Cedar Realty Trust, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Welcome to the First Quarter 2021 Cedar Realty Trust Earnings Conference Call. As a reminder this conference is being recorded. At this time, all audience lines have been placed on mute. We will conduct a question-and-answer session following the formal presentation. I will now turn the call over to Jennifer Bitterman. Please proceed.

[Jennifer Bitterman:]

Good evening and thank you for joining us for the First Quarter 2021 Cedar Realty Trust Earnings Conference Call. Participating in today's call will be Bruce Schanzer, Chief Executive Officer; Robin Zeigler, Chief Operating Officer; and Philip Mays, Chief Financial Officer.

[Bruce Schanzer:]

Thank you Jennifer, and thank you all for joining us for the Cedar Realty Trust First Quarter 2021 Earnings Call. Before diving into a discussion of our accomplishments for the quarter and significant activity since the end of the quarter, I would like to take a moment and recognize my Team Cedar colleagues who have continued working tirelessly with a commitment to collaboration and collegiality, as well as a dedication to everyday excellence. In the first quarter and since our last call in February, we have accomplished a lot with positive progress continuing into this week as evidenced by the closing of a joint venture for the first phase of our Northeast Heights redevelopment, the closing of a $114 million financing that will address our 2021 maturities and the closing of the sale of The Commons in Dubois Pennsylvania for roughly $10 million. For the first quarter, our collections were strong at nearly 96% with another 100 basis points of improvement in April. Our collections rate is now approaching pre-COVID levels with a bit more improvement hopefully to come. This remarkable performance is a credit to the industriousness of my Team Cedar colleagues and to our decision many years ago to focus our portfolio on grocery-anchored shopping centers, which have proven to be ideal retail real estate assets. Moreover, we are seeing leasing volumes pick up and positive leasing spreads, especially with our new leases. These are the green shoots we have been anticipating with the resolution of the pandemic, as our leasing pipeline has begun to build and deals are starting to get done. The economic tailwinds are real and palpable. We anticipate significant growth in occupancy and NOI during this recovery phase and are keenly focused on execution to make sure the opportunity is fully exploited.

[Robin Zeigler:]

Thanks Bruce. Good evening. 2021 has gotten off to a strong start at Cedar. Given recent leasing activity and customer traffic patterns it seems as though we are starting to move upward as we approach the other side of the pandemic. Our rent collections remain robust at 95.7% as of quarter end and 96.7% for the month of April. Our leasing volume is gaining momentum the 31 leases executed this quarter, totaling 268,200 square feet, four new comparable leases were executed with a positive spread of 5.7% and 21 renewals were done at a flat spread on average of 0.1%. An additional six non-comparable deals were executed this quarter including two completed anchor deals that provide meaningful momentum for the portfolio. Big Y and Norwood Shopping Center will undergo an expansion into their new 55,000 square foot prototype paying $19 per square foot in base rent. The former grocery store has been demolished and their new store is currently under construction. We will perform some minor shopping center improvements with the opening of the expanded store. A lease with the GAME was executed this quarter at Yorktowne Plaza. This sports entertainment restaurant will serve as the catalyst for the merchandising transformation we are undertaking for this renovation. The GAME will take 10,454 square feet at Yorktowne, paying $18 per square foot in base rent. The Yorktowne Plaza value-add redevelopment was previously put on hold due to the pandemic, but this fully entitled project is now in process. The value-add redevelopment plan includes a new façade, new signage, new pad buildings, and landscaping improvements. Additional executed leases for Yorktowne include IHOP, Dunkin' Donuts and Panda Express.

[Philip Mays:]

Thanks Robin. On this call, I will briefly highlight operating results and provide an update on our balance sheet. Starting with, operating results. For the quarter, operating FFO was $8.6 million or $0.62 per share and property NOI was $20.6 million. This quarter, property NOI did include almost $500,000 of net snow removal expense, and was impacted another $500,000 from dispositions that took place late in 2020, along with Kroger, closing at Coliseum Marketplace and Big Y temporarily closing at Norwood to construct their new larger store as Robin discussed. Same-property NOI decreased 5.1%, compared to the comparable period in 2020. This decrease is primarily related to the timing of when the pandemic began, as the comparable period last year was not significantly affected by the pandemic. Further, please keep in mind the relatively small size of our same-store property NOI. Our same-store property NOI for the quarter was $16.6 million. Accordingly, a 5% change equates to just $800,000. Moving to the balance sheet, yesterday, was a notable day for Cedar, as we closed three transactions. First the DGS joint venture discussed by Bruce and Robin. Second, the disposition of, The Commons in Dubois, our last remaining property in Western Pennsylvania for $9.8 million, third and finally, we closed $114 million non-recourse mortgage loan. We began working on this transaction, while still on the depth of the pandemic and are pleased with the terms we were able to achieve. In order to enhance lender appetite for this loan, we decided to utilize a cross-collateralized pool of five shopping centers located in three states with groceries operating under three different brands. Additionally, our broker Bainbridge ensured our loan was broadly marketed to life companies, debt funds and CMBS lenders. This strategy, of broadly marketing a diverse pool of grocery-anchored shopping centers, permitted us to close a 10-year loan with Guardian Life Company, at a 65% loan to value, five years of interest-only payments and a fixed interest rate of 3.49%. After closing these transactions yesterday, we have reduced the amount outstanding under our revolving credit facility to $59 million have $60 million available for additional borrowings and $15 million of cash. One last reminder, before opening the call to questions, our revolving credit facility maturing in September is the only debt maturity we have in 2021. And as previously discussed, this credit facility can be extended at our option, for one additional year. And with that, I'll open the call to questions.

[Operator:]

Thank you. Thank you. Our first question is coming from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

[Todd Thomas:]

Hi. Thanks. Good afternoon. A couple of questions on the joint venture at Northeast Heights, congrats by the way. I know you've been working on that for a little while. But I'm curious, is Cedar's 10% interest and capital commitment limited to the contribution of the asset? And are there any proceeds to Cedar or promotes at all to Cedar available as a general partner?

[Bruce Schanzer:]

Why don't I take that? Although, this was definitely a team effort with specific and special kudos to Robin for really just quarterbacking this thing and getting it over the finish line, in terms of your particular question, the DGS building sits on the Senator Square side of the overall Northeast Heights parcel. So that side is on the ground. And because of that, the nature of the contribution was different, than if for example we were going to contribute the land that we own and see on the East River side. The way the economics work is that, we were able to get all of the capital that we put in effectively back to us as part of the formation event, subject to some adjustments that you can imagine happen in the context of finalizing a JV. And in terms of the waterfall going forward, we're going to be co-GPs with Asland. And as we mentioned, Jim Simmons and his organization were really terrific in helping get this project done and there's going to be a promote payable to the GP that we're going to share in. And a lot of that is disclosed in more detail in our filing.

[Todd Thomas:]

Okay. And are there any rights at all for the partners to participate in future phases of the project, or is this a single-asset venture, just specific to this asset? And can you also update us on the future redevelopment phases and timing?

[Bruce Schanzer:]

Sure. So why don't I handle the first part and then I'll hand it over to Robin to talk about the second part? The answer to your first question is really, kind of, yes. In other words, on the one hand there's no real necessary explicit right that our partners have in future phases. But certainly, these are outstanding partners and we would be happy to contemplate continuing with them, assuming that things lined up well economically. But the nature of the JV agreement gives them some rights, but not an absolute right. And certainly, we're all capitalists and we'll endeavor to do what's best for our respective organizations, while at the same time recognizing that there's something to be said for finding good partners and continuing to partner with them. And so, while we're not bound to do it, we would certainly be very open to exploring financing and capitalizing these subsequent phases of Northeast Heights with this same group. The phasing of Northeast Heights is a little bit of a moving target, although, it's certainly something that's coming together well. But maybe, I'll let Robin expand a little bit on the plans for the next few phases in Northeast Heights and how we see it lining up from a timing perspective, while we recognize that, obviously, there's a little bit of a moving target.

[Robin Zeigler:]

Sure. So the entirety of Northeast Heights can be thought about in four phases, with the DGS headquarters being the first phase. The subsequent phases are in process, as Bruce alluded to. And the timing is not 100% certain as to when we will break ground, but I would suffice it to say that it's in the next year or so.

[Todd Thomas:]

Okay. That's helpful. All right. Then Robin, I guess, sticking with you here, in terms of operations. I mean, you discussed a lot of tenant activity, the Kroger and all these closures during the quarter. Do you have a sense for when occupancy in the portfolio might trough? Are you starting to see leasing pick up to the point where you'd expect to see lease rate and occupancy rate begin to climb higher?

[Robin Zeigler:]

Sure. So I always hesitate to pull out my crystal ball on things like this. But from a -- just in general, as we watch kind of the activity that's been happening, we have seen a pickup in transaction and in retail activity over the last couple of months, as people kind of dust off -- brush the dust off from the pandemic and the low-hanging fruit that was kind of sitting on folks' desks during that time frame. And so, now people are looking at opening new stores, talking about new deals. And we are starting to see more momentum that way and more transaction activity. So from a -- just seeing, kind of, reading the tea leaves of what we're seeing, both within theater and more from a more macro perspective in the economy, we are expecting to see an uptick of occupancy as we go forward in the coming quarters, as well as revenue as a result of that.

[Bruce Schanzer:]

And Todd, I would just interject here and to expand on it, the thing with Cedar's occupancy statistic that's important to appreciate is that, there is a significant negative -- just statistically, just that percentage that is a function of the intentional vacancy associated with the redevelopment projects. And so, that alone, at least -- I don't have the statistic at my fingertips. But at least 100 basis points of vacancy, probably closer to 150 basis points of vacancy. And so, again when we think about the opportunity to drive occupancy, recognizing that a whole part of that statistic is clearly baked into the redevelopment opportunity is an important thing to appreciate.

[Todd Thomas:]

Okay. Thanks helpful.

[Robin Zeigler:]

And then, just to solidify the numbers that Bruce gave I mentioned it in my prepared remarks. But the redevelopment portfolio, for example, has an occupancy of 73%, while the same-store leased portfolio is at 90.1%. So that's that spread that he was talking about. Where as those development -- the properties and the development portfolio get actualized and those projects are stabilized then and that will naturally bring up the occupancy as well.

[Todd Thomas:]

Okay. And in the near term is the redevelopment occupancy expected to fall further, while these projects are in motion?

[Robin Zeigler:]

There are a couple of projects where we might see a little bit more. There's a couple of box small shops that we're moving around for Norwood. And Valley Plaza is essentially made up of the Kmart and the Ollie's so we won't see much more there. There might be a little bit more movement for Yorktowne before we get it fully leased up and stabilized. But by and large, the majority of it has already been handled in the occupancy number you're looking at.

[Todd Thomas:]

Okay. All right. Thank you

[Bruce Schanzer:]

Thanks, Todd.

[Operator:]

Thank you. Our next question is coming from the line of RJ Milligan with Baird . Please proceed with your question.

[RJ Milligan:]

Hey. It's Raymond James, but that's all right. First, I appreciate your comments on NAV and cap rates. I'm just curious if you could give some color on what you're seeing out there in terms of comparable transactions or cap rates you guys are getting from the lenders.

[Bruce Schanzer:]

Sure. So, again, as I mentioned in my prepared remarks, the blended cap rate on the five assets that we contributed into our secured financing was 6.7%. We are seeing a fair amount of transaction activity in our markets as sort of in that Mid-Atlantic and Northeast footprint grocery-anchored assets. And the cap rates are really remarkable in terms of there being much, much lower than one would have expected and the quality of the correction, in other words, the recovery in that asset sale market for these types of assets has been pronounced. We're getting feedback from some of the private equity firms, for example, that own these types of grocery-anchored assets in our footprint that they're very happy to be getting the kind of pricing that they're getting right now. On the financing side, Phil really advanced our financing through the pandemic period. Right now, obviously we're sort of in a post-pandemic phase and the financing markets have really heated up and are very supportive of the types of transactions that we're seeing. And it's certainly supporting the pricing that we're seeing on the single-asset side. So again, cap rates in the 6s are something that we're seeing pretty regularly for the grocery-anchored assets very similar to Cedar in that Mid-Atlantic and Northeast footprint.

[R.J. Milligan:]

That's helpful. That's it for me guys. Thanks.

[Bruce Schanzer:]

Okay.

[Operator:]

Thank you. The next question is from the line of Floris Van Dijkum with Compass Point. Please proceed with your question.

[Floris Van Dijkum:]

Thanks for taking my question guys. My question is sort of along the same lines as the one before, but I'm sure you've seen the joint venture that RPT put together for net lease assets. And have you thought about or are you looking at ways of parsing out your lower cap rate, lower growth, highly leased anchor boxes and you have a lot of anchor boxes in your portfolio and arbitraging between that and redeploying that to either reduce leverage or to make new investments?

[Bruce Schanzer:]

First, I would start off by just noting that I think Brian Harper at RPT is a terrific CEO. And certainly when we saw that announcement considering how -- what high regard I personally hold him in we obviously have to pause and digest that endeavor and sort of see if it applies to Cedar and it could. So certainly, it is something that is a potential way that we can asset manage or portfolio manage in other words to carve out assets or pieces of assets and monetize them in ways that offer us an arbitrage opportunity. One of the things that I mentioned in our call for example is that we're selling one of our assets. We're selling the Camp Hill Shopping Center, Camp Hill Mall we call it. And it's an example of just the fact that we're fairly open-minded, whether it comes to buying assets or selling assets. We're simply capital allocators that try to think about cost of capital and risk-adjusted returns. And in that vein, we would certainly locate anything that made sense and it could be that this does make sense. I think one of the nice things about RPT having undertaken this move to try to exploit what might be an arbitrage between multi-tenant, open-air shopping centers and single-tenant net leased assets is that we'll see if it works. And if it does and if the arbitrage opportunity is still there, it's something that we would pursue. If it turns out that it's not there, it will be something that we don't pursue. So certainly I can't tell you that it's a good idea or a bad idea. I can tell you that the folks at RPT are very smart and that certainly will justify us monitoring it. But right now, it's not something that we're actively pursuing.

[Floris Van Dijkum:]

Thanks, Bruce. And then maybe in terms of other potential joint venture opportunities to pursue some of these growth assets that you have, have you -- would you include someone like a Goldman and does Asland come with Goldman to do something like Quartermaster or something in South Philly?

[Bruce Schanzer:]

Yeah. Look I would tell you that -- I would make a couple of comments. First of all, I mean obviously the relationship between Asland and Goldman is between Asland and Goldman. I don't know what the nature of that relationship is. What I would tell you is that we absolutely grew to admire Jim Simmons at Asland and Caleb Ratinetz and that team and we also came to really admire the Urban Investment Group folks. And so again, whether they have to come together, whether they happen to come together is almost secondary to the fact that we would be open to potentially doing something with them. To be plain about it as I mentioned in my earlier comment, right we're ultimately capital allocators. We think about cost of capital and what are the return opportunities and that was how we thought about the joint venture in the context of doing the DGS building. And it's going to be how we think about joint ventures going forward. And so, I would tell you that we would certainly be open to doing it, but it's not necessarily the only way do it. It'd be just simply a function of what the opportunity is and what are our various capital alternatives at the time.

[Floris Van Dijkum:]

Thanks, Bruce. That's it for me.

[Operator:]

Thank you. At this time, I'll turn the call back over to Bruce Schanzer for closing remarks.

[Bruce Schanzer:]

Thank you, operator. Thank you all for joining us this evening. Like I mentioned in my comments, I really wanted to thank the team, Team Cedar. Everybody at Cedar really have been pulling hard. It's reflected in our results. It's reflected in events as recent as the closings that we were able to conclude yesterday and we look forward to continuing to advance the projects here and continuing to put up strong results in the months and quarters and years ahead. Thank you again and have a good evening.

[Operator:]

Thank you. This will conclude today's conference. You may disconnect your lines at this time and we thank you for your participation.