Cedar Realty Trust, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Welcome to the Fourth Quarter 2020 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 would now turn this call back over to Mr. Nicholas Partenza. Please proceed. Go ahead.

[Nicholas Partenza:]

Good evening, and thank you for joining us for the Fourth Quarter 2020 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:]

Thanks, Nick, and thank you all for joining us this evening for Cedar's fourth quarter 2020 earnings conference call. Before sharing my thoughts on the quarter and full year 2020, I must acknowledge and thank my colleagues and Board of Directors. This has been a year like no other, and yet certain things have remained remarkably and reassuringly the same. The members of team Cedar have continued to work with their typical commitment to everyday excellence, collegiality and collaboration. I will admit after nearly ten years, I might have started to take your devotion to our remarkably special corporate culture for granted. But the experience over the last ten months has reminded me, how fortunate I am to have you all as colleagues and teammates. And in leading by example, our Board continues to evidence judgment and character that represent the highest forms of service to our shareholders and management team. This collective effort by everyone involved in Cedar is precisely why the fourth quarter of 2020 might go down as one of the finest in the history of this company. Remarkably, despite being in the midst of a pandemic, the likes of which we literally have not seen in over a century, our fourth quarter 2020 operating FFO was actually higher than it was in the fourth quarter of 2019. This is a result of team Cedar remaining keenly focused on executing both our near-term pandemic related initiatives, and not losing sight of the needs of our post pandemic future. Our pandemic related initiatives have revolved around collections, expense management, tenant health, and retention proactive renewals, and energetic leasing.

[Robin Zeigler:]

Thanks, Bruce. Good evening. As we ended the turbulent year of 2020, we continue to see the benefits and foresight of holding a portfolio anchored by grocers and essential businesses. The concentration of our top ten tenants as measured by annualized rents are essentials-grocer anchored retailers with the exception of La Fitness and Staples. These top ten retailers represent 30% of our annualized base rent. Our individualized hands-on approach to rent collections during this pandemic has proved a successful formula. The fourth quarter 2020 collections rate totaled 94.3%, a 3.6% increase over the third quarter collections rate. As of today, we executed 113 deferral agreements totaling $3.3 million. The average payback period is 10.4 months with the average deferral totaling four months of rent. As mentioned previously, but which bears repeating these agreements were made with tenants in an effort to not only sustain their viability, but also to achieve some landlord favorable concessions including sales reporting, additional lease term and modification of key lease provisions. Our leasing team continues to drive hard to keep a solid leasing pace. This quarter we completed deals for 222,000 square feet totaling 37 comparable leases comprised of four new leases and 33 renewals with a total comparable spread of 1.5%. Same-center leased occupancy as of year-end 2020 is 91.2%, a 0.5% reduction from third quarter. The vacancies that we experienced are largely consistent with what we have been seeing throughout the pandemic as it has affected some categories particularly hard such as fitness centers, restaurants and movie theaters. Our largest impact of return of possession was from 24 Hour Fitness at Carman's, which closed due to a bankruptcy filing in June 2020. Other significant closures included A.C. Moore in April 2020 at The Point in New London, Kmart at Valley Plaza in March 2020 and the bankruptcy filing of Pet Valu in December 2020. In 2021, we have had the closure of Kroger at Coliseum in January and Ollie's at Valley Plaza in March. The Carman's Plaza, Valley Plaza and New London vacancies have led to attractive re-tenanting and remerchandising opportunities for those centers that will be announced in the coming quarters. The mixed-use redevelopment and value-add renovations are progressing steadily. At Fishtown Crossing, the IGA grocery store facade renovation has been completed and we are preparing to finish the remaining facade renovation and place-making improvements for the rest of the center. We paused this project during COVID, but anticipate restarting in the coming months.

[Philip Mays:]

Thanks Robin. On this call I will briefly highlight operating results and then provide our current expectations for 2021. Starting with operating results. For the quarter operating FFO was $9.8 million or $0.71 per share. And for the full year operating FFO was $40.3 million or $2.91 per share. With regard to same-property NOI growth for the year same-property NOI decreased 6.8% excluding redevelopment properties and 9.3% including redevelopments. The decrease relating to redevelopment properties was largely driven by United artists at Riverview Plaza the only large movie theater in our portfolio, along with intentional vacancy necessary to facilitate our value-add redevelopments in urban mixed-use projects. Following the depth of pandemic crisis our grocer anchored portfolio has demonstrated strength and steady improvement as reflected in the relatively modest fourth quarter decrease in same-property NOI of 4% moving forward in the midpoint of our full year 2021 same-property NOI projection a decrease of just 2%. Moving to 2021 expectations. At this time we are not providing 2021 first year guidance for net income or FFO. However we do want to provide our current expectations with regards to some of the key drivers of our earnings. Those expectations and items are as follows; decrease in lease termination income of $7.5 million. As you may recall this is substantially driven by the $7.1 million of lease termination income quoted in Q1 of 2020 related to accepting a cash payment and consideration for permitting a dark anchor to vacate early at Metro Square. Same-property NOI decreasing 1% to 3% excluding redevelopment properties and 2% to 4% including redevelopment properties. Please keep in mind the first quarter of 2021 will have a comparable period that was not significantly impacted by the pandemic. That's making it a difficult comparable. Property NOI decreasing $2.5 million related to property dispositions that closed in 2020. However as discussed we are exploring additional property dispositions in 2021 which if closed would further reduce 2021 property NOI. Interest expense decreasing approximately $1.7 million prior to any proactive refinancing transactions completed in 2021. Taking into account the one-year extension option we have for the revolving credit facility. There are no anticipated 2021 debt maturities. However, as discussed on our last call, we are advancing the long-term refinancing of a substantial portion of our 2022 debt maturities and any such completed refinancing will increase interest expense in 2021 as the proceeds will likely first be used to repay offsetting amounts on the company's revolving credit facility which has a current variable rate of only 1.8%. With that, I'll open the call to questions.

[Operator:]

Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. You may proceed with your question.

[Todd Thomas:]

Hi, thanks. Good afternoon. First question, Phil just sticking with the guidance a bit. The same-store NOI growth forecast of down 1% to 3% for the year. Can you just talk about the trajectory there? Obviously cycling the COVID impacted quarters beginning in the second quarter. I'm just curious if you can provide some guidance around the quarterly cadence? And would you expect same-store NOI growth in the first quarter to improve on a year-over-year basis relative to this quarter?

[Philip Mays:]

Yeah Todd. I think -- obviously the first quarter is going to have a very difficult comparable period, because the first quarter of 2020 really had no impact related to the pandemic at all. So that's going to be a tough comp. And not only do I not expect an improvement it will probably be more negative than it was in the fourth quarter because of the comp involved there. And then I think you'll see a steady improvement. The guidance of 1% to 3% is for the full year. And I think if you want to try to figure out trajectory and be a little more specific with your model probably the best thing to do is go back and look at the cash collections we reported for the second quarter in the third quarter and in the fourth quarter. And you can kind of see how far down we dipped in the second quarter and the kind of the rapid or the pace at which we came back out of that. That's probably your best map for kind of figuring out the trajectory, but the 1% to 3% is for the full year.

[Todd Thomas:]

Okay. And then you gave us some of the building blocks around the guidance. What's -- where is the uncertainty, I guess stem from then in terms of providing an FFO range? And is it possible that you provide FFO guidance in the first quarter?

[Philip Mays:]

Yeah. Well we've discussed providing very specific FFO or net income per share guidance. The reasons we didn't really kind of fall into three buckets. First is, if you want to call it big picture items. Look we all hope the worst of the store closures and the stay-at-home orders are behind us. And there's not any additional setbacks or ways of these, but obviously it still is a risk. And even if the worst is behind us, it's still possible and even likely we may still see some pandemic related tenant failures in 2021 and additional closures related to the strain the pandemic put on tenants such as gyms. The second category really for lack of a better term kind of falls into the accounting bucket. Look you're very good at understanding our business and the economics and the real estate market. And you also take a lot of interest in understanding our specific accounting issue that comes with it. And so, you'll appreciate at this point we have about 15% of our rental revenue is on a cash basis. We talked about it before it doesn't mean we expect these tenants to pay nothing, but they're probably going to pay infrequent; they're going to probably make partial payments. And we'll recognize revenue as they pay. So that's going to create a bumpy and uncertain impact to earnings. And then for the full year 2020, we did formal deferral agreements for almost $3 million of rent related to 2020. 75% of this is probably on accrual basis tenants and 25% is on a cash basis tenant. So obviously that could also create some noise and bumps and a little difficulty in providing a specific amount. The third bucket is, kind of, really more cedar specific matters look the amount and timing of dispositions, refinancing debt and closing joint ventures related to the urban mixed use developments are all going to have a significant impact on earnings. But taken as a whole when we walk through all those we just didn't feel it was appropriate this time to give really specific guidance. But what we wanted to do because we would appreciate the coverage right is to provide you at least a pretty good map and directions. Now albeit it might be a paper map and not turn-by-turn GPS directions but I think if you go through the press release and the supplement you have everything you kind of need to put it in the model.

[Todd Thomas:]

Okay. That's helpful. Yeah. And then so with the rent collection so 94.3% that's a nice improvement from 91% last quarter. It sounds like that second bucket you just mentioned, right the 15% of tenants on a cash basis. Are you anticipating that you could see collection levels back off a little bit here around January maybe into February before maybe rebounding a little bit again later in the year? And what's the status overall of the remaining tenants that are not paying rent today? What's the likely outcome here?

[Philip Mays:]

I mean, the majority of the cash-based tenants we have generally fall in the categories of gyms and even like local gyms in particular restaurants and health and beauty like nails and salons items like our categories like that. If you go through the collection page we have where we break down all of our tenants by different categories, and we report how much is paying you can go through that and you can look at the low collection categories and then basically assume those are the ones that are on a cash basis Todd. And it's just -- it could back off a little early on in the year. There were some setbacks that might trickle in and have some impact. It just -- it really is bumpy with them, because for instance we'll have someone not pay for two or three months and four months. So it's just going to create a little bumpiness there. But just for kind of scaling and size, I think it's probably helpful to know that 15% of them are on a cash basis. And hopefully that will help you have some sense of the potential magnitude of that.

[Todd Thomas:]

Okay. And one last question for Bruce. In terms of the dispositions you talked about exploring some asset sales. Can you, sort of, bookend the range in value that you're considering or that you're trying to solve for? And what the timing might look like to see some dispositions cross as we think about 2021?

[Bruce Schanzer:]

What I would point you to -- I'd actually orient you around two different ideas. So we have our two held for sale assets. We have the Commons at Dubois and then Carll's Corner. Carll's Corner, as we've talked about before, is a very small asset. We just need to get it to a position where we can divest it but again not meaningful in value. The Commons at DuBois is an asset that we've been actively marketing. And realistically it's going to be divested in the first half of the year. Beyond those two assets, we continue to explore additional asset sales that I would characterize as being more a function of careful portfolio management. The way we run our business is that we study our assets and we try to identify where there might be opportunities to either A, sell an asset out of value that we think is particularly attractive or sell an asset where we think it's reached its peak value where we think that there's the potential for tenants to either need rent reductions when their leases come up for renewal or where there's a risk that they might move out. That second category, Todd, is something that we do actively certainly in the environment we're in right now, arguably we're doing it a little bit more actively and I can't predict how that plays out. I think you know that the site -- the timeline for selling an asset is fairly prolonged. So, if we didn't have something actively being marketed right now realistically, it wouldn't close certainly in the first quarter and probably not even in the first half. And so, I would tell you that while the Commons at DuBois is one that I think I would expect to close in the, call it, first half. Beyond that while we are actively looking at a bunch of situations, I can't say that anything else is likely to sell before, call it, the middle of the year to the back half of the year.

[Todd Thomas:]

Okay, all right. That’s helpful. Thank you.

[Bruce Schanzer:]

Sure, Todd. Thank you.

[Operator:]

Our next question comes from the line of Floris van Dijkum with Compass Point. Your may proceed with your question.

[Floris van Dijkum:]

Thanks. Thanks, guys for taking my question. Bruce, maybe -- or Robin, if you could maybe comment on the lease spreads. And I note that the renewal lease spreads were positive. Obviously most of your leases were renewals, but your new lease spreads were negative. What do you think that's saying about the market? And do you anticipate, obviously, on new leases further lease reductions going forward, or how do you see the leasing environment for your portfolio?

[Robin Zeigler:]

Thanks Floris…

[Bruce Schanzer:]

Robin, why don't you take that?

[Robin Zeigler:]

Sure. Thanks Floris for the question. So, as I mentioned, we only did -- we had four leases executed in the quarter, and so it's not really a relative comp set of our full tenancy. And in addition to it just being four, the deals that were negative were very small, small shops one at Coliseum one at Kempsville and one at Carman's. And so, I wouldn't say that it's reflective of an overall trend, but just more a matter of the specific deals that were done at that time. And as you can imagine with each shopping center we kind of evaluate the center the tenancy the space that needs to be leased. And each one has its own kind of requisite story that goes along with it. But the number of four leases that we're looking at for this particular quarter, I don't think, is indicative of kind of an overall story. And then, the renewals, as you mentioned, we did a ton of renewals this quarter at 33, with an overall positive spread. And there were some of those that were very positive and some of those are offset with some flat or lower spread deals. And so, it also kind of pans out in the wash. It is certainly more difficult to get tenants signed in and completely lease execution in this current market environment. But nevertheless, we are trudging through those waters and still getting deals done.

[Floris van Dijkum:]

Thanks, Robin. Can you maybe also comment on the Kroger that vacated, I think, in January? What are the prospects there? And who's going to go into that space in your view?

[Robin Zeigler:]

Yes. So we have -- we've been aware of that for a little bit of time and that was a corporate decision not necessarily pandemic related or otherwise and we are actively marketing that box. It's actually in a very good location in Hampton Roads, Virginia. But at the same time there is a lot of big-box vacancy around us from a competition standpoint. So we feel like we're pretty well positioned in that market to be able to backfill the box and we're also being creative about the types of tenancy that we may look at in addition to retail to anchor the center, factoring in the need to make sure that we still have a good merchandising and viability for the rest of our small shops. But we are -- it's actively being marketed and we hope to be able to announce a backfill soon.

[Floris van Dijkum:]

Thanks, Robin. Maybe -- and Phil, if you could -- what can you say about the refinancing? I think Bruce had alluded to the fact that it could be more expensive, obviously, to refinance some of your debt that's due in 2021 and 2022. And some of it will likely have to be mortgages. Can you give any more color around that?

[Philip Mays:]

Yes, Floris. We have engaged a firm to secure financing options. They're speaking to both life companies and CMBS both. We've given them a select kind of subset of grocery-anchored centers within our portfolio they're working with, but they're just not really in the market with that. At this point, we've only gotten some initial and general feedback, but largely it's been positive, as a result of the strong performance of our grocers during the pandemic. So we're watching that. I mean, I think why you're going to see it -- I think the rates are not going to be so bad, Floris. It's just, keep in mind, the first $175 million or so will be likely used to pay down our revolver, which only has a rate of 1.8%. All the feedback we're initially getting is still with the rates in the mid-three, but we haven't gotten a lot of specifics yet, it's just been general initial feedback. But I think it's expensive relative to paying down the line but as far as long-term debt financing, I think, mid-three's is not necessarily a bad rate. Additionally, the unsecured bank market is starting to come back, albeit, slow, in particular, for retail and smaller companies, but we'll keep an eye on that also. And we'll monitor that, as we get feedback from the firm we've engaged to explore secured financing. And once we kind of get a good matrix of all those options, we'll size it and inert accordingly.

[Floris van Dijkum:]

And do you expect -- when do you expect something like that? Obviously you have a little bit of time Phil, before you have to make a decision but do you think this will be a second quarter or third quarter event in your view?

[Philip Mays:]

Yes, I'm hopeful by the time we get our next call I can give you more specifics around that. So hopefully, when we get on our next call, I'll be able to provide more details and more direction.

[Floris van Dijkum:]

Great. And one last question for me. So if you do go down this secured route, how different is your balance sheet going to look in your view in three years' time? And I'm talking more about the mixture between secured and unsecured and term and all of those things? And will this obviously, presumably, if you mortgage these assets you're going to term out your debt quite a bit. Is this 10, 15 years? I guess it depends a little bit on the terms but how will this help de-risk the balance sheet going forward?

[Philip Mays:]

Yes. So generally with the bank group, you're talking five years, seven years. LifeCo's and CMBS, not so much for CMBS. CMBS 10 years LifeCo's; seven, 10, 12, 15 are all potential options. Really it's going to depend on the rate we get on the amortization terms in particular if it's all IO, partial IO, the loan to values, which – that we get and we'll size it accordingly to significantly de-risk our 22 maturities to a point to where we're comfortable but we'll do so kind of based on those terms we get back along with what the bank market is doing. But obviously, we'd like to term it out and take us the longest tinder we can and clear up a substantial portion if not all of the 22 maturities.

[Floris van Dijkum:]

Thanks, Phil. Sorry and I just had one final follow-up here maybe for Bruce. And I know you can't comment on the letter from one of your shareholders. But maybe one of the thoughts that I've heard from a couple of investors is that on the G&A reduction, obviously that's one of the things that was harped on by the activists. You did reduce your headcount quite a bit. How much of that headcount reduction in your view is permanent versus just a temporary COVID-related production?

[Bruce Schanzer:]

The headcount reduction is certainly something that as a broad characterization, we hope to maintain from an order of magnitude perspective. Just to take you back Floris and you've been with us for a while. When Phil and I started at Cedar, we had 115 employees. We reduced that to 70. It slowly crept up to 75, as we expanded our redevelopment efforts. And during the course of the pandemic as part of just a more granular G&A reduction exercise, we reduced headcount further. A lot of that or a significant part of that happened in the call it the back half of the year. Obviously, the pandemic first arrived after the first quarter. In terms of backfilling, I would say that there are probably fewer than a handful of positions that were likely to backfill during the course of 2021. But my hope is again to be able to run a little bit leaner than we have in the past. Keep in mind, the people who are carrying the burden of this is the balance of team Cedar and so I do recognize their efforts. These are folks who are working incrementally harder than they have in the past. But certainly we recognize that this was -- this pandemic period was an opportunity for us to really bear down on our G&A to really do a line-by-line analysis of where we're spending money. And of course the result was this reduction in G&A. And again it's going to hopefully continue into 2021 in terms of continuing to focus on that and continuing to extract savings from the platform.

[Floris van Dijkum:]

Thanks Bruce. That’s it for me for now.

[Bruce Schanzer:]

Thank you.

[Operator:]

Our next question comes from the line of Ward Blum with UBS. You may proceed with your question. We have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Bruce Schanzer for closing remarks.

[Bruce Schanzer:]

Thank you all for joining us this evening. I expect the next few months at Cedar are going to be remarkably exciting and productive. Between our refinancing and redevelopment joint venture, we hope to have exciting announcements before our next earnings call. And beyond those two matters, we anticipate continued solid progress on our many other initiatives that we look forward to sharing in the months and quarters ahead. I would conclude by wishing you all good health in the time ahead as we contemplate hopefully moving past this challenging pandemic period.

[Operator:]

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.