Ramco-Gershenson Properties Trust Q1 2009 Earnings Call Transcript

Apr.24.09 | About: Ramco Gershenson (RPT)

Ramco-Gershenson Properties Trust (NYSE:RPT)

Q1 2009 Earnings Call

April 24, 2009; 11:00 am ET


Dennis Gershenson - President and Chief Executive Officer

Richard Smith - Chief Financial Officer

Thomas Litzler - Executive Vice President of Development

Michael Sullivan - Senior Vice President of Asset Management

Dawn Hendershot - Director of Investor Relations


Rich Moore - RBC Capital Markets

Nathan Isbee - Stifel Nicolaus


Greetings and welcome to the Ramco-Gershenson Properties Trust first quarter 2009 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)

It is now my pleasure to introduce your host, Dawn Hendershot, Director of Investor Relations for Ramco-Gershenson. Thank you, Ms. Hendershot. You may begin.

Dawn Hendershot

Good morning and thank you for joining us for Ramco-Gershenson Properties Trust first quarter 2009 conference call. I’m hopeful that everyone received our press release and supplemental financial package, which are available on our website at www.rgpt.com.

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.

Although, Ramco-Gershenson believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. Factors and risks that could cause actual results to differ from expectations are detailed in the press release and from time-to-time in the company’s filings with the SEC.

Additionally, we want to let everyone know that the information and statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made. Also the contents of the call are the property of the company and any replay or transmission of the call maybe done only with the consent of Ramco-Gershenson Properties Trust.

I’d now like to introduce the participants for today’s call. Here with us today are Dennis Gershenson, President and Chief Executive Officer, Richard Smith, Chief Financial Officer, Thomas Litzler, Executive Vice President of Development and Michael Sullivan, Senior Vice President of Asset Management. At this time I’d like to turn the call over to Dennis, for his opening remarks.

Dennis Gershenson

Thank you, Dawn. Good morning and welcome. There are two subjects I’d like to cover over the next 10 minutes or so, first our successes in asset management over the last 90 days and second, our plan and progress on improving the balance sheet.

I’m pleased to report that we exceeded first call estimates for the quarter achieving $0.56 per share. Even more important than this one number however, are the results of our asset management team’s efforts in maintaining our occupancy ratio, their achievements in retaining existing retailers, who are renewing their leases at expiration, their progress in securing the execution of new tenant leases during these challenging times and their stewardship of our other operating metrics.

Our performance in these four areas has been quite strong, not withstanding current market conditions. Our asset management goal for the quarter and the year are primarily to maintain an occupancy ratio above 90%, renew over 75% of expiring leases, aggressively fill existing vacancies both large and small with retailers that complement our tenant mix, control and reduce center operating costs, which directly benefit our tenants and advance our planned redevelopments, which will have a dramatic and positive impact on our net operating income over the next 18 months.

You’ll note from our supplement that our portfolio wide occupancy rate stands at 90.9% as of March, 31. Although, we feel that even more significant statistic is a same center comparison, those analysts who cover Ramco have focused on the portfolio-wide number, which includes centers currently under redevelopment and therefore are in various stages of completion.

Using this portfolio wide metric, our first quarter occupancy number remains relatively consistent with the 2008 year end figure of 91.3%. It is important to note that our March, 31 occupancy rate, includes the impact of all of the Linens ‘n Things and Circuit City vacancies. On the leasing front, we are making significant progress. At quarter end, we have renewed or have amendments out for 75% of our lease expirations achieving an increase at quarter end of 6.4% over prior rentals paid.

Further, although we show only 19 new tenant openings during Q1, we have signed 26 new leases in the first quarter. This compares favorably to 24 signed leases in the same period in 2008 and 25 lease agreements for the first quarter of 2007. Clearly, our leasing velocity is exceeding similar periods for the last two years. Also as of quarter end, we have an additional 37 leases out and under negotiation.

Rental spreads for the 19 new non-anchor tenant occupancies shown on our supplement are down just over 12% compared to our non-anchored tenant portfolio average. Included in that number are three larger format stores in approximately 8,000 square feet each. Since larger format retailers typically pay less rent than smaller shop spaces, we had a disproportionate drag on our leasing statistics.

Excluding those three tenants, we would have recognized a 9.6% increase over non-anchor portfolio average rents. If we compare the total 26 new leases signed in the first quarter to the overall portfolio average, these newly signed tenants will be paying an average rental rate of 49.2% above the portfolio average number.

During our last call, I indicated that our asset management team was committed to reducing shopping center variable costs, including common area maintenance and real estate taxes, which are passed through to our tenants.

As a result of their efforts, we have reduced our common area maintenance expenses by approximately $200,000 in the first quarter as compared to the budgeted number for that period. These numbers demonstrate that we are on track to reduce our center’s operating costs by approximately $1 million for the year, a significant savings for our tenants. We are also pleased to report that our same center net operating income remained positive in the first quarter increasing just under 1%.

Lastly, we continue to make substantial progress on the pace of our redevelopments. We have completed the re-tenanting and have opened a 51,000 square foot Hobby Lobby at our Clinton Valley Shopping Center in Sterling Heights, Michigan. We have opened a new Staples office supply store in 20,000 square feet at our market Plaza in Glen Ellyn, Illinois. Also we are announcing today that we have signed a lease for a studio movie grill, which will occupy approximately 40,000 square feet in our Holcomb Center in Roswell, Georgia.

Additionally, we have signed a lease with Ross Dress for Less for a new store in 27,600 square feet in our marketplace of Delray in Delray Beach, Florida. Ross plans to open quickly at this center, sometime during the fall of 2009. This rapid lease negotiation and aggressive construction schedule validates the desirability of our shopping center location.

We have also executed a letter of intent with a national soft goods retailer at the Plaza at Delray to fill a Linens ‘n Things vacancy and we have two national retail anchor tenants vying for our Circuit City location in Novi, Michigan. The sheer number of our value add redevelopments and the pace at which we are releasing vacancies created by Linens ‘n Things and Circuit City is a testament to the strength and attractiveness of our shopping center locations, as well as their demographic profile and superior tenant mix.

At our most significant redevelopment, the Town Center at Aquia development in Stafford County, Virginia, our 100,000 square foot office building is now completely leased with the exception of two small retail spaces on the first floor.

We have signed a letter of intent with a residential developer to form a joint venture for the construction of 287 apartment units as part of our mixed use project. We’ll be initiating the entitlement process for the residential component of the development at this summer.

We’re also in discussion for a joint venture with several office developers. It’s our plan to sell the existing office building into the new joint venture and then have the partnership proceed to construct up to three additional office buildings. Based on our proximity to Quantico and Washington DC, we are receiving a great deal of office tenant interest for this project.

Proof of that statement lies in the fact that we’re presently responding to an RFP or request for proposals from a 20,000 square foot prospective office user. Whether it be making progress on the leasing front, demonstrating our concern for our tenants by controlling operating costs or achieving significant success in advancing our value add redevelopments.

Ramco-Gershenson’s asset management team is firing on all cylinders. While our operating group pushes ahead on advancing the core portfolio. Our senior management team has been focused on improving the company’s balance sheet and we’re making progress on that front.

I’m pleased to report today that we have received a term sheet from our lead banker to extend our revolver and term loan into the second half of 2012. We’re in the process of reviewing the new terms and we will be working toward an understanding. While we expect this new agreement will resolve the company’s 2010 debt maturity overhang issue, we recognize that additional steps are needed to strengthen the balance sheet.

As a result, we have determined to sell a select number of assets to generate up to $50 million. Despite the number of sellers in the marketplace and the difficult credit environment, we have found a very receptive market for net lease assets at reasonably aggressive cap rates. We’re already in contract to sell a national retail tenant, net land lease parcel. We’re also finalizing negotiations with two parties and expect to go to contract this quarter for the sale of an additional two net leased assets.

Further, we’re reviewing our portfolio to identify a limited number of high credit quality net leased outparcels. We conservatively estimate that the net proceeds from these sales will generate a minimum of $35 million and we’re working to increase that sum to $50 million. None of these contemplated sales involve any of the centers we view as core assets or properties that would be candidates for value add redevelopments.

Additionally, we have initiated a push to secure long term mortgage financing for a number of our unencumbered shopping centers. These new financings will generate proceeds to reduce our bank lines. Rich Smith will address this subject as part of his remarks.

All of these actions including an extension of our revolver in term loan, the conservative financing of a number of well located high quality shopping centers and the sale of a limited number of net lease assets are both prudent and consistent with our goal to enhance shareholder value and are not inconsistent with our review of financial and strategic options.

I want to briefly address the board’s ongoing review of these financial and strategic alternatives. As many of you know, in late March, we announced that our board commenced a process to review the company’s potential strategic and financial alternatives to enhance shareholder value. The range of alternatives, which maybe considered includes potential financings and restructuring transactions, asset sales and strategic transactions with third parties.

Merrill Lynch has been retained as the board’s financial advisor. The board has been actively engaged in this process and intends to complete its review of potential alternatives as promptly as practical.

The board is approaching this review with one goal in mind, to enhance value for all Ramco shareholders. That said we’re giving no indication that any particular alternative will be pursued or that any transaction will occur. Also, we do not plan to release additional information about the status of the board’s review until the review process is completed.

Finally, as most of you are aware, Equity One has publicly indicated that they intend to nominate a slate of two directors for election at our annual meeting. We are in the process of finalizing our proxy materials in connection with the upcoming annual meeting and will be reaching out to all of our shareholders to discuss these matters in the near future.

With that said, I would like to remind everyone listening that the purpose of today’s call is to discuss first quarter results and I ask that you please confine your questions to this topic. We will not be taking any questions regarding the board’s financial and strategic review or Equity One.

This May, Ramco will have been a public company for 13 years. Over that period, we have built a portfolio of 89 centers that rivals any of our peers in location, demographic profile, tenant mix and performance. We have constantly upgraded our existing asset base through redevelopments, which has produced even stronger centers often at the price of slower FFO growth and we have formed strategic partnerships that have allowed us to mitigate risk and generate substantial profits.

Throughout our tenure as a public company, Ramco’s board and management team have always acted in the best interests of our shareholders. I can assure you that our process to review financial and strategic alternatives will be held to that very same high standard. Our board and management team are committed to producing the best possible outcome for all our shareholders.

I would now like to turn the call over to Rich Smith, after his brief comments we will be pleased to take your questions.

Richard Smith

Thank you, Dennis and good morning everyone. For the quarter, our diluted FFO per share was $0.56, which was inline with our business plan and exceeded first call estimates by $0.01. This represented a $0.06 decrease compared to the $0.62 reported in 2008.

As we outlined in our year end conference call, the decrease was anticipated. It was a result of contributions of assets to off balance sheet joint ventures in 2008, reductions in acquisition and development fees, restructuring costs, lost revenues due to the closing of Circuit City and Linens ‘n Things, as well as taking assets offline for redevelopment.

Our 99% operating expense recovery ratio was slightly above plan due to adjustments to actual for billing accruals made in 2008. As 2009 normalizes, we expect a recovery ratio to between 97% and 98%. Our $4.1 million G&A expense included restructuring costs. The expense for the quarter was at plan and is tracking our expectations of between $14.5 million and $15 million for the year.

Even in this challenging environment we feel our debt is manageable. Through December, 2010, we have only four significant debt maturities. Our $23.4 million loan secured by West Oaks II and Spring Meadows is leveraged approximately 35%. We feel we could either refinance the centers and generate approximately $15 million of net proceeds or extend the loans with Travelers.

After exercising our two six month extension options, our $40 million facilities secured by Aquia project, matures in December, 2010. We expect to repay the loan by placing permanent debt on the office building and by using net proceeds generated from the sale of the project to an off balance sheet joint venture.

Lastly, after exercising extension options, our $100 million term loan and $150 million revolver mature in December, 2010. As Dennis mentioned, we’re in preliminary discussions with our bank group to extend the facilities. We’re also exploring permanent debt options on a number of our unencumbered properties.

We’re seeing a lending market starting to be receptive to financing well leased credit quality assets including our Michigan centers and as we finance these assets, we’ll use the proceeds to pay down our credit facilities. The availability at quarter end under our revolver was approximately $21 million. Our EBITDA interest coverage for the three months was 2.2 times. Our fixed charge coverage was approximately two times and our FFO payout ratio was only 41.5%.

Our capital plan for 2009 and 2010 should provide us with over $47 million of availability to start 2011. Our 2009 and 2010 capital sources are expected to exceed $110 million and include $40 million of free cash flow from operations, $20 million of line availability at quarter end and $50 million from financings and asset sales.

Our capital uses are expected to total only $63 million through 2010 and include $29 million for development and redevelopment projects and $34 million of property level capital expenditures including leasing commissions, tenant allowances and renovation costs. Lastly we reaffirm our 2009 diluted FFO per share guidance of between $2.21 and $2.34.

Vetori, can we open up the call for questions.

Question-and-Answer session


(Operator Instructions) Your first question comes from Rich Moore - RBC Capital Markets.

Rich Moore - RBC Capital Markets

Dennis, anyhow you look at this about and I realize you’re working hard on it, but about half of your debt comes due between now and the end of 2010 and I’m wondering, a lot of other companies have gone out and issued equity and I’m wondering if that is a potential option for you guys to, even though I realize you’re working each of the pieces and then you have ideas for each of the pieces, but just as a general sort of delevering, is equity a possibility here?

Dennis Gershenson

Well, one of the good things about being a public company obviously is that, you have a whole variety of arrows in your quiver, in order to advance your business plan and to delever the balance sheet. So that, equity is always a possibility, we have discussed this with the board.

Obviously, we’re advancing our review of our financial and strategic alternatives and I think that, what would be important is to truly know which direction we’re headed in and based upon those conclusions then we would address, a variety of additional issues.

So I can’t really give you a specific answer, because we are in the process of this review, but as you’ve seen the pending extension of the revolver and term loan as well as the asset sales, we are indeed focused on strengthening the balance sheet.

Rich Moore - RBC Capital Markets

I know this sound’s like a silly question and maybe it is, but when would the process that you guys are doing with the board? When would that be complete, if you will or at a point where you think you could discuss it more openly?

Dennis Gershenson

I think I use the words as quickly as practical.

Rich Moore - RBC Capital Markets

If I figured, it was a silly question, okay. That’s fair.

Dennis Gershenson

Rich, none of your questions are ever silly.

Rich Moore - RBC Capital Markets

Now on the lender side, I mean you said some pretty positive things. I mean which characterize the environment with lending officers as having improved over the last six, seven months or over the last few months or how would you characterize the environment with the lenders?

Richard Smith

It’s certainly nowhere where it’s been, but I think we’re starting to get calls, we’re starting to get interest in some properties and we put out in the marketplace. Basically all of our unencumbered assets with a number of brokers and lenders and then really looking at that and then I’ve been surprised that there’s been a lot of interest into a lot of our higher quality properties you can expect, even the properties in Michigan and I expect to proceed with negotiations on some loans there. So that’s to me very positive where if you looked at a few months ago it was hard to even get a call back so, optimistic about that.

Dennis Gershenson

I think just to amplify that, just a little bit. I think that we are seeing this change probably in the last 30 days. So it’s an extremely recent event.

Rich Moore - RBC Capital Markets

Has there been any impact, Dennis from the slowing down of the developments. I mean any tenants who lost interest as a result or just any impact at all to the fact that you pulled back the reins on the development pipeline?

Dennis Gershenson

Well, what’s happened is that we have found that many of the retailers who have been interested in our development sites continue to be interested in the development sites. It’s just that any schedules that they have had that were more aggressive relative to openings in 2010 have all been pushed back.

As we said in our last conference call, we will continue to work on the entitlements and we will continue to work on our relationships with the anchor tenants to mature those so that when the time is appropriate we’ll have all of the critical elements that are necessary to make a development happen, which would include a joint venture partner and financing.

Rich Moore - RBC Capital Markets

Okay. Then the last thing from me in that every line, what are you hearing from potential joint venture partners either for developments or for possibly taking some of your assets and rather than selling them directly joint venturing those?

Richard Smith

Well, we continue to talk to the same group of people that we were talking to before. Some have money; others are in the process of putting funds together. I think there’s some degree of hesitancy in the marketplace as everybody wonders, if they made a deal today, will they look brilliant or will they look foolish?

So, I think that a lot of people continue to at least tread some water, but as far as where we would go in the future that’s, okay because the marketplace is still very uncertain and so, we’ll continue to be very focused on improving the core portfolio. We expect in the second quarter to be able to talk about more successes with the core portfolio with our redevelopments and then these other things will come in time.


Your next question comes from Nathan Isbee - Stifel Nicolaus.

Nathan Isbee - Stifel Nicolaus

Dennis, I have to tell you that I haven’t got much to ask about. When you. When you talk about these asset sales, the one that you have on the contract and the other ones you’re targeting, it clearly is going to free up some capital. You mentioned that it was at attractive prices. Can you just give a little more detail on what you’re seeing with that?

Dennis Gershenson

Yes. Our cap rates that we’re seeing are somewhere between 7.5 and 8 in a quarter. We are in contract with a number in that range, I just gave you.

Nathan Isbee - Stifel Nicolaus

Okay and when you as the acquired you talk about building, another office building there. What type of targeted hurdle rates would you look for before you started construction even if you had the pre-leasing?

Dennis Gershenson

Well, again understand that we wouldn’t do anything. The first time anybody would put a shovel in the ground it would be only after securing a joint venture partner and that joint venture partner would say go, but the people that we’re talking to are looking at an unlevered return of approximately 10%.

Nathan Isbee - Stifel Nicolaus

Final question, this movie deal, you just signed in Georgia, looking at your supplemental it says you’re only spending about $4 million there. Can you talk a little bit about the economics on that deal?

Dennis Gershenson

Well, first of all the $4 million includes money that we plan to spend on the fascia of the center. So, it’s in addition to our contribution and it’s in the form of an allowance to the movie operator. So, the $4 million will completely reface the entire shopping center and based upon this commitment because we’ve been talking to a number of ancillary tenants. There is significant new interest in retailers coming into the center, not now that we are in a position to announce another new anchor.


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

Dennis Gershenson

Thank you all very much for your attention. We look forward to talking to you on a number of topics in the near future. Have a great day.


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

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