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Cedar Realty Trust, Inc. (NYSE:CDR)

Q2 2013 Earnings Conference Call

August 6, 2013 17:00 ET

Executives

Brad Cohen - Investor Relations, The ICR Group

Bruce Schanzer - President and Chief Executive Officer

Phil Mays - Chief Financial Officer

Nancy Mozzachio - Vice President, Leasing

Analysts

Nate Isbee - Stifel Nicolaus

Craig Schmidt - Bank of America

Todd Thomas - KeyBanc Capital Markets

Operator

Greetings, and welcome to the Cedar Realty Trust Second Quarter 2013 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, Mr. Cohen. You may begin.

Brad Cohen - Investor Relations, The ICR Group

Thank you, operator. Good afternoon. At this time, management would like me to inform you that certain statements made during the call, which are not historical facts maybe deemed forward-looking statements within the meaning of Section 27-A of the Securities Act 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 risks 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 under 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 - President and Chief Executive Officer

Thanks Brad. Welcome to the second quarter 2013 earnings call for Cedar Realty Trust. This quarter was another solid quarter with $0.12 per share in operating FFO. With our continued earnings visibility and operating stability, we are comfortable tightening 2013 guidance as we announced in our earnings release. That said, what I am most excited about were our accomplishments this quarter on the leasing and capital structure fronts and what these accomplishments pretend for the future of this company.

We leased roughly 350,000 square feet at a 10.3% positive spread on a cash basis. These figures are both significantly higher than our historical averages and notably were helped by SuperValu’s early renewal of four Farm Fresh leases maturing in 2014 that we now have extended and renewed out to 2019. In addition, our same-store NOI grew 2.4% including redevelopments. A critical element of the Cedar business model is the consistency with which our assets perform through all economic environments.

I would note that this remains the case. So, I would add that we are now positioned to achieve outsized and above trend earnings growth as we release over 30% of the square footage of our portfolio representing roughly a quarter of our revenue that is generally at the low market rents. This quarter’s leasing results are the first to be impacted by what I would expect to be larger leasing volumes over the next two to three years on account of all this rolling square footage.

I am optimistic that with the tailwind that what appears to be a broadening of the economic recovery combined with a muted supply expansion, we have the opportunity to reset the rents on a significant proportion of our portfolio with relatively modest capital investment. This will be particularly satisfying since the challenge for any retail REIT is to reset leases as early as possible in an economic recovery in order to track or beat inflation. At Cedar, we have just such an opportunity which couples with the steadiness afforded by our grocery anchored shopping center straddling the DC to Boston corridor will enable us to continue to offer our shareholders stability supported by embedded portfolio growth.

On the capital structure front, we continue to reduce our leverage reaching the eight times leverage mark, a little sooner than promised. The two things I would note about this leverage mark are first in the near-term, this figure will definitely move around as we continue our dark anchor replacement strategy since those transactions tend to reduce EBITDA without reducing debt. And second, in the medium to long-term, we intend to continue to drive down our leverage by completing our divestiture program and therefore through a constant focus on conservative balance sheet management. We have also advanced ourselves on the capital structure front by recasting our corporate facility as an unsecured line of credit at a lower cost. I will allow Phil to expand on this achievement in his comments.

Lastly, we just implemented a common equity ATM program. Although our intention is to not necessarily be in the market everyday selling stock, we do think this is another attractive and low cost arrow in our capital alternatives quiver when utilized appropriately. The improved flexibility that comes with less leverage combined with the improved the capital availability I just described support our gradual shift from defense to offense. Without getting into too much detail this shift covers both certain redevelopment opportunities we are pursuing as well a number of attractive grocery anchor shopping center acquisitions that could serve to improve our average asset quality and intensify our geographic footprint. As I’ve noted on prior calls our definition of what constitutes a grocery anchor has evolved just as the grocery business has changed and it goes beyond the classic supermarket to include superstores such as Wall-Mart and Target warehouse clubs such as Costco and B.J.’s as well as certain Dollar Stores that had significant grocery offerings. We like the hire customer traffic generated by tenants with these offerings. And I feel that a logical evolution to our portfolio composition and anchor mix. I would expect to have more to discuss on some of these opportunities once the transaction is disclosed.

The second quarter of 2013 represented a note worthy period in the evolution of this company. Although the capital markets have been choppy with the competing themes of economic expansion and higher real interest rates roiling all real estate stocks we have seen team Cedar continue to create value at the asset and corporate level by staying focused on our five part long-term strategic plan. In summary our plan is to focus on grocery anchored centers between Washington DC and Boston to drive strong results through leasing and operations, to create value through targeted capital investments into our existing portfolio, to intensify our footprint and raise our average asset quality through selective capital recycling and to continually improve and strengthen our balance sheet. This five part plan has become ingrained in our corporate culture and I would be remiss if I do not acknowledge the members of team Cedar and all of the work they have done and continued to do in further ends of meeting these objectives.

While on this subject of the team, I would like to introduce a new team member and say a few words about a departing executive. This evening in addition to my fellow senior executives namely Philip Mays, Brenda Walker, Nancy Mozzachio, Michael Winters and Stuart Widowski we are joined by Charles Burkert, our new Head of Construction and Development. Charles is replacing Tom Richey who has decided to retire from Cedar after an illustrious 15 year career. Charles joined us from Brixmor where he held a similar position. Charles is more than 20 years of experience between Brixmor and its predecessor entities as well as Rose & Associates. He has already hit the ground running and we are excited for what future holds with Charles on board. I would like to take a moment and acknowledge our dear friend Tom. Tom has decided to retire to spend more time with his family and more generally stay closure to home. He has been a friend and admired colleague to all of us here at Cedar. It has been an honor to work with Tom. He is a role model to all of us due to his professionalism and personal integrity. Tom, we wish you and your family much health and happiness in the years ahead.

With that I give you Phil Mays.

Phil Mays - Chief Financial Officer

Thanks Bruce and good evening everyone. On this call I’ll briefly highlight our balance sheet improvements, discuss our operating results and provide an update on guidance. Starting with the balance sheet, on August 1st we closed $310 million unsecured credit facility. The facility consists of a three year $260 million revolver that had two one year extension options, a five year $50 million term loan and is initially priced at LIBOR plus 195 basis points. The new unsecured facility replaces our prior secured facility and immediately decreases our bond rate margin by 55 basis points, extend our debt maturity profile and provide additional flexibility for future financing.

Closing this new facility roughly two years after introducing the new Cedar provides an appropriate time to highlight some of the balance sheet improvements accomplished to-date. We decreased debt to EBITDA by over a full term from an excess of nine times when we started to eight times at the end of this quarter. Further we’ve realized the $107 million of the target $150 million of dispositions and remain on track to reduce debt to EBITDA below eight times. We reduced our prorated debt by almost $110 million, while also decreasing our weighted average interest rate by 60 basis points. We increased our unencumbered cash NOI from approximately 25% to almost 40% of our total NOI that’s providing the foundation for the new unsecured credit facility discussed earlier. And we recapped $160 million of Series A preferred stock with $190 million of proceeds from a new Series B decreasing our yield by about 1.38%. It’s important to note that these accomplishments were all achieved without a significant decrease in enterprise value or a significant dilution to operating FFO per share.

Before discussing operating results, let me also note that in July we have decided the one year extension option on our $60 million Upland Square loan and repaid our $14 million Port Richmond Village mortgage. As a result, we have no debt maturities for the remainder of 2013.

Moving on to financial results, operating FFO was $0.12 per diluted share for the quarter, compared to $0.16 for the same period last year. As previously noted, last year included $3.4 million or approximately $0.05 per share of termination related income associated with replacing the dark anchor. Excluding this termination in income, operating FFO per share increased $0.01.

With respect to property results, same property NOI increased 2.4% including redevelopment of properties and 1.4% excluding redevelopment of properties. Consistent with the prior quarters, both of these results exclude the temporary timing impact associated with replacing a dark anchor at Oakland Commons with the Wal-Mart Neighborhood market. Notably, we are pleased to report that this Wal-Mart Neighborhood market has completed its build-out opened for business and recently commenced paying rents.

Bruce noted a couple of leasing highlights, but let me provide a little more detail. During the quarter, we signed 37 leases for a total of 350,000 square feet at a weighted average interest rate of $12.95 per square foot. On a comparable basis, we signed 33 new and renewal leases for 344,000 square feet at a positive spread of 10.3%. Please keep in mind that the Farm Fresh leases Bruce discussed and the majority of the leases signed this year will not contribute significantly to earnings growth until 2014. When the renewal period start for the existing tenants and the new tenants take occupancy. At the end of this quarter, our total portfolio was 92.7% leased and 92% occupied. Our same-property portfolio was 93.9% leased and 93.4% occupied. These percentages are generally consistent with last quarter except for our total portfolio occupancy has increased 50 basis points.

And turning to guidance, with half of the year completed, we are raising the low end of our full year 2013 operating FFO guidance and updated range of $0.47 to $0.49 per diluted share. The underlying key assumptions remain consistent with those previously discussed. This range takes into account the possible timing of our remaining dispositions and the potential downtime related to dark anchor replacements.

With that, I will open the call for questions.

Question-and-Answer Session

Operator

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

Nate Isbee - Stifel Nicolaus

Hi, good afternoon. As you look ahead to ‘14, can you perhaps quantify the amount of leases that you have signed that you do not expect to take occupancy until next year both in terms of square footage perhaps total rent?

Nancy Mozzachio

Hi, Nate, it’s Nancy. And kind of leases that are executed, we expect them to actually take occupancies were trained I think at this point, we anticipate that there is leases that are executed well in fact take occupancy before the end of 2013. On the renewal front, of course, we are executing renewals today which will impact not go into effect until 2014.

Nate Isbee - Stifel Nicolaus

Okay. And then just in terms of what the total NOI that you expect coming online that’s going to impact ‘14 numbers?

Phil Mays

Hi, Nate, it’s Phil. You are asking about leases that have already been completed?

Nate Isbee - Stifel Nicolaus

Correct or that you have good visibility on at this point?

Phil Mays

You are talking about a spread right now on the total portfolio is almost 70 basis points in lease and occupied. Most of that is at about the same average rents that’s in places of higher some lower around 12 bucks. Nancy believes (indiscernible) take occupancy by the end of the year. And then on top of that, for next year, the largest thing you have got is the Farm Fresh leases that have already been done which Bruce talked about in his comments a little over 300,00 square feet up, but I believe with this 8% to 9% and they will start actually I think the renewal period January, so that you get that for the full year.

Nancy Mozzachio

And of course just to add to his comments made we have the Old Navy lease that’s assigned for Colonial Commons which will actually commence paying rents in 2014 although they will take occupancy in ‘13. And then we have Hobby Lobby at Trexlertown which was executed last quarter and is just by shy of 2,000 square feet and let’s call that less than $500,000 in annual revenues, so that was full year revenue in ’14.

Nate Isbee - Stifel Nicolaus

Sure. And then Bruce you talked about the capital recycling both the selling as well acquisitions, can you talk about the acquisitions environment and with you cost of capital how you – can you effectively compete in the core Mid-Atlantic markets and what type of – what your pipeline looks like at this point and is there anything imminent?

Bruce Schanzer

Certainly, that’s a great question. And yes, we are definitely actively looking for opportunities and because of our cost of capital and also to be fair because of the size of the company, we are pretty selective and thoughtful about which assets we really key in and focus on. In terms of where we stand we’ve definitely identified a couple of opportunities that we are pursuing pretty aggressively and that we hope to secure. And when in fact we have we reached the point where it’s disclosable, we will absolutely disclose them and talk more about them. In terms of how we finance them I guess what I would say is the following. Everything that we are looking to acquire is intended to achieve really to check three boxes. One is it improves our average asset qualities, in other words it’s an asset that is better than our average asset and hopefully one that with top quartile type asset for our portfolio.

The second thing is that it intensifies our footprint, so in other words it’s an asset that fits within our Washington DC to Boston existing footprint and hopefully again enhances that footprint. And then third element is that there is going to be some type of a grocery component although as I mentioned in my prepared remarks that doesn’t necessarily mean a supermarket, it just means some type of a grocery retailer. In terms of how we finance it and how we think about it relative to our cost of capital again there is no secret that we have slightly higher cost of capital than certain participants in the markets, but we have a pretty competitive cost of capital and if we are thoughtful and selective of about what we pursue we are able to deals that really add value to the company and over the long-term will definitely increase our warranted share price.

Nate Isbee - Stifel Nicolaus

Alright. Thank you so much.

Operator

Thank you. 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. In looking at the potential acquisitions are you seeing any changing in the prices of assets given the changes that are happening in the capital markets?

Bruce Schanzer

Craig at this point I would say not at all. So, I would actually guide you to two different perspectives. One is assets that we are looking to acquire and the second is assets that we are looking to divest and that would fall into two categories. We have a held for sale bucket, we are also exploring potentially selling assets as part of the capital recycling program where we would use the proceeds of asset sales to finance acquisitions. So, again we have absolute data points on both higher quality acquisitions, lower quality acquisitions by others which would be acquisitions that assets were divesting and I would tell you the cap rates have been relatively sticky if you are comparing the time period before the Bernanke announcements on quantitative easing and today. And so despite the sell-off in the REIT market, we have not really seen much softening of cap rate expectations. That said at least from a Cedar perspective I guess we are being a lot more thoughtful in terms of which assets we are pursuing. So, again when we think about our underwriting we are definitely on the exit cap rate for example when we look at our IRR now see we are certainly assuming some type of cap rate expansion really to be conservative. But again I can’t tell you that we are seeing much in the way of loosening of cap rate expectations by sellers despite the softening in the REIT market.

Craig Schmidt - Bank of America

Okay thank you

Bruce Schanzer

Sure.

Operator

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

Todd Thomas - KeyBanc Capital Markets

Hi, good afternoon. Jordan Saddler is here with me as well. Question, Phil, the tenant reimbursement ratio dropped a bit from last quarter and I would have thought that, that would have either remained steady or even increased a little bit with the occupancy increase here. And I think last quarter I think snow removal costs came in a little bit high. So, I was just wondering is there anything one-time or non-reimbursable this quarter that would have impacted that ratio, I am just trying to get a sense for what to expect over the next couple of quarters there?

Phil Mays

No, last quarter you had snow which is generally close to 100% recoverable to the extent we have occupancy rate. Nobody generally had an exclusion related to snow. So, when you have a lot of snow, your recovery rate does tend to be a little higher. No one gets some inclusion on that.

Todd Thomas - KeyBanc Capital Markets

Okay.

Phil Mays

Does that make sense, Todd?

Todd Thomas - KeyBanc Capital Markets

Yes, yes, that does make sense actually. Okay, that’s helpful. And then Bruce, you talked about the opportunity here to renew and release sort of an above average volume of space over the next couple of years here. I was just wondering you have given your comments on sort of the supply demand imbalance and the position that the company is in, do you think that you will be able to achieve better rent escalators and other non-economic terms from retailers today?

Bruce Schanzer

Well, let me touch on that a little bit, and then I will hand it over to Nancy to expand on it. And she is really in the trenches on a lot of these lease negotiations. What I would say by way of background is what we really pride ourselves on it, Cedar is the fact that we have a very stable portfolio. So, in other words, we have a portfolio that even during the recession really perform pretty solidly. One of the reasons why you see on a relative basis modest same-store growth is that we are comparing ourselves with numbers that didn’t really did that much. And so with that background, we see again above trend growth as I would highlight above trend growth for Cedar, because again we have relatively stable portfolio base. In terms of the growth opportunity, again what excites us is that with its very consistent portfolio, we are able to add a little bit on top of that which is this opportunity to really release a significant proportion of our square footage in what we expect and what we are seeing is a pretty favorable landlord environment. And so again that’s an equation that includes a whole slew of elements including things like better escalators as well as just better base rents and other terms that come up that are less reportable between landlords and tenants. So, with that, I will let Nancy to comment specifically on escalators.

Nancy Mozzachio

Hi, Todd. We are in fact seeing the opportunity to increase rents as more frequently than we did back in 2009, 2010, where we had a great number of these leases that were created. So, let’s say we have let’s call 300 leases expiring in 2014, 2015. As Bruce mentioned if we think about our small shop member which right now is approaching 84%, so we have about 2.5 million square feet in small shop. And let’s say we were to increase that by 1% at second number $20 rent. So, the amount of revenue that generate for us is say $0.5 million and for us if we have that goal to increase each year by 1% that small shop occupancy number, I mean these are kinds of numbers that we think, that we can plan to report now and in the coming years. But again I can’t emphasize enough what Bruce just said is that it’s part of all the initiatives that we have that are ongoing at the time it’s a piece, it’s a enrollment piece, it’s a important piece, but it’s in fact of a piece of what we’re doing on the – leasing front. In addition to the small shop, the large shop replacement dark anchor program and some other things we have ongoing.

Todd Thomas - KeyBanc Capital Markets

Okay, that’s helpful. And then I’m sorry, and then I’ve just the question the Walmart neighborhood market that began paying rent in the quarter. I was just wondering if you could share with this when commenced just from a timing perspective. Just trying to get a sense for how much rent or NOI is baked into the quarter run rate here. So, we could think about making an adjustment?

Phil Mays

They commenced rent July 18, Todd. So it did a half of month and that is not a lot in the current quarter.

Todd Thomas - KeyBanc Capital Markets

Okay, and about how much NOI is that on the annualized basis?

Phil Mays

How much NOIs on an annualized basis?

Unidentified Company Speaker

(Technical Difficulty)

Phil Mays

It’s around of 500.

Todd Thomas - KeyBanc Capital Markets

Okay.

Phil Mays

On an annual basis and so they were in for I said mid July, so they were in for most of the quarter.

Todd Thomas - KeyBanc Capital Markets

Okay, that’s helpful. Alright, great. Thank you.

Operator

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

Nat Isbee - Stifel Nicolaus

Yeah, hi. I’m I guess before I ask my next question I did want to echo your sentiment about Tom’s departure and it’s been pleasure working with him and wish him all the best. Phil as you look at the balance sheet you have made some progress reducing leverage, encumbered asset pool that’s 35% of NOI. Where do you see the balance sheet going from here both in terms of leverage level and perhaps further that unencumbered pool and what that ultimately might mean?

Phil Mays

So, we ended the quarter of leverage rate around eight times, if we just complete the remaining dispositions that we originally targeted it will get us just below eight times. Now, there will be some noise like Bruce discussed around the dark anchorage and as we could have some temporary downtime that could bounce that around. I think as we go forward you will see considerably finance acquisitions and probably continue to take that down a little more. I know our unencumbered NOI is currently about 39%. That will be – that will grow depending on acquisitions and how we finance them and how much equity we need.

Bruce Schanzer

So, Nat this is Bruce, just to expand on that. One of the core parts of our strategy is really conservative balance sheet management that’s something that is the first leg of that was the execution of our near term strategic plan which contemplated selling the assets that we’ve been selling in order to get leverage down below eight times. More broadly our objective is to continue to drive down leverage and continue to manage our balance sheet conservatively. And so there are whole slew of different ways that, that could potentially happen. And a lot of it will depend on the various opportunities that either the capital markets afford us or different transactions afford us as well as benefits of generating cash flow in using that for its corporate purposes.

Nat Isbee - Stifel Nicolaus

Alright, thank you very much.

Operator

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

Bruce Schanzer - President and Chief Executive Officer

Thank you all for joining us. The new Cedar is roughly two years old this quarter. We have spent the past two years endeavoring to be a management team that produces consistent results in a reliable manner with an emphasis on transparency, thoughtfulness, and judiciousness when it comes to how we manage our capital structure and create value. Hopefully, the results we have described this evening whether the improvements in our leverage of our new unsecured corporate credit facility or the excellent leasing results with the promise of more to come give you a confidence that a foundation is being built for many years of strong results. With that, I wish you all a good evening.

Operator

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

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