Rithm Property Trust Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Greetings and welcome to RPT Realty First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Vin Chao Senior Vice President of Finance. Thank you, sir. You may begin.

[Vin Chao:]

Good morning and thank you for joining us for RPT's first quarter 2021 earnings conference call. At this time, management would like me to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

[Brian Harper:]

Good morning and thank you for joining our first quarter 2021 conference call. I hope you and your families are all well. We are happy to have kicked off the new year in strong fashion. Our rent collections continue to tick higher. We continue to benefit from the multiyear mark-to-market opportunity and strong demand at our centers. We recently closed on our new net lease platform and are now under contract on our first property in the Boston market that we expect to allocate between RPT's balance sheet and the new platform. We believe we now have the capital and the platforms to generate strong external growth as well as the portfolio quality and leasing demand to drive above-trend internal growth as we move past the pandemic. While the pandemic has created many hardships, it has also created opportunities that we have been able to capitalize on. For instance, COVID-19 has had a negative impact on many tenant categories. But unlike during the global financial crisis, it has also had a positive impact on many other tenant categories like grocery, home improvement, electronics, wholesale clubs, general merchandise, and medical use. It has also boosted some businesses that were struggling pre-pandemic like pets, office supply, and hobby. Ironically many of the big-box tenants that were not in favor pre-pandemic have thrived sense enough so that we think credit center is a more apt description for the power center category.

[Mike Fitzmaurice:]

Thanks, Brian, and good morning, everyone. Today, I will discuss our first quarter results, our strong balance sheet and liquidity position and end with a commentary on our updated guidance. First quarter operating FFO per share of $0.19 was up $0.01 versus last quarter, driven by our improving rent collections as we experienced a decline in rent not probable collection and abatement which totaled $3.2 million in the quarter, down from $4.4 million last quarter. Further, as disclosed on page 33 of our supplemental, our first quarter rental income excluding prior year amounts has ticked up since last quarter and is now only down 5% from first quarter of 2020, despite the continued nonpayment of our theater tenants who have remained closed since the onset of the pandemic. Our four Regals are slated to open in late May and account for about 75% of our total theater exposure. Given Regal's reopening plans and recent liquidity infusions, we expect in our forecasting resumption of rent payments in the next few weeks. We continue to take a conservative stance with uncollected rents and have reserved nearly 80% of our uncollected first quarter recurring billings. Additionally, we effectively have no exposure to tenants in bankruptcy left in the portfolio. As of quarter end, $18 million of our recurring billings for the trailing 12 months remain outstanding of which $12 million has been reserved with the majority of the $6 million balance expected to be repaid over the course of 2021 and 2022. Operationally, we continue to execute and put runs on the board. We started 2021 on a high note, signing 62 deals in the quarter covering 556,000 square feet. This was the highest number of deals signed in the quarter in almost two years. Blended rent spreads were up 9% as we achieved a 51% comparable new lease spread, our best quarterly spread in almost three years driven by our Troy Marketplace grocery deal that Brian previously noted, while the TI related to this deal was outsized it was more than offset by the value of nearly $20 million that was created by cap rate compression. Excluding this deal, our new lease spread would have been up 26% highlighting a solid broad-based demand and mark-to-market opportunities in our portfolio. Our renewal spreads also continued to improve, up 3.9% making the third consecutive quarter of improving renewal spreads. Given our strong leasing activity, we ended the first quarter with a signed not open backlog of $3.3 million, the majority of which will come online over the next 12 months. We also have a full pipeline of deals with over $2 million of leases in advanced legal negotiations.

[Operator:]

Thank you. At this time, we will conduct a question-and-answer session Our first question comes from Derek Johnston with Deutsche Bank. Please proceed with your question.

[Derek Johnston:]

Hi, everybody. Good morning. Thanks for the details on the RGMZ in the opening. But Brian, what's the criteria? And how do you decide which basket or a platform to utilize for acquisitions either on-balance sheet or within a JV as you now have three strong partners? How do the mandates vary? And how do you envision the mix unfolding?

[Brian Harper:]

Great. Hi, Derek. Good morning and thank you for that question. So really since December of 2019 in equity basis alone, we've raised $800 million of committed capital for our investments. This was done to transform the footprint and portfolio of the company. And really for the following three points

[Derek Johnston:]

Great. Great color. Thank you. Just two quick ones. The 140 basis point drop in small shop occupancy was a pretty noticeable acceleration from previous quarters. I guess simply what drove this decrease?

[Mike Fitzmaurice:]

Yes. Derek, this is Mike. What drove that decrease is the seasonal move-out, this is mainly in tenants. And then number two, as we noted in the release, we did sell the first tranche with an initial fee of about $40 million of the triple-net assets that we contributed to our net lease platform. That also contributed about 10 to 20 basis points of deceleration in the occupancy rate for small shops. But, we do see that drop in this quarter Derek, for small shop and total occupancy, and see it mildly ticking up over the year as we continue to restabilize the portfolio.

[Derek Johnston:]

Okay. Okay, makes sense. And then just, TIs came in pretty high at $124 per square foot. I mean we're assuming, it's a big-box transition to a grocer. But can you just let us know what the actual drivers behind this were?

[Mike Fitzmaurice:]

Yes, absolutely. I think you just alluded to it you're spot on. It has to do with the grocer deal that we did in the Detroit market, the first in the market, high quality credit grocer that we can't name right now. But hopefully, at some point we can name in the future. It was tied up to that deal. And whenever you're doing a lease transaction where you're taking a non-grocer space or to grocer space or where you're redemising the spaces where you're combining spaces, you're going to have higher TI costs. But the great thing with this deal is

[Brian Harper:]

Hey Derek, we're excited to get the name out when we're allowed to. And really, this was -- as I said in the prepared remarks, I mean this is one of the positives of COVID of where -- since I've been here, I've been trying to get at this space, which was $8.30 gross, two combined spaces, creating roughly a 40,000-square foot, flagship investment grade first-to-state grocer, which we are extremely excited about.

[Derek Johnston:]

Excellent. Thank you everyone.

[Brian Harper:]

Thanks, Derek.

[Operator:]

Our next question comes from Todd Thomas with KeyBanc Capital. Please proceed with your question.

[Todd Thomas:]

Hi. Thanks. Good morning. First question, Mike just a clarification around the guidance. The $0.01 of outperformance for the quarter, I think that you outlined in the guidance provision I think you may have said that that's not recurring. What was that attributable to specifically? And can you just clarify that perhaps?

[Mike Fitzmaurice:]

Yeah. It's primarily due to prior year adjustments related to recovery billings associated with our CAM tax billings.

[Todd Thomas:]

Okay. And then, was there anything I guess sort of operationally that offset, I guess the improved outlook to some extent? I mean it sounds like the outlook has improved with leasing and demand and sort of the commentary around Regal expected to begin paying rent, which I think is a little bit earlier than you previously anticipated. I'm just curious if there's anything around either the recaptures or otherwise that was not previously anticipated.

[Mike Fitzmaurice:]

I mean look, the outlook is slightly better for bad debt. We did better than expected during the quarter, relative to our own expectations plus signed not commenced continues to pick up a bit. We're going to have probably relative to the first quarter Todd you'll have about $0.02 of upside in base rent from signed not commenced. And then based on our expectations today, again relative to the first quarter run rate, you'll have about $0.03 of upside in bad debt and a more favorable bad debt and less abatement. That's really tied to the theaters. Our four Regal theaters, as I mentioned in my prepared remarks, are going to be opening up in a few weeks. And it's our expectation based on our discussions with them the deal that we struck that they're going to be paying contract rent in the second half of the year.

[Todd Thomas:]

Okay. That's helpful. And then Brian in terms of the competition for some of these larger assets perhaps I guess Northborough deal, for example, there's been a lack of transaction activity in some of these centers over the last couple of years really. Are you seeing any change in demand for these assets, or do you feel that you have properties and sort of execute without so much outside competition? How much competition...

[Brian Harper:]

Yes. Todd, let me do that. Competition no doubt has picked up. The debt markets have opened and competition is there. I think our advantage was we've been cultivating this pipeline since May of 2020, when we knew and had an idea that this RGMZ platform was going to go into fruition. So, this was a deal that was marketed pre COVID and was purchased on an off-market deal. There's a lot of others in the pipeline that are true off-markets. Some are with institutions in larger portfolio deals where we could potentially syndicate between balance sheet GIC platform and RGMZ. And we're a credible buyer because of that. And I think that when we show up for an acquisition, we now have an arrow that no one else has. And that can help with pricing as well. So the way I look at Northborough where extremely high barrier-to-entry with top-performing tenants in the MSA, we have more of those in the pipeline. And the pipeline is becoming clearer every day. And as we said, we fully expect to be -- to surpass our guidance on the acquisitions.

[Todd Thomas:]

Okay. Where do you think -- I think you mentioned a 7% cap rate on Northborough. Has that changed at all compared to where it would have been pre pandemic I guess? How do you think pricing compared…

[Brian Harper:]

I think it's hung around the rim. Obviously the movement in essential triple-nets is terrific and that's a very, very competitive world right now. And when you look at the attractive debt you can get on a lot of those assets that's opened up a lot of, I mean, an unlimited supply of liquidity in that space. So I think the center kind of hung in, but definitely saw some cap rate compression in the kind of essential guys. And I think our platform and the investors are getting it at a very, very attractive yield as well.

[Todd Thomas:]

Okay. Thank you.

[Brian Harper:]

Thank you.

[Operator:]

Our next question comes from Craig Schmidt with Bank of America. Please proceed.

[Craig Schmidt:]

Great. Thank you. I'm just wondering, do you think there's a good chance or probability that someone else will replicate your net lease platform, or do you have some advantages that you don't think that they can replicate?

[Brian Harper:]

Yes. I think, I mean, Craig the interesting thing is this has been going on for 40 years, right, in the private markets. I mean, when you look at developers selling off to -- their land off to Walmart or Target or the pads and building the small shop for the boxes, this has been going on in the private world for a while. What this does in the public space is gives investors that access and that availability to achieve very, very attractive yields. I think this certainly could be replicated, I think, it would be difficult. I think the combination of GIC, Monarch and Zimmer together is difficult to replicate. This is a year in the making. And this was something that took a long time. And our pipeline is large and we've got off to a very, very quick start which we knew and paid a lot of attention to as we were cultivating the deal in the first place.

[Mike Fitzmaurice:]

Yes. And then the second thing I would add, there is control, Craig. We have 6.4% interest in this net lease platform. That's asymmetrical to our control rights. We have equal voting right leasing redevelopment buying selling. We have a ROFO under that lease component. So we really control the value creation on the net lease side of the asset and also the multi-tenant side on RPT's balance sheet. So that's very unique and I think it's also hard to replicate that you don't see with other REITs in our space.

[Craig Schmidt:]

Okay. Thank you. And then just at River City Marketplace I see you're retenanting the vacancy with a national fitness center. Maybe you can tell us what you've seen in that format that's gotten you comfortable to retenant to it.

[Brian Harper:]

Yes, I mean, I think, I mean it depends on the markets and it depends on the credit and the tenants. I mean, personally I'm pretty comfortable with your LA Fitnesses and some of the boutiques, as well as Planet in certain markets. It's a patent it's a case-by-case. It's understanding the competition in that market. We have seen particularly in Florida a good snapback with the health and fitness concepts, and they're seeing good levels of traffic. So we're seeing boots on the ground at all of our assets good activity in certain parts of the country as it regards to fitness thankfully.

[Craig Schmidt:]

Thank you.

[Brian Harper:]

Yes. Thank you.

[Operator:]

Our next question comes from Linda Tsai with Jefferies. Please proceed.

[Linda Tsai:]

Hi. Good morning. It looks like net debt-to-EBITDA came down this quarter. As EBITDA improved, how do you expect this to change as you continue to deploy cash proceeds your RGMZ tranches close and future parcelizations? How much could this metric bounce around over the next few quarters?

[Mike Fitzmaurice:]

Sure. Good morning, Linda. Good to hear. One just to level set everybody that our long-term target range is 5.5 times to 6.5 times. Also important to note given the strategic joint venture that we completed over the last 15 months, the $250 million of war chest of capital that we raised and the opportunity to redeploy this in a high single-digit cap rate asset really gives us that external lever to get to that 5.5 times, 6.5 times much, much quicker than we would have without the power of the platform as we say often around here. So that said, we are at 7.2 times today that you just noted. And that will trend downward over time as we return the stabilization of the portfolio and we execute on our external growth opportunities. But as you kind of pointed out it will be choppy quarter-to-quarter. Northborough is a great example. We're putting that on our balance sheet in the second quarter just over $100 million or so. So you're going to see our leverage tick up likely in the second quarter. But then once we sell those selected components of the center up to $75 million as Brian noted in his prepared remarks later in the year leverage will tick back down.

[Linda Tsai:]

Thanks. And then just given the improving environment, do you have better visibility on when occupancy might trough?

[Mike Fitzmaurice:]

Yes. Look I think we're pretty close to that. As I said in my prepared remarks, we think it's troughed here in the first quarter. And we think it will pick up over time and 2021 right where we started the year at about 91.5% or so. And Linda it's important to note that that's absent any transactions that we complete over the next call it nine months here. We are going to be a net acquirer as we disclosed in our guidance that we're going to be acquiring about $100 million or so. And then we are selling about $150 million or so with the net lease platform. And that was 98% occupied. So that's somewhat dilutive to the occupancy. But all the assets that we're looking at within our pipeline that Brian talked in great detail here in Q&A and the prepared remarks those centers are at 94%, 95% occupied. It's very accretive to where we stand today. So, that will be a moving target that will impact occupancy well organically again 91.5%, 91.5% for the year.

[Brian Harper:]

Yes. And just organically, Linda I've got pretty good visibility -- very good visibility on the pipeline. And I mean the amount with grocer, medical, fast casual and QSR restaurants discount apparel wholesale has never been stronger since we've been here. And that is including when we put up the sector-leading results in 2020. I mean in 2019 and spending really a lot of time with the essential tenants home improvements wholesale. And then really there's a lot of local and regional operators with the entrepreneurial spirit are showing up. And they're seeing this as a chance to expand their reach or in some cases start something new for more of the small shops. So we're seeing robust demand in all parts of our organization.

[Linda Tsai:]

Thanks for that.

[Brian Harper:]

Yes.

[Operator:]

Our next question comes from Floris Van Dijkum with Compass Point. Please proceed.

[Floris Van Dijkum:]

Good morning, guys. Thanks for taking my question. Obviously you guys have been very innovative here in accessing capital through the various JVs that you've created. It does complicate things for investors a little bit. So I guess the onus will be on you to explain that very well. And you've done a nice job so far. Just curious though Brian maybe if you can the -- it appears that some of the lower growth portions of your portfolio will go into some of these JVs I mean I'm thinking grocery-anchored and certainly the net lease segments. As you look out five years where do you see your small shop percentage as a percentage of the overall space in RPT? Will that go up significantly? And does that make your long-term growth rate obviously significantly higher than what it's been historically? Maybe if you can give some more color on how you see the company evolving over time.

[Brian Harper:]

Yes. I mean this was part of the recipe is to increase small shop. And the battleships of huge credit are parked in a battleship garage with our venture. And to give you kind of context Northborough pre - or pre-spin if you will 15% small shop, post spin 35% -- 36% small shop. That 36% small shop has much more contractual rent increases. So we see Floris a much more robust growth trajectory organically and obviously externally for the company. And this is simply syndicating really growth between the two platforms.

[Mike Fitzmaurice:]

Yes. I mean today our small shop percentage on the basis of ABR, Floris is below 40%. This will over time as we execute on the strategy and continue to transform the portfolio and break these assets up between these platforms they will get north of 50% which will correlate into much, much better contractual rent increases as part of our growth profile as we move forward. Today they're about 125 basis points contribution to our NOI growth profile. We see this based on trajectory in front of us and the essence that we're buying we could get to 200 basis points overtime. And then you layer on the mark-to-market opportunity that we've been experiencing in this portfolio for geez since we've been here since June of 2018 and that's another percent or so. So you're well north of -- could be well north of 3% on an annual basis, which is outsized relative to our peer set.

[Floris Van Dijkum:]

Thanks, guys, And then maybe just a follow-up on that particular why stop at 50% of ABR? Why would you not go to 70% or 80% of ABR or 50% of your total space being small shop space down the line?

[Mike Fitzmaurice:]

Look I think it comes down to risk management. I think if you have too much small shop which are short-term leases less national tenants you might have disruption in your cash flow. So I think 50% at this point is a good target in terms of a risk-adjusted growth profile that we look to attain.

[Brian Harper:]

Floris, we're not managing to a number though. I mean this is going to be done asset-by-asset overtime and building by -- with growth in mind, balanced with credit in mind to put us on a long-term trajectory for what we believe will be sector-leading growth.

[Floris Van Dijkum:]

Thanks, guys.

[Mike Fitzmaurice:]

Thank you, Floris.

[Brian Harper:]

Thank you.

[Operator:]

Our next question comes from Mike Mueller with JPMorgan. Please proceed.

[Mike Mueller:]

Yes. Hi. I just wanted to touch on guidance here for a second. So you're talking about the theaters starting to pay again and that's obviously a big portion of the reserve. So when you're looking at guidance what's baked in there for I guess the reserves tied to the theaters that are going to start to pay rents later this month?

[Mike Fitzmaurice:]

Yes. If you look at what we experienced in the first quarter Mike, like I said, we had about $3.2 million, which was $2.6 million of bad debt and over $600,000 of abatements. 60% of that was tied to the theaters. And so we -- and our theater is going to be opening up mid-May here. So we'll have like 1.5 quarters of some form of payment. So you're going to see a deceleration in the second quarter in the bad debt line item and then a further bigger deceleration in the second half of the year as they get to full rent based on our expectation. And if you look at -- another way to look at it too Mike, is if you look at our quarterly run rate. Based on Q1, we'll have about a $0.03 pickup from bad debt over the course of the year.

[Mike Mueller:]

Got it. Okay. So basically as they start to pay that bad debt is going to go away and hit the numbers. Okay.

[Mike Fitzmaurice:]

Yes. Correct.

[Mike Mueller:]

Got it. Okay. That was it. Thank you.

[Mike Fitzmaurice:]

You bet.

[Operator:]

Thank you. Our next question comes from RJ Milligan with Raymond James. Please proceed.

[RJ Milligan:]

Good morning, guys. I was wondering if you could give a little bit more detail on what exactly at Northborough you expect to parcel off and what the expected cap rate is or blended cap rate for the parcels you do expect to sell?

[Brian Harper:]

Yes, RJ. We'll provide more color after we close. Just – obviously, since we haven't closed, we just don't want to get into what cap rate is where and what tenant is going, staying, leaving. So we'll provide some more color in the next few weeks.

[Mike Fitzmaurice:]

Yes. And in terms of the impact to the guidance relative to our midpoint that we provided in our fourth quarter call down to now it's about a $0.04 pickup. But like I said, we're happy to -- once we close the asset on the entire center and then we sell the select components to the platform, we'll talk through obviously at that point what we sold and our thesis and IRR and rationale -- more rationale on the transaction.

[RJ Milligan:]

Okay. And then maybe just thinking about longer-term after parceling off some of these I guess probably more investment-grade or anchor-type tenants, can you talk about the value that you expect to be left with for the remaining property? How does that impact the desirability of potential future buyers? What kind of cap rates -- you mentioned getting to a 10% yield on the remaining. What do you think you could sell that for?

[Brian Harper:]

I mean, I think actually cap rate compresses tremendously. We bought Austin -- Lakehills in Austin December of 2019 shadow anchor Target in one of the best intersections in the city for 5.5% cap. We didn't own the Target box. It was a 4% NOI CAGR, $27 ABR in a $42 market. We are what we would have left at Northborough still is over roughly 50% investment-grade, with four TJX concepts, ULTA small shop Old Navy. So we feel very bullish and we feel that it could be a great cap rate compression just because of the more liquidity and high investment-grade tenancy.

[RJ Milligan:]

Okay. That’s it for me. Thanks, guys.

[Mike Fitzmaurice:]

Thank you, RJ.

[Operator:]

Our next question comes from Peter Hermann with Baird. Please proceed.

[Peter Hermann:]

Hi, everyone. How many more opportunities are there to recapture spaces like you did in Detroit this quarter? And will the CapEx requirements be as high as they were with these opportunities? Thank you.

[Brian Harper:]

Thanks. There's a lot. And some of those -- a lot of these spaces were old tired neglected spaces that were call it, mid-single-digit rent. I'm staring at one in West Broward at $6.13. That's not going to be as high of a TA because that's a grocer taking one existing box. The elevated cost for the deal in Troy was really a lot of the combination of the two spaces creating a 40,000-square foot flagship. Looking at another office support -- office supply store that we're looking at combining another space of which is currently in vacancy, those combined spaces are $11. And we expect to get call it close to low 20s in rent from the new tenant. So we don't see this type of cost as high a cost, but we see a lot of value upside on the rent and really cap rate compression of adding these grocers.

[Peter Hermann:]

That’s helpful. Thank you.

[Brian Harper:]

Thank you.

[Operator:]

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Brian Harper for closing remarks.

[Brian Harper:]

Yes. Just appreciate everybody's time. Thank you all for listening and looking forward to hopefully seeing many of you physically for the first time in quite some time. Thank you all.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.