Cedar Realty Trust's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Cedar Realty (CDR)

Cedar Realty Trust, Inc. (NYSE:CDR)

Q4 2012 Earnings Call

March 7, 2013 5:00 PM ET


Brad Cohen – IR

Bruce Schanzer – President and CEO

Phil Mays – CFO

Nancy Mozzachio – VP, Leasing


Nate Isbee – Stifel Nicolaus

Craig Schmidt – Bank of America

Todd Thomas – KeyBanc Capital Markets


Greetings and welcome to the Cedar Realty Trust Fourth Quarter and Full Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brad Cohen, Investor Relations for ICR. Thank you, sir. You may begin.

Brad Cohen

Good afternoon. At this time, management would like me to inform you that certain statements made during the call, which are not historical facts, may be deemed forward-looking statements within the meaning of Section 27A of the Securities and Exchange Commission of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995.

Although the company believes that expectations reflecting any forward-looking statements are based upon reasonable assumptions, they are subject to various risk and uncertainties. The company can provide no assurance that expectations will be achieved and that actual results may or will differ.

Many other facts and risks that could cause actual results to differ materially from expectations are detailed in the company’s press release, which was put out this afternoon, and from time-to-time in the company’s filings with the Securities and Exchange Commission. The company undertakes no obligation to revise or update any forward-looking statements reflected in any circumstances after the date of the company’s release.

It is now my privilege to turn the call over to Mr. Bruce Schanzer, Chief Executive Officer and President. Bruce?

Bruce Schanzer

Thanks, Brad, and welcome to the fourth quarter 2012 earnings call of Cedar Realty Trust. 2012 was noteworthy as the first full year during which I served as CEO and Phil Mays served as CFO. It was a very eventful year and I would like think a very successful one.

The measures we have taken since the management change are in furtherance of our objective to cause Cedar to be recognized as a company with safe and defensive assets, that produces solid per share results with predictable and sustainable growth. A hallmark of our strategy is our disciplined and analytical approach to capital allocation, with a keen focus on driving growth on a per share basis and not merely the growth of our enterprise.

During 2012, we effectively executed our near-term divestiture strategy with just a few assets still remaining to be placed under contract and with the company on track to achieve our leverage target of being below eight times levered on a debt-to-EBITDA basis when we close on the sale of our last asset. Despite all our divestitures and de-levering, we generated $0.50 per share of operating FFO for 2012 inclusive of a $0.04 lease termination fee. Even after adjusting for this non-recurring income, our result represents a $0.01 beat to our initial 2012 FFO guidance of $0.40 to $0.45.

Moreover, we anticipate that our 2013 results will represent a solid year-over-year improvement, especially considering that we intend to continue our divestiture and de-levering process during the course of this year. We’re very pleased that we have been able to improve our FFO per share while simultaneously improving our balance sheet and portfolio.

As was previously disclosed, during the fourth quarter of 2012, we closed on the unwind of our joint venture with RioCan. We executed this unwind in a manner that was neutral to earnings and that improved our average asset quality through the acquisition of what we feel was the best asset in the joint venture. Furthermore, the series of steps taken in conjunction with the JV unwind including reducing our overhead expenses by $2.5 million within 12 months of the unwind announcement and reducing head count by roughly 20% have left Cedar in a stronger position both financially and organizationally.

The great news is that we have already secured the $2.5 million in overhead savings well in advance of the 12-month timeframe we contemplated at the time of the JV unwind last September. These savings are factored into our 2013 guidance. 2012 was a very solid leasing year. We concluded the year at 92.7% leased portfolio wide, 94.3% leased on a same center basis and 85.3% leased on a small shop basis, a remarkable 246 basis point increase in small shop occupancy year-over-year.

Notably, our fourth quarter cash renewal spread of 7.6% marked our 28th straight quarter of positive renewal spreads. In addition, during 2012, we locked down many of our expiring leases for 2013 with nearly 40% of leases scheduled to expire in 2013 renewed during 2012. These achievements are a credit to Nancy Mozzachio and her leasing team. They employ a boots on the ground approach to leasing that leverages our small size and local market expertise to optimize the performance of our assets. As we enter 2013 and confidently look to the future, we see the elements of our long-term strategy for value creation taking root.

Strategically, we remain committed to our focus on grocery-anchored shopping centers in the Washington DC to Boston corridor. One of the benefits of our attractive geography, coupled with our relatively small portfolio size is that we can be very nimble in leveraging our local market expertise to address the ever changing grocery industry landscape.

As I often remind my team, the grocery business is both Darwinian and dynamic. Accordingly, we need to not only partner with strong operators who are likely to survive through numerous business cycles, as we’ve generally done, but we also need to identify grocery formats that are likely to endure through the inevitable secular changes that occur in the grocery business. We continue to aggressively and successfully address these issues.

For example, last year, we replaced one of our SUPERVALU grocers with a Wal-Mart neighborhood market in the first instance of our dark anchor replacement strategy. We anticipate more such dark anchor replacement transactions during 2013 and beyond based on our pipeline at this time. In addition, we have been targeting smaller format and discount grocers with some success and I would similarly expect to see one or more such lease deals during 2013.

In terms of SUPERVALU, I would like to take a moment to give you some color around their recently announced transaction. SUPERVALU was broken up in a transaction that involved the public company being recapitalized by a group led by Cerberus and certain of its banner sold to that same group as part of the recapitalization.

From Cedar’s perspective, this is a net positive event for the following reasons, first, the uncertainty surrounding the SUPERVALU enterprise is now resolved and the worst case scenarios, such as bankruptcy appear to be off the table. Second, the way SUPERVALU was split up works well for us in the context of our particular assets. The banners that were taken private in our geography are Shaw’s and Acme. We have two Shaw’s, both of which are already darked and three Acmes, all of which have below market leases.

Accordingly much of the risk to Cedar has been mitigated since our Shaw’s stores are already closed, with plans underway to address their dark status and the Acmes we’d be happy to have back. The banners that remain in the public company are now in a better credit quality entity and again, we have specific plans for each of those banners including the two already dark anchors.

As we shift from defense to offense, we are starting to act on opportunity to invest back into our centers and also seeing opportunities to intensify our footprint through acquisitions that improve our average asset quality. We currently have eight value add projects of various sizes underway in which we anticipate investing approximately $20 million in the aggregate during 2013. In addition, we are underwriting a number of potential acquisitions, but we are not ready to discuss size, timing or cost.

Before handing the call over to Phil to walk you through our results and guidance in greater detail, I would like to acknowledge the contributions of our senior management team, specifically Phil our CFO, Brenda Walker, our COO, Nancy, our Head of Leasing, Tom Richey, our Head of Development; Mike Winters, our Head of Acquisitions and Stuart Widowski, our General Counsel as well as all at Team Cedar who have worked tirelessly as we have streamlined the company and continued its transformation.

In reflecting on 2012, I am struck by the energy and enthusiasm with which the entire Team Cedar has embraced our new direction. First, the team worked with zeal to advance the near-term strategic objectives we articulated shortly before the beginning of the year. Second, the resolution of the RioCan relationship in a manner that meaningfully improved our portfolio, capital structure and operating platform is an accomplishment of which we are proud.

Last, we move forward with a very clear and actionable plan to build on our strong portfolio and platform in a manner that generates consistent per share value creation, attractive returns on capital and continued operating leverage.

With that, I give you, Phil Mays.

Phil Mays

Thanks, Bruce and good evening everyone. On this call, I will highlight our operating results, continued balance sheet progress and provide comments about our initial 2013 guidance. Operating FFO for the fourth quarter was $0.12 per diluted share and for the full year was $0.50 per diluted share. As noted on prior calls, the full year results include $3 million or $0.04 per share of lease termination fee income associated with replacing the dark anchor at Oakland Commons.

Excluding this one-time termination fee income, operating FFO would have been $0.46 per share for 2012 compared to $0.49 per diluted share for 2011. This reduction in FFO per share is consistent with what we communicated at the start of our disposition and de-levering program and is modest when you consider that we can currently reduce debt-to-EBITDA by almost a full turn. Accordingly, we are very pleased with these results and believe our accomplishments in 2012 are building a solid foundation for the future of Cedar.

Same-property NOI, excluding the timing impact associated with the replacing of dark anchor at Oakland Commons increased 1.6% for the quarter and 1.8% for the full year of 2012. Layering in redevelopments, our same-property NOI increased 2.1% for the full year, reflecting the lease-up at our redevelopment properties, more specifically Trexlertown Plaza.

Turning to the balance sheet. In the fourth quarter, we redeemed another $113 million of our 8.78% Series A preferred stock. This redemption was completed utilizing the proceeds from our Series B preferred stock issued late in the third quarter at a yield of 7.58%. Further subsequent to the end of the fourth quarter, we received a reverse inquiry on our Series B Preferred Stock and opportunistically used this enquiry as an anchor order to reopen our Series B and raise another $57 million at a yield of 7.38%. With these proceeds, we will retire our remaining 8.78% Series A Preferred Stock.

Overall, we’re pleased that during 2012 and the first quarter of 2013 we were able to reduce our cost of capital by retiring the full $150 million of our 8.78% Series A preferred stock with a new Series B preferred stock issued at an average yield of approximately 7.5%.

Now let me address our 2013 debt maturity. In the fourth quarter of 2012 and the first two months of 2013, we used the proceeds from our dispositions along with the cash received from our exit of the RioCan JV to prepay almost $50 million of mortgages maturing in 2013 all without incurring any prepayment notice. This leaves us $75 million of debt maturing in the latter half of 2013 of which $60 million has a one-year extension option leaving only $50 million of maturities in 2013. The one-year extension option that we can exercise for $60 million relates to our Upland Square property financing.

Upland Square has entitlements for another 65,000 square feet that we could construct, or that we would construct only upon obtaining a signed anchor lease. We do have a couple of solid leasing leads at Upland Square and accordingly we like the flexibility our one-year extension option provides as we pursue these leads. How and when we ultimately refinance Upland either in 2013 or in 2014 after exercising our extension will depend on how negotiations progress with these potential anchors.

Moving to our initial 2013 guidance. We are establishing 2013 operating FFO guidance of $0.46 to $0.49 per diluted share. The key assumptions underlying our 2013 guidance and noted in our press release today are as follows: Same property NOI growth of 1% to 2%, an increase in occupancy of approximately a 100 basis points. No termination fee income and no acquisitions. This is not to say that we will not have any termination fee income or complete any acquisitions in 2013. It is to simply be clear that such amounts are not included in our initial guidance.

I should also note that revenue from amortizing our below-market lease intangibles will decrease about $1 million in 2013 just from the burn off of scheduled amortization. Additionally, as Bruce discussed in order to replace the lost management fee income from RioCan, we have identified $2.5 million of overhead savings. Approximately $1.5 million of these savings will reduce our property operating costs and $1 million will reduce G&A.

These savings are weighted towards our property operating costs and this is where the cost was recorded for the majority of the terminated employees that managed and operated the RioCan properties.

With regard to G&A our annual run rate was approximately $14.7 million for the first nine months of 2012 before we began implementing these cost savings measures and we anticipate it being approximately $13.7 million in 2013.

Finally, although we only provide annual guidance, I would like to make a couple of quick comments about the timing of our quarterly results for 2013. In the first quarter of 2013, we will incur negative drag related to timing and seasonality. First, there is a 30-day notice requirement to redeem the last portion of our Series A preferred stock. Second, we could not fully utilize all of the RioCan cash proceeds to reduce debt until February.

Third, we incur seasonal snow removal costs. Last, the new Wal-Mart Neighborhood Market at Oakland Commons will not commence paying cash rent until about mid 2013. Each of these individually is not significant, but in the aggregate will negatively impact our first quarter operating FFO and property NOI growth. Further, our anticipated 2013 leasing is weighted towards the latter half of the year.

And with that, I will open the call to questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from the line of Nathan Isbee with Stifel Nicolaus. Please proceed with your question.

Nate Isbee – Stifel Nicolaus

Hi. Good evening. Just getting back to the SUPERVALU’s remaining in your portfolio. Can you talk a little bit about broken down by the different flags and brands what the grocery sales are in each of those?

Nancy Mozzachio

Hi, Nate, it’s Nancy.

Nate Isbee – Stifel Nicolaus


Nancy Mozzachio

The bulk of our SUPERVALU concentration is really within the Farm Fresh banner. And I think from a sales perspective it’s by far the strongest sales per square foot of everything that we have within SUPERVALU. So, I would probably say that that’s our strongest and then I would go to the Acmes located in the Philadelphia region, and then our Shaw’s locations, of course, you know we have two dark anchors there.

Nate Isbee – Stifel Nicolaus

When you talk about the strongest, what are we talking about, are we talking about 400 to 500, 500 plus?

Nancy Mozzachio

Yeah, I’d say probably the 400 to 500 is the area, we’re talking about.

Nate Isbee – Stifel Nicolaus

Okay. And then with the RioCan ownership out of the way, have you had any other further discussions with other of the large owners that have made some signs over the last year that they might be interested in selling?

Bruce Schanzer

We track this the same way you do, Nate. So, the answer is no.

Nate Isbee – Stifel Nicolaus

Okay. Thank you.

Bruce Schanzer



(Operator Instructions) Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.

Craig Schmidt – Bank of America

Thank you. Thinking about the same property NOI of 1% to 2%, how much of that is coming from a lift in occupancy and how much is coming from leasing spreads?

Phil Mays

Hey, Craig, it’s Phil. In the low end, we’re expecting occupancy to go up, approaching 1%. So, probably a little less than 1% would be due to occupancy gains, and the rest would be just leasing spreads and new leases.

Craig Schmidt – Bank of America

Okay. And then, I guess, in terms of the leasing traction, would you say that leasing for the small shops is on par with 2012, stronger or weaker?

Nancy Mozzachio

I would say that it’s stronger. We are definitely seeing an uptick in activity and what we are seeing is and this is partly due to taking a little bit of proactive approach, is we are paying attention to our restaurant uses. Last year, and in particular last quarter, I think our small shops were about 30%, represented by restaurant uses, we’re trending about 40%. There was a study that came out that talked about 41,000 small shop tenants expected to commit in 2013, 41% is supposed to be restaurant. And it’s an important fact because restaurant uses do, in fact, add a lot of traffic to a shopping center. And secondly, I think those users are insulated from e-commerce. So it’s a smart move to put our focus when we talk to our leasing folks out in seeking restaurant tenants in our portfolio, so that’s where we say we’re going.

Craig Schmidt – Bank of America

Great. Thank you.


(Operator Instructions) Our final question today comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas – KeyBanc Capital Markets

Hi, thanks. Good afternoon. With regard to the two dark Shaw’s, can you just talk about the re-tenanting plans that you’re contemplating for those sites?

Bruce Schanzer

Todd, we can’t completely discuss them actually just because they’re somewhat active and we’re reluctant to get into it until things are finalized, but we are actively pursuing the re-tenanting of all of our dark anchors. There is obviously a timeline, so some of them will happen sooner than others, but again I’d be very reluctant to talk about it before it’s a little bit more firm.

I think one of the things that as a relatively new management team and as a group here that we really endeavor to do is try to only commit to things that are pretty much in hand and I’d be reluctant to get too far over my skis on something that’s not yet completely resolved. So I would just tell you that you’d have to wait and see and hopefully we’ll have some good news on these and the other dark anchors over the next few months.

Todd Thomas – KeyBanc Capital Markets

Okay. Understood. And then, with regard to the Acmes, you mentioned that you would be happy to get those back. I was wondering if you had a sense for where in-place rents on those leases are relative to market rents.

Bruce Schanzer

Well, so there are – we have three of them and they vary pretty dramatically in terms of the rent per square foot and therefore how they relate to their market rents. But I would say just broadly speaking – again, there’s really a wide variance. The average rent might be about $5, but there is probably $2.5 variance around that average. And I would say that if you look at that average, it’s probably half of the market today.

Todd Thomas – KeyBanc Capital Markets

Okay. And then on the balance sheet, thinking about the preferreds, is there any more capacity under the preferred – the ATM that you have set up? I guess I am just wondering if we should expect to see any additional issuance under that agreement.

Bruce Schanzer

Well, so those are two different questions. I can tell you this is a technical matter. There is capacity and we do have, as a practical matter, a number of constraints, one of which is that we want to make sure that we leave a wide berth from a fixed charge coverage perspective in terms of utilizing our preferred to finance our business.

So I would say that in terms of what you should expect, if we do use preferred, it will be for something that enhances our fixed charge coverage. So, in other words, it’d have to be an investment that has a fair amount of yield in it, so perhaps we might consider using that just – again, I’m throwing this out there – as an equity alternative to the extent our share price isn’t at the right place and we need to finance either an acquisition that’s particularly attractive or some type of high yielding capital expenditure.

Todd Thomas – KeyBanc Capital Markets

Okay. And then just last question for Phil. In terms of the amortization of intangible lease liabilities, the non-cash rent, I think you said you’re expecting that to be lower for the full year by about $1 million. Was that correct?

Phil Mays

Yeah, so it was about $5.5 million in 2012. It will be about $4.5 million in 2013. And actually we filed our K today also, Todd, if you go look, there is a footnote that shows out of all that that’s in place, it schedules the amortization out for the next five years and you can see what the schedule of amortization is for the next five years in there.

Todd Thomas – KeyBanc Capital Markets

Right. Okay, great. Thank you.


There are no further questions at this time. I would like to turn the floor back over to Mr. Schanzer for closing comments.

Bruce Schanzer

Thank you, everyone, for joining us. Have a good evening.


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

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