Cedar Realty Trust, Inc.
Q4 2008 Earnings Call Transcript

Published: 6 Mar 2009

[Operator:]

Welcome to the Cedar Shopping Centers fourth quarter and yearend 2008 earnings conference call. At this time all participants have been placed in a listen only mode and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to your host Mr. Brad Cohen.

[Brad Cohen:]

At this time management would like to inform you that certain statements made during this conference cal which are not historical facts may be deemed forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995. Although the company believes that expectations reflected in any forward-looking statements are based upon reasonable assumptions, they are subject to various risks and uncertainties. The company can provide no assurance that expectations will be achieved and actual results may vary. Many of the factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday’s press release and from time-to-time in the company’s filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements reflected in or circumstances after the date of the company’s release. It is now my pleasure to turn the call over to Mr. Leo Ullman, Chairman, CEO and President.

[Leo S. Ullman:]

Thank you very much for joining us today on the Cedar Shopping Center earnings conference call for the fourth quarter and full year 2008. With me on the call is Larry Kreider, our Chief Financial Officer, other members of our team including Tom Richey, our Vice President of Development and Construction, Brenda Walker, our Vice President of Operations and Nancy Mozzachio, our Vice President of Leading are also on the call and available to you. Today’s conference call comes amiss financial turmoil unprecedented in our industry. We will of course discuss various aspects of the current financial landscape but before we do so, I think it is important to recognize the extraordinary efforts of our board, the management team and indeed all employees of our company in dealing with the many issues which confront most any company in the real estate business and in the public markets at this time. Incidentally, all of our employees own stock of our company. Our financial results announced last night for the quarter and the year ended December 31, 2008, we believe fairly reflect the continued strength of our company with respect to its operations at this time. We continue to execute our business plan and to meet our expectations. Larry Kreider will discuss some of the details with respect to our financial picture for the current year. The hallmark of our company continues to be its focus on bread and butter shopping centers and a fairly obsessive focus on risk aversion with respect to our operations, our acquisitions and our development projects. We note that our occupancy level remains extremely high. With respect to our stabilized properties, our occupancy was 95% as of the end of the year representing a rounding reduction of only nine basis points from the level at September 30, 2008. The reduction was in fact attributable almost entirely to a couple of small properties reaching 80% occupancy and thus moving from the non-stabilized group of properties to our stabilized property portfolio. Paradoxically, as a result of our strong leasing results with respect to these two properties reaching 80% they pulled down our 96% occupancy to 95% by just those nine basis points. Of our 121 properties at December 31, 2008, 63 are anchored by supermarkets, almost all of them doing very well, another 28 properties are anchored by drug stores. Subsequent to yearend we acquired two additional supermarket centers. Thus, on an overall basis more than 75% of our properties are anchored by supermarkets and drug stores with average remaining lease terms of approximately 11 years. In the entire history of our company, extending for more than a decade, we’ve had to face only two grocery stores going dark both of the same chain and both having substantial remaining base lease terms of five and 18 years respectively and continuing to pay rent while we and they look for sub tenants or potential S&Es. Incidentally, they will both allow other grocers to lease the space. It is also important to note that we are not in our geographic area beholding to any single dominate supermarket operator. Rather, we have a bakers’ dozen of excellent operators in the seven states in which we have supermarket anchored centers. They include Giant, Shaws, Stop & Shop, Weis, Acme, Shop Rite, Price Chopper, Redner’s, Food Lion, Hannaford, Pathmark, Shop n’ Save, Farm Fresh, Ukrop, Aldis, etc. All of them strong operators in their market segments. As we previously indicated and a factor which is very important in our development pipeline, many of these grocery chains are actively seeking additional sites with us and opening new stores. Further, it should be noted that the Wal-Mart factor is not in fact a significant factor in our respective markets in the northeast. Notwithstanding the strength of our primarily supermarket anchored properties, we are of course not blind to the pressures on retailers at this time nor are we immune to the pressures on retailers. We have experienced an increase in our bad debt arising from inabilities of primarily a few smaller tenants to keep up rental payments or cam charges, yet our bad debt level as it approaches 2% from less than 1% previously still remains quite modest under the circumstances. The increase in bad debt is almost entirely attributable to ancillary tenancy, primarily privately owned fitness facilities which we are working to replace and four drugstore anchored Ohio properties. If we leave out such four Ohio properties, our bad debt experience remains at a level of less than 1% which we believe to be exemplary in our business. In general we have had little exposure to the major chains who have declared bankruptcies. However, as indicated, we’re not totally immune from such challenges. We had one national wholesale liquidators in our portfolio which closed its store of approximately 20,000 square feet. We are closely watching other potential retail risks, yet so far have continued to operate effectively. Among the bigger boxes we believe that our Boscov’s department store chain would be very unlikely to close or sell the two stores that are in our portfolio. The Shore Mall New Jersey location for Boscov’s is their number one store and the Camp Hill Pennsylvania store is in a market where they have historically done well and where they have recently closed a newly opened store just a few miles from our site. Those leases are way below market in fact, extending back to an [EJ Corvette] lease and each of the two stores is in the order of 165,000 square feet. Boscov’s is emerging from bankruptcy under the renewed leadership of Al Boscov and has just announced substantial completed financial commitments. We also have three Bon-Ton’s and on Elder Beerman that seem to be doing okay and we believe those stores are not imminently in danger of closing. Nonetheless our risk is reduced in that the leases are generally well below market and generally in strong centers and markets. Another chain Peebles, which operates six stores of approximately 20,000 square feet each in our portfolio of 123 properties, has also sought programmatic rent reductions and we will be working with them. We have only one Bally’s Fitness facility which is doing extremely well in our South Philadelphia property. They have requested a three year rent reduction for that store. We have several LA Fitness facilities but we built them purposely in a manner so that they could be converted in to office buildings should the need arise, a need which we do not presently foresee. We have only one Pier 1 Imports stores, we have one Strauss Auto store which has requested a downsizing and among the mid and smaller size boxes our only real commitment is to Staples of which we have a dozen or so. Staples continues to be the best operator in its sector. We have one Office Max and no Office Depots in our portfolio. One area in retail stores where going forward we perceive potential challenges will be in the area of men’s and women’s fashion concepts where we have just a sprinkling of exposure in our portfolio. We maintain a watch list and we have been carefully in the first instance in putting in any new tenants and we are always high vigilant with respect to our tenants and our tenancies. The aggregate of all those watch tenants represents less than 5% of our nearly 13 million square feet of GLA. Again, it is important to note and important to distinguish our business from that of many retail property owners in that we have had not one single Linen N’ Things, not one Circuit City, not one Steve & Barry’s, no Mervyn’s, no [Got Chalk’s], no [Goody’s], no Sharper Images, etc., etc. This is not because we are prescient but it is in large part because we are careful and we stay within our business plan. We continue to stress the relatively low risk profile for our development pipeline. We are effectively executing that pipeline however, we do expect during the course of 2009 to stop pursuing a couple of projects probably in Pennsylvania and Delaware. Our large crown jewel projects such as the Upland Square project joint venture in Pottsgrove PA of some 600,000 square feet with a Target, Best Buy, Giant Supermarket, Pet Smart, Bed Bath & Beyond, Staples, etc. are doing well. Our Blue Mountain Commons project featuring a 98,000 square foot new Giant Supermarket is expected to be delivered in the second quarter. It is a beautiful store and should add handsomely to our overall income and FFO results. That store alone will generate approximately $2.5 million in rental receipts. We expect 2009 financial results to be challenged and to reflect a number of adverse accounting influences such as the expensing of property acquisition transaction costs which Larry will discuss in further detail. We announced 2009 FFO guidance last night at $0.85 to $1 for 2009. The range and the decrease from 2008 levels reflect a number of variable factors which individually and collectively provide considerable uncertainty for the coming year including accounting changes, some moderation of development activities, pressures on retail rents generally and potentially substantially increased interest rates. One of the critical factors affecting this year’s results will be a new or extended credit facility for stabilized properties which we would expect to conclude during the next few months. This will have considerable impact and we cannot yet predict the sizing or the terms of that facility. I’d now like to turn the microphone over to Larry Kreider who will walk you through some of our financial metrics. Thereafter, we would of course welcome your questions and comments.

[Lawrence E. Kreider:]

For full details of our financial results for the quarter and year ended December 31, 2008 I refer you to our press release issued last night as well as our supplemental financial information published at our website and also available at www.SEC.gov. Our results in the fourth quarter demonstrate the relative stability of our operations and customer base and reflect limited impacts from the present volatile economic and capital markets environment. In our press release, we highlighted various items of note in the fourth quarter of 2008 in comparison to the fourth quarter 2007. Here, I’ll take you through a comparison to the third quarter of 2008. FFO was $0.31 per diluted share in the fourth quarter of 2008 equal to the third quarter 2008 reflecting the following significant variances

[Leo S. Ullman:]

Operator we’d be glad, I think, to accept questions at this point.

[Operator:]

(Operator Instructions) Your first question comes from Nathan Isbee – Stifel Nicolaus & Company, Inc.

[Nathan Isbee:]

Can you talk about the acquisitions you made in 2009 in New London Connecticut and California Maryland property, what the cap rate was on those two properties?

[Leo S. Ullman:]

The sellers in one announced a cap rate of 7.7%. We believe in our underwriting it to be 8% for both.

[Nathan Isbee:]

Can you just address why unlike most of your peers enter in to acquisitions here given the constrained credit markets and the fact that you do have your credit line expiring in 2010, chances are it’s not going to be anywhere near the 250 that it currently is.

[Leo S. Ullman:]

I’d be glad to address that, the purchase contracts for these properties, one of which was bought from [Centro] and the other of which was bought from a partnership including the [Harvard Endowment Fund], were extraordinary opportunities that we entered in to a good six months before the closing. We thought about that a lot, the total commitment for the two properties I believe was about $7 million. We entered in to a joint venture with a European group for both of those properties which provided very attractive terms including acquisition fees, various fee structures plus a promote structure and again, these two properties required relatively modest cash at $7 million and very importantly, they both had outstanding debt with long term. On one of the properties I believe the rate was at 4.9% interest only with many years to go. On a cash flow basis these were both cash flowing in excess of 10%. We thought they were very good opportunities with excellent tenants, very strong shopping centers. The one in New London you can see from Route 95, it’s right on the road. The other one in California Maryland which we hoped to announce as our first California acquisitions but our PR folks wouldn’t let us do that is also wonderful property. So yes, we considered that very carefully but we thought on balance these were just very, very good opportunities with very little cash commitment.

[Nathan Isbee:]

But aren’t you going to have to figure out a way given the environment, aren’t you going to have to figure out a way to delever over the next 10 months as you approach here?

[Leo S. Ullman:]

Yes, we have considered that very carefully and we’re pursuing a number of routes which we think will turn out favorably. Yes, we are looking at delevering and yes, we are looking at redoing our existing credit facility, those are our two principal challenges but we think we will get there with the plans that are place.

[Operator:]

Your next question comes from Analyst for Michael Bilerman – Citigroup.

[Analyst for Michael Bilerman:]

Just following on the previous question, the acquisition opportunities that you had, you mentioned that they were going back six months and just how you look at potential opportunities, the numbers weren’t great across your desk versus being cautious and not drawing down too much, perhaps you can talk about it? And then, maybe provide more detail in to what sort of routes you are pursuing in terms of delevering through this year?

[Leo S. Ullman:]

With respect to other acquisition opportunities, we are not contemplating at this time any meaningful expenditures towards acquisition opportunities whatsoever. We are highly cognoscente that this is a constrained credit atmosphere and therefore we are being suitably cautious. We do think that there are outstanding opportunities out there with distressed owners more than distressed properties as such. It would be very nice to be able to access some of those opportunities but we are not in a position to do so now. In terms of how we are addressing this, we are contemplating the sales of a couple of properties, we are working on a couple of joint ventures. We have talked to a couple of folks who might be interested in putting some equity in to our company. Those are the kinds of things that we are looking at. But, appreciate these amounts are going to be relatively modest. When we’re talking about the JV kind of approaches we’re talking $40 to $50 million and we can comfortably handle that and we think would be enough to carry us at least for a couple of years.

[Analyst for Michael Bilerman:]

Then just one more on tenant performance if you could, discuss the performance across the grocer versus the in line tenants this past quarter.

[Leo S. Ullman:]

Our grocers continue to perform very well. Of our entire portfolio there were two grocers that went dark with substantial lease terms remaining, we saw that coming. In one case they were withdrawing from the market entirely and in the other case they got too close to one of their other stores. This was a group that grew by acquisitions. With respect to our other in line tenancies, there’s been an awful lot of folklore as you surely are aware with respect to the mom and pops. We have had as we announced with the exception of four properties in Ohio, three of which involved fitness facilities with those modest exceptions we are experiencing no decline, no adverse results in bad debt experience and no decline in occupancy. Appreciate that our overall occupancy at 92.1% or 92.3% currently is more or less what it’s been for a long time. Our development properties are leasing up well, we’re more than 84% leased including LOIs for our development properties. Our stabilized properties have remained at 95%, 96% and our small tenancies in line have performed very well except with these instances of the four properties in Ohio, three of which were privately owned fitness facilities and one of which was a storage facility. So, our smaller mom and pops have remained in good shape, in large part we think because the supermarkets are doing so well and bringing traffic to the centers. As we indicated with respect to other in line kind of tenancies, we don’t have much exposure at all to the big box kind of tenants that are the hallmarks of many of our peers. We just don’t have that because our typical property is a supermarket-anchored center with some small ancillary retail. We have been careful for example, with respect to a new development project in Campbelltown, PA, which is near our ground up development in Hershey, there for that ground up shopping center we have reduced our ancillary retail from 14,000 to 8,000 square feet just because we didn’t want to have any risk with respect to leasing of the small space and we did something similar in connection with the Blue Mountain Commons. Whether we will be able to sustain those results in 2009, we don’t know. But, I mean the chances are right now that there will be some slippage but we don’t see it as being enormous or unduly challenging.

[Operator:]

Your next question comes from Mark Rozanski – BMO Capital Markets.

[Mark Rozanski:]

Were there any dispositions in guidance?

[Leo S. Ullman:]

No. We are working on a couple of smaller ones at this point and as I mentioned we do think we may be able to put an attractive joint venture in place but that was not included in our guidance.

[Mark Rozanski:]

Looking at your redevelopment and development schedule in your supplement it looks like your NOI expectations for your redevelopments have gone down a little bit and I was wondering what’s driving that?

[Lawrence E. Kreider:]

Well, it’s not major. I think in one case I think there were some increase in cost at specifically maybe Blue Mountain Commons.

[Leo S. Ullman:]

I think it was Blue Mountain Commons where the offsite costs were originally contemplated. I believe that our offsite costs that we originally contemplated were in the order of $1.5 million and they’ve grown to $5 million because we’ve had to extend the entrance and exit lanes for the roadwork by a considerable distance which in turn has caused us to have to deal with 11 different owners and the costs therefore were that much higher. We also had originally contemplated receiving some state reimbursement and we’re not confident that will happen at this point. But Blue Mountain Commons is an example where we have a 98,000 foot grocer and the building is substantially finished. We would expect to deliver that at this point in June and we have six small spaces of which four are leased and we have two out parcels of which one is a bank and that’s substantially finished and one we’re working with a fast food operator

[Mark Rozanski:]

One last question, on page 12 of your supplement it looks like the average square feet on terminated leases has trended down a little bit. I was wondering what the backlog for replacing smaller tenants looks like? Is the demand for small space still as robust as it use to be?

[Leo S. Ullman:]

It’s certainly not as robust in the Ohio area ancillary space. In other spaces we have relatively little. If there’s a block buster on an end cap we would hope to replace it with a Game Stop, if there’s a pizza parlor operator we think there are a couple of others that are available to do that. The nail salons, we don’t know how well they will do in this kind of market but right now those kinds of tenants have been replaceable. In the dollar store area we’ve been extremely successful so far with tenants like Dollar Tree taking available space because they are expanding and we have a number of dollar trees. There are other dollar store concepts who are also doing pretty well but Dollar Tree is sort of the most significant in our portfolio.

[Operator:]

Your next question comes from David Fick – Stifel Nicolaus.

[David Fick:]

You effectively had an IPO in the fall of 2003 with your recapitalization program. At that time you essentially reset the company and in 2004 your FFO was $0.91, in ’05 it was $1.03, in ’06 it was $1.21, in ’07 it was $1.22, in ’08 it was $1.22 and now for ’09 you’re guiding $0.85 to $1. So, six full years now as a public company under your guidance, virtually no earnings growth, zero earnings growth despite having taken tremendous development risks, despite your claim of having created tremendous value for shareholders, despite your claim for having bought a lot of properties right; virtually no earnings growth in the best period in history in modern real estate in terms of fundamental demand for space, tenant demand, opportunities, development and so forth. Can you address that observation?

[Leo S. Ullman:]

I guess I better. I think the conclusion is wrong, I think your factual references to per share FFO are right. We have grown tremendously during those first four years and we’ve been fairly constant during the last two and I do think that it’s a reflection of the times. I don’t think that we’ve performed any less well than the rest of our peers. I do think that our shares outstanding at this point are a substantial multiple of what we came out with in our IPO and in the meantime we have grown our AFFO and our EBITDA and our cash flow figures very dramatically. You will recall that when we came out of the box and for the first year or two we were not in fact covering our dividend yet so I do think we have grown handsomely. I think we’ve changed our company very much from being almost entirely focused in Pennsylvania to very substantial growth in Massachusetts and Connecticut. We are not a company with huge exposure to the kind of tenants who might skyrocket during good times. Our portfolio has basically been a very modest growth, low risk profile and we knew that from the beginning. So, I do think we’ve grown quite a lot, I think we’ve added quite a lot of value and on a per share basis it’s true that our FFO has remained constant the past couple of years but our AFFO and our cash flow metrics have increased nicely.

[David Fick:]

Well your FFO has clearly not grown for six years against your original measure in 94 and to this year’s guidance and that’s within your control. This is not an external market factor. You’ve made decisions of what to buy and when to buy it. I don’t mean to be argumentative but the bottom line is that management has not grown earnings per share.

[Leo S. Ullman:]

David, the earnings per share on an income metric it’s true. I’m focusing again on the FFO which you had mentioned. The FFO did grow from $0.90 to $1.22 and it stayed constant at a time when almost all of our peers have gone down. With respect to the guidance for this coming year we’re being careful. We have shown, I think you’ll notice, that for the year 2008 we performed pretty darn well and even in the last quarter compared to most everybody we’ve performed pretty darn well. We’re being careful about 2009 and giving our guidance and being conservative because we think 2009 is going to be very difficult. I don’t think you’re going to show me many of our peers who are going to grow in 2009 and I think you’ll see a lot who may perform worse than we have.

[David Fick:]

[Inaudible] the shopping business is defense here and grocery anchor in particular and I think many of your peers are actually reflecting that defensiveness and it’s a good asset class to be in there’s no question. Can you address the dividend coverage question and the dividend strategy going forward given that you did not have dividend coverage initially, you did obtain dividend coverage and now obviously you slipped below covering your dividend again.

[Lawrence E. Kreider:]

I don’t think we’re below. Our dividend has been reduced to $0.45 per share/OP unit. We believe our coverage is two times that.

[David Fick:]

Your guidance at the low end doesn’t even cover that much less cash flow.

[Lawrence E. Kreider:]

Our dividend is $0.45 per share.

[David Fick:]

Your two times multiple, it doesn’t get you there. But, you’ve got a significant FAS adjustment also and you’ve got amortizing debt which we can’t assume gets refinanced here so you do have out-of-pocket that is dramatically pulling you closer. I mean, can you say you have free cash flow after your amortization of debt, $0.45 levels?

[Lawrence E. Kreider:]

David, I believe we do. We provide the metrics on one of the pages in here and I believe we show coverage of the $0.45.

[David Fick:]

Including amortization of debt?

[Lawrence E. Kreider:]

I believe so but, I’ll look. I haven’t done this specific calculation.

[Operator:]

Your next question comes from RJ Milligan – Raymond James.

[RJ Milligan:]

I had a question for the ’09 guidance, the $0.07 to $0.11 reduction for lower revenues and increased bad debt expense, is that solely coming from the four Ohio properties or is that taking in to account additional lease terms?

[Lawrence E. Kreider:]

It’s just general reserves that we’re providing for collection short falls for potential loss tenants across our portfolio and there is no specific thought as to who that might be at this point.

[RJ Milligan:]

So that’s not the Ohio properties?

[Leo S. Ullman:]

No, the Ohio properties have been accounted for at this point. We’ve taken care of that in our bad debt reporting to date so what we’re contemplating with the guidance is the potential for losing other tenants but we haven’t been specific in that regard.

[RJ Milligan:]

The renegotiated lease, do you guys have an idea as to I guess the percentage of rents or percentage of your tenants that you renegotiated rents with?

[Leo S. Ullman:]

In ’08 we only renegotiated I believe with respect to a couple of Discount Drug Marts. Where in fact, and this is a model for the way we think, they were doing poorly in one particular store in Columbus Ohio suburb where there was a substantial amount of road work. We agreed to give them a temporary abatement of rent and we’re only talking $20,000 a year. In return for that we got lease extensions in three other sites. We told most tenants who asked for rent reductions, and it’s no secret that an awful lot of tenants ask for rent reductions whether they deserve it or not and we’ve told most of them that we would not do anything before yearend 2008 and that we’d work with them only after they’ve filled out some serious questionnaires and certified their answers with respect to how they were doing. We’re looking hard at their competition, we’re looking at historical perspectives, we’re looking at our opportunities to re-lease the relevant space. This is not something we just do willy-nilly and we haven’t done it with the exception of the one case for all of 2008 to the best of my knowledge.

[RJ Milligan:]

So thus far in ’09, just looking at the guidance, that $0.07 to $0.11 renegotiated lease arrangements, that’s also just a general assumption for the year, it’s not anything in particular?

[Leo S. Ullman:]

Yes and we’re trying to be careful. As you heard in my prepared remarks there are some stores who have come to us and indeed all other owners with programmatic reduction requests. We’ll deal with those very carefully on an individual store basis. But, the landscape is just that, an awful lot of tenants looking for that kind of relief but the ones that are most painful are the big stores and we don’t have much of those.

[Operator:]

Your next question comes from Paul Adornato – BMO Capital Markets.

[Paul Adornato:]

I was wondering if you could tell us if you’ve had any contact with Inland Group since our last conference call?

[Leo S. Ullman:]

We had only brief discussions as to possibility of a joint venture and that did not proceed and other than that we haven’t talked to them in some time. We did ask them what their reaction was, how they would react when we were cutting our dividend and they were supportive. Other than that there have been no discussions.

[Paul Adornato:]

Have you or they entertained the possibility of another financing short of a JV or outright acquisition?

[Leo S. Ullman:]

As I mentioned, we did briefly discuss a potential joint venture, those discussions were terminated some time ago. I believe that Inland has extraordinary opportunities for investments on a very high yield basis and we may or may not be in that picture and I think they could do better than the joint venture than we had proposed.

[Operator:]

Seeing no further questions in queue Mr. Ullman, I’d like to turn the conference back over to you for any additional or closing remarks.

[Leo S. Ullman:]

Again, thank you all for listening in and participating in our call today. We hope the message has been clear that we’re sticking to our risk adverse focus on our operations, on our existing primarily supermarket anchored portfolio in the Northeast, our strong development pipeline and on our stable financial structure. While we understand the coming year may be difficult, we will be prepared for long term survival and we would hope to be in a position to benefit from opportunities which we believe will be available to our company. Thank you all very much.

[Operator:]

Again ladies and gentlemen thank you for your participation. This will conclude today’s call. You may now disconnect. Copyright policy