Weingarten Realty Investors
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good morning and welcome to the Weingarten Realty Inc. Third Quarter 2018 Earnings Call for October 25, 2018. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. [Operator Instructions] Please note this conference is being recorded. And I'll now turn it over to Michelle Wiggs. Michelle, you may begin.

[Michelle Wiggs:]

Good morning, and welcome to our third quarter 2018 conference call. Joining me today is Drew Alexander, President and CEO; Johnny Hendrix, Executive Vice President and COO; Steve Richter, Executive Vice President and CFO; and Joe Shafer, Senior Vice President and CAO. As a reminder certain statements made during the course of this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the Company's SEC filings. Also, during this call, management may make reference to certain non-GAAP financial measures such as funds from operations or FFO, both core and NAREIT, which we believe help analysts and investors to better understand Weingarten's operating results. Reconciliation to these non-GAAP financial measures is available in our supplemental information package located under the Investor Relations tab of our Web site. I will now turn the call over to Drew Alexander.

[Drew Alexander:]

Thank you, Michelle, and thanks to all of you for joining us. I'm pleased to announce another good quarter. While the retail market has challenges we continue to produce strong results, which is a testimony to the quality of our portfolio. Additionally, these results show the resiliency of neighborhood and community centers with grocers and merchants selling basic goods and services. As we continue to pair the bottom of our portfolio through our disposition program, the performance of our remaining portfolio just gets stronger, coupled with the best tenant diversification in our segment we continue to produce the solid results we announced this quarter and feel good about our future. As to capital allocation, we continue to follow market signals. We believe that disposing of assets in the bottom portion of our portfolio where we can sell at or near the property level net asset value is the right strategy especially when our stock is selling at a significant discount to our NAV. We've been successful in closing transactions and looking at our current pipeline, we're increasing our 2018 disposition guidance to a range of $525 million to $625 million. During the quarter we closed $49 million of dispositions and $394 million for the first nine months of 2018. We have multiple deals working and several that are scheduled to close shortly. The increase in 2018 disposition activity will produce a headwind for 2019 FFO. As to dispositions in 2019 we will continue to be opportunistic and respond to the market. However, we expect to significantly reduce our disposition activity. We've shared with many of you the transformation slide in our roadshow which quantifies the many benefits of the significant repositioning where we've eliminated much of the bottom third of our portfolio. We've sold properties with low TAP scores the demographics of the portfolio are significantly better and we've lowered our exposure to power centers. We've exited multiple states and so numerous assets in secondary and tertiary markets. We dramatically reduced our exposure to watchlist tenants. In the last seven years we've sold a lot of property creating significant value for our shareholders. So there are many positives to this strategy. As to the use of proceeds, we continue to actively pursue acquisitions. However, there remains an immense amount of capital chasing the quality product which has made it very difficult for us to make sense of the pricing that this competition produces. Disposition proceeds give us the ability to fund our new development and redevelopment projects, repurchase debt and common shares and fund a reasonably large special dividend at year end. We're solidly positioned to take advantage of market opportunities going forward while maintaining our strong balance sheet. Our new developments and redevelopments are progressing nicely which will provide future earnings growth. West Alex, Central Arlington and the Whitaker are on track. The Driscoll at River Oaks, our 30-story high rise at our prominent River Oaks shopping center here in Houston is also moving forward nicely and we're actively under construction. We're quite excited about transforming this asset to live, work, play. As to future new developments, we continue to work on projects but are being very cautious with our risk profile. Our redevelopment program continues to produce very strong risk adjusted returns generally over 11%. A solid quarter. Steve, the financials.

[Steve Richter:]

Thanks, Drew. Good morning, everyone. Core FFO for the quarter ended September 30, 2018 was $0.58 per share compared to $0.61 per share for the same quarter of the prior year. Core FFO for 2018 benefited from the increased base rent and bad debt recoveries as well as higher interest income from invested excess cash. We also recognized over $400,000 in investment income from investments held by our insurance captive in 2018. Due to the implementation of a new accounting pronouncement where we have to mark to market those investments. Going forward, you could see fluctuations here both up and down as the markets change. Additionally, interest expense was lower due to the reduction of debt outstanding with disposition proceeds. However, these increases were more than offset by reduced operating income from the dispositions. These dispositions reduced FFO by about $0.07 per share for the quarter. This metric requires some assumptions regarding earnings on the proceeds received, but is a reasonable estimate of the impact of the dispositions on FFO. A reconciliation to net income to core FFO is included in our press release. Our balance sheet is among the strongest in our sector. At quarter end, we had nothing outstanding under our $500 million revolver and have excess cash totaling $17 million. Also at quarter end, net debt to EBITDA was a strong 4.9x and debt to total market capitalization was only 31.75% with no significant maturities until 2022. Our great liquidity and strong credit metrics provide significant flexibility to pursue opportunities that arise. As to earnings guidance, we are tightening the reins on net income per share to $2.52 to $2.55 and NAREIT FFO to a range of $2.38 to $2.41 a share. We are also tightening the range of core FFO to $2.27 to $2.30 per share. All these changes are primarily driven by the success in our disposition program including as we mentioned earlier increasing our disposition guidance to a range of $525 million to $625 million for the full-year of 2018. All the details of our guidance are included on Page 10 of our supplemental. Johnny?

[Johnny Hendrix:]

Thanks, Steve, we're pleased with the results we generated this quarter. Occupancy ended the quarter at 94.4%, new lease rent increased almost 13%. Tenant fallout was modest. Same property NOI with redevelopment increased 2.2% with base minimum rent for those same properties up 2.7% in the quarter. In addition, our redevelopment program continues to produce strong risk-adjusted returns. Our tenants continue to generate strong same-store sales and continue to attract millions of customers to our centers. Our top five tenants, Kroger, Whole Foods, HEB Ross and TJX are very strong. No other tenant in our portfolio represents more than 1.75% of our annual base rent. This diversification has proven to be important as some retailers have experienced trouble in recent months. Since our last call, we had three noteworthy tenants file [technical difficulty] percent. Drew?

[Drew Alexander:]

Thanks, Johnny. Our job is to position the company to maximize the long-term value for our shareholders and we remain focused on that goal. Our strong dispositions over the last several years create some earnings pressure, but has made a good portfolio [technical difficulty] for 2019 same property NOI. Our strong balance sheets continues to improve [technical difficulty].

[Unidentified Analyst:]

-- what's your target leverage level as you look to use dry powder [technical difficulty]?

[Drew Alexander:]

Where we're really going to increase next quarter is going to be commencing some of that 578,000 square feet of space through the balance of the quarter. And we've already commenced some of that with -- we opened Sprouts yesterday morning, we've got the 80,000 square foot Gulf Coast Hospital that commenced in October. So a lot of that acceleration is already built in to the number. But yes, we are expecting to accelerate in the fourth quarter.

[Unidentified Analyst:]

Okay, thanks. And follow-up here on, different type of question, but what percent of taxable income is currently being disbursed via dividend payments, and how are you thinking about that long-term AFFO payout?

[Drew Alexander:]

Greg, if I understand your question, we're obviously paying out 100% of our taxable income. And I would tell you, obviously as we have dispositions going forward into next year, that would probably drive a special dividend as well, but I'm not a 100% sure that I follow where we are for '18.

[Unidentified Analyst:]

Okay, so I'm just kind of curious how your payout if your tax [indiscernible] changed with the significant level of dispositions that you've had, and whether or not it's creating any pressure on dividend increases?

[Drew Alexander:]

No, we have the normal dividend. And we kind of bifurcate between the two. The gains that are being generated through the dispositions is being covered by the special dividend. Having said that, it's not quite that simple because we had some excess taxable income that some of the gains covered but -- and it's, again, we can talk offline, but you can borrow money from the future year to pay the current year's dividend, and so forth. So there's a little complication in there. But bottom line is we're paying out a 100% of our taxable income.

[Unidentified Analyst:]

And then how are you thinking about the long-term AFFO payout ratio?

[Drew Alexander:]

I'm not sure exactly --

[Unidentified Analyst:]

On the regular dividend.

[Drew Alexander:]

We generally have used the regular -- or the policy has been to increase the regular dividend around the same level that we generate increase in earnings in the FFO, so that has been remained consistent. And I don't see that really changing on the regular dividend side. The special dividend is obviously being driven off of the gains on sales.

[Unidentified Analyst:]

Right. Thank you very much. Appreciate it.

[Operator:]

From JPMorgan, we have Mike Mueller. Please go ahead.

[Mike Mueller:]

Yes, I'm just curious. I mean what could be a scenario or some factors that would cause you reevaluate dispositions next year and not have them be significantly lower than this year?

[Drew Alexander:]

Morning, Mike. Drew. As I said, I think they will be significantly lower because this year is a very strong year. And as I went through the criteria that we've looked at in terms of improving tap stores of selling weak tenant, continuing to hone the map, improving the demographic profile. There are some things that we look at selling. But it's just not as much. And therefore I feel comfortable that we'll be decreasing things. We've also reduced the exposure to power centers. But as you know, we're very comfortable with the quote supermarket-anchored power center, and I think it all comes down to if we can effectively take risk off the table. We have a very diversified tenant base, as Johnny touched on in his prepared remarks. And a lot of that is because we've been selective to who we lease to and we've also been able to sell a lot of the weak tenants in advance of the concern. So hopefully that answers your question. I can't put a number around it at this time because we will look at things, we will be opportunistic. But I am comfortable that it'll be a lot less because we've so much improved the portfolio over the last several years.

[Mike Mueller:]

Got it. So it sounds like it's not going to be a case where even if pricing gets richer or the environment is still attractive to sell, you're going to step up and do it just because you can, it sounds like --?

[Drew Alexander:]

To an extent. That's what I mean by we'll be opportunistic that if the gap between private markets and public markets were to widen, I think our responsibility is to do the right long-term thing for shareholders. So when I talk about opportunistic, that certainly factors into a specific number. So I still think it'll be less, significantly less. But as to where it is, when I say opportunistic, if the stock is at an ever-increasing discount NAV and the private markets continue strong, I think it's the right thing to do for shareholders long-term, of which I'm reasonably a decent one.

[Mike Mueller:]

Of course, got it. Okay, thank you.

[Operator:]

[Operator Instructions] And from Green Street Advisors, we have Vince Tibone. Please go ahead.

[Vince Tibone:]

Good morning. Can you discuss how renewal discussions are going for anchored space. I'm just curious to know if the solid sales results of many big-box retailers are translating into better market rank growth or are some of these bankruptcies and elevated vacancy rates kind of limiting any rank growth potential.

[Drew Alexander:]

Hey, Vice, how are you. It's a complicated question because it really all comes down to a specific space in what the current rent is on the property. I think embedded in your question is what is the negotiating leverage like between the landlord and the tenant, and again it really depends on which space it is. We have had some instances where we felt like reducing the rent was the best case. And we've had some instances where we've had really great rent growth in renewals. There is a discussion with ever anchored tenant who's lease is coming up and there -- it's a lot of negotiation and some amount of brinkmanship. We feel like we have really great properties. And in those properties where we don't think the tenant can replace the sales, we are holding strong on those. And in some cases we are parting ways with the tenant. So I think clearly if you look at the leverage on the anchored spaces today, there is more leverage for the tenant than there was two or three years ago. And I think that is part of what we've seen in a little bit slowing on the rent growth. On the other side of that, the shop space leasing, we're really getting good rent growth. And I think the landlord has the leverage in many of those cases. If you look at that 578,000 square feet of property that I have coming online, the minimum rent for that is over $23 a square foot. So I think that's a great number when you look at the average rent of the company, around $19. So we're improving that. And I think that's a very positive sign. But it always ends up being a case-by-case situation.

[Vince Tibone:]

That's really helpful color. One more for me, can you just talk a little bit about the funding plan for next year, particularly around the developments given the disposition volume is expected to be much lower.

[Steve Richter:]

Good morning, Vince. This is Steve. I think, clearly, where we wind up with dispositions as of quarter end, as I mentioned in prepared remarks, we're sitting in an excess cash position. We obviously have the special dividend that we will fund at the end of the year. Going forward, we have nothing outstanding on the revolver. And I would tell you that would be the primary source of funds, plus whatever we may have in excess cash from dispositions.

[Vince Tibone:]

That makes sense. Are you providing how much you think you'll spend next year on the big development or redevelopment projects?

[Drew Alexander:]

We have not given 2019 guidance yet, but we are -- if you kind of look at where we are going -- where we are today, it will ramp, we are spending about $50 million a quarter in Q3 I think 45 million-50 million if my memory is right. And we will step-up a little bit as the three big developments that we have, the two in DC and River Oaks here in Houston, the Driscoll, as those begin to crank up, it will go up a little bit next year.

[Vince Tibone:]

Okay. That's helpful. That's all I have.

[Operator:]

[Operator Instructions] From Capital One Securities we have Chris Lucas. Please go ahead.

[Chris Lucas:]

Good morning, everybody. I just wanted to chat a little bit about West Alex and Central, are there -- what's the timing for when the apartments will be completed for each for those, and then what is the timing for when capitalization will see when you will start to accrue all the expenses?

[Drew Alexander:]

Hey, Chris, good morning, it's Drew. As you talked about, that remains fluid and at this point, we are actually optimistic that there is a good chance we could accelerate things. So generally speaking, we are looking at into 2021 is when the bulk of things will come on and the project will start to stabilize. We should get something to done sooner, and I know you've met with the team out in the field that we are working to [indiscernible] and feel we have some chance to accelerate that.

[Steve Richter:]

Chris, this is Steve. To follow-up on the interest cap issue, in terms of -- as the rank comes online we see commencing capitalization. So it's not all at one time, it's over time. It's on a pro-rata basis.

[Chris Lucas:]

Okay, great. So you don't expect any drag to '19 for the transition of these assets?

[Steve Richter:]

That's correct. I mean it will be capitalized in '19.

[Chris Lucas:]

Okay. And then just as it relates to -- I guess uses for capital and the -- going forward, if you kind of look at the numbers, it feels like maybe 200 million of disposition next year get you fully-funded for what's on the pipeline, your special dividend and debt maturities for next year roughly. Is there any other opportunities out there as it relates to use of proceeds beyond what sort of laid out the pipeline is currently needed to spend as well as the modest mortgage maturity for next year?

[Drew Alexander:]

No, I would say that's generally -- as Johnny mentioned in his remarks and me in mine, you know, we are working on a number of deals, both acquisitions that have good upside and development deals that have a nice risk award. There is nothing huge that we see that's compelling, but there are a few things that we think can be you know, add value. Constantly working on the different redevelopment scenarios Palms and country project will be a multi, multi-year redevelopment effort, and we will certainly enjoy a lot of things there, but there is nothing big that would trigger a lot of capital early next year. So I think we are in a pretty good spot, you know, that we are seeing some opportunities and as Steve mentioned earlier, we have definitely got the balance sheet capacity to do it with some cash in the bank and nothing drawn under our line. So we will continue to be judicious. We are seeing some opportunities, and we are in a good spot.

[Chris Lucas:]

Great. Thank you. I appreciate the time.

[Operator:]

[Operator Instructions] Okay. Showing no further questions at the moment, Drew, we will turn it back to you for closing remarks.

[Drew Alexander:]

Thank you, Brandon, and thanks to all of you for your interest in Weingarten for joining us on the call. We look forward to seeing many of you at NARIET in a couple of weeks. We will be around if there is any questions. Thanks again so much for your interest, and have a great day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.