Cedar Realty Trust, Inc.
Q4 2015 Earnings Call Transcript

Published: 19 Feb 2016

[Operator:]

Welcome to the Fourth Quarter 2015 Cedar Reality 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 Nicholas Partenza. Please proceed.

[Nicholas Partenza:]

Good evening and thank you for joining us for the fourth quarter 2015 Cedar Reality Trust earnings conference call. Participating in today's call will be Bruce Schanzer, Chief Executive Officer and Philip Mays, Chief Financial Officer and Interim 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. These statements are subject to numerous risks and uncertainties, including those disclosed in the Company's most recent Form 10-K for the year ended 2015. As a reminder, the forward-looking statements speak only of as of the date of this call February 18, 2016 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 and supplemental financial information 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:]

Thanks Nick. Good evening, and welcome to the fourth quarter 2015 earnings call for Cedar Realty Trust. Our results for the quarter and the full year 2015 were once again in line with our guidance and expectations. From an operating perspective, although our headlined least occupancy statistics are sequentially lower, which is due to four large space vacancies we discussed at our third quarter 2015 earnings call, we are generally pleased with our overall operating performance. On tonight’s call, I will ask Phil Mays to do a little bit more of the talking as he will review our results for the quarter and full year, introduce our 2016 guidance and provide an update on operations and leasing as interim COO. I trust you all saw our filing earlier this week announcing the termination of Nancy Mozzachio, Phil has graciously agreed to fill in as Interim COO until a full time replacement is announced. This evening, I will briefly update you on the continued execution of our strategic plan, which is centered on a keen focus on Grocery-anchored shopping centers between Washington DC and Boston. Our plan includes extracting as much value as possible from our portfolio through an emphasis on leasing and operations. Our plan also comprises a multi pronged redevelopment strategy that includes both adding smaller outparcel buildings and re-tenanting projects that cost a few million dollars and are typically executed in 12 months or less as well as larger scale redevelopments that will run in the many tens of millions of dollars and will take a number of years to complete once underway. As you can see from our periodic press releases, our ongoing efforts to migrate our capital from less dense to more dense markets with a strong preference for off market transactions continues as a essential element of our strategy. Lastly, our careful attention to our balance sheet in terms of leverage, cost of capital, capital sources, flexibility and manageable maturities continues showing results. Before jumping into this discussion however, I’d like to take a moment to recognize my colleagues who are with me this evening. Phil, Chief Financial Officer and Interim Chief Operating Officer; Michael Winters, Chief Investment Officer; Charles Burkert, Head of Construction and Development; Lori Manzo, Head of Leasing; and Adina Storch, General Counsel. In addition, I would be remiss if I didn’t acknowledge the balance of my colleagues on Team Cedar who exemplify the core values of Cedar through their collegiality, collaboration and dedication to everyday excellence. Finally, I should note that we will not be discussing further Nancy’s departure from Cedar either during our prepared remarks or Q&A. As our 8-K filing on Tuesday disclosed she was terminated and that is all that we wish to say at this time. I will let Phil get into our leasing statistics in more detail. I would just comment that although the four large space move outs caused a downtick in occupancy for the quarter, we have solid traction with potential replacements in all four locations and are optimistic we will have the spaces released in the coming quarters in on average at overall higher rents than before. On the redevelopment front, we continue advancing two large redevelopments that we have not yet fully disclosed publicly as well as smaller projects we have underway or have previously discussed. Notably as you may have seen, we announced in early January the acquisition of East River Park Shopping Center in Washington, DC. In addition to being a well priced and structured off market acquisition for a high quality center in an attractive DC submarket this is a center that we fully expect will join our redevelopment pool in the years to come. Although we have already actively begun the process of evaluating various alternatives for repositioning the asset, it will realistically not be undertaken for a few years as we pursue other opportunities that are further along in order to manage our redevelopment risk. Transitioning to capital migration, the East River Park acquisition in addition to being a terrific redevelopment candidate also represents our first shopping center acquisition within the District of Columbia proper. I am happy to report there is at least one other deal within the beltway for which we are under contract and which is scheduled to close. More generally, we continue executing on our plan of divesting centers in lower density markets and using the proceeds to acquire centers in higher density markets. Interestingly, we are benefiting from the fact that although the public markets don’t appear to appreciate the demand for many of our lower population density, grocery-anchored centers we are generating significant demand when bringing these assets to market and getting reasonably attractive pricing on our sales, far better than the implied public market valuation. That said, I will avoid the temptation to join the chorus of REIT CEOs expressing frustration because their share prices are at such a profound discount to underlying net asset values. However, you can expect us to continue to be mindful of the public, private pricing dynamic as we make our capital allocation decisions, most notably by using our existing assets as our source of capital for new acquisitions. Beyond the capital allocation considerations, another noteworthy aspect of this process is the remarkable statistical transformation that is underway as we migrate our capital from lower population density to higher population density markets. I do not want to get ahead of myself by predicting what we might look like once the dust settles on this endeavour other than to note as I have in the past, that with a relatively small portfolio such as ours the effect of just a few purchases in sales could have a measurable impact on the portfolio as a whole. On the balance sheet front, we ended the year at 7.2 times on a debt-to-EBITDA basis because of the timing of the East River Park closing in the last week of the year. We anticipate continuing to de-lever over the course of 2016 as we close on the divestitures we have underway that are funding our identified acquisition pipeline. Something worth highlighting even more than our overall leverage statistics is the culmination of our efforts to dramatically level out our maturity schedule and manage refinancing risk. As you can see in our supplemental, 2016 has a fair number of maturities in the second half of the year especially if you include the mortgage maturity at Camp Hill in January of 2017 that is pre payable at the end of 2016. We are of course paying significant attention to these liabilities and as is our practice intend to have the refinancing obligations addressed well in advance. What is exciting for us is that beyond this year’s debt repayments, including the Camp Hill mortgage, we literally have no debt maturities of any consequence for the following two years. Accordingly, while the volatile markets are giving nearly all companies both real estate and non real estate some cause for concern, we are sanguine in the face of this turmoil as we anticipate the opportunities that correction might offer us. Much of the credit for this facet of our transformation goes to Phil to whom I will now pass the baton. Phil.

[Philip Mays:]

Thanks, Bruce. On this call, I will discuss our results for the fourth quarter and full year, provide updates on leasing and our balance sheet and introduce 2016 guidance. Starting with the operating results. For the quarter, operating FFO was $12.3 million or $0.14 per diluted share. For the full year operating FFO was $46.4 million or $0.54 per diluted share. With the backdrop of our capital migration strategy to improve the quality of our portfolio, as evidenced by an increase in both 3 mile population density and ABR, we are pleased with our operating results. Additionally, these results are consistent with the strategic plan we have been discussing over the last couple of years and with the guidance communicated at the beginning of this year. With regards to same property NOI growth including redevelopment, same property NOI increased 2.5% for the quarter and 2.8% for the year. When redevelopment properties are excluded, same property NOI increased 2.4% for the quarter and 1.9% for the year. These results like operating FFO are consistent with the high end of the guidance range we established at the beginning of the year. With respect to leasing, during the fourth quarter, we signed 36 leases for 415,000 square feet and for the full year we signed 140 leases for 1.1 million square feet. Comparable lease spreads for the quarter were 12% and comparable lease spreads for the year were 9.5%. As discussed on our last call, four anchors vacated their spaces during the fourth quarter. This caused our leased total portfolio and same property portfolio to decrease to 91.5% and 92.8% respectively. We expect on average to release these spaces at a higher ABR with new tenants taking possession in late 2016 or early 2017. We are focused on getting this vacated spaces not only fill quickly, but filled in a manner that would generate more foot traffic for the centers and it fits with additional leasing. This quarter, at the vacated Price Chopper box at Webster Plaza, we signed a lease with Planet Fitness to take a portion of the vacated space and expect them to open towards the end of 2016. Additionally, we are well along in discussions with another retailer to take substantially all the remaining vacated Price Chopper box. In fact, we are at various stages of negotiations with several retailers for each of these vacated spaces and provide more details and updates on these spaces throughout 2016. Before leaving the topic on leasing, I would like to briefly discuss one other new lease. During the quarter, we signed a lease with Alby supermarket for space at Groton shopping center. Alby is expected to open late in 2016 and as with the Planet Fitness lease, this re-tenanting should both generate additional foot traffic and leasing. We plan to invest about $3 million in connection with this redevelopment at a yield of approximately 9%. Moving to the balance sheet. As a result of acquiring East River Park late in December, we ended the quarter with net debt to EBITDA at 7.2 times, up slightly from 7.0 times at the end of the third quarter. Our year end interest and fixed charge coverage ratios improved to 3.6 times and 2.0 times respectively. Further, we currently have about $180 million available on our revolving credit facility and no debt maturities until the latter half of 2016. Let me provide some additional details about our 216 debt maturities. We now have more flexibility as our secured debt is below 20% of our total asset value. Accordingly, we are comfortable refinancing our 2016 maturities with either secured or unsecured debt. In fact, our current plan is to use a combination of both to refinance a $125 million of debt maturing in the latter half of 2016. Additionally, in late 2016 we will likely take advantage of an early prepayment window and refinance the $60 million mortgage on the Camp Hill Shopping Center that is otherwise scheduled to mature in January of 2017. Once these maturities are refinanced, we will have an aggregate of less than $25 million maturing in 2017 and 2018 combined. Although we cannot refinance these maturities until late 2016, it is likely we will obtain loan commitments during the first half of 2016 that permitted the late closing or funding. Finally guidance, we are establishing an initial 2016 operating FFO guidance range of $0.53 to $0.56 per diluted share. And an initial NAREIT defined FFO guidance range of $0.50 to $0.53 per diluted share. The primary difference between these ranges is estimated acquisition cost. Further, key assumptions included are as follows. Same property NOI growth of 1% to 2%, this is consistent with prior years. However, in prior years we guided to the high end of this range as a result of the vacated anchor spaces we are guiding towards the low end of the range. We expect the replacement anchorage to take possession in late 2016 or early 2017 thereby causing a significant drag on same property NOI growth early in the year. Specific modeling, we currently are forecasting the impact of this re-tenanting because approximately a $2 million reduction of NOI in 2016. Excluding these vacated anchor spaces, same property NOI growth would be in the 2% to 3% range. As far as transaction assumptions, we are including $40 million of acquisitions and $110 million of dispositions. This reflects two acquisitions and two dispositions that are very far along and expected to close in the first half of 2016. Including the $39 million acquisition of East River Park in late December, our dispositions will feed acquisitions by approximately $30 million. We do have a healthy acquisition pipeline and will update our guidance throughout the year as we gain more clarity here. Lastly, our guidance does not include the accrual of any severance related to the recently announced termination of our COO. And with that, I will open the call to questions.

[Operator:]

Thank you.[Operator Instructions] Thank you. Our first question is coming from the line of Todd Thomas of KeyBanc. Please proceed with your question.

[Todd Thomas:]

Hi. Thanks. Good afternoon. Question on the re-tenanting activity, so last quarter I think the cost to re-tenant the four boxes was sort of pegged around maybe $40 a square foot and the average mark-to-market was somewhere in the 20% range. Just any additional insight being that you’re a little further down the road at this point?

[Philip Mays:]

Yes, Todd. It’s Phil. I think those still stand, but I think when you’re looking at this, lot of what we’re putting in there as I discussed in my prepared remarks were to generate additional foot traffic and additional leasing around it. But I think you do 40 bucks on the 200,000 square feet, that gets you 8 million in invested capital. That’s probably when you include surrounding leasing that we are hopeful that will happen with it, that number of price starts approach 10 million and probably a low double-digit return altogether.

[Todd Thomas:]

Okay. And then what was the timing of the vacancies like in the fourth quarter. I guess, I’m wondering how much of the $2 million reduction in NOI is in the run rate from the fourth quarter, if you can share that?

[Philip Mays:]

Yes. Probably the midpoint was about in November. It started, I think [10/30] [ph] was the earliest and I think [12/28] [ph] was the latest, so around November.

[Todd Thomas:]

Okay. And then, I mean as you think about the ramp throughout the year than as tenants take occupancy in the later months of the year into 2017, do you think as we think about the trend in same-store NOI throughout the year, are you expecting to see negative same store growth early in the year and the first half of the year?

[Philip Mays:]

You know it’s possible especially in the first quarter, maybe even the first half. We have hopefully at least two of those boxes been filled by the end of the year but those are both be towards the fourth quarter and other two early the following year. Dates could get moved up a little, but that’s how we’ve currently forecasted and put it in the guidance.

[Todd Thomas:]

Okay. And just one other question on guidance, what’s factored in, is there any burn off of non-cash FAS 141 rent that’s included in guidance at all that would be outside of what’s disclosed, I guess in your Q or K just based on some of the – either some of the move outs or some of the recent dispositions?

[Philip Mays:]

I believe on just the kind of in place run rate, it goes down 250,000 to 300,000 just from what’s in place. Obviously as we buy assets throughout the year, you know that could change, but that’s probably about where we’ll end up year-over-year.

[Todd Thomas:]

All right. Thank you.

[Operator:]

Thank you. The next question comes from the line of Collin Mings with Raymond James. Please go ahead with your question.

[Collin Mings:]

Hey, good afternoon guys.

[Bruce Schanzer:]

Hey, Collin.

[Collin Mings:]

First question, just going back to the prepared remarks, just on the dispositions, it looks like there’s what another 95 million of incremental disposition and so all of that is expected to close in the first half of the year?

[Philip Mays:]

I think all together - incremental yes, because we announced 110 for two dispositions, both should happen in the first half of the year, that’s correct.

[Collin Mings:]

Okay. If I’m not mistaken, wasn’t it 15 - 15 million that’s already closed?

[Philip Mays:]

Yes. So, the incremental is 15 on Liberty closed in February. And so there’s one more left that will get us in aggregate of 110 million.

[Collin Mings:]

Okay. Can you talk at all on pricing even or maybe just Liberty or what you might have in the pipeline as far as pricing on these sales?

[Bruce Schanzer:]

Collin, on Liberty I could tell you that it was in the mid 7s and we, as you know don’t talk about pricing until deals close, so we’re not going to talk about the pricing on any of the other transactions we have teed up.

[Collin Mings:]

Okay. That’s fair. All right. And then switching to just talk, and again in the prepared remarks touched on the fact that you’re maybe looking at some unsecured debt later this year you’re looking at some refinancings, can you just maybe touch on what type of pricing or term you are contemplating at this point and maybe what that -- that maybe how that’s evolved, given some of the dislocation in the credit markets?

[Philip Mays:]

Yes. I mean we have a few options, I think the most likely one would be similar to what we’ve done in the past. Where we’ve done five and seven-year term loans with the bank, it could be off seven-year. Pricing right now balancing around a little bit, but that would still be in the low to mid 3s.

[Collin Mings:]

Okay. All right. Great. It’s very helpful. And then, again just making sure I understand as far as on the acquisition guidance. It sounded like relative to your last call you’ve identified one other acquisition in the neighborhood of about $20 million, now that again call it first half of the year that you’d expect to close on top of other deals that you guys were moving through the pipeline at the end of last year. Is that a right way to think about it?

[Philip Mays:]

That’s correct. There’s two in the guidance. They’re both about 20 million each and we expect both of them to close in the first half of the year.

[Collin Mings:]

Okay. And then just looking forward, I don’t know if you guys maybe just touch on the qualities that you’re looking for as you’re looking at replacing – looking for replacement of COO, are you planning on hiring a recruiting firm, do you have some candidates lined up, just maybe on a go forward basis update us on the plan going forward on that front?

[Bruce Schanzer:]

Sure, so obviously we’ve already started the process of looking for a replacement COO, I’m not going to get into too much detail about how exactly we’re doing that. It’s a multi-pronged strategy. What I could tell you just in terms of how we’re approaching it is, look we’re looking for the -- the next COO that we hire is going to realistically have some type of prior COO experience or have some type of senior executive experience in our space, hopefully with the track record of successfully executing complex development projects, hopefully, with some retail experience. One of things as you know just from dealing with me and Phil and our team is we’re obviously looking for somebody with significant technical and analytical ability, somebody who can jump right into our highly analytical approach to underwriting and problem solving and then the last thing and you hear me talk about this all the time on the earnings calls, is of course, you know at Cedar we really focus very heavily on our culture of collegiality and collaboration and everyday excellence and certainly that’s going to be a character feature that we’ll be looking for in anybody who we bring on. So broadly speaking, if we are able to check all those boxes, I think we’d be thrilled and certainly we’re going too patiently but at the same time decisively pursue candidates with those thoughts in mind.

[Collin Mings:]

Any specific time line you have in mind there Bruce, that you like to have someone announced by?

[Bruce Schanzer:]

As soon as we can.

[Collin Mings:]

Okay. Fair enough. All right, And then I guess just one – again big picture question from me is just on tenant watch list, anything that’s moved around as we’ve started the year here for you guys and anything you’re paying a little bit closer attention to?

[Bruce Schanzer:]

No, I mean, I don’t think we’ve had any significant changes in our watch list that we update each quarter, remain pretty consistent last couple of quarters.

[Collin Mings:]

All right. I’ll turn it over. Thank guys.

[Bruce Schanzer:]

Thanks, Collin.

[Operator:]

Thank you. [Operator Instructions] Our next question is from the line of Flores [ph] [Indiscernible]. Please go ahead with your question.

[Unidentified analyst:]

Hey, guys. Can you hear me?

[Bruce Schanzer:]

Yes. Hey Flores.

[Unidentified analyst:]

Couple of questions, number one I notice that you have -- 2% of your tenants are temporary, what do you expect that number to be at the end of the year, end of 2016?

[Bruce Schanzer:]

You know what’s in there really relates to several properties where we’re contemplating re-development where we’re keeping tenants and not giving them terms, so it kind of depends on the timing of when those take off. I don’t expect it to be that different. At the end of year there’ll be obviously some that will fall out, new ones will come in as we start to ramp up other properties potentially. But it’s probably not going to be materially different.

[Unidentified analyst:]

Okay. The next question is I noticed on your -- the new list rental spread were actually smaller than your renewal spreads or yet your TI was almost two years of rent. Was that property specific or was that skewed by certain things or is that sort of indicative of maybe some of the lower half of your properties that you’re trying to fill up before you sell?

[Bruce Schanzer:]

Any one quarter because there’s a not a lot of leases in there, its not really a good representative. I always kind of look at it more on the kind of a drilling four quarters, but within the quarter specifically, the TI [Indiscernible] gym, and a couple of restaurants that typically cost TI to be higher and that’s why the TIs were high, but I don’t – one lease, two leases within one quarter when you talking about small things amplifies [ph] can kind of bounce the numbers around, so I would direct you to kind of look more kind of a trailing four quarters and to get run rate.

[Unidentified analyst:]

Okay. And maybe one other thing, can you guys maybe talk about your view towards on new leases for fixed bumps and what is the evidence that you’re getting about maybe increasing your fix bumps on new leases compared what has historically been in the portfolio?

[Bruce Schanzer:]

So its definitely been a focus and our leasing team focuses on that with each lease we sign, and we do our best to understand sales and cost of occupancy in all of our tenants and what’s going on with individual businesses and we push for those as much as possible, obviously the anchor ones its harder to get him, but on the small shop especially in the markets we’ve been pushing into, but the more identity we’re able to generally get 2% to 3% annual bump at more recent properties we acquired which is an improvement from the portfolio prior to that.

[Unidentified analyst:]

And if I can, Bruce you touched upon this, you didn’t want it necessarily give an answer but in three years time do you guys see yourself more as a Philadelphia DC, New York Metro, Boston Metro Strip Company, or do you still see yourself as sort of a more diversified company?

[Bruce Schanzer:]

I think its clearly the former, Flores [ph] as we spoken about quite a bit on our calls, migrating our capital into the more dense, some markets within our DC to Boston footprint almost by definition and necessity will that will lead to is Cedar eventually been the owner of predominantly urban and quite close into Urban area open air shopping centers, and that certainly where we’re taking our portfolio. But again, we’re doing it systematically and patiently while trying to grow the per share value of the company and so I guess three years is not a bad place to look in terms of when we’ll see that transformation that we can measure it and reflect on it, although I would expect it to be something that takes many years as we just consistently try to grow our portfolio probably.

[Unidentified analyst:]

Thanks guys.

[Bruce Schanzer:]

Thank you.

[Operator:]

At this time, I will turn the floor back to Bruce Schanzer for closing remarks.

[Bruce Schanzer:]

Thank you all for joining us this evening. We will of course keep you posted on our search for new COO and will generally look forward to continuing to share with you the ongoing improvement in our asset level performance, our portfolio quality and our management team in the quarters and years to come.

[Operator:]

Thank you. This concludes today’s teleconference. Thank you for your participation and you may now disconnect your lines at this time.