Quarterly Report



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016
 
OR
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number 001-33749

RETAIL OPPORTUNITY INVESTMENTS CORP.
RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
(Exact name of registrant as specified in its charter)
Maryland (Retail Opportunity Investments Corp.)
Delaware (Retail Opportunity Investments Partnership, LP)
(State or other jurisdiction of
incorporation or organization)
 
26-0500600 (Retail Opportunity Investments Corp.)
94-2969738 (Retail Opportunity Investments Partnership, LP)
(I.R.S. Employer
Identification No.)
 
8905 Towne Centre Drive, Suite 108
San Diego, California
(Address of principal executive
offices)
92122
(Zip code)
(858) 677-0900
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
Retail Opportunity Investments Corp.
Yes [X]    No [_]
 
Retail Opportunity Investments Partnership, LP
Yes [X]    No [_]

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

Retail Opportunity Investments Corp.
Large accelerated filer [X]
Accelerated filer [_]
Non-accelerated filer [_]
(Do not check if a smaller
reporting company)
Smaller reporting company [_]
 
Retail Opportunity Investments Partnership, LP
Large accelerated filer [_]
Accelerated filer [_]
Non-accelerated filer [X]
(Do not check if a smaller
reporting company)
Smaller reporting company [_]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Retail Opportunity Investments Corp.
Yes [_]    No [X]
 
Retail Opportunity Investments Partnership, LP
Yes [_]    No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 108,868,665 shares of common stock, par value $0.0001 per share, outstanding as of July 22, 2016 .





EXPLANATORY PARAGRAPH
 
This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2016 of Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”), and Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), of which ROIC is the parent company and general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “the Company,” “we,” “us,” “our,” or “our company” refer to ROIC together with its consolidated subsidiaries, including the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “the Operating Partnership” refer to Retail Opportunity Investments Partnership, LP together with its consolidated subsidiaries.
 
ROIC operates as a real estate investment trust and as of June 30, 2016 , ROIC owned an approximate 89.3% partnership interest and other limited partners owned the remaining 10.7% partnership interest in the Operating Partnership. Retail Opportunity Investments GP, LLC, ROIC’s wholly-owned subsidiary, is the sole general partner of the Operating Partnership, and as the parent company, ROIC has the full and complete authority over the Operating Partnership’s day-to-day management and control.
 
The Company believes that combining the quarterly reports on Form 10-Q of ROIC and the Operating Partnership into a single report will result in the following benefits:
 
facilitate a better understanding by the investors of ROIC and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;

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

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

Management operates ROIC and the Operating Partnership as one enterprise. The management of ROIC and the Operating Partnership are the same.
 
There are a few differences between ROIC and the Operating Partnership, which are reflected in the disclosures in this report. The Company believes it is important to understand the differences between ROIC and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. ROIC is a real estate investment trust, whose only material asset is its ownership of direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, which is the sole general partner of the Operating Partnership. As a result, ROIC does not conduct business itself, other than acting as the parent company of the Operating Partnership and issuing equity from time to time. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by ROIC, which are contributed to the Operating Partnership, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) or through the issuance of operating partnership units (“OP Units”).
 
Non-controlling interests is the primary area of difference between the Consolidated Financial Statements for ROIC and the Operating Partnership. The OP Units in the Operating Partnership that are not owned by ROIC are accounted for as partners’ capital in the Operating Partnership’s financial statements and as non-controlling interests in ROIC’s financial statements. Accordingly, this report presents the Consolidated Financial Statements for ROIC and the Operating Partnership separately, as required, as well as Earnings Per Share / Earnings Per Unit and Capital of the Operating Partnership.
 
This report also includes separate Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 4. Controls and Procedures sections and separate Chief Executive Officer and Chief Financial Officer certifications for each of ROIC and the Operating Partnership as reflected in Exhibits 31 and 32.





TABLE OF CONTENTS

 
 





PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements


RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Balance Sheets
(In thousands, except share data)  
 
June 30, 2016
(unaudited)
 
December 31,
2015
ASSETS
 

 
 

Real Estate Investments:
 

 
 

Land
$
730,661

 
$
669,307

Building and improvements
1,835,071

 
1,627,310

 
2,565,732

 
2,296,617

Less: accumulated depreciation
162,411

 
134,311

Real Estate Investments, net
2,403,321

 
2,162,306

Cash and cash equivalents
17,535

 
8,844

Restricted cash
121

 
227

Tenant and other receivables, net
30,480

 
28,652

Deposits
2,000

 
500

Acquired lease intangible assets, net of accumulated amortization
77,017

 
66,942

Prepaid expenses
943

 
1,953

Deferred charges, net of accumulated amortization
33,747

 
30,129

Other
1,778

 
1,895

Total assets
$
2,566,942

 
$
2,301,448

LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Term loan
$
298,996

 
$
298,802

Credit facility
330,591

 
132,028

Senior Notes Due 2024
245,092

 
244,833

Senior Notes Due 2023
244,736

 
244,426

Mortgage notes payable
71,961

 
62,156

Acquired lease intangible liabilities, net of accumulated amortization
142,815

 
124,861

Accounts payable and accrued expenses
15,479

 
13,205

Tenants’ security deposits
5,709

 
5,085

Other liabilities
14,541

 
11,036

Total liabilities
1,369,920

 
1,136,432

Commitments and contingencies


 


Non-controlling interests – redeemable OP Units

 
33,674

Equity:
 

 
 

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

 

Common stock, $.0001 par value 500,000,000 shares authorized; and 101,979,470 and 99,531,034 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
10

 
10

Additional paid-in-capital
1,218,721

 
1,166,395

Dividends in excess of earnings
(143,563
)
 
(122,991
)
Accumulated other comprehensive loss
(6,328
)
 
(6,743
)
Total Retail Opportunity Investments Corp. stockholders’ equity
1,068,840

 
1,036,671

Non-controlling interests
128,182

 
94,671

Total equity
1,197,022

 
1,131,342

Total liabilities and equity
$
2,566,942

 
$
2,301,448


See accompanying notes to consolidated financial statements.

- 1 -



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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 
 
 
Base rents
$
45,652

 
$
36,028

 
$
89,500

 
$
71,230

Recoveries from tenants
12,511

 
9,841

 
24,371

 
19,530

Other income
508

 
346

 
894

 
577

Total revenues
58,671

 
46,215

 
114,765

 
91,337

Operating expenses
 

 
 

 
 

 
 
Property operating
8,210

 
6,854

 
15,708

 
13,779

Property taxes
6,053

 
4,686

 
11,708

 
9,418

Depreciation and amortization
21,821

 
16,874

 
42,754

 
34,508

General and administrative expenses
3,516

 
3,654

 
6,835

 
6,295

Acquisition transaction costs
298

 
245

 
434

 
416

Other expense
217

 
104

 
371

 
253

Total operating expenses
40,115

 
32,417

 
77,810

 
64,669

Operating income
18,556

 
13,798

 
36,955

 
26,668

Non-operating expenses
 

 
 

 
 

 
 
Interest expense and other finance expenses
(9,918
)
 
(8,387
)
 
(19,392
)
 
(16,881
)
Net income
8,638

 
5,411

 
17,563

 
9,787

Net income attributable to non-controlling interests
(934
)
 
(210
)
 
(1,832
)
 
(386
)
Net Income Attributable to Retail Opportunity Investments Corp.
$
7,704

 
$
5,201

 
$
15,731

 
$
9,401

Basic and diluted per share:
$
0.08

 
$
0.05

 
$
0.16

 
$
0.10

Dividends per common share
$
0.18

 
$
0.17

 
$
0.36

 
$
0.34

Comprehensive income:
 

 
 

 
 

 
 
Net income
$
8,638

 
$
5,411

 
$
17,563

 
$
9,787

Other comprehensive income
 

 
 

 
 

 
 
Unrealized swap derivative loss arising during the period
(521
)
 

 
(818
)
 

Reclassification adjustment for amortization of interest expense included in net income
640

 
535

 
1,233

 
1,069

Other comprehensive income
119

 
535

 
415

 
1,069

Comprehensive income
8,757

 
5,946

 
17,978

 
10,856

Comprehensive income attributable to non-controlling interests
(934
)
 
(210
)
 
(1,832
)
 
(386
)
Comprehensive income attributable to Retail Opportunity Investments Corp.
$
7,823

 
$
5,736

 
$
16,146

 
$
10,470


See accompanying notes to consolidated financial statements.


- 2 -



RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statement of Equity
(Unaudited)
(In thousands, except share data)
 
Common Stock
 
Additional
paid-in capital
 
Retained
earnings
(Accumulated
deficit)
 
Accumulated
other
comprehensive
loss
 
Non-
controlling
interests
 
Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2015
99,531,034

 
$
10

 
$
1,166,395

 
$
(122,991
)
 
$
(6,743
)
 
$
94,671

 
$
1,131,342

Shares issued under the 2009 Plan
337,556

 

 

 

 

 

 

Repurchase of common stock
(75,472
)
 

 
(1,351
)
 

 

 

 
(1,351
)
Cancellation of restricted stock
(833
)
 

 

 

 

 

 

Stock based compensation expense

 

 
2,568

 

 

 

 
2,568

Issuance of OP Units to non-controlling interests

 

 

 

 

 
48,175

 
48,175

OP Unit redemption
244,126

 

 
4,730

 

 

 
(4,730
)
 

Cash redemption for non-controlling interests

 

 

 

 

 
(7,182
)
 
(7,182
)
Adjustment to non-controlling interests ownership in Operating Partnership

 

 
7,157

 

 

 
(7,157
)
 

Proceeds from the issuance of common stock
1,943,059

 

 
39,964

 

 

 

 
39,964

Registration expenditures

 

 
(742
)
 

 

 

 
(742
)
Cash dividends ($0.36 per share/unit)

 

 

 
(36,214
)
 

 
(4,137
)
 
(40,351
)
Dividends payable to officers

 

 

 
(89
)
 

 

 
(89
)
Net income attributable to Retail Opportunity Investments Corp.

 

 

 
15,731

 

 

 
15,731

Net income attributable to non-controlling interests

 

 

 

 

 
1,832

 
1,832

Other comprehensive income

 

 

 

 
415

 

 
415

Total
101,979,470

 
$
10

 
$
1,218,721

 
$
(143,563
)
 
$
(6,328
)
 
$
121,472

 
$
1,190,312

Proceeds on repayment of promissory note receivable secured by equity

 

 

 

 

 
6,710

 
6,710

Balance at June 30, 2016
101,979,470

 
$
10

 
$
1,218,721

 
$
(143,563
)
 
$
(6,328
)
 
$
128,182

 
$
1,197,022

 

See accompanying notes to consolidated financial statements.

- 3 -



RETAIL OPPORTUNITY INVESTMENTS CORP.
Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
17,563

 
$
9,787

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

 
 

Depreciation and amortization
42,754

 
34,508

Amortization of deferred financing costs and mortgage premiums, net
1,036

 
(18
)
Straight-line rent adjustment
(2,058
)
 
(2,776
)
Amortization of above and below market rent
(8,576
)
 
(4,713
)
Amortization relating to stock based compensation
2,568

 
2,185

Provisions for tenant credit losses
1,449

 
1,228

Other noncash interest expense
1,070

 
1,069

Change in operating assets and liabilities:
 

 
 

Restricted cash
70

 
71

Tenant and other receivables
(1,219
)
 
1,064

Prepaid expenses
1,011

 
1,555

Accounts payable and accrued expenses
(965
)
 
(1,258
)
Other assets and liabilities, net
2,135

 
323

Net cash provided by operating activities
56,838

 
43,025

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Investments in real estate
(183,105
)
 
(122,370
)
Improvements to properties
(19,534
)
 
(11,960
)
Deposits on real estate acquisitions
(1,500
)
 
1,000

Construction escrows and other
35

 
(332
)
Net cash used in investing activities
(204,104
)
 
(133,662
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal repayments on mortgages
(7,448
)
 
(16,888
)
Proceeds from draws on credit facility
229,500

 
165,500

Payments on credit facility
(31,500
)
 
(36,000
)
Proceeds on repayment of promissory note receivable
6,710

 

Redemption of OP Units
(38,820
)
 

Distributions to OP Unitholders
(4,137
)
 
(1,308
)
Deferred financing and other costs
14

 
(204
)
Proceeds from the sale of common stock
39,964

 
9,936

Registration expenditures
(626
)
 
(325
)
Dividends paid to common stockholders
(36,349
)
 
(31,999
)
Repurchase of common stock
(1,351
)
 
(1,307
)
Net cash provided by financing activities
155,957

 
87,405

Net increase (decrease) in cash and cash equivalents
8,691

 
(3,232
)
Cash and cash equivalents at beginning of period
8,844

 
10,773

Cash and cash equivalents at end of period
$
17,535

 
$
7,541

Other non-cash investing and financing activities:
 

 
 

Issuance of OP Units in connection with acquisitions
$
46,140

 
$

Fair value of assumed mortgages upon acquisition
$
17,618

 
$

Intangible lease liabilities
$
12,537

 
$
11,442

Interest rate swap liabilities
$
655

 
$

Accrued real estate improvement costs
$
3,267

 
$
245

OP Unit redemption
$
4,730

 
$
2,731

 
See accompanying notes to consolidated financial statements.

- 4 -




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

 
June 30, 2016
(unaudited)
 
December 31, 2015
ASSETS
 

 
 

Real Estate Investments:
 

 
 

Land
$
730,661

 
$
669,307

Building and improvements
1,835,071

 
1,627,310

 
2,565,732

 
2,296,617

Less:  accumulated depreciation
162,411

 
134,311

Real Estate Investments, net
2,403,321

 
2,162,306

Cash and cash equivalents
17,535

 
8,844

Restricted cash
121

 
227

Tenant and other receivables, net
30,480

 
28,652

Deposits
2,000

 
500

Acquired lease intangible assets, net of accumulated amortization
77,017

 
66,942

Prepaid expenses
943

 
1,953

Deferred charges, net of accumulated amortization
33,747

 
30,129

Other
1,778

 
1,895

Total assets
$
2,566,942

 
$
2,301,448

LIABILITIES AND CAPITAL
 

 
 

Liabilities:
 

 
 

Term loan
$
298,996

 
$
298,802

Credit facility
330,591

 
132,028

Senior Notes Due 2024
245,092

 
244,833

Senior Notes Due 2023
244,736

 
244,426

Mortgage notes payable
71,961

 
62,156

Acquired lease intangible liabilities, net of accumulated amortization
142,815

 
124,861

Accounts payable and accrued expenses
15,479

 
13,205

Tenants’ security deposits
5,709

 
5,085

Other liabilities
14,541

 
11,036

Total liabilities
1,369,920

 
1,136,432

Commitments and contingencies


 


Redeemable limited partners

 
33,674

Capital:
 

 
 

Partners’ capital, unlimited partnership units authorized:
 

 
 

ROIC capital (consists of general and limited partnership interests held by ROIC)
1,075,168

 
1,043,414

Limited partners’ capital (consists of limited partnership interests held by third parties)
128,182

 
94,671

Accumulated other comprehensive loss
(6,328
)
 
(6,743
)
Total capital
1,197,022

 
1,131,342

Total liabilities and capital
$
2,566,942

 
$
2,301,448

 
See accompanying notes to consolidated financial statements.


- 5 -



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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 

 
 

Base rents
$
45,652

 
$
36,028

 
$
89,500

 
$
71,230

Recoveries from tenants
12,511

 
9,841

 
24,371

 
19,530

Other income
508

 
346

 
894

 
577

Total revenues
58,671

 
46,215

 
114,765

 
91,337

Operating expenses
 

 
 

 
 

 
 

Property operating
8,210

 
6,854

 
15,708

 
13,779

Property taxes
6,053

 
4,686

 
11,708

 
9,418

Depreciation and amortization
21,821

 
16,874

 
42,754

 
34,508

General and administrative expenses
3,516

 
3,654

 
6,835

 
6,295

Acquisition transaction costs
298

 
245

 
434

 
416

Other (income) expense
217

 
104

 
371

 
253

Total operating expenses
40,115

 
32,417

 
77,810

 
64,669

Operating income
18,556

 
13,798

 
36,955

 
26,668

Non-operating expenses
 

 
 

 
 

 
 

Interest expense and other finance expenses
(9,918
)
 
(8,387
)
 
(19,392
)
 
(16,881
)
Net Income Attributable to Retail Opportunity Investments Partnership, LP
$
8,638

 
$
5,411

 
$
17,563

 
$
9,787

Basic and diluted per unit:
$
0.08

 
$
0.05

 
$
0.16

 
$
0.10

Distributions per unit
$
0.18

 
$
0.17

 
$
0.36

 
$
0.34

Comprehensive income:
 

 
 

 
 

 
 

Net income
$
8,638

 
$
5,411

 
$
17,563

 
$
9,787

Other comprehensive income
 

 
 

 
 

 
 

Unrealized swap derivative loss arising during the period
(521
)
 

 
(818
)
 

Reclassification adjustment for amortization of interest expense included in net income
640

 
535

 
1,233

 
1,069

Other comprehensive income
119

 
535

 
415

 
1,069

Comprehensive income
$
8,757

 
$
5,946

 
$
17,978

 
$
10,856


See accompanying notes to consolidated financial statements.
 

- 6 -



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

 
Limited Partner’s Capital (1)
 
ROIC Capital (2)
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Accumulated
other
comprehensive
loss
 
Capital
Balance at December 31, 2015
12,195,603

 
$
94,671

 
99,531,034

 
$
1,043,414

 
$
(6,743
)
 
$
1,131,342

OP units issued under the 2009 Plan

 

 
337,556

 

 

 

Repurchase of OP Units

 

 
(75,472
)
 
(1,351
)
 

 
(1,351
)
Cancellation of restricted stock

 

 
(833
)
 

 

 

Stock based compensation expense

 

 

 
2,568

 

 
2,568

Issuance of OP Units
2,434,833

 
48,175

 

 

 

 
48,175

Equity redemption of OP Units
(244,126
)
 
(4,730
)
 
244,126

 
4,730

 

 

Cash redemption of OP Units
(2,206,613
)
 
(7,182
)
 

 

 

 
(7,182
)
Adjustment to non-controlling interests ownership in Operating Partnership

 
(7,157
)
 

 
7,157

 

 

Issuance of OP Units in connection with sale of common stock

 

 
1,943,059

 
39,964

 

 
39,964

Registration expenditures

 

 

 
(742
)
 

 
(742
)
Cash distributions ($0.36 per unit)

 
(4,137
)
 

 
(36,214
)
 

 
(40,351
)
Dividends payable to officers

 

 

 
(89
)
 

 
(89
)
Net income attributable to Retail Opportunity Investments Partnership, LP

 
1,832

 

 
15,731

 

 
17,563

Other comprehensive income

 

 

 

 
415

 
415

Total
12,179,697

 
$
121,472

 
101,979,470

 
$
1,075,168

 
$
(6,328
)
 
$
1,190,312

Proceeds on repayment of promissory note receivable secured by capital

 
6,710

 

 

 

 
6,710

Balance at June 30, 2016
12,179,697

 
$
128,182

 
101,979,470

 
$
1,075,168

 
$
(6,328
)
 
$
1,197,022

 
_________________________________
(1)
Consists of limited partnership interests held by third parties.
(2)
Consists of general and limited partnership interests held by ROIC.

See accompanying notes to consolidated financial statements.


- 7 -



RETAIL OPPORTUNITY INVESTMENTS PARTNERSHIP, LP
Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)

 
Six Months Ended June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
17,563

 
$
9,787

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

 
 

Depreciation and amortization
42,754

 
34,508

Amortization of deferred financing costs and mortgage premiums, net
1,036

 
(18
)
Straight-line rent adjustment
(2,058
)
 
(2,776
)
Amortization of above and below market rent
(8,576
)
 
(4,713
)
Amortization relating to stock based compensation
2,568

 
2,185

Provisions for tenant credit losses
1,449

 
1,228

Other noncash interest expense
1,070

 
1,069

Change in operating assets and liabilities:
 

 
 

Restricted cash
70

 
71

Tenant and other receivables
(1,219
)
 
1,064

Prepaid expenses
1,011

 
1,555

Accounts payable and accrued expenses
(965
)
 
(1,258
)
Other assets and liabilities, net
2,135

 
323

Net cash provided by operating activities
56,838

 
43,025

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Investments in real estate
(183,105
)
 
(122,370
)
Improvements to properties
(19,534
)
 
(11,960
)
Deposits on real estate acquisitions
(1,500
)
 
1,000

Construction escrows and other
35

 
(332
)
Net cash used in investing activities
(204,104
)
 
(133,662
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal repayments on mortgages
(7,448
)
 
(16,888
)
Proceeds from draws on credit facility
229,500

 
165,500

Payments on credit facility
(31,500
)
 
(36,000
)
Proceeds on repayment of promissory note receivable
6,710

 

Redemption of OP Units
(38,820
)
 

Deferred financing and other costs
14

 
(204
)
Proceeds from the issuance of OP Units in connection with sale of common stock
39,964

 
9,936

Registration expenditures
(626
)
 
(325
)
Distributions to Unitholders
(40,486
)
 
(33,307
)
Repurchase of OP Units
(1,351
)
 
(1,307
)
Net cash provided by financing activities
155,957

 
87,405

Net increase (decrease) in cash and cash equivalents
8,691

 
(3,232
)
Cash and cash equivalents at beginning of period
8,844

 
10,773

Cash and cash equivalents at end of period
$
17,535

 
$
7,541

Other non-cash investing and financing activities:
 

 
 

Issuance of OP Units in connection with acquisitions
$
46,140

 
$

Fair value of assumed mortgage upon acquisition
$
17,618

 
$

Intangible lease liabilities
$
12,537

 
$
11,442

Interest rate swap liabilities
$
655

 
$

Accrued real estate improvement costs
$
3,267

 
$
245

OP Unit redemption
$
4,730

 
$
2,731

 

See accompanying notes to consolidated financial statements.

- 8 -



Notes to Consolidated Financial Statements
 
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies

Business
 
Retail Opportunity Investments Corp., a Maryland corporation (“ROIC”), is a fully integrated and self-managed real estate investment trust (“REIT”). ROIC specializes in the acquisition, ownership and management of necessity-based community and neighborhood shopping centers on the west coast of the United States anchored by supermarkets and drugstores.
 
ROIC is organized in a traditional umbrella partnership real estate investment trust (“UpREIT”) format pursuant to which Retail Opportunity Investments GP, LLC, its wholly-owned subsidiary, serves as the general partner of, and ROIC conducts substantially all of its business through, its operating partnership subsidiary, Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), together with its subsidiaries. Unless otherwise indicated or unless the context requires otherwise, all references to the “Company”, “we,” “us,” “our,” or “our company” refer to ROIC together with its consolidated subsidiaries, including the Operating Partnership.
 
With the approval of its stockholders, ROIC reincorporated as a Maryland corporation on June 2, 2011. ROIC began operations as a Delaware corporation, known as NRDC Acquisition Corp., which was incorporated on July 10, 2007, for the purpose of acquiring assets or operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination. On October 20, 2009, ROIC’s stockholders and warrantholders approved the proposals presented at the special meetings of stockholders and warrantholders, respectively, in connection with the transactions contemplated by the Framework Agreement (the “Framework Agreement”) ROIC entered into on August 7, 2009 with NRDC Capital Management, LLC (“NRDC”), which, among other things, set forth the steps to be taken by ROIC to continue its business as a corporation that has elected to qualify as a REIT for U.S. federal income tax purposes.
 
ROIC’s only material asset is its ownership of direct or indirect partnership interests in the Operating Partnership and membership interest in Retail Opportunity Investments GP, LLC, which is the sole general partner of the Operating Partnership. As a result, ROIC does not conduct business itself, other than acting as the parent company and issuing equity from time to time. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by ROIC, which are contributed to the Operating Partnership, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) or through the issuance of operating partnership units (“OP Units”) of the Operating Partnership.
 
Recent Accounting Pronouncements
 
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-2, “Leases.” The pronouncement requires lessees to put most leases on their balance sheets but recognize expenses on their income statements. The guidance also eliminates real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact this pronouncement will have on the Company’s consolidated financial statements.
 
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments.” The pronouncement simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The pronouncement requires any adjustments to provisional amounts to be applied prospectively. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company adopted the provisions of ASU No. 2015-16 effective January 1, 2016 and the adoption did not have a material impact on the consolidated financial statements of the Company.
 
In April 2015, the FASB issued ASU No. 2015-3, “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.” The pronouncement requires reporting entities to present debt issuance costs related to a note as a direct deduction from the face amount of that note presented in the balance sheet. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company adopted the provisions of ASU No. 2015-3 effective January 1, 2016 and retrospectively applied the guidance to its debt obligations for all periods presented, which resulted in the presentation of debt issuance costs associated with its term loan, unsecured revolving credit facility,

- 9 -



Senior Notes Due 2024, Senior Notes Due 2023, and mortgage notes payable as a direct reduction from the carrying amount of the related debt instrument. These amounts were previously included in deferred charges, net on the Company’s consolidated balance sheets. See Note 4.
 
In February 2015, the FASB issued ASU No. 2015-2, “Amendments to the Consolidation Analysis.” The pronouncement focuses to minimize situations under previously existing guidance in which a reporting entity was required to consolidate another legal entity in which that reporting entity did not have: (1) the ability through contractual rights to act primarily on its own behalf; (2) ownership of the majority of the legal entity's voting rights; or (3) the exposure to a majority of the legal entity's economic benefits.  ASU 2015-2 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. ASU 2015-2 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company adopted the provisions of ASU No. 2015-2 effective January 1, 2016, and there were no changes to the Company’s consolidation conclusions as a result of the adoption of this guidance.
 
In May 2014, the FASB issued ASU No. 2014-9, “Revenue from Contracts with Customers.” The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for fiscal years beginning after December 15, 2017. The Company is in the process of evaluating the impact this pronouncement will have on the Company’s consolidated financial statements.
 
Principles of Consolidation
 
The accompanying consolidated financial statements are prepared on the accrual basis in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, the consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and the results of operations and cash flows for the periods presented. Results of operations for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 . It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2015 .

The consolidated financial statements include the accounts of the Company and those of its subsidiaries, which are wholly-owned or controlled by the Company. Entities which the Company does not control through its voting interest and entities which are variable interest entities (“VIEs”), but where it is not the primary beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.
 
The Company follows the FASB guidance for determining whether an entity is a VIE and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. Effective January 1, 2016, the Company adopted the provisions of ASU No 2015-2, and as a result, concluded that the Operating Partnership is a VIE. The Company has concluded that because they have both the power and the rights to control the Operating Partnership, they are the primary beneficiary and are required to continue to consolidate the Operating Partnership.
 
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are required to be presented as a separate component of equity in the consolidated balance sheet and modify the presentation of net income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.

Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the disclosure of contingent assets and liabilities, the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods covered by the financial statements. The most significant assumptions and estimates relate to the purchase price allocations, depreciable lives, revenue recognition and the collectability of tenant receivables, other receivables, notes receivables, the valuation of performance-based restricted stock, stock options, and derivatives. Actual results could differ from these estimates.
 

- 10 -



Federal Income Taxes
 
Commencing with ROIC’s taxable year ended December 31, 2010, ROIC elected to qualify as a REIT under Sections 856-860 of the Internal Revenue Code (the “Code”). Under those sections, a REIT that, among other things, distributes at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) and meets certain other qualifications prescribed by the Code will not be taxed on that portion of its taxable income that is distributed.
 
Although ROIC may qualify as a REIT for U.S. federal income tax purposes, the Company is subject to state income or franchise taxes in certain states in which some of its properties are located.  In addition, taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiary (“TRS”), if any, is fully subject to U.S. federal, state and local income taxes. For all periods from inception through September 26, 2013 the Operating Partnership has been an entity disregarded from its sole owner, ROIC, for U.S. federal income tax purposes and as such has not been subject to federal income taxes. Effective September 27, 2013, the Operating Partnership issued OP Units in connection with the acquisitions of two shopping centers. Accordingly, the Operating Partnership ceased being a disregarded entity and instead is being treated as a partnership for federal income tax purposes.    
 
The Company follows the FASB guidance that defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The FASB also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company records interest and penalties relating to unrecognized tax benefits, if any, as interest expense. As of June 30, 2016 , the statute of limitations for the tax years 2012 through and including 2014 remain open for examination by the Internal Revenue Service (“IRS”) and state taxing authorities.
 
ROIC intends to make regular quarterly distributions to holders of its common stock.  U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income.  ROIC intends to pay regular quarterly dividends to stockholders in an amount not less than its net taxable income, if and to the extent authorized by its board of directors.  Before ROIC pays any dividend, whether for U.S. federal income tax purposes or otherwise, it must first meet both its operating requirements and its debt service on debt.  If ROIC’s cash available for distribution is less than its net taxable income, it could be required to sell assets or borrow funds to make cash distributions or it may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
 
Real Estate Investments
 
All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred. The Company expenses transaction costs associated with business combinations in the period incurred. During the six months ended June 30, 2016 and 2015 , capitalized costs related to the improvement or replacement of real estate properties were approximately $22.8 million and $12.2 million , respectively.
 
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 sheets. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management’s determination of the relative fair values of these assets. In valuing an acquired property’s intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, and estimates of lost rental revenue during the expected lease-up periods based on management’s evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs. Leasing commissions, legal and other related costs (“lease origination costs”) are classified as deferred charges in the accompanying consolidated balance sheets.

The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant. Above-market and below-market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of acquisition. Such valuations include a

- 11 -



consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The value of the above-market and below-market leases is amortized to rental income, over the terms of the respective leases including option periods, if applicable. The value of in-place leases are amortized to expense over the remaining non-cancellable terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recognized in operations at that time. The Company 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 in the period in which the amounts are adjusted.
 
In conjunction with the Company’s pursuit and acquisition of real estate investments, the Company expensed acquisition transaction costs during the three months ended June 30, 2016 and 2015 of approximately $298,000 and $245,000 , respectively, and approximately $434,000 and $416,000 during the six months ended June 30, 2016 and 2015 , respectively.
 
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 June 30, 2016 .
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed the federally insured limit by the Federal Deposit Insurance Corporation. The Company has not experienced any losses related to these balances.
 
Restricted Cash
 
The terms of several of the Company’s mortgage loans payable require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established and is not available to fund other property-level or Company-level obligations.
 
Revenue Recognition
 
Management has determined that all of the Company’s leases with its various tenants are operating leases. Rental income is generally recognized based on the terms of leases entered into with tenants. In those instances in which the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. Minimum rental income from leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Percentage rent is recognized when a specific tenant’s sales breakpoint is achieved. Property operating expense recoveries from tenants of common area maintenance, real estate taxes and other recoverable costs are recognized in the period the related expenses are incurred.
 
Termination fees (included in other income) are fees that the Company has agreed to accept in consideration for permitting certain tenants to terminate their lease prior to the contractual expiration date. The Company recognizes termination fees in accordance with Securities and Exchange Commission Staff Accounting Bulletin 104, “Revenue Recognition,” when the following conditions are met: (a) the termination agreement is executed; (b) the termination fee is determinable; (c) all landlord services pursuant to the terminated lease have been rendered; and (d) collectability of the termination fee is assured. Interest income is recognized as it is earned. Gains or losses on disposition of properties are recorded when the criteria for recognizing such gains or losses under GAAP have been met.
 

- 12 -



The Company must make estimates as to the collectability of its accounts receivable related to base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes accounts receivable by considering tenant creditworthiness, current economic trends, and changes in tenants’ payment patterns when evaluating the adequacy of the allowance for doubtful accounts receivable. The Company also provides an allowance for future credit losses of the deferred straight-line rents receivable. The provision for doubtful accounts at June 30, 2016 and December 31, 2015 was approximately $5.1 million and $4.5 million , respectively.
 
Depreciation and Amortization
 
The Company uses the straight-line method for depreciation and amortization. Buildings are depreciated over the estimated useful lives which the Company estimates to be 39 - 40  years. Property improvements are depreciated over the estimated useful lives that range from 10 to 20  years. Furniture and fixtures are depreciated over the estimated useful lives that range from 3 to 10  years. Tenant improvements are amortized over the shorter of the life of the related leases or their useful life.
 
Deferred Leasing and Financing Costs
 
Costs incurred in obtaining tenant leases (principally leasing commissions and acquired lease origination costs) are amortized ratably over the life of the tenant leases. Costs incurred in obtaining long-term financing are amortized ratably over the related debt agreement. The amortization of deferred leasing and financing costs is included in Depreciation and amortization and Interest expense and other finance expenses, respectively, in the Consolidated Statements of Operations.
 
Internal Capitalized Leasing Costs
 
The Company capitalizes a portion of payroll-related costs related to its leasing personnel associated with new leases and lease renewals. These costs are amortized over the life of the respective leases. During the three months ended June 30, 2016 and 2015 , the Company capitalized approximately $314,000 and $268,000 , respectively. During the six months ended June 30, 2016 and 2015 , the Company capitalized approximately $618,000 and $525,000 , respectively.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and tenant receivables. The Company places its cash and cash equivalents in excess of insured amounts with high quality financial institutions. The Company performs ongoing credit evaluations of its tenants and requires tenants to provide security deposits.
 
Earnings Per Share
 
Basic earnings per share (“EPS”) excludes the impact of dilutive shares and is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock and then shared in the earnings of the Company.
 

For the three and six months ended June 30, 2016 and 2015 , basic EPS was determined by dividing net income allocable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. Net income during the applicable period is also allocated to the time-based unvested restricted stock as these grants are entitled to receive dividends and are therefore considered a participating security.  Time-based unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders other than the holders of time-based unvested restricted stock. The performance-based restricted stock awards outstanding under the 2009 Plan described in Note 7 are excluded from the basic EPS calculation, as these units are not participating securities until they vest.
 

- 13 -



The following table sets forth the reconciliation between basic and diluted EPS for ROIC (in thousands, except share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 

 
 

 
 

 
 

Net Income
$
8,638

 
$
5,411

 
$
17,563

 
$
9,787

Less income attributable to non-controlling interests
(934
)
 
(210
)
 
(1,832
)
 
(386
)
Less earnings allocated to unvested shares
(68
)
 
(57
)
 
(136
)
 
(115
)
Net income available for common stockholders, basic
$
7,636

 
$
5,144

 
$
15,595

 
$
9,286

Numerator:
 

 
 

 
 

 
 

Net Income
$
8,638

 
$
5,411

 
$
17,563

 
$
9,787

Less earnings allocated to unvested shares
(68
)
 
(57
)
 
(136
)
 
(115
)
Net income available for common stockholders, diluted
$
8,570

 
$
5,354

 
$
17,427

 
$
9,672

Denominator:
 

 
 

 
 

 
 

Denominator for basic EPS – weighted average common equivalent shares
100,166,136

 
93,586,398

 
99,788,706

 
93,339,158

OP units
12,192,109

 
3,786,149

 
11,642,990

 
3,853,358

Restricted stock awards - performance-based
152,675

 
139,096

 
131,783

 
127,964

Stock options
131,981

 
100,582

 
125,493

 
104,905

Denominator for diluted EPS – weighted average common equivalent shares
112,642,901

 
97,612,225

 
111,688,972

 
97,425,385

 
Earnings Per Unit
 
The following table sets forth the reconciliation between basic and diluted earnings per unit for the Operating Partnership (in thousands, except unit data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 

 
 

 
 

 
 

Net Income
$
8,638

 
$
5,411

 
$
17,563

 
$
9,787

Less earnings allocated to unvested shares
(68
)
 
(57
)
 
(136
)
 
(115
)
Net income available to unitholders, basic and diluted
$
8,570

 
$
5,354

 
$
17,427

 
$
9,672

Denominator:
 

 
 

 
 

 
 

Denominator for basic earnings per unit – weighted average common equivalent units
112,358,245

 
97,372,547

 
111,431,696

 
97,192,516

Restricted stock awards – performance-based
152,675

 
139,096

 
131,783

 
127,964

Stock options
131,981

 
100,582

 
125,493

 
104,905

Denominator for diluted earnings per unit – weighted average common equivalent units
112,642,901

 
97,612,225

 
111,688,972

 
97,425,385

 
Stock-Based Compensation
 
The Company has a stock-based employee compensation plan, which is more fully described in Note 7.
 
The Company accounts for its stock-based compensation plans based on the FASB guidance which requires that compensation expense be recognized based on the fair value of the stock awards less estimated forfeitures.  Restricted stock grants vest based upon the completion of a service period (“time-based grants”) and/or the Company meeting certain established market-specific financial performance criteria (“performance-based grants”).  Time-based grants are valued according to the market price for the Company’s common stock at the date of grant.  For performance-based grants, a Monte Carlo valuation model is used, taking into account the underlying contingency risks associated with the performance criteria.  It is the Company’s policy to grant options with an exercise price equal to the quoted closing market price of stock on the grant date.  Awards of stock options and time-based grants of stock are expensed as compensation on a straight-line basis over the vesting period.  Awards of performance-based grants are expensed as compensation under an accelerated method and are recognized in income regardless of the results of the performance criteria.

- 14 -



 
Non-Controlling Interests – Redeemable OP Units / Redeemable Limited Partners
 
OP Units are classified as either mezzanine equity or permanent equity. If ROIC could be required to deliver cash in exchange for the OP Units upon redemption, such OP Units are referred to as Redeemable OP Units and presented in the mezzanine section of the balance sheet. If ROIC could, in its sole discretion, deliver cash or shares of ROIC common stock in exchange for the OP Units upon redemption, such OP Units are classified as permanent equity and presented in the equity section of the balance sheet. As of June 30, 2016 , all outstanding OP Units are classified as permanent equity. See Note 8 for further discussion.
 
Derivatives
 
The Company records all derivatives on the balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. When the Company terminates a derivative for which cash flow hedging was being applied, the balance which was recorded in Other Comprehensive Income is amortized to interest expense over the remaining contractual term of the swap. The Company includes cash payments made to terminate interest rate swaps as an operating activity on the statement of cash flows, given the nature of the underlying cash flows that the derivative was hedging.
 
Segment Reporting
 
The Company’s primary business is the ownership, management, and redevelopment of retail real estate properties. The Company reviews operating and financial information for each property on an individual basis and therefore, each property represents an individual operating segment. The Company evaluates financial performance using property operating income, defined as operating revenues (base rent and recoveries from tenants), less property and related expenses (property operating expenses and property taxes). The Company has aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities including the fact that they are operated using consistent business strategies, are typically located in major metropolitan areas, and have similar tenant mixes.
 
Reclassifications
 
Certain reclassifications have been made to the prior period consolidated financial statements and notes to conform to the current year presentation. See Note 4.

2. Real Estate Investments

The following real estate investment transactions have occurred during the six months ended June 30, 2016 .
 
Property Acquisitions
 
On March 10, 2016, the Company acquired a two-property portfolio for an adjusted purchase price of approximately $64.3 million . The first property known as Magnolia Shopping Center is located in Santa Barbara, California, is approximately 116,000 square feet and is anchored by Kroger (Ralph’s) Supermarket. The second property, known as Casitas Plaza Shopping Center is located in Carpinteria, California, within Santa Barbara County, is approximately 97,000 square feet and is anchored by Albertson’s Supermarket and CVS Pharmacy. The acquisitions were funded through the issuance of 2,434,833 OP Units with a fair value of approximately $46.1 million , the assumption of $9.3 million and $7.6 million in mortgage loans on Magnolia Shopping Center and Casitas Plaza Shopping Center, respectively, and cash on hand.

On April 28, 2016, the Company acquired the property known as Bouquet Center located in Santa Clarita, California, within the Los Angeles metropolitan area, for a purchase price of approximately $ 59.0 million . Bouquet Center is approximately 149,000 square feet and is anchored by Safeway (Vons) Supermarket, CVS Pharmacy and Ross Dress For Less. The property was acquired with borrowings under the Company's unsecured revolving credit facility, proceeds from the ATM program and available cash from operations.

- 15 -




On June 1, 2016, the Company acquired the property known as North Ranch Shopping Center located in Westlake Village, California, within the Los Angeles metropolitan area, for a purchase price of approximately $ 122.8 million . North Ranch Shopping Center is approximately 147,000 , square feet and is anchored by Kroger (Ralph's) Supermarket, Trader Joe's, Rite Aid Pharmacy, and Petco. The property was acquired with borrowings under the Company's unsecured revolving credit facility, proceeds from the ATM program and available cash from operations.

Any reference to the number of properties and square footage are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of its financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
 
The financial information set forth below summarizes the Company’s purchase price allocation for the properties acquired during the six months ended June 30, 2016 (in thousands).

 
June 30, 2016
ASSETS
 

Land
$
57,006

Building and improvements
192,373

Acquired lease intangible assets
7,070

Deferred charges
2,951

Assets acquired
$
259,400

LIABILITIES
 

Mortgage notes assumed
$
17,618

Acquired lease intangible liabilities
12,537

Liabilities assumed
$
30,155

 
The allocations for Magnolia Shopping Center and Casitas Plaza Shopping Center are final. The allocations for Bouquet Center and North Ranch Shopping Center are preliminary and will be adjusted as final information becomes available.
 
Pro Forma Financial Information
 
The pro forma financial information set forth below is based upon the Company’s historical consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 , adjusted to give effect to the acquisition of properties described above as if such transactions had been completed at the beginning of 2015 . The pro forma financial information set forth below is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2015 , nor does it purport to represent the results of future operations (in thousands). 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Statement of operations:
 
 
 
 
 
 
 
Revenues
$
60,290

 
$
57,049

 
$
122,080

 
$
113,005

Net income attributable to Retail Opportunity Investments Corp.
$
7,909

 
$
6,330

 
$
16,535

 
$
11,897


The following table summarizes the operating results included in the Company’s historical consolidated statement of operations for the three and six months ended June 30, 2016 , for the properties acquired during the six months ended June 30, 2016 (in thousands).

 
Three Months Ended
June 30, 2016
 
Six Months Ended
June 30, 2016
Statement of operations:
 

 
 

Revenues
$
2,961

 
$
3,257

Net income attributable to Retail Opportunity Investments Corp.
$
415

 
$
327


- 16 -



3. Tenant Leases

Space in the Company’s shopping centers is leased to various tenants under operating leases that usually grant tenants renewal options and generally provide for additional rents based on certain operating expenses as well as tenants’ sales volume.
 
Future minimum rents to be received under non-cancellable leases as of June 30, 2016 are summarized as follows (in thousands):

 
Minimum Rents
Remaining 2016
$
81,143

2017
151,617

2018
131,367

2019
109,003

2020
90,291

Thereafter
404,079

Total minimum lease payments
$
967,500


4. Mortgage Notes Payable, Credit Facilities and Senior Notes

ROIC does not hold any indebtedness. All debt is held directly or indirectly by the Operating Partnership; however, ROIC has guaranteed the Operating Partnership’s term loan, unsecured revolving credit facility, carve-out guarantees on property-level debt, the Senior Notes Due 2024 and the Senior Notes Due 2023.
 
In April 2015, the FASB issued ASU No. 2015-3, which requires reporting entities to present debt issuance costs related to a note as a direct deduction from the face amount of that note presented in the balance sheet. Effective January 1, 2016, the Company adopted the provisions of ASU 2015-3 and retrospectively applied the guidance to its debt obligations for all periods presented. The unamortized deferred financing costs were previously included in deferred charges, net on the Company’s consolidated Balance Sheets.
 
Mortgage Notes Payable
 
On March 10, 2016, in connection with the acquisitions of Magnolia Shopping Center and Casitas Plaza Shopping Center, the Company assumed two existing mortgage loans with an outstanding principal balance of approximately $9.3 million and $7.6 million , respectively. On April 1, 2016, the Company repaid in full the Gateway Village III mortgage note related to Gateway Shopping Center for a total of approximately $7.1 million , without penalty, in accordance with the prepayment provisions of the note.
 
The mortgage notes payable collateralized by respective properties and assignment of leases at June 30, 2016 and December 31, 2015 , respectively, were as follows (in thousands):

Property
Maturity Date
 
Interest Rate
 
June 30, 2016
 
December 31, 2015
Gateway Village III
July 2016
 
6.10
%
 
$

 
$
7,166

Bernardo Heights Plaza
July 2017
 
5.70
%
 
8,312

 
8,404

Santa Teresa Village
February 2018
 
6.20
%
 
10,500

 
10,613

Magnolia Shopping Center
October 2018
 
5.50
%
 
9,223

 

Casitas Plaza Shopping Center
June 2022
 
5.32
%
 
7,517

 

Diamond Hills Plaza
October 2025
 
3.55
%
 
35,500

 
35,500

 
 
 
 

 
$
71,052

 
$
61,683

Mortgage premiums
 
 
 

 
1,378

 
922

Net unamortized deferred financing costs
 
 
 

 
(469
)
 
(449
)
Total mortgage notes payable
 
 
 

 
$
71,961

 
$
62,156

 

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

 
June 30, 2016
 
December 31, 2015
Term Loan
$
300,000

 
$
300,000

Net unamortized deferred financing costs
(1,004
)
 
(1,198
)
Term Loan:
$
298,996

 
$
298,802

 
On September 29, 2015, the Company entered into a term loan agreement (the “Term Loan Agreement”) with KeyBank National Association, as Administrative Agent, and U.S. Bank National Association, as Syndication Agent and the other lenders party thereto, under which the lenders agreed to provide a $300.0 million unsecured term loan facility. The Term Loan Agreement also provides that the Company may from time to time request increased aggregate commitments of $200.0 million under certain conditions set forth in the Term Loan Agreement, including the consent of the lenders for the additional commitments. The initial maturity date of the term loan is January 31, 2019, subject to two one-year extension options, which may be exercised upon satisfaction of certain conditions including the payment of extension fees. Borrowings under the Term Loan Agreement accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of the Company, plus, as applicable, (i) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the relevant period (the “Eurodollar Rate”), or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50% , (b) the rate of interest announced by the Administrative Agent as its “prime rate,” and (c) the Eurodollar Rate plus 1.10% .
 
The carrying values of the Company’s unsecured revolving credit facility were as follows (in thousands):

 
June 30, 2016
 
December 31, 2015
Credit Facility
$
333,500

 
$
135,500

Net unamortized deferred financing costs
(2,909
)
 
(3,472
)
Credit Facility:
$
330,591

 
$
132,028

 
The Operating Partnership has an unsecured revolving credit facility (the “credit facility”) with several banks which provides for borrowings of up to $500.0 million . Additionally, the credit facility contains an accordion feature, which allows the Operating Partnership to increase the credit facility amount up to an aggregate of $1.0 billion , subject to lender consents and other conditions. The maturity date of the credit facility is January 31, 2019, subject to a further one-year extension option, which may be exercised by the Operating Partnership upon satisfaction of certain conditions. Borrowings under the credit facility accrue interest on the outstanding principal amount at a rate equal to an applicable rate based on the credit rating level of the Company, plus, as applicable, (i) the Eurodollar Rate, or (ii) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50% , (b) the rate of interest announced by KeyBank, National Association as its “prime rate,” and (c) the Eurodollar Rate plus 1.00% . Additionally, the Operating Partnership is obligated to pay a facility fee at a rate based on the credit rating level of the Company, currently 0.20% , and a fronting fee at a rate of 0.125% per year with respect to each letter of credit issued under the credit facility. 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.

Both the term loan and credit facility contain customary representations, financial and other covenants. The Operating Partnership’s ability to borrow under the term loan and credit facility is subject to its compliance with financial covenants and other restrictions on an ongoing basis. The Operating Partnership was in compliance with such covenants at June 30, 2016 .
 
As of June 30, 2016 , $300.0 million and $333.5 million were outstanding under the term loan and credit facility, respectively. The average interest rate on the term loan during both the three and six months ended June 30, 2016 was 1.5% . The average interest rates on the credit facility during the three and six months ended June 30, 2016 were 1.5% and 1.4% , respectively. The Company had no available borrowings under the term loan at June 30, 2016 . The Company had $166.5 million available to borrow under the credit facility at June 30, 2016 .
 
Senior Notes Due 2024
 
The carrying value of the Company’s Senior Notes Due 2024 is as follows (in thousands):

- 18 -



 
 
June 30, 2016
 
December 31, 2015
Principal amount
$
250,000

 
$
250,000

Unamortized debt discount
(3,042
)
 
(3,191
)
Net unamortized deferred financing costs
(1,866
)
 
(1,976
)
Senior Notes Due 2024:
$
245,092

 
$
244,833

 
On December 3, 2014, the Operating Partnership completed a registered underwritten public offering of $250.0 million aggregate principal amount of 4.000% Senior Notes due 2024 (the “Senior Notes Due 2024”), fully and unconditionally guaranteed by ROIC. The Senior Notes Due 2024 pay interest semi-annually on June 15 and December 15, commencing on June 15, 2015, and mature on December 15, 2024, unless redeemed earlier by the Operating Partnership. The Senior Notes Due 2024 are the Operating Partnership’s senior unsecured obligations that rank equally in right of payment with the Operating Partnership’s other unsecured indebtedness, and effectively junior to (i) all of the indebtedness and other liabilities, whether secured or unsecured, and any preferred equity of the Operating Partnership’s subsidiaries, and (ii) all of the Operating Partnership’s indebtedness that is secured by its assets, to the extent of the value of the collateral securing such indebtedness outstanding. ROIC fully and unconditionally guaranteed the Operating Partnership’s obligations under the Senior Notes Due 2024 on a senior unsecured basis, including the due and punctual payment of principal of, and premium, if any, and interest on, the notes, whether at stated maturity, upon acceleration, notice of redemption or otherwise. The guarantee is a senior unsecured obligation of ROIC and ranks equally in right of payment with all other senior unsecured indebtedness of ROIC. ROIC’s guarantee of the Senior Notes Due 2024 is effectively subordinated in right of payment to all liabilities, whether secured or unsecured, and any preferred equity of its subsidiaries (including the Operating Partnership and any entity ROIC accounts for under the equity method of accounting). The interest expense recognized on the Senior Notes Due 2024 during the three months ended June 30, 2016 included $2.5 million and approximately $75,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2024 during the six months ended June 30, 2016 included $5.0 million and approximately $148,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2024 during the three months ended June 30, 2015 included $2.5 million and approximately $71,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2024 during the six months ended June 30, 2015 included $5.0 million and approximately $143,000 for the contractual coupon interest and the accretion of the debt discount, respectively.
 
In connection with the Senior Notes Due 2024 offering, the Company incurred approximately $2.2 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2024.
 
Senior Notes Due 2023
 
The carrying value of the Company’s Senior Notes Due 2023 is as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
Principal amount
$
250,000

 
$
250,000

Unamortized debt discount
(3,303
)
 
(3,482
)
Net unamortized deferred financing costs
(1,961
)
 
(2,092
)
Senior Notes Due 2023:
$
244,736

 
$
244,426


On December 9, 2013, the Operating Partnership completed a registered underwritten public offering of $250.0 million aggregate principal amount of 5.000% Senior Notes due 2023 (the “Senior Notes Due 2023”), fully and unconditionally guaranteed by ROIC. The Senior Notes Due 2023 pay interest semi-annually on June 15 and December 15, commencing on June 15, 2014, and mature on December 15, 2023, unless redeemed earlier by the Operating Partnership. The Senior Notes Due 2023 are the Operating Partnership’s senior unsecured obligations that rank equally in right of payment with the Operating Partnership’s other unsecured indebtedness, and effectively junior to (i) all of the indebtedness and other liabilities, whether secured or unsecured, and any preferred equity of the Operating Partnership’s subsidiaries, and (ii) all of the Operating Partnership’s indebtedness that is secured by its assets, to the extent of the value of the collateral securing such indebtedness outstanding. ROIC fully and unconditionally guaranteed the Operating Partnership’s obligations under the Senior Notes Due 2023 on a senior unsecured basis, including the due and punctual payment of principal of, and premium, if any, and interest on, the notes, whether at stated maturity, upon acceleration, notice of redemption or otherwise. The guarantee is a senior unsecured obligation of ROIC and will rank equally in right of payment with all other senior unsecured indebtedness of ROIC. ROIC’s guarantee of the Senior Notes Due 2023 is

- 19 -



effectively subordinated in right of payment to all liabilities, whether secured or unsecured, and any preferred equity of its subsidiaries (including the Operating Partnership and any entity ROIC accounts for under the equity method of accounting). The interest expense recognized on the Senior Notes Due 2023 during the three months ended June 30, 2016 included approximately $3.1 million and $90,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2023 during the six months ended June 30, 2016 included approximately $6.3 million and $179,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2023 during the three months ended June 30, 2015 included approximately $3.1 million and $85,000 for the contractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the Senior Notes Due 2023 during the six months ended June 30, 2015 included approximately $6.3 million and $170,000 for the contractual coupon interest and the accretion of the debt discount, respectively.
 
In connection with the Senior Notes Due 2023 offering, the Company incurred approximately $2.6 million of deferred financing costs which are being amortized over the term of the Senior Notes Due 2023.

5. Preferred Stock of ROIC

ROIC is authorized to issue 50,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. As of June 30, 2016 and December 31, 2015 , there were no shares of preferred stock outstanding.

 6. Common Stock of ROIC

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

During the six months ended June 30, 2016 , ROIC sold a total of 1,943,059 shares under the Sales Agreements, which resulted in gross proceeds of approximately $40.0 million and commissions of approximately $524,000 paid to the Agents. Since the Original Sales Agreements were entered into through June 30, 2016 , ROIC has sold a total of 2,487,626 shares under the Sales Agreements, which resulted in gross proceeds of approximately $49.9 million and commissions of approximately $673,000 paid to the Agents.
 
Stock Repurchase Program
 
On July 31, 2013, the Company’s board of directors authorized a stock repurchase program to repurchase up to a maximum of $50.0 million of the Company’s common stock. During the six months ended June 30, 2016 , the Company did not repurchase any shares of common stock under this program.

7. Stock Compensation for ROIC

ROIC follows the FASB guidance related to stock compensation which establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of the employer’s stock. The guidance also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.
 
In 2009, ROIC adopted the 2009 Plan. The 2009 Plan provides for grants of restricted common stock and stock option awards up to an aggregate of 7.5% of the issued and outstanding shares of ROIC’s common stock at the time of the award, subject to a ceiling of 4,000,000 shares.
 
Restricted Stock
 

- 20 -



During the six months ended June 30, 2016 , ROIC awarded 350,614 shares of restricted common stock under the 2009 Plan, of which 121,150 shares are performance-based grants and the remainder of the shares are time-based grants. The performance-based grants vest based on pre-defined market-specific performance criteria with a vesting date on January 1, 2019.
 
A summary of the status of ROIC’s non-vested restricted stock awards as of June 30, 2016 , and changes during the six months ended June 30, 2016 are presented below:
 
Shares
 
Weighted Average Grant Date Fair Value
Non-vested at December 31, 2015
627,471

 
$
14.39

Granted
350,614

 
$
15.96

Vested
(304,545
)
 
$
14.01

Cancelled
(833
)
 
$
17.92

Non-vested at June 30, 2016
672,707

 
$
15.38

 
For the three months ended June 30, 2016 and 2015 , the amounts charged to expenses for all stock-based compensation arrangements totaled approximately $1.5 million and $1.3 million , respectively. For the six months ended June 30, 2016 and 2015 , the amounts charged to expenses for all stock-based compensation arrangements totaled approximately $2.6 million and $2.2 million , respectively.

8. Capital of the Operating Partnership

As of June 30, 2016 , the Operating Partnership had 114,159,167 OP Units outstanding. ROIC owned an approximate 89.3% partnership interest in the Operating Partnership at June 30, 2016 , or 101,979,470 OP Units. The remaining 12,179,697 OP Units are owned by other limited partners. A share of ROIC’s common stock and an OP unit have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership.
 
As of June 30, 2016 , subject to certain exceptions, holders are able to redeem their OP Units, at the option of ROIC, for cash or for unregistered shares of ROIC common stock on a one -for-one basis. If cash is paid in the redemption, the redemption price is equal to the average closing price on the NASDAQ Stock Market for shares of ROIC’s common stock over the ten consecutive trading days immediately preceding the date a redemption notice is received by ROIC.
 
During the year ended December 31, 2015 , in connection with the acquisition of Bellevue Marketplace, the property formerly known as Sternco Shopping Center, the Operating Partnership issued 1,946,483 OP Units whereby the Operating Partnership was required to deliver cash in exchange for the OP Units upon redemption if such OP Units were redeemed on or before January 31, 2016 (“Redeemable OP Units”). These Redeemable OP Units were previously classified as mezzanine equity as of December 31, 2015 because, as of such date, ROIC could be required to deliver cash upon the redemption of such OP Units. During the six months ended June 30, 2016 , the Company received notices of redemption for 1,828,825 Redeemable OP Units. The Company redeemed the OP Units in cash at a price of $17.30 , in accordance with the Third Amendment to the Second Amended and Restated Agreement of Limited Partnership, as amended, of the Operating Partnership, and accordingly, a total of approximately $31.6 million was paid to the holders of the respective Redeemable OP Units. The remaining 117,658 Redeemable OP Units are treated as permanent equity as ROIC now has the option, in its sole discretion, to settle the redemption of the OP Units in cash or unregistered shares of ROIC common stock.
 
During the six months ended June 30, 2016 , ROIC received notices of redemption for a total of 621,914 OP Units (excluding Redeemable OP Units, described above). ROIC elected to redeem 244,126 OP Units for shares of ROIC common stock on a one -for-one basis, and accordingly, 244,126 shares of ROIC common stock were issued. ROIC elected to redeem the remaining 377,788 OP Units in cash.
 
The redemption value of outstanding OP Units owned by the limited partners as of June 30, 2016 , not including ROIC, had such units been redeemed at  June 30, 2016 , was approximately  $253.6 million , calculated based on the average closing price on the NASDAQ Stock Market of ROIC common stock for the ten consecutive trading days immediately preceding  June 30, 2016 , which amounted to $20.82  per share.
 
Retail Opportunity Investments GP, LLC, ROIC’s wholly-owned subsidiary, is the sole general partner of the Operating Partnership, and as the parent company, ROIC has the full and complete authority over the Operating Partnership’s day-to-day management

- 21 -



and control. As the sole general partner of the Operating Partnership, ROIC effectively controls the ability to issue common stock of ROIC upon redemption of any OP Units. The redemption provisions that permit ROIC to settle the redemption of OP Units in either cash or common stock, in the sole discretion of ROIC, are further evaluated in accordance with applicable accounting guidance to determine whether temporary or permanent equity classification on the balance sheet is appropriate. The Company evaluated this guidance, including the ability, in its sole discretion, to settle in unregistered shares of common stock, and determined that the OP Units meet the requirements to qualify for presentation as permanent equity.

9. Fair Value of Financial Instruments

The Company follows the FASB guidance that defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
 
The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies as discussed in Note 1. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts realizable upon disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
 
The carrying values of cash and cash equivalents, restricted cash, tenant and other receivables, deposits, prepaid expenses, other assets, accounts payable and accrued expenses are reasonable estimates of their fair values because of the short-term nature of these instruments. The carrying values of the term loan and credit facility are deemed to be at fair value since the outstanding debt is directly tied to monthly LIBOR contracts.   The fair value, based on inputs not quoted on active markets, but corroborated by market data, or Level 2, of the outstanding Senior Notes Due 2024 at  June 30, 2016 is approximately  $246.0 million . The fair value, based on inputs not quoted on active markets, but corroborated by market data, or Level 2, of the outstanding Senior Notes Due 2023 at  June 30, 2016 is approximately  $266.9 million . Assumed mortgage notes payable were recorded at their fair value at the time they were assumed and are estimated to have a fair value of approximately $37.1 million with an interest rate range of 3.2% to 3.8% and a weighted average interest rate of 3.4% as of June 30, 2016 . Mortgage notes payable originated by the Company are estimated to have a fair value of approximately $35.0 million with an interest rate of 3.7% as of June 30, 2016 . These fair value measurements fall within level 3 of the fair value hierarchy.
 
Derivative and Hedging Activities
 
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The following is a summary of the terms of the Company’s interest rate swaps as of June 30, 2016 (in thousands):

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

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

 
2/29/2016
 
1/31/2019
 
The effective portion of changes in the fair value of derivatives that are designated as cash flow hedges are recorded in accumulated other comprehensive income (“AOCI”) and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
 
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative.  This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities.  The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
 
The Company incorporated credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements.  In adjusting the fair value of its derivative contract for the effect of non-performance risk, the Company considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
 
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties.  However, as of June 30, 2016 , the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Company has determined that its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
 
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
 
 
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
June 30, 2016: