distributions may include a return of capital.
 
 
21

 
The Company’s warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and dilute the ownership of existing stockholders.
 
Outstanding warrants, consisting of 5,942,668 public warrants, to purchase an aggregate of 5,942,668 shares of the Company’s common stock are currently exercisable at an exercise price of $12.00 per share. In 2013, NRDC exercised all of their 8,000,000 warrants, exercisable for the Company’s Common Stock at an exercise price of $12.00 per share. NRDC exercised the warrants on a cashless basis and ROIC issued 688,500 shares to NRDC.  NRDC is entitled to certain registration rights with respect to the shares for which its 8,000,000 private placement warrants were exercised.  The warrant exercise price may be lowered under certain circumstances, including, among others, in the Company’s sole discretion at any time prior to the expiration date of the warrants for a period of not less than 20 business days; provided, however, that any such reduction shall be identical in percentage terms among all of the warrants.  At any time our common stock trades at prices in excess of the exercise of the warrants, it is possible that the holders of those warrants may exercise their right to purchase shares of the Company’s common stock. If such events occur, the number of shares of the Company’s common stock outstanding could increase, and the shares issued could be traded on the market. This increase, in turn, could dilute future earnings per share and the ownership of existing stockholders, and could depress the market value of the Company’s common stock. The Company cannot predict the extent to which the dilution, the availability of a large amount of shares for sale, and the possibility of additional issuances and sales of common stock will negatively affect the trading price of the Company’s common stock or the liquidity of its common stock.  Further, if these warrants are exercised at any time in the future at a price lower than the book value per share of the Company’s common stock, existing stockholders could suffer dilution of their investment, which dilution could increase in the event the warrant exercise price is lowered.  Additionally, if the Company were to lower the exercise price in the near future, the likelihood of this dilution could be accelerated.
 
Item 1B.  Unresolved Staff Comments
 
None.
 
Item 2.  Properties
 
The Company maintains its executive office at 8905 Towne Centre Drive, Suite 108, San Diego, CA 92122.
 
As of December 31, 2013, the Company’s portfolio consisted of 55 retail properties totaling approximately 5.9 million square feet of gross leasable area which were approximately 95.0% leased.  During the year ended December 31, 2013, the Company leased or renewed a total of 624,000 square feet in its portfolio.  The Company has committed approximately $2.9 million and $612,000 in tenant improvements and leasing commissions, respectively, for the new leases and renewals that occurred during the year ended December 31, 2013.
 
 
22

 
The following table provides information regarding the Company’s properties as of December 31, 2013.
 
                         
Property, State
 
Year
Completed/ Renovated
 
Year
Acquired
 
Gross
Leasable
Sq. Feet
 
Number
of
Tenants
 
% Leased
 
Principal Tenants
 
Northern California
                         
Norwood Shopping Center, CA
 
1993
 
2010
 
88,851
 
15
 
98.9%
 
Viva Supermarket, Rite Aid Pharmacy, Citi Trends
 
Pleasant Hill Marketplace, CA
 
1980
 
2010
 
69,715
 
3
 
100.0%
 
Buy Buy Baby, Office Depot, Basset Furniture
 
Pinole Vista Shopping Center, CA
 
1981/2012
 
2011
 
165,025
 
29
 
98.9%
 
Kmart, SaveMart (Lucky) Supermarket(1)
 
Mills Shopping Center, CA
 
1955/1988
 
2011
 
239,081
 
23
 
74.2%
 
Warehouse Markets,  Dollar Tree
 
Morada Ranch, CA
 
2006
 
2011
 
101,842
 
19
 
100.0%
 
Raley’s Supermarket
 
Round Hill Square, NV
 
1998
 
2011
 
115,984
 
25
 
83.1%
 
Safeway Supermarket, U.S. Postal Service
 
Country Club Gate Center, CA
 
1974/2012
 
2011
 
109,331
 
29
 
93.6%
 
SaveMart (Lucky) Supermarket, Rite Aid Pharmacy
 
Marlin Cove Shopping Center, CA
 
1972/2001
 
2012
 
73,186
 
23
 
97.2%
 
99 Ranch Market
 
Green Valley Station, CA
 
2006/2007
 
2012
 
52,245
 
11
 
77.4%
 
CVS Pharmacy
 
The Village at Novato, CA
 
2006
 
2012
 
20,043
 
3
 
90.6%
 
Trader Joe’s
 
Santa Teresa Village, CA
 
1974-79 / 2013
 
2012
 
125,162
 
35
 
97.6%
 
Raley’s (Nob Hill) Supermarket
 
Granada Shopping Center, CA
 
1962/1994
 
2013
 
69,325
 
15
 
100.0%
 
SaveMart (Lucky) Supermarket
 
Country Club Village, CA
 
1995
 
2013
 
111,172
 
18
 
91.1%
 
Walmart Neighborhood Market, CVS Pharmacy
 
                           
Southern California
                         
Paramount Plaza, CA
 
1966/2010
 
2009
 
95,062
 
13
 
98.0%
 
Fresh & Easy, Rite Aid Pharmacy, TJ Maxx
 
Santa Ana Downtown Plaza, CA
 
1987/2010
 
2010
 
100,305
 
27
 
100.0%
 
Kroger (Food 4 Less) Supermarket, Marshalls
 
Gateway Village, CA
 
2003/2005
 
2010
 
96,959
 
29
 
93.2%
 
Sprout’s Farmers Market
 
Sycamore Creek, CA
 
2008
 
2010
 
74,198
 
18
 
100.0%
 
Safeway (Vons) Supermarket, CVS Pharmacy (1)
 
Phillips Village, CA
 
1980/2006
 
2010
 
130,872
 
8
 
100.0%
 
Fresh Choice Supermarket
 
Claremont Promenade, CA
 
1982/2011
 
2010
 
91,529
 
24
 
96.0%
 
Super King Supermarket
 
Marketplace Del Rio, CA
 
1990/2004
 
2011
 
177,136
 
43
 
98.3%
 
Stater Brothers Supermarket, Walgreens, Ace Hardware
 
Renaissance Towne Centre, CA
 
1991/2011
 
2011
 
53,074
 
29
 
100.0%
 
CVS Pharmacy
 
Desert Springs Marketplace, CA
 
1993-94 / 2013
  
2011
 
105,157
 
16
 
97.1%
 
Kroger (Ralph’s) Supermarket, Rite Aid Pharmacy
 
Euclid Plaza, CA
 
1982/2012
 
2012
 
77,044
 
9
 
100.0%
 
Vallarta Supermarket, Walgreens
 
Seabridge Marketplace, CA
 
2006
 
2012
 
93,784
 
19
 
95.2%
 
Safeway (Vons) Supermarket
 
Glendora Shopping Center, CA
 
1992/2012
 
2012
 
106,535
 
20
 
95.1%
 
Albertson’s Supermarket
 
Bay Plaza, CA
 
1986/2013
 
2012
 
73,324
 
28
 
95.1%
 
Seafood City Supermarket
 
Cypress Center West, CA
 
1970/1978
 
2012
 
106,451
 
32
 
97.5%
 
Kroger (Ralph’s) Supermarket, Rite Aid Pharmacy
 
Redondo Beach Plaza, CA
 
1993/2004
 
2012
 
110,509
 
16
 
100.0%
 
Safeway (Von’s) Supermarket, Petco
 
Harbor Place Center, CA
 
1994
 
2012
 
119,821
 
10
 
100.0%
 
AA Supermarket, Ross Dress for Less
 
Diamond Bar Town Center, CA
 
1981
 
2013
 
100,342
 
23
 
100.0%
 
National grocery tenant
 
Bernardo Heights Plaza, CA
 
1983/2006
 
2013
 
37,729
 
6
 
100.0%
 
Sprouts Farmers Market
 
Diamond Hills Plaza, CA
 
1973/2008
 
2013
 
139,505
 
38
 
100.0%
 
H Mart Supermarket, Rite Aid Pharmacy
 
Hawthorne Crossings, CA
 
1993-1999
 
2013
 
141,288
 
17
 
95.6%
 
Mitsuwa Supermarket, Ross Dress for Less, Staples
 
Five Points Plaza, CA
 
1961-62 / 2012
 
2013
 
160,906
 
36
 
100.0%
 
Trader Joes, Old Navy, Pier 1
 
Peninsula Marketplace, CA
 
2000
 
2013
 
95,416
 
16
 
100.0%
 
Kroger (Ralphs) Supermarket
 
Plaza del la Canada, CA
 
1968/2000
 
2013
 
100,408
 
14
 
100.0%
 
Gelson’s Supermarket, TJ Maxx, Rite Aid Pharmacy
 
                           
Portland Metropolitan
                         
Happy Valley Town Center, OR
 
2007
 
2010
 
138,696
 
34
 
95.1%
 
New Seasons Market
 
Oregon City Point, OR
 
2007
 
2010
 
35,305
 
18
 
92.6%
 
Starbucks, West Coast Bank, FedEx Kinko’s
 
Cascade Summit, OR
 
2000
 
2010
 
95,508
 
31
 
100.0%
 
Safeway Supermarket
 
Vancouver Market Center, WA
 
1996/2012
 
2010
 
118,385
 
16
 
92.7%
 
Albertson’s Supermarket
 
Division Crossing, OR
 
1992
 
2010
 
104,089
 
17
 
94.8%
 
Rite Aid Pharmacy, Ross Dress For Less
 
Halsey Crossing, OR
 
1992
 
2010
 
99,428
 
15
 
95.9%
 
Safeway Supermarket, Dollar Tree
 
Wilsonville Old Towne Square, OR
 
2011
 
2011
 
49,937
 
21
 
100.0%
 
Kroger (Fred Meyer) (1)
 
Heritage Market Center, WA
 
2000
 
2010
 
107,468
 
17
 
98.1%
 
Safeway Supermarket, Dollar Tree
 
Hillsboro Market Center, OR
 
2001-2002
 
2011
 
156,021
 
20
 
97.5%
 
Albertson’s Supermarket, Dollar Tree, Marshalls
 
Robinwood Shopping Center, OR
 
1980 / 2012
 
2013
 
70,831
 
15
 
96.6%
 
Walmart Neighborhood Market
 
                           
 
 
23

 
Seattle Metropolitan
                         
Meridian Valley Plaza, WA
 
1978/2011
 
2010
 
51,597
 
14
 
100.0%
 
Kroger (QFC) Supermarket
 
The Market at Lake Stevens, WA
 
2000
 
2010
 
74,130
 
10
 
100.0%
 
Haggen Food & Pharmacy
 
Canyon Park, WA
 
1980/2012
 
2011
 
123,627
 
23
 
100.0%
 
Albertson’s Supermarket, Rite Aid Pharmacy
 
Hawks Prairie, WA
 
1988/2012
 
2011
 
154,781
 
21
 
100.0%
 
Safeway Supermarket, Dollar Tree, Big Lots
 
Kress Building, WA
 
1924/2005
 
2011
 
73,563
 
8
 
100.0%
 
IGA Supermarket, TJ Maxx
 
Gateway Shopping Center, WA
 
2007
 
2012
 
106,104
 
17
 
97.9%
 
WinCo Foods (1), Rite Aid Pharmacy, Ross Dress for Less
 
Aurora Square, WA
 
1980
 
2012
 
38,030
 
4
 
100.0%
 
Central Supermaket
Canyon Crossing Shopping Center, WA
 
2008-2009
 
2013
 
120,504
 
19
 
87.3%
 
Safeway Supermarket
Crossroads, WA (2)
 
1962/2004
 
2010/2013
 
463,538
 
94
 
99.6%
 
Kroger (QFC) Supermarket, Bed Bath & Beyond, Sports Authority
_______________
 
(1)
Retailer owns their own space and is not a tenant of the Company.
 
(2)
The Company acquired a 49% interest in Crossroads in December 2010 and acquired the remaining 51% in September 2013.

As illustrated by the following tables, the Company’s shopping centers are substantially diversified by both tenant mix and by the staggering of its major tenant lease expirations.  For the year ended December 31, 2013, no single tenant comprised more than 5.0% of the total annual base rent of the Company’s portfolio.
 
The following table sets forth a summary schedule of the Company’s ten largest tenants by percent of total annual base rent, as of December 31, 2013.
 
Tenant
 
Number of Leases
   
% of Total Annual
Base Rent(1)
 
Safeway Supermarket
    9       5.0 %
Kroger Supermarket
    6       3.3 %
Rite Aid Pharmacy
    10       2.6 %
Marshalls / T.J. Maxx
    5       2.2 %
JP Morgan Chase
    12       1.6 %
Ross Dress for Less
    4       1.4 %
Raley’s Supermarket
    2       1.4 %
Walmart Neighborhood Market
    3       1.3 %
Albertson’s Supermarket
    4       1.3 %
CVS Pharmacy
    4       1.1 %
      59       21.2 %
                 
___________________
(1)  
Annual base rent is equal to the annualized cash rent for all leases in place as of December 31, 2013 (including initial cash rent for new leases). 
 
The following table sets forth a summary schedule of the annual lease expirations for leases in place across the Company’s total portfolio at December 31, 2013.
 
Year of Expiration
 
Number of
Leases
Expiring(1)
   
Square
Footage
   
Annual Base
Rent(2)
   
Annual Base
Rent%
 
2014
   
178
     
374,990
   
$
8,761,656
     
8.7
%
2015
   
174
     
576,798
     
10,747,287
     
10.7
%
2016
   
207
     
680,830
     
12,395,758
     
12.4
%
2017
   
193
     
644,074
     
12,720,986
     
12.7
%
2018
   
158
     
618,783
     
12,776,126
     
12.7
%
Thereafter
   
236
     
2,662,865
     
42,910,055
     
42.8
%
Total
   
1,146
     
5,558,340
   
$
100,311,868
     
100.0
%
                                 
___________________
(1)
Assumes no tenants exercise renewal options or cancellation options.
(2)
Annual base rent is equal to the annualized cash rent for all leases in place as of December 31, 2013 (including initial cash rent for new leases). 
 
 
24

 
The following table sets forth a summary schedule of the annual lease expirations for leases in place with the Company’s anchor tenants at December 31, 2013.  Anchor tenants are tenants with leases occupying at least 15,000 square feet or more.
 
Year of Expiration
 
Number of
Leases
Expiring(1)
   
Square
Footage
   
Annual Base
Rent(2)
   
Annual Base
Rent %
 
2014
   
1
     
19,251
   
$
248,256
     
0.2
%
2015
   
5
     
182,445
     
1,668,085
     
1.7
%
2016
   
8
     
280,261
     
2,472,539
     
2.5
%
2017
   
7
     
209,115
     
1,865,879
     
1.9
%
2018
   
11
     
276,252
     
4,288,305
     
4.3
%
Thereafter
   
53
     
1,982,449
     
26,428,543
     
26.3
%
Total
   
85
     
2,949,773
   
$
36,971,607
     
36.9
%
                                 
____________________
(1)
Assumes no tenants exercise renewal or cancellation options.
(2)
Annual base rent is equal to the annualized cash rent for all leases in place as of December 31, 2013 (including initial cash rent for new leases). 

Item 3.  Legal Proceedings

In the normal course of business, from time to time, the Company is involved in routine legal actions incidental to its business of the ownership and operations of its properties.  In management’s opinion, the liabilities, if any, that ultimately may result from such legal actions are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.
 
Item 4.  Mine Safety Disclosures
 
Not applicable.
 
 
25

 
 PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
ROIC Market Information
 
ROIC’s common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “ROIC”. The following table sets forth, for the period indicated, the high and low sales price for the ROIC’s common stock as reported by the NASDAQ and the per share dividends declared:
 
Period
 
High
   
Low
   
Dividends
Declared
 
2012
                 
First Quarter
 
$
12.18
   
$
11.53
   
$
0.12
 
Second Quarter
 
$
12.80
   
$
11.80
   
$
0.13
 
Third Quarter
 
$
12.96
   
$
12.01
   
$
0.14
 
Fourth Quarter
 
$
13.00
   
$
12.11
   
$
0.14
 
2013
                       
First Quarter
 
$
14.02
   
$
12.63
   
$
0.15
 
Second Quarter
 
$
15.79
   
$
12.78
   
$
0.15
 
Third Quarter
 
$
14.23
   
$
12.60
   
$
0.15
 
Fourth Quarter
 
$
15.20
   
$
13.57
   
$
0.15
 

On February 24, 2014, the closing price of ROIC’s common stock as reported by the NASDAQ was $14.56.
 
Dividends Declared on Common Stock and Tax Status
 
ROIC intends to make regular quarterly distributions to holders of its common stock.  U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income.  ROIC intends to pay regular quarterly dividends to stockholders in an amount not less than its net taxable income, if and to the extent authorized by its board of directors.  Before ROIC pays any dividend, whether for U.S. federal income tax purposes or otherwise, it must first meet both its operating requirements and its debt service on debt.  If ROIC’s cash available for distribution is less than its net taxable income, it could be required to sell assets or borrow funds to make cash distributions or it may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
 
The following table sets forth the dividends declared per share of ROIC’s common stock and the tax status for U.S. federal income tax purposes of such dividends declared during the years ended December 31, 2013 and 2012:
 
For the year ended December 31, 2013
 
Record Date
 
Payable Date
 
Total Dividend per
Share
 
Ordinary Income per
Share (1)
 
Return of Capital per
Share
3/15/2013
 
3/29/2013
 
$0.150000
 
$0.05934
 
$0.09066
6/14/2013
 
6/28/2013
 
$0.150000
 
$0.05934
 
$0.09066
9/16/2013
 
9/30/2013
 
$0.150000
 
$0.05934
 
$0.09066
12/16/2013
 
12/30/2013
 
$0.150000
 
$0.05934
 
$0.09066
_________________
(1)
Ordinary Income per Share is non-qualified dividend income.
 
For the year ended December 31, 2012
 
Record Date
 
Payable Date
 
Total Dividend per
Share
 
Ordinary Income per
Share (1)
 
Return of Capital per
Share
2/29/2012
 
3/15/2012
 
$0.120000
 
$0.07086
 
$0.04914
5/16/2012
 
5/30/2012
 
$0.130000
 
$0.07676
 
$0.05324
8/14/2012
 
8/31/2012
 
$0.140000
 
$0.08267
 
$0.05733
11/14/2012
 
11/30/2012
 
$0.140000
 
$0.08267
 
$0.05733
_________________
(1)
Ordinary Income per Share is non-qualified dividend income.
 
 
26

 
As of December 31, 2013, 95.8% of the outstanding interests in the Operating Partnership were owned by the Company.
 
Holders
 
As of February 21, 2014, ROIC had 39 registered holders.  Such information was obtained through the registrar and transfer agent.
 
Operating Partnership

There is no established trading market for the Operating Partnership's OP Units.  The following table sets forth the distributions per OP Unit with respect to the periods indicated:

Period
 
Distributions
 
2012
     
First Quarter
 
$
0.12
 
Second Quarter
 
$
0.13
 
Third Quarter
 
$
0.14
 
Fourth Quarter
 
$
0.14
 
2013
       
First Quarter
 
$
0.15
 
Second Quarter
 
$
0.15
 
Third Quarter
 
$
0.15
 
Fourth Quarter
 
$
0.15
 

The Operating Partnership intends to make regular quarterly distributions to holders of OP Units, to the extent authorized by ROIC's board of directors.  As of December 31, 2013, the Operating Partnership had 24 registered holders, including Retail Opportunity Investments GP, LLC.

Stockholder Return Performance


 The above graph compares the cumulative total return on the Company’s common stock with that of the Standard and Poor’s 500 Stock Index (“S&P 500”) and the National Association of Real Estate Investment Trusts Equity Index (“FTSE NAREIT Equity REITs”) from December 31, 2008 through December 31, 2013.  The stock price performance graph assumes that an investor invested $100 in each of ROIC and the indices, and the reinvestment of any dividends.  The comparisons in the graph are provided in accordance with the SEC disclosure requirements and are not intended to forecast or be indicative of the future performance of ROIC’s shares of common stock.  ROIC commenced its operations as a REIT on October 20, 2009.  Prior to October 20, 2009, ROIC operated as a special purpose acquisition company in pursuit of an initial business combination. 
 
 
27

 
   
Period Ending
 
Index
 
12/31/08
   
12/31/09
   
12/31/10
   
12/31/11
   
12/31/12
   
12/31/13
 
Retail Opportunity Investments Corp.
   
100.00
     
110.27
     
110.35
     
136.55
     
154.78
     
185.23
 
S&P 500
   
100.00
     
126.46
     
145.51
     
148.59
     
172.37
     
228.19
 
FTSE NAREIT Equity REITs
   
100.00
     
127.99
     
163.78
     
177.36
     
209.39
     
214.56
 

Except to the extent that the Company specifically incorporates this information by reference, the foregoing Stockholder Return Performance information shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act.  This information shall not otherwise be deemed filed under such Acts.
 
Securities Authorized For Issuance Under Equity Compensation Plans
 
During 2009, ROIC adopted the 2009 Equity Incentive Plan (the “2009 Plan”).  For a description of the 2009 Plan, see Note 9 to the consolidated financial statements in this Annual Report on Form 10-K.
 
The following table presents certain information about the Company’s equity compensation plans as of December 31, 2013:
 
Plan Category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights(1)
   
Weighted-average
exercise price of
outstanding options,
warrants and rights
   
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in the
first column of
this table)
 
Equity compensation plans approved by stockholders
   
282,000
   
$
10.76
     
2,519,000
 
Equity compensation plans not approved by stockholders
   
     
     
 
Total
   
282,000
   
$
10.76
     
2,519,000
 
                         
_________________
 
 
(1)
Consists of 8,000, 49,500 and 102,000 options granted during the year ended December 31, 2013, 2012 and 2011, respectively.

During the three months ended December 31, 2013, ROIC purchased the following:

Period
 
Total Number
of Shares
Purchased
   
Weighted
Average
Price Paid
Per Share
   
Total Number of Shares
Purchased as Part
of Publicly Announced
Plans or Programs
   
Dollar Value of
Shares that May Yet
Be Purchased Under
the Program
 
October 1, 2013 through October 31, 2013 (1)
   
   
$
     
     
 
October 1, 2013 through October 31, 2013(2)
   
4,404,200
   
$
2.15
     
     
 
November 1, 2013 through November 30, 2013 (1)
   
   
$
     
     
 
November 1, 2013 through November 30, 2013 (2)
   
   
$
     
     
 
December 1, 2013 through December 31, 2013 (1)
   
8,468
   
$
14.83
     
     
 
December 1, 2013 through December 31, 2013 (2)
   
   
$
     
     
 
Total (1)
   
8,468
   
$
14.83
     
     
 
Total (2)
   
4,404,200
   
$
2.15
     
     
 
 
(1)
Represents shares repurchased by ROIC in connection with the net share settlement to cover the minimum taxes on vesting of restricted stock issued under ROIC’s 2009 Equity Incentive Plan that vested.
 
(2)
Represents shares repurchased by ROIC in connection with the acquisition of outstanding Public Warrants
 

Sales of Unregistered Equity Securities
 
On September 27, 2013, the Operating Partnership issued 2,639,632 OP Units, with a fair value of approximately $36.4 million as consideration for the acquisition of the 51% of the partnership interests in Terranomics Crossroads Associates, the partnership which owns the Crossroads Shopping Center, which it did not already own.  In addition, on September 27, 2013, the Operating Partnership issued 650,631 OP Units, with a fair value of approximately $9.0 million as consideration for the acquisition of the membership interests in SARM Five Points Plaza, LLC (“Five Points LLC”), the entity that owned Five Points Plaza Shopping Center.  In each case, the OP Units were issued in reliance upon exemptions from registration provided under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.  The OP Units are exchangeable into shares of common stock of the Company on a one-for-one basis, subject to the terms of the Operating Partnership's Partnership Agreement.

 
28

 
Item 6.  Selected Financial Data
 
The following tables set forth selected financial and operating information on a historical basis for ROIC and the Operating Partnership, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and the Company’s financial statements, including the notes, included elsewhere herein.

RETAIL OPPORTUNITY INVESTMENTS CORP.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION

 
   
Year Ended December 31,
 
Retail Opportunity Investments Corp. 
 
2013
   
2012
   
2011
   
2010
 
Statement of Income Data:
                       
Total Revenues                                                                            
  $ 111,232,031     $ 75,095,687     $ 51,737,512     $ 16,328,969  
Operating expenses                                                                            
    83,456,857       63,541,899       46,782,558       21,642,505  
Operating income (loss)                                                                            
    27,775,174       11,553,788       4,954,954       (5,313,536 )
Gain on consolidation of joint venture
    20,381,849       2,144,696              
Gain on bargain purchase                                                                            
          3,864,145       9,449,059       2,216,824  
Interest income
          11,861       19,143       1,108,507  
Interest expense                                                                            
    15,854,978       11,379,857       6,225,084       324,126  
Income (loss) from continuing operations
    34,691,982       7,892,613       9,656,321       (400,921 )
Loss from discontinued operations
    (713,529 )                  
Net income (loss)
    33,978,453       7,892,613       9,656,321       (400,921 )
Net income (loss) attributable to Retail Opportunity Investments Corp.
    33,813,561       7,892,613       9,656,321       (400,921 )
Weighted average shares outstanding- Basic:
    67,419,497       51,059,408       42,477,007       41,582,401  
Weighted average shares outstanding- Diluted:
    71,004,380       52,371,168       42,526,288       41,582,401  
Income (loss) per share – Basic:
                               
Income (loss) from continuing operations
  $ 0.51     $ 0.15     $ 0.23     $ (0.01 )
Net (loss) income attributable to Retail Opportunity Investments Corp.
  $ 0.50     $ 0.15     $ 0.23     $ (0.01 )
Income (loss) per share – Diluted:
                               
Income (loss) from continuing operations
  $ 0.49     $ 0.15     $ 0.23     $ (0.01 )
Net income (loss) attributable to Retail Opportunity Investments Corp.
  $ 0.48     $ 0.15     $ 0.23     $ (0.01 )
Dividends per common share                                                                            
  $ 0.60     $ 0.53     $ 0.39     $ 0.18  
Balance Sheet Data:
                               
Real estate investments, net                                                                            
  $ 1,314,933,668     $ 864,624,046     $ 602,623,893     $ 344,212,083  
Cash and cash equivalents                                                                            
  $ 7,919,697     $ 4,692,230     $ 34,317,588     $ 84,736,410  
Total assets                                                                            
  $ 1,439,089,843     $ 950,911,527     $ 694,432,627     $ 464,192,502  
Total liabilities                                                                            
  $ 733,679,777     $ 484,369,456     $ 243,943,573     $ 73,668,932  
Total equity                                                                            
  $ 705,410,066     $ 466,542,071     $ 450,489,054     $ 390,523,570  

 
29

 
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP 
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION

   
Year Ended December 31,
 
   
2013
   
2012
   
2011
   
2010
 
Statement of Income Data:
                       
Total Revenues                                                                            
  $ 111,232,031     $ 75,095,687     $ 51,737,512     $ 16,328,969  
Operating expenses                                                                            
    83,456,857       63,541,899       46,782,558       21,642,505  
Operating income (loss)                                                                            
    27,775,174       11,553,788       4,954,954       (5,313,536 )
Gain on consolidation of joint venture
    20,381,849       2,144,696              
Gain on bargain purchase                                                                            
          3,864,145       9,449,059       2,216,824  
Interest income
          11,861       19,143       1,108,507  
Interest expense                                                                            
    15,854,978       11,379,857       6,225,084       324,126  
Income (loss) from continuing operations
    34,691,982       7,892,613       9,656,321       (400,921 )
Loss from discontinued operations
    (713,529 )                  
Net income (loss) attributable to the Operating Partnership
    33,978,453       7,892,613       9,656,321       (400,921 )
Weighted average units outstanding- Basic:
    68,258,005       51,059,408       42,477,007       41,582,401  
Weighted average units outstanding- Diluted:
    71,004,380       52,371,168       42,526,288       41,582,401  
Income (loss) per unit – Basic:
                               
Income (loss) from continuing operations
  $ 0.51     $ 0.15     $ 0.23     $ (0.01 )
Net income (loss) attributable to the Operating Partnership
  $ 0.50     $ 0.15     $ 0.23     $ (0.01 )
Income (loss) per unit – Diluted:
                               
Income (loss) from continuing operations
  $ 0.49     $ 0.15     $ 0.23     $ (0.01 )
Net income (loss) attributable to the Operating Partnership
  $ 0.48     $ 0.15     $ 0.23     $ (0.01 )
Distributions per unit
  $ 0.60     $ 0.53     $ 0.39     $ 0.18  
Balance Sheet Data:
                               
Real estate investments, net                                                                            
  $ 1,314,933,668     $ 864,624,046     $ 602,623,893     $ 344,212,083  
Cash and cash equivalents                                                                            
  $ 7,919,697     $ 4,692,230     $ 34,317,588     $ 84,736,410  
Total assets                                                                            
  $ 1,439,089,843     $ 950,911,527     $ 694,432,627     $ 464,192,502  
Total liabilities                                                                            
  $ 733,679,777     $ 484,369,456     $ 243,943,573     $ 73,668,932  
Total capital
  $ 705,410,066     $ 466,542,071     $ 450,489,054     $ 390,523,570  

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the Retail Opportunity Investments Corp. Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K.  The Company makes statements in this section that are forward-looking statements within the meaning of the federal securities laws.  For a complete discussion of forward-looking statements, see the section in this Annual Report on Form 10-K entitled “Statements Regarding Forward-Looking Information.”  Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion.  For a discussion of such risk factors, see the section in this Annual Report on Form 10-K entitled “Risk Factors.”
 
Overview
 
ROIC commenced operations in October 2009 as a fully integrated and self-managed REIT, and as of December 31, 2013, ROIC owned an approximate 95.8% partnership interest and other limited partners owned the remaining 4.2% 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.
 
From the commencement of its operations through December, 2013, the Company has completed approximately $1.3 billion of shopping center investments.  As of December 31, 2013, the Company’s portfolio consisted of 55 retail properties totaling approximately 5.9 million square feet of gross leasable area (“GLA”).
 
As of December 31, 2013, the Company’s portfolio was approximately 95.0% leased.  During the year ended December 31, 2013, the Company leased or renewed a total of 624,000 square feet in its portfolio.  The Company has committed approximately $2.9 million and $612,000 in tenant improvements and leasing commissions, respectively, for the new leases and renewals that occurred during the year ended December 31, 2013.
 
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, and 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.
 
 
30

 
Results of Operations
 
At December 31, 2013, the Company had 55 properties, all of which are consolidated (“consolidated properties”) 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 December 31, 2013. 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, mortgage interest income, depreciation and amortization, acquisition transaction costs, other expense, interest expense, gains and losses from property acquisitions and dispositions, equity in earnings from unconsolidated joint ventures, extraordinary items, tenant improvements and leasing commissions.  Other REITs may use different methodologies for calculating property operating income, and accordingly, the Company’s property operating income may not be comparable to other REITs.
 
Property operating income is used by management to evaluate and compare the operating performance of the Company’s properties, to determine trends in earnings and to compute the fair value of the Company’s properties as this measure is not affected by the cost of our funding, the impact of depreciation and amortization expenses, gains or losses from the acquisition and sale of operating real estate assets, general and administrative expenses or other gains and losses that relate to our ownership of our properties.  The Company believes the exclusion of these items from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating the Company’s properties as well as trends in occupancy rates, rental rates and operating costs.
 
Property operating income is a measure of the operating performance of the Company’s properties but does not measure the Company’s performance as a whole. Property operating income is therefore not a substitute for net income or operating income as computed in accordance with GAAP.
 
Results of Operations for the year ended December 31, 2013 compared to the year ended December 31, 2012.
 
Property Operating Income
 
The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to consolidated property operating income for the years ended December 31, 2013 and 2012.
 
   
For the Year Ended
 
   
December 31,
2013
   
December 30,
2012
 
             
Operating income per GAAP
  $ 27,775,174     $ 11,553,788  
Plus:
Depreciation and amortization
    40,397,895       29,074,709  
 
General and administrative expenses
    10,058,669       12,734,254  
 
Acquisition transaction costs
    1,688,521       1,347,611  
 
Other expenses
    314,833       324,354  
Less:
Mortgage interest income
    (623,793 )     (1,106,089 )
Property operating income
  $ 79,611,299     $ 53,928,627  
                 
The following comparison for the year ended December 31, 2013 compared to the year ended December 31, 2012, makes reference to the effect of the same-store properties. Same-store properties represent all operating properties owned by the Company in the same manner during the entirety of both periods which totaled 29 of the Company’s 55 consolidated properties.
 
The table below provides a reconciliation of operating income in accordance with GAAP to property operating income for the years ended December 31, 2013 and 2012 related to the 29 same-store properties owned by the Company during the entirety of both periods.
 
     
For the Year Ended
 
     
December 31,
2013
   
December 31,
2012
 
             
Same-store operating income per GAAP
  $ 25,195,308     $ 21,367,666  
Plus:
Depreciation and amortization
    21,515,014       24,628,922  
 
Acquisition transaction costs
    6,997       57,720  
Same-store property operating income
  $ 46,717,319     $ 46,054,308  
                 
 
 
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During the year ended December 31, 2013, the Company generated property operating income of approximately $79.6 million compared to property operating income of $53.9 million generated during the year ended December 31, 2012.  Property operating income increased by $25.7 million during the year ended December 31, 2013 primarily as a result of an increase in the number of properties owned by the Company in 2013 compared to 2012 and an increase in same-store properties’ operating income.  As of December 31, 2013, the Company owned 55 consolidated properties as compared to 44 properties at December 31, 2012. The newly acquired properties increased property operating income in 2013 by approximately $25.0 million.  The 29 same-store properties increased property operating income by approximately $663,000.
 
Mortgage interest income
 
The Company generated interest income from mortgage notes receivable during the year ended December 31, 2013 of approximately $624,000 compared to $1.1 million during the year ended December 31, 2012.  Mortgage interest income decreased by approximately $482,000 as a result of the cancellation of the Company’s loan to Crossroads joint venture in connection with the Company’s acquisition of the remaining partnership interests in the Crossroads Shopping Center from its joint venture partner in September 2013 and loans in the prior year that were eliminated when the Company obtained the remaining ownership interests.  As of December 31, 2013, the Company has no remaining investments in mortgage loans on real estate.
 
Depreciation and amortization
 
The Company incurred depreciation and amortization expenses during the year ended December 31, 2013 of approximately $40.4 million compared to $29.1 million incurred during the year ended December 31, 2012. Depreciation and amortization expenses were higher in 2013 as a result of an increase in the number of properties owned by the Company in 2013 compared to 2012.
 
General and administrative Expenses
 
The Company incurred general and administrative expenses during the year ended December 31, 2013 of approximately $10.1 million compared to $12.7 million incurred during the year ended December 31, 2012. General and administrative expenses decreased approximately $2.7 million primarily as a result of approximately $2.8 million incurred in 2012 related to severance costs and the cost for moving the Company’s corporate headquarters from White Plains, New York to San Diego, California, for which there were no comparable expenses in 2013.
 
Acquisition transaction costs
 
The Company incurred property acquisition costs during the year ended December 31, 2013 of approximately $1.7 million compared to $1.3 million incurred during the year ended December 31, 2012.  Property acquisition costs were higher in 2013 due to additional legal and other professional fees incurred related to acquisition activity.
 
Interest expense and other finance expenses
 
During the year ended December 31, 2013, the Company incurred approximately $15.9 million of interest expense compared to approximately $11.4 million during the year ended December 31, 2012.  The increase was due to higher net borrowings on the term loan and credit facility, interest incurred on loans assumed for Santa Teresa Village, Bernardo Heights and Crossroads and interest incurred related to the issuance of the Notes due 2023, slightly offset by lower borrowing costs on the credit facility and term loan during 2013 as compared to 2012.
 
Gain on consolidation of joint venture
 
During the year ended December 31, 2013, the Company acquired the remaining partnership interests in the Crossroads Shopping Center from its joint venture partner.  The Company recorded a gain of approximately $20.4 million when determining the fair value of the property at the time of the purchase of the remaining interest in the property. During the year ended December 31, 2012, the Company acquired the remaining partnership interests in Wilsonville Old Town Square from its joint venture partner.  The Company recorded a gain of approximately $2.1 million when determining the fair value of the property at the time of the purchase of the remaining interest in the property.
 
Gain on bargain purchase
 
During the year ended December 31, 2012, the Company recorded a gain on bargain purchase of approximately $3.9 million when recording the fair values of two properties that were acquired during the period through Conveyance in Lieu of Foreclosure Agreements.  There was no comparable gain recorded during the year ended December 31, 2013.
 
 
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Equity in earnings from unconsolidated joint venture
 
During the year ended December 31, 2013, the Company recorded equity in earnings from unconsolidated joint venture of approximately $2.4 million compared to $1.7 million during the year ended December 31, 2012.  The increase of approximately $0.7 million was primarily due to the recognition of the earned preferred return of approximately $2.0 million on the Company’s initial 49% investment in the Crossroads Shopping Center in connection with the acquisition of the remaining partnership interests during the year ended December 31, 2013 for which there was no comparable preferred return in the prior year.  This increase was offset by the reduction in regular earnings from our partnership interests in Wilsonville Old Town Square that were consolidated on August 1, 2012, and Crossroads Shopping Center that were consolidated on September 27, 2013.  As of December 31, 2013, the Company has no remaining unconsolidated joint ventures.
 
Loss from discontinued operations
 
In June 2013, the Company sold the Nimbus Village Shopping Center, a non-grocery anchored, non-core shopping center located in Rancho Cordova, California. The sales price of this property of approximately $6.3 million, less costs to sell, resulted in proceeds to the Company of approximately $5.6 million.  Accordingly, the Company recorded a loss on sale of property of approximately $714,000 for the year ended December 31, 2013, which has been included in discontinued operations.  There was no comparable loss recorded during the year ended December 31, 2012.
 
Results of Operations for the year ended December 31, 2012 compared to the year ended December 31, 2011.
 
Property Operating Income
 
The table below provides a reconciliation of consolidated operating income, in accordance with GAAP, to consolidated property operating income for the years ended December 31, 2012 and 2011.
 
     
For the Year Ended
 
     
December 31,
2012
   
December 31,
2011
 
             
Operating income per GAAP
  $ 11,553,788     $ 4,954,954  
Plus:
Depreciation and amortization
    29,074,709       21,264,172  
 
General and administrative expenses
    12,734,254       9,390,091  
 
Acquisition transaction costs
    1,347,611       2,290,838  
 
Other expenses
    324,354       411,142  
Less:
Mortgage interest income
    (1,106,089 )     (1,908,655 )
Property operating income
  $ 53,928,627     $ 36,402,542  
                 
The following comparison for the year ended December 31, 2012 compared to the year ended December 31, 2011, makes reference to the effect of the same-store properties. Same-store properties represent all operating properties owned by the Company in the same manner during the entirety of both periods which totaled 17 of the Company’s 44 consolidated properties owned as of December 31, 2012.
 
The table below provides a reconciliation of operating income in accordance with GAAP to property operating income for the years ended December 31, 2012 and 2011 related to the 17 same-store properties owned by the Company during the entirety of both periods.
 
     
For the Year Ended
 
     
December 31,
2012
   
December 31,
2011
 
             
Same-store operating income per GAAP
  $ 12,092,619     $ 10,389,156  
Plus:
Depreciation and amortization
    10,304,479       11,999,207  
 
Acquisition transaction costs
          84,697  
 
Other expenses
          6,349  
Same-store property operating income
  $ 22,397,098     $ 22,479,409  
                 
During the year ended December 31, 2012, the Company generated property operating income of approximately $53.9 million compared to property operating income of $36.4 million generated during the year ended December 31, 2011.  Property operating income increased by $17.5 million during the year ended December 31, 2012 primarily as a result of an increase in the number of properties owned by the Company in 2012 compared to 2011 offset by a slight decrease in same-store properties’ operating income.  As of December 31, 2012, the Company owned 44 consolidated properties as compared to 30 properties at December 31, 2011. The newly acquired properties increased property operating income in 2012 by approximately $17.5 million.  The 17 same-store properties decreased property operating income by approximately $82,000.
 
 
33

 
Mortgage interest income
 
The Company generated interest income from mortgage notes receivable during the year ended December 31, 2012 of approximately $1.1 million compared to $1.9 million during the year ended December 31, 2011.  Mortgage interest income decreased by approximately $800,000 primarily as a result of the Company obtaining the ownership interests in three properties that were previously secured by a mortgage note.  The Company obtained these properties through a Conveyance in Lieu of Foreclosure agreement during the year ended December 31, 2011.
 
Depreciation and amortization
 
The Company incurred depreciation and amortization expenses during the year ended December 31, 2012 of approximately $29.1 million compared to $21.3 million incurred during the year ended December 31, 2011. Depreciation and amortization expenses were higher in 2012 as a result of an increase in the number of properties owned by the Company in 2012 compared to 2011.
 
General and administrative expenses
 
The Company incurred general and administrative expenses during the year ended December 31, 2012 of approximately $12.7 million compared to $9.4 million incurred during the year ended December 31, 2011. General and administrative expenses increased approximately $3.3 million primarily as a result of approximately $2.8 million incurred in 2012 related to severance costs and the cost for moving the Company’s corporate headquarters from White Plains, New York to San Diego, California, for which there were no comparable expenses in the prior year, and increased costs related to the increase in the number of properties owned in 2012.
 
Acquisition transaction costs
 
The Company incurred property acquisition costs during the year ended December 31, 2012 of approximately $1.3 million compared to $2.3 million incurred during the year ended December 31, 2011.  Property acquisition costs were higher in 2011 due to additional professional fees incurred related to the types of properties acquired.
 
Interest expense and other finance expenses
 
During the year ended December 31, 2012, the Company incurred approximately $11.4 million of interest expense compared to approximately $6.2 million during the year ended December 31, 2011.  The increase of approximately $5.2 million was due primarily to higher net borrowings on the term loan and credit facility, as well as interest incurred on loans assumed during 2012.
 
Gain on consolidation of joint venture
 
During the year ended December 31, 2012, the Company acquired the remaining partnership interests in Wilsonville Old Town Square from its joint venture partner.  The Company recorded a gain of approximately $2.1 million when determining the fair value of the property at the time of the purchase of the remaining interest in the property.  There was no comparable gain recorded during the year ended December 31, 2011.
 
Gain on bargain purchase
 
During the year ended December 31, 2012, the Company recorded a gain on bargain purchase of approximately $3.9 million when recording the fair values of two properties that were acquired during the period through Conveyance in Lieu of Foreclosure Agreements.  During the year ended December 31, 2011, the Company recorded a gain on bargain purchase of approximately $9.4 million when recording the fair values of four properties that were acquired during the period through Conveyance in Lieu of Foreclosure Agreements.
 
Equity in earnings from unconsolidated joint venture
 
During the year ended December 31, 2012, the Company recorded equity in earnings from unconsolidated joint venture of approximately $1.7 million compared to $1.5 million during the year ended December 31, 2011.  The increase of approximately $240,000 was primarily due to an increase in regular earnings of the joint ventures due to an increase in occupancy.
 
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.
 
 
34

 
  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 Financial Accounting Standards Board (“FASB”) guidance relating to business combinations requires, among other things, an acquirer of a business (or investment property) to expense all acquisition costs related to the acquisition, the amount of which will vary based on each specific acquisition and the volume of acquisitions.  Accordingly, the costs of acquisitions will reduce our FFO. For the years ended December 31, 2013, 2012 and 2011, the Company expensed $1.7 million, $1.3 million and $2.3 million, respectively, relating to real estate acquisitions.
 
While the Company does not have any joint ventures as of December 31, 2013, in the future, the Company may acquire the remaining interests from its joint venture partners it does not already own.  At that time, a gain or loss may be recorded, in accordance with GAAP, based on the Company’s determination of the fair value of the properties at the time of any such purchase of the remaining interests in the properties.  Accordingly, the amount of the gain or loss will increase or decrease, respectively, our FFO.  During years ended December 31, 2013 and 2012, the Company acquired the remaining interests from certain of its joint venture partners.  The gains recorded upon consolidation of joint ventures for the years ended December 31, 2013 and 2012 was approximately $20.4 million and $2.1 million, respectively.  The Company did not record any such gain during the year ended December 31, 2011.
 
In the future, the Company may make real estate-related debt investments where the primary focus is to capitalize on opportunities to acquire control positions that will enable the Company to obtain the underlying property should a default occur.  The Company’s bargain purchase gains are primarily associated with these types of investments.  Accordingly, the amount of the gain will increase our FFO.  Currently the Company does not have any real estate-related debt investments.  The Company recognized bargain purchase gains of approximately $3.9 million and $9.4 million during years ended December 31, 2012 and 2011.  The Company did not recognize a bargain purchase gain during the year ended December 31, 2013.
 
The table below provides a reconciliation of net income applicable to stockholders in accordance with GAAP to FFO for the years ended December 31, 2013, 2012 and 2011.

   
For the year ended December 31,
 
   
2013
   
2012
   
2011
 
                   
Net income attributable to ROIC
  $ 33,813,561     $ 7,892,613     $ 9,656,321  
Plus:  Real property depreciation
    20,111,007       13,494,776       8,730,177  
Amortization of tenant improvements and allowances
    5,202,756       4,349,863       2,590,234  
Amortization of deferred leasing costs
    15,084,132       11,230,070       9,943,761  
Depreciation and amortization attributable to unconsolidated joint ventures
    1,059,761       2,174,877       2,121,232  
Loss from discontinued operations
    713,529              
Funds from operations
  $ 75,984,746     $ 39,142,199     $ 33,041,725  
                         
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 the Company’s consolidated financial statements.
 
Recently Issued Accounting Pronouncements
 
See Note 1 to the accompanying consolidated financial statements.
 
 
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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
 
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.
  
Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the 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).  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 sheet.  The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management’s determination of the relative fair values of these assets.  In valuing an acquired property’s intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, and estimates of lost rental revenue during the expected lease-up periods based on its evaluation of current market demand.  Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs.  
 
The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant.  Above-market and below-market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of acquisition.  Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods.  The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions.  The value of the above-market and below-market leases associated with the original lease term is amortized to rental income, over the terms of the respective leases.  The value of below-market rental lease renewal options is deferred until such time as the renewal option is exercised and subsequently amortized over the corresponding renewal period.  The value of in-place leases are amortized to expense, and the above-market and below-market lease values are amortized to rental income, 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 may record a bargain purchase gain if it determines that the purchase price for the acquired assets was less than the fair value.  The Company will record a liability in situations where any part of the cash consideration is deferred.  The amounts payable in the future are discounted to their present value.  The liability is subsequently re-measured to fair value with changes in fair value recognized in the consolidated statements of operations.  If, up to one year from the acquisition date, information regarding fair value of assets acquired and liabilities assumed is received and estimates are refined, appropriate property adjustments are made to the purchase price allocation on a retrospective basis.
 
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 its net income.
 
 
36

 
Properties are depreciated using the straight-line method over the estimated useful lives of the assets.  The estimated useful lives are as follows:
 
Buildings
39-40 years
Property Improvements
10-20 years
Furniture/Fixtures
3-10 years
Tenant Improvements
Shorter of lease term or their useful life

Asset Impairment
 
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to aggregate future net cash flows (undiscounted and without interest) expected to be generated by the asset.  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 December 31, 2013.
 
The Company reviews its investments in unconsolidated joint ventures for impairment periodically and the Company would record an impairment charge when events or circumstances change indicating that a decline in the fair values below the carrying values has occurred and such decline is other-than temporary.  The ultimate realization of the Company’s investment in an unconsolidated joint venture is dependent on a number of factors, including the performance of each investment and market conditions.  As of December 31, 2013, the Company has no unconsolidated joint ventures.
 
REIT Qualification Requirements
 
The Company has elected to be taxed as a REIT under the Internal Revenue Code (the “Code”), and believes that it has been organized and has operated in a manner that will allow it to continue to qualify for taxation as a REIT under the Code.
 
The Company is subject to a number of operational and organizational requirements to qualify and then maintain qualification as a REIT.  If the Company does not qualify as a REIT, its income would become subject to U.S. federal, state and local income taxes at regular corporate rates that would be substantial and the Company may not be permitted to re-elect to qualify as a REIT for four taxable years following the year that it failed to qualify as a REIT.  The resulting adverse effects on the Company’s results of operations, liquidity and amounts distributable to stockholders would be material.

Liquidity and Capital Resources of the Company
 
In this “Liquidity and Capital Resources of the Company” section and in the “Liquidity and Capital Resources of the Operating Partnership” section, the term “the Company” refers to Retail Opportunity Investments Corp. on an unconsolidated basis, excluding the Operating Partnership.
 
The Company’s business is operated primarily through the Operating Partnership, of which the Company is the parent company and which it consolidates for financial reporting purposes.  Because the Company operates on a consolidated basis with the Operating Partnership, the section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
 
The Company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company.  The Company itself does not hold any indebtedness other than guarantees of indebtedness of the Operating Partnership, and its only material assets are its ownership of direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, the sole general partner of the Operating Partnership.  Therefore, the consolidated assets and liabilities and the consolidated revenues and expenses of the Company and the Operating Partnership are the same on their respective financial statements.  However, all debt is held directly or indirectly by the Operating Partnership.  The Company’s principal funding requirement is the payment of dividends on its common stock.  The Company’s principal source of funding for its dividend payments is distributions it receives from the Operating Partnership.
 
As the parent company of the Operating Partnership, the Company, indirectly, has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control.  The Company causes the Operating Partnership to distribute such portion of its available cash as the Company may in its discretion determine, in the manner provided in the Operating Partnership’s partnership agreement.
 
The Company is a well-known seasoned issuer with an effective shelf registration statement filed in June 2013 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.
 
 
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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 year ended December 31, 2013, the Company’s primary source of cash was proceeds from the exercise of warrants.  As of December 31, 2013, 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, 2011, the Company entered into an ATM Equity OfferingSM Sales Agreement (“sales agreement”) with Merrill Lynch, Pierce, Fenner & Smith Incorporated to sell shares of the Company’s common stock, par value $0.0001 per share, having aggregate sales proceeds of $50.0 million from time to time, through an “at the market” equity offering program under which Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as sales agent and/or principal (“agent”).  During the year ended December 31, 2013, the Company did not sell any shares under the sales agreement.
 
For the year ended December 31, 2013, dividends paid to stockholders totaled approximately $42.5 million.  On a consolidated basis, cash flows from operations for the same period totaled approximately $37.8 million.  The deficiency of $4.7 million was funded through a borrowing by the Operating Partnership under the credit facility.  For the year ended December 31, 2012, dividends paid to stockholders totaled approximately $27.1 million.  On a consolidated basis, cash flows from operations for the same period totaled approximately $24.7 million.  The deficiency of $2.4 million was funded through a borrowing by the Operating Partnership under the credit facility.  In the future, it is expected that the cash flows from stabilized properties will be sufficient to cover the dividends paid to stockholders.
 
Potential future sources of capital include debt and equity issuances, and if the value of its common stock continues to exceed the exercise price of its warrants, proceeds from the exercise of warrants from time to time.
 
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 year ended December 31, 2013, the Operating Partnership’s primary sources of cash were (i) proceeds from the issuance of senior unsecured debt, (ii) proceeds from bank borrowings, (iii) proceeds from warrant exercises that were contributed to the Operating Partnership, and (iv) cash flow from operations.  As of December 31, 2013, the Operating Partnership has determined that it has adequate working capital to meet its debt obligations and operating expenses for the next twelve months.
 
The Operating Partnership has a revolving credit facility with several banks. Previously, the credit facility provided for borrowings of up to $200.0 million.  Effective September 26, 2013, the Company entered into a third amendment to the amended and restated credit agreement pursuant to which the borrowing capacity was increased to $350.0 million.  Additionally, the credit facility contains an accordion feature, which was amended to allow the Operating Partnership to increase the facility amount up to an aggregate of $700.0 million subject to lender consents and other conditions.  The maturity date of the credit facility has been extended by one year to August 29, 2017, subject to a further one-year extension option, which may be exercised by the Operating Partnership upon satisfaction of certain conditions.

The Operating Partnership has a term loan agreement with several banks. The term loan provides for a loan of $200.0 million and contains an accordion feature, which allows the Operating Partnership to increase the facility amount up to an aggregate of $300.0 million subject to commitments and other conditions.  The maturity date of the term loan is August 29, 2017. The agreements contain customary representations, financial and other covenants.  The Operating Partnership’s ability to borrow under the credit facility is subject to its compliance with financial covenants and other restrictions.  The Operating Partnership was in compliance with such covenants at December 31, 2013.  As of December 31, 2013, $200.0 million and $56.9 million were outstanding under the term loan and credit facility, respectively.  The average interest rates on the term loan and credit facility during the year ended December 31, 2013 were 1.6% and 1.5%, respectively.  The Company had $293.1 million available to borrow under the credit facility at December 31, 2013. The Company had no available borrowings under the term loan.  The Company obtained investment grade credit ratings from Moody’s Investors Service (Baa2) and Standard & Poor’s Ratings Services (BBB-) during the second quarter of 2013.  Prior to receiving such investment grade ratings, borrowings under the credit facility and term loan agreements accrued interest on the outstanding principal amount at a rate equal to an applicable rate based on the consolidated leverage ratio of the Company and its subsidiaries, plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds for dollar deposits for the relevant period, 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%.

Since receiving the investment grade credit ratings from the two ratings agencies, borrowings under the loan agreements accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of ROIC, plus, as applicable, (i) the Eurodollar Rate, or (ii) the Base Rate.  In addition, prior to receipt of such credit ratings, the Operating Partnership was obligated to pay an unused fee of (a) 0.35% of the undrawn balance if the