Cedar Realty Trust, Inc.
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Welcome to the First Quarter 2015 Cedar Reality Trust Earnings Conference Call. As a reminder, this conference is being recorded. [Operator Instructions] I will now turn the call over to Nicholas Partenza. Please proceed.

[Nicholas Partenza:]

Good evening, and thank you for joining us for the first quarter 2015 Cedar Reality Trust earnings conference call. Participating in today's call will be Bruce Schanzer, Chief Executive Officer; Philip Mays, Chief Financial Officer; and Nancy Mozzachio, Chief Operating Officer. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, May 05, 2015 and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures including funds from operations and net operating income. Please see Cedar's earnings press release posted on its website for reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures. With that, I will now turn the call over to Bruce Schanzer.

[Bruce Schanzer:]

Good evening and thank you for joining Cedar's first quarter 2015 earnings call. As always, I will spend a few minutes on the call reviewing our results before asking Nancy and Phil to discuss them in more detail. I will also give you a feel for the measures we are taking in furtherance of our long term strategy. In addition to Phil and Nancy, I'm joined by the balance of the Cedar senior management team Charles Burkert, our Head of Construction and Development; Lori Manzo, our Head of Leasing; Adina Storch, our General Counsel and Mike Winters, our Chief Investment Officer. As always the accomplishments we are describing on this call are credit to all the members of team Cedar, most of whom are listening to this call. And I thank them for doing their critical work with everyday excellence. Our first quarter results were consistent with our guidance and expectations. We had operating FFO per share of $0.13 which is a strong result in the context of our continued capital migration and delevering both of which are dilutive to earnings. In addition, our leasing results were solid with a number of exciting new junior anchor leases. Lastly, our leverage ratios continue to improve according to plan. As we have discussed in the past, our five-part long term strategy begins with a single minded focus on grocery anchored shopping centers in the Washington DC to Boston corridor. We then emphasize leasing and operations, value add redevelopment, capital migration and conservative balance sheet management, all to create and enhance shareholder value. In the first quarter we announced two acquisitions in furtherance of the capital migration lag of our strategy. First, we acquired Lawndale Plaza in Philadelphia. Second, we acquired our partners 60% interest in the New London Mall in New London, Connecticut. Both centers are anchored by a shop right supermarket. Our total outlay for the two acquisitions was roughly $53 million. We are underwriting a number of additional high quality acquisition opportunities and expect to announce at least one or two deals before year end. Notably, all the centers we are presently looking at are off market opportunities. Any one of these assets if we are successful in acquiring them will represent a top quartile asset and we'll most likely further diversify as geographically and by grocer banner. In addition, these acquisitions will generally advance our objective of migrating our capital from the bottom half of our portfolio, which in the aggregate represents roughly 25% of the value of our company into grocery anchored shopping centers in higher density submarkets within our DC to Boston footprint. I expect that if we succeed in executing our capital migration plan, our portfolio will evolve so that it will eventually have the following salient characteristics. First, three mile population density will be substantially above the shopping center REIT average thereby driving consistently high traffic. Second, our average base rents will be dramatically above our current rate of roughly $13 per square foot. Third, the NOI growth rate of our centers will meaningfully improve from our current 1% to 2%. Fourth, more of our centers will have embedded value add investment opportunities. Fifth, our centers will offer greater stability and have defensive characteristics that will allow our portfolio to be even more resilient to market shocks such as we experienced during the great recession. I know however, we had one of the best performing shopping center portfolios during this period. As discussed, the acquisitions we are contemplating are generally going to be funded with the proceeds of assets sales from the bottom half of our portfolio. Accordingly, we are buying and selling assets in the same cap rate environment, which mutes concerns about timing the market. To a lesser extent, we will potentially use some common equity or OP units to permanently finance these acquisitions, as well as a modest amount of leverage in certain instances. Taking a big step back, Cedar has a strategy that is uniquely well suited to execute for three primary reasons. First, our narrow geographic and asset focus has led this company to be truly a team of local sharp shooters and asset type experts. I've seen us consistently reap the benefits of this whether in terms of sourcing deals, our government and local contacts, or learning about news or trends before they are broadly known. The Washington DC, Philadelphia, New York and Boston markets are four of the eight best and largest markets in the country. We have more than enough opportunities within these markets to invest and create significant shareholder value. Moreover, these four markets are highly desired by both domestic and international institutional capital sources, especially the grocery anchored shopping centers within these markets. The persistent institutional demand for these assets in these markets underlies our investment thesis. Second, our relatively small size means that what we're doing with our portfolio will have a real impact on our metrics and operating fundamentals. This sort of corporate transformation would be difficult to achieve with a larger portfolio or company. Third, as an organization we have developed a real expertise in actively and dispassionately managing our portfolio. Since announcing our strategic reinvention in November of 2011, we have sold more than half our assets by number. In describing a strategy that contemplates selling a significant part of our portfolio to reinvest into a few very high-quality centers, we're confident that we’re likely to succeed in this endeavor, because it is what we have been doing with considerable success for the past three years. Of course our capital migration activities are not the only areas in which we are focusing and endeavoring to grow the per share value of Cedar. We continue advancing a number of redevelopment projects some of which we have already disclosed and a couple of which have been on the drawing board for a few years and are now starting to come into sharper focus. In addition, our continued strong leasing results both in terms of new leases and renewal activity is solidifying the foundation for steady earnings growth. However, so as not to steal Nancy's thunder, I will turn it over to her to elaborate. Nancy?

[Nancy Mozzachio:]

Thanks so much Bruce. Operating fundamental for the first quarter of 2015 represents a solid period of new lease and renewal activity fueled primarily by commitments for junior anchor and grocer spaces, as well as medical, wellness and service uses. New lease volume is up from the fourth quarter of last year and renewal volume is inline with previous quarters. For the first quarter, we executed 33 new and renewal leases totaling approximately 313,000 square feet with new lease cash spread of 12.1% and renewal spread of 7.3%. Although AVR for new leases and renewals is lower than the previous quarter, the reduction in new leases is mostly driven by the completion of a home goods lease. If we were to exclude home goods from the AVR, new lease AVR would be $15.22. Lower renewal AVR was driven by two anchor renewals, which were contractual options exercised by these tenants. If we were to exclude these anchor contractual options, renewal AVR would have been $12.59 with 8.2% cash spread. New lease totals include commitments from home goods at Trexler Mall in Trexlertown, Pennsylvania and grocery outlet at Fairview Commons in Harrisburg, Pennsylvania. We expect both tenants to open in the later half of this year and while these leases will not contribute much to earnings this year, they are important long-term additions. Notably, subsequent to the close of the quarter, we executed a second home goods lease at Colonial Commons shopping center in Harrisburg, Pennsylvania. Home goods expect to open at this asset in the back half of 2015. While occupancy totals for the first quarter were slightly down from the fourth quarter of last year attributable to normal post holiday move-out, it is important to know new transactions assisted in raising our AVR on all basis, total portfolio, same-center, large shop and small shop. The addition of Lawndale product to our portfolio and continued efforts attacking organic growth through rent escalations within new and renewal leases are the primary contributing factors for AVR growth. We are pleased to report that the RadioShack bankruptcy has had very little impact on Cedar, when it does settled established cell phone operators committed to approximately 75% of our RadioShack stores with approximately $241,000 in annual revenue. Total revenue of the three spaces we received back was approximately $121,000. Each of the returns former RadioShack stores are in active centers where we had the low market range. We believe the new operator speed and committing to these spaces and our centers speaks to the quality of the assets within the portfolio. On the redevelopment front, we commenced construction in the fourth quarter on a 12,000 square foot pad building at Trexlertown Plaza shopping center. The building is 50% pre-leased and we are finalizing otherwise LOIs for another 25% of the GLA. Construction should be completed late in the third quarter with tenant opening schedule to occur before year's end. We’re also advancing entitlement for another pad building at Upland Square. The building will likely be on 100% leased when construction commences this year with store openings occurring late 2015 or early 2016. Capital spend for each of these projects is between $2 million and $3 million. In addition to these smaller projects we continue to [aggressively] [ph] pursue larger redevelopment and re-tenanting project, which we hope to curtail on future calls. In closing, as we head to RECon, we are excited about new tenant commitments and opportunities in our portfolio particularly on the junior anchor and small shop front. We hope to leverage these commitments to drive further leasing activity within our centers and achieve our near and long-term goals. With that, I give you Phil.

[Philip Mays:]

Thanks Nancy and good evening. Operating FFO was $0.13 per diluted share for the first quarter of 2015 consistent with $0.13 per diluted share for the first quarter of last year. Same property NOI increased 2% including redevelopment and 1.2% excluding them. The growth including redevelopment properties was driven by leasing at Colonial Commons and Kempsville Crossing. Now let me provide some additional color regarding our operating FFO. While $0.13 per share this quarter is consistent with the $0.13 per share we've quoted a year ago, this financial measure loan does not tell the full story here at Cedar. Consider the following year-over-year item; Financial leverage has decreased half a ton from 7.9 times to 7.4 times debt-to-EBITDA. Interest coverage has increased from below 3 times to 3.2 times. Financial and operating flexibility has increased as we continue to refinance secured debt with unsecured debt. Average base rent per square foot has increased from approximately $12.50 to almost $13. And the quality of our earnings has arguably improved as non-cash income from lease amortization now contributes about $1 million less per year. In this context, we are pleased with our operating results. Before turning to guidance, let me add a couple of balance sheet notes. We ended the quarter with $184 million available under our revolving credit facility. Additionally as a reminder, we are refinancing the approximately $100 million of mortgage debt maturing in 2015 with $100 million of new unsecured term loans closed in February. This $100 million of new term loans consist about $50 million five year term loan drawn at closing and a $50 million seven year term loan that we would draw down near mid year. Lastly guidance. We are reaffirming our 2015 operating FFO guidance range at $0.51 to $0.54 per diluted share. This range is based on the same underlying assumptions provided in our fourth quarter 2014 call. Again, our 2015 guidance only reflects acquisitions and dispositions completed to-date. And with that, I will open the call to questions.

[Operator:]

[Operator Instructions] Our first question is from Nathan Isbee from Stifel.

[Nathan Isbee:]

Hi, good afternoon. There has been a lot of buzz in the shopping center space albeit regarding the M&A, you recently had an M&A transaction which was announced. And I was hoping you could talk broadly about your views about M&A environment a bit more specifically. Has Executive Team and the Board either contemplated or actually explored - what the appetite out there is for Cedar like portfolio?

[Bruce Schanzer:]

Thanks Nat. So we are of course aware of what's been happening in the market and as you know I'm a former REIT M&A banker, so I have a better understanding than many of how the source of deals come together in terms of process, structure and pricing. So in response to your question what I will tell you might sound big, but it is sincerely how we think about the topic. We are public company, so anyone who wants to buy our stock can do so. Of course, more generally we run this company for the benefit of our shareholders. As you are aware, the management team at Cedar in particular is very strongly incentivized through their ownership of stocking in the company to think like long term shareholders and to choose the path that maximizes total shareholder return. Speaking for myself, the vast majority of my network is invested in Cedar common stock so I believe speaking for myself my interest are aligned with Cedar shareholders. All that said, in my opinion as the Chief Executive of the Company, the best thing for this company to do is to remain focused on growing the per share value of the company by methodically executing the well conceived strategic plan we just walk through. I realize that it doesn't necessarily get into exactly what's going on in the boardroom, but hopefully that answers your question.

[Nathan Isbee:]

Right. That is helpful. Thank you.

[Operator:]

Our next question is from Todd Thomas from KeyBanc Capital Markets.

[Todd Thomas:]

Hi, good afternoon. So you essentially - you've met your acquisition target for the year, it sounds like you are fairly confident about acquiring another one or two properties by year end. What should we think about in terms of total dollars for new investments? Can you sort of book end for us and then Bruce you mentioned that additional acquisitions would diversify the footprint geographically, what does that mean in the context of owning a Boston to DC corridor portfolio?

[Bruce Schanzer:]

That's a great question Todd, I'm glad you asked for clarification around that. To answer your first question, we did announce the target in terms of the number of acquisitions, or the value of the acquisition we thought we would acquire in 2015. In fact I think on our last earnings call, we acknowledged that although we are actively in the market that we really didn’t have visibility into what would necessarily come together. Of course we have announced a few deals and we are reasonably confident about some of the other deals that we are looking at such that we think that they will probably announce another one, two or maybe even three new deals by year end. To give you a book end feel what that would represent, that would probably be called in the aggregate $100 million to $150 million in aggregate value and so that's why we think about the 2015 acquisition volume in total. In terms of your second question about diversifying, what I meant – I'm glad you asked for clarification because our geographic focus is not changing bur rather when you look at where our capital is concentrated today, more of it is in Pennsylvania than in the other markets that are within our footprint. And so when I said that we would be diversifying geographically, what I meant is that, as we invest outside of Pennsylvania, you’ll see a lowering of the concentration of our capital in Pennsylvania. But it will still remain within the same DC to Boston footprint.

[Todd Thomas:]

Okay. That's helpful. And then you talked about being sort of an IRR buyer, so I am curious in terms of your underwriting, what are you thinking about in terms of exit cap rate today, are you changing your underwriting assumptions at all given some of the volatility that we’re seeing with interest rates here. And also you mentioned that you’re in conversations on some of these transactions with sellers about issuing OP units, how sensitive are sellers to the stock price today?

[Bruce Schanzer:]

It's a two part. So let me answer each one separately. In terms of how we underwrite of course we’re always more conservative on the exit cap rate and certainly the reason why we do that is because we realize that we don't know where cap rates are going to be in and so just to be conservative we assume cap rates will widen. So cap rates will be higher on the exit than they are going in and we do that irrespective of the interest rate environment because again we just don't know where cap rates will be and it’s just a matter of being conservative and that’s something we will continue to do. In terms of the OP unit, sellers appeal of owning Cedar's OP units is really a few fold, one of them is of course the tax benefits of owning OP units but in the case of Cedar in particular, where we have seen consistently with sellers with whom we either have transacted or well potentially transacted, they are excited about what we’re doing at Cedar. And so they see an opportunity to get our stock at their NAV, right, they are selling us the asset, their shopping center added value but then they see the opportunity to get in depreciation and the consideration by virtue of being in the form of Cedar stock or more specifically in the form of OP units because of the fact that they see what we're doing at Cedar is being something that is going to lead to appreciation in value over time. And so they like the idea of the tax deferral and they also like the idea of partnering so to speak with the management team that is oriented in a manner that aligns well with shareholders where they think that there is going to be an appreciation of the value of those OP units over time. And we don’t really get lost too much in negotiations over near term movements in the share price but again we don’t know where prices are going to go. So I don’t know if it will be thinking about it differently in the weeks and months to come.

[Todd Thomas:]

All right, that's helpful. And then just last question, I was just looking in the supplement at the two acquisitions in the quarter. I don't know if - on Page 3 it looks like you have Lawndale Plaza being acquired on January 23, and I think the dates are flip flopped later in the supplement, in the acquisition schedule. Which one - which property was acquired, which date January 23 and then February 27?

[Bruce Schanzer:]

Lawndale was acquired first Todd.

[Todd Thomas:]

Okay.

[Bruce Schanzer:]

The remaining interest in New London was acquired second.

[Todd Thomas:]

All right, so Page 3 is correct. Okay, great. Thank you.

[Bruce Schanzer:]

Thanks Todd.

[Operator:]

Our next question is from Collin Mings of Raymond James.

[Collin Mings:]

Hi, good afternoon. I guess first just can you just update on the yields you generally targeting on some of the redevelopment projects you spoke about. And then has that threshold as you look at potential other redevelopment projects has that threshold come down at all over the last six, 12 months just given some of the competition that you’re seeing as it relates to just the overall acquisition environment?

[Bruce Schanzer:]

So the way we think about yields is really [indiscernible] on the smaller deals that you have actually publicly discussed and disclosed generally speaking we are underwriting those to yields in the double digits, so north of 10%. Some of the larger redevelopment projects that we’ve been working on - frankly we have not yet publicly disclosed that would be larger are being underwritten into the higher single digits, but we are not seeing realistically hovering again into the double-digits on those deals but again very, very attractive unlevered IRRs relative to either the cost of capital at Cedar or the cap rates at which those assets will be value either today or in the future. And that’s generally speaking how we’re thinking about it. In terms of competition for assets, as it relates to the unlevered IRRs, which we are underwriting, the redevelopment projects, I guess we think about that in terms of what the value of the asset will be in the future but we take a pretty conservative view and so movement in cap rates which of course the function of the competition for some of these assets that we’re seeing today isn't really informing the underwriting that we are using and thinking about exit cap rates 10 years from now.

[Collin Mings:]

Okay. So those are not like a specific spread threshold that you necessarily targeting between redevelopment acquisitions?

[Bruce Schanzer:]

No, we think about it in terms of achieving an adequate spread to our cost of capital and so we don't - cost of capital too dramatically based on things like cap rates and interest rates, we try to take a longer view and so generally speaking movements, short term movements in cap rates or interest rates aren’t really impacting and causing us to get more aggressive in how we underwrite things.

[Collin Mings:]

Okay. And I think just on the redevelopment front, last quarter you suggested spending somewhere around $20 million for the year, I think in the prepared remarks you were talking a few million dollars a quarter, should we still be thinking about $20 million of total redevelopment spend this year?

[Bruce Schanzer:]

So what we have said is that - on average we expect to spend $20 million a year, that's not to say that every year we are going to spend $20 million but on average we will spend $20 million. So that $20 million is made up of these smaller $2 million to $5 million investments in the number of redevelopment projects that we expect to kick-off in the foreseeable future that are in the many tens and millions of dollars and on average that will get us to about $20 million a year again on average.

[Collin Mings:]

Okay. And then I think in last couple of quarters you suggested maybe targeting around $100 million of dispositions this year. Can you just update us on that front, again it sounds like there is pretty strong bid out there for assets but just maybe update us how that is progressing?

[Bruce Schanzer:]

Sure. So again, the way to think about it and it really is the simplest we are describing it, but we literally just try to sell the same amount from a dollar value perspective of asset that we are buying. So for example last year we bought Quartermaster Plaza for call it $93 million and change, and we sold eight assets for an aggregate value of $95 million. So as we tally up, what we are buying this year will be pretty much back into what we’ll be selling, we will probably try to sell similar value in terms of assets.

[Collin Mings:]

Okay. And then just last one from me. Just as it relates the whole acquisition discussion, potential opportunities to buy some anchored space maybe where that tenant was paying but the space is vacant, something I know that you talked about in the past any update on opportunities on that specific front?

[Bruce Schanzer:]

The answer is there are updates, unfortunately we can't share them publicly right now but I think you could expect that that would be a topic of discussion in the coming quarters.

[Collin Mings:]

Okay. Thanks.

[Bruce Schanzer:]

Thank you.

[Operator:]

[Operator Instructions] Our next question is from RJ Milligan from Robert Baird.

[RJ Milligan:]

Hi, good evening guys. Just wanted to follow up on sort of the how you think about financing the acquisitions obviously trying to match those with dispositions, the idea of issuing units as well. Curious if raising equity, additional equity here given where the stock price is, if that is also an option or if you would only look to match fund that with dispositions or unit deals?

[Bruce Schanzer:]

Realistically in the foreseeable future, I would tell you that we are unlikely to do an equity offering publicly - public equity offering to raise capital to do these deals. The OP unit deals are separate topic obviously that is the same - virtually the same thing as doing an equity offering. We think about it a little bit differently in the sense that it is of course an inducement to get something to transact with us. They are typically get to being much longer term shareholders and of course we are selling our stock in that instance on an undiscounted basis since there is a slight benefit there. But more generally we are thinking about as we describe capitalizing our assets on a long term basis with the capital and the value that's embedded in our existing assets. So we think that's probably at least for the near term how we are going to be financing ourselves.

[RJ Milligan:]

Okay. Would you be open to - I know you had answered Collin's question that you are looking at match funded but given the demand that's out there , that's still not adequate enough for you to think about disposing properties, even if you don’t necessarily have a use of those proceeds.

[Bruce Schanzer:]

Realistically RJ, of course never say never, but realistically that’s not going to be how we finance ourselves as we described in the past - again this is very simple but this is really how we approach it which is we typically acquire assets, as we close on those assets we start the process of identifying asset divest and then we start to process divesting those assets and in the interim we capitalize those acquisitions on our line generally.

[RJ Milligan:]

Okay. Thanks guys.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Bruce Schanzer, for closing remarks.

[Bruce Schanzer:]

Thank you all for joining us this evening. We look forward to continuing sharing our excitement regarding what we are doing to create shareholder value at Cedar when we see many of you in a few week at RECon in Las Vegas and then at NAREIT in New York. Have a good night.

[Operator:]

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.