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Cedar Shopping Centers Inc. (NYSE:CDR)

Q1 2010 Earnings Call Transcript

May 7, 2010 9:00 am ET

Executives

Brad Cohen – IR, ICR

Leo Ullman – Chairman, CEO & President

Larry Kreider – CFO

Nancy Mozzachio – VP, Leasing

Analysts

Nate Isbee – Stifel Nicolaus

Todd Thomas – KeyBanc Capital Markets

RJ Milligan – Raymond James

Arthur Friedman – Friedman Asset Management

Jim Rosenwatt [ph] – Private Fund Management [ph]

Dave Fick – Stifel Nicolaus

Operator

Good morning, and welcome to the Cedar Shopping Centers Inc. first quarter 2010 earnings conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open to your questions following the presentation.

It’s now my pleasure to turn the floor over to your host, Brad Cohen with ICR. Please go ahead, sir.

Brad Cohen

Thank you very much, operator. Good morning. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical facts may be deemed forward-looking statements within the meaning of Section 27A of the Securities Exchange 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 reflect in any forward-looking statements are based upon reasonable assumptions, they are subject to various risks and uncertainties. The Company can provide no assurance of expectations will be achieved and actual results may differ.

Many of the factors and risks that could cause actual results to differ materially from expectations are detailed in the Company's press release and that release was put out yesterday and from time-to-time in the Company's filings with the Securities and Exchange Commission. In the end, the Company undertakes no obligation to revise or update any forward-looking statements reflected in or circumstances after the date of the Company's release.

It is now my pleasure to turn the call over to Mr. Leo Ullman, Chairman, Chief Executive Officer and President. Leo?

Leo Ullman

Thank you very much, Brad. Your disclaimer was just as powerful as it was last quarter. Good morning, everyone, and thank you very much for joining us today on the Cedar Shopping Centers Earnings Conference Call for the first quarter 2010 Results.

With me on the call today is Larry Kreider, our Chief Financial Officer. Other members of our team including Tom Richey, President of our Development and Construction Division, Brenda Walker, our Chief Operating Officer and Nancy Mozzachio, our Vice President of Leasing are also on the call and available to you.

The most important message that we wish to convey today is that our company is continuing to execute on its business plan. Thus, the first quarter reflected continuing steady operating results with high occupancy which we have been able to maintain at 95% for our stabilized assets now for a matter of years not just quarters and the continued movements to further enhance and delever our company’s balance sheet.

This continued execution of our business plan focusing on both our operations and our balance sheet has indeed positioned our company to enhance shareholder value and participate effectively in future acquisitions and to a lesser extent in development opportunities during this and coming years.

Let me discuss a few of the important steps which we have taken during the past quarter and the weeks subsequent thereto relevant to the execution of our business plan. First of all, our financial and joint venture arrangements with RioCan, the largest REIT in Canada and a major owner of shopping center properties in Canada, have been to a large extent transformative for a company and continued to drive benefits for our company.

We have now closed on the transfer of six of the seven joint venture properties previously in Cedar’s own portfolio to the 80% RioCan and 20% Cedar joint venture of which two were completed during the last couple of weeks.

The one remaining property to be transferred Loyal Plaza and Williamsport, Pennsylvania has been awaiting lender approval from the special service for a matter of many months.

RioCan just this past week has also exercised its warrant for the purchase of approximately 1.4 million shares of stock at a purchase price of $7 per share, resulting in cash proceeds to the company of an additional $10 million. Thus the company has been able to raise approximately $110 million in cash from the joint venture arrangements in stock purchases by RioCan to-date while we’re moving nearly a $100 million of debt from our balance sheet.

In addition, we raised an additional $60 million plus through an add-on overnight public offering in February and a related sale to RioCan. The underwriting group for that offering consisted primarily of members and affiliates of the syndicate for our credit facility which is now in place at $285 million for two years plus a one year option.

As a result of the focus on our balance sheet our company has been able to effect a reduction in the outstanding balance under the credit facility to a level of less than $90 million. We will thus have reduced the amount outstanding under our credit facility by nearly $200 million in one year. Again, by nearly $200 million in one year. This, of course, is a significant indeed singular achievement.

Importantly, it has also created substantial availability and driven down our debt to capital ratio to an exemplary level. With respect to our fixed-rate debt we have basically no maturities this year and only a couple of manageable loan maturities next year.

The reductions to the outstanding balances under the credit facility for stabilized properties also reflected some programmatic sales of properties at periphery of our portfolio. Thus we have now sold 10 properties of the 34 properties of the primarily discount drug mart anchored smaller properties in Ohio and northern New York.

The sales of the 10 properties resulted in removal of debt from our balance sheet coupled with net cash proceeds used to reduce our credit facility. We expect to continue to sell properties from that portfolio on a one-off basis when and where appropriate. In the meantime, the remaining Ohio properties represent at this point less than 3% of our Company’s revenues.

We previously announced the first acquisition of a new property with the RioCan joint venture in Temple, Pennsylvania a property anchored by a new joint foods store supermarket and shadow anchored by a newly completed target store. That acquisition is accretive for the company and it includes an attractive fee structure encompassing acquisition fees, financing fees, joint venture reporting fees and property management, leasing and construction management fees at standard rates for the entire property.

We have been vigorously pursuing additional acquisition opportunities for the joint venture. We expect to be able soon to announce such acquisitions in accordance with our general policy when due diligence has been completed and our deposits become non-refundable.

We have previously mentioned target of $500 million in acquisitions during the next two years by the RioCan’s Cedar joint venture of primarily supermarket anchored properties in a seven state area where we currently operate. Such acquisition should drive important additions to NOI and FFO based on attractive leverage, strong ongoing returns and nice fee structures.

Finally, again consistent with our business plan and the nature of our portfolio both in terms of product and geography, our financial cash metrics continue to evidence substantial strength and constancy.

Our lease renewals at new leasing results for example, continue to be positive and remarkably strong. We’ve given only one small rent concession this year to-date and we’ve experienced no meaningful insolvencies, bankruptcies, or indeed unplanned vacancies in our tenant portfolio whether major chain tenants or mom and pops. We have now arranged renewals for approximately 95% of our tenancies coming due this year and already more than 40% of leases expiring in 2011.

Larry Kreider will now go into some further details with respect to our financial metrics. Thereafter, we would, as always, welcome your thoughts and comments. Larry?

Larry Kreider

Thank you, Leo. For further details of our financial results for the quarter ended March 31, 2010, I refer you to our press release issued last night as well as our supplemental financial information published on our Web site and also available at www.sec.gov.

Our results in the first quarter feature a continuation of the tremendous strides we have made in securing our capital structure and maintaining steady operating results. Our operating results is documented in our press releases and supplemental remain generally consistent with prior quarters.

Stabilized occupancy remains 95%, and core renewal leasing rates increased almost 6%. First quarter 2010 financial results as compared to the fourth quarter of 2009 included steadily increasing leasing results from our recently delivered ground up development projects and improvements in our bad debt expense to 1.5% of revenues, and improvements in the expense recovery rate to 72% of revenues, despite incurring additional costs from unusually heavy winter snow.

As expected, the first quarter of 2010 reflects the transfer of four of the seven RioCan joint venture properties to the joint venture at various times which caused NOI to decrease as compared to the fourth quarter of 2009 by approximately $1.5 million.

The first quarter of 2010 also reflects as expected. Retenanting expenses at two properties that will be undergoing redevelopment. This cause a decrease in NOI of approximately $0.5 million and a decline in total occupancy by 1% to 90%, inclusive of properties undergoing redevelopment and retenanting.

Note that the fourth quarter of 2009 included approximately $800,000 of non-recurring lease termination income. As compared to the first quarter of 2009 same properties net operating income excluding non-cash items was $21.6 million in the first quarter of 2010 as compared to $23.3 million for the comparable quarter of 2009, a decline of $1.7 million.

The first quarter of 2010 reflects steady operating results offset by reduced income from the above mentioned two properties that incurred retenanting revenue losses, as contemplated in our annual guidance of approximately $0.5 million and the unusually heavy snow removal costs of approximately $0.5 million that we would not expect to reoccur. In addition, the first quarter of 2009 includes the favorable impact of non-recurring lease termination income and tax adjustments of approximately $0.7 million.

Just a few words about non-operating expenses. G&A expenses were very consistent with our expected ongoing spending levels which have been and continue to be approximately $2.5 million to $2.7 million per quarter. Reported G&A in the first quarter of 2009 includes approximately $300,000 of non-cash stock-based compensation mark-to-market expense offset by $750,000 of cash benefit from a legal settlement began in prior years.

Interest expense decreased approximately $0.3 million in the first quarter of 2010 as compared to the fourth quarter 2009, reflecting the benefit of the debt reductions we have made from our capital transactions offset by higher interest expense under our stabilized line of credit that was renewed in November 2009 and by the recognition of interest expense of the delivered ground up development projects.

The impairment costs incurred in the quarter or for additional costs from the contribution of properties to the RioCan joint venture predominantly at the Blue Mountain Commons property and to a lesser extent for our discontinued properties held for sale.

Our transactions costs were incurred for the abandonment of a development opportunity in Williamsport, Pennsylvania for expenditures made in prior years and to a lesser extent for the acquisition of a Town Square property.

Net cash provided by operations was $5.2 million in the first quarter of 2010 as compared to $9.1 million in the first quarter of 2009, reflecting the payment of the unusually heavy snow removal costs for both the fourth quarter of 2009 and the first quarter of 2010 and the related build that uncollected receivables for these costs which we normally collect in annual settlements or through special interim assessments.

In addition, our seasonal property tax payments were somewhat higher as a result of our newly operational development projects. As measured by FAD a non-GAAP cash flow measure funds available for distribution of FAD was approximately $6.8 million for the first quarter of 2010, providing a dividend payout ratio of approximately 86% based on our declared quarterly dividend of $0.09 per share.

It should be clear from our press release and prior announcements our financial position has improved dramatically as a result of the capital raising and financial activities completed in the fourth quarter of 2009 and first quarter of 2010 and beyond.

Our press release, Leo’s comments and our supplemental financial information release document the benefit that we have received from the RioCan common stock sale and joint venture arrangements beginning October 2009, including RioCan’s exercise of warrants in April 2010, the public sale of common stock in the first quarter of 2010, incremental sales of common stock under our SEPA program, sales of peripheral properties, and our drug store anchored drug, primarily in Ohio, and the renewal of our stabilized line of credit in November 2009.

Following completion of the last property transfers to the RioCan joint venture which we expect shortly we will have a debt to market capitalization ratio of less than 56%, down from nearly 90% at March 31, 2009. The ratio of debt to EBITDA of 8.4 times, down from 9.9 times at March 31, 2009, $80 million outstanding under our $285 million stabilized line of credit, down from $276 million at March 31, 2009.

As we said in our press release we reiterate our annual guidance of $0.60 to $0.70 per share. This excludes stock-based compensation, mark-to-market costs for which we incurred $509,000 in the first quarter of 2010 and impairment and transaction costs for which we incurred $3.3 million in the first quarter of 2010.

I would now like to turn the call back to Leo for Q&A and closing remarks.

Leo Ullman

Thank you, Larry. Operator, we’d be pleased to take any calls.

Question-and-Answer Session

Operator

Certainly, sir. (Operator instructions) And we’ll take our first question from Nate Isbee from Stifel Nicolaus.

Nate Isbee – Stifel Nicolaus

Hi, good morning.

Leo Ullman

Good morning, Nate.

Nate Isbee – Stifel Nicolaus

I’m just trying to figure out here on the 95% stabilized occupancy, it’s been like that for a few quarters, few questions about that. First of all, I mean in the leasing section of the release it talks about 17 terminated leases –

Leo Ullman

Yes.

Nate Isbee – Stifel Nicolaus

Or about 175,000 square feet? I was wondering how that flowed through to the 95% flat occupancy?

Leo Ullman

Well it flowed through in the sense that the 175,000 square feet reflect primarily the loss of tenancies at Brickyard and Oakhurst Plaza. At Brickyard it was the Sam’s Club that left that was in line and went through a freestanding site elsewhere, we knew that was coming and we contemplate knocking down that building and putting in a new large tenant. For that purpose we’ve acquired an adjacent small property to provide additional parking, but it did hit us on the denominator and the numerator in effect. Oakhurst is where we vacated a supermarket tenancy for giant stores when we built for them a new 98,000 square feet store down the street and we have not yet replaced that tenancy.

For determining our stabilized properties we apply an 80% occupancy metric. If it goes below 80% it will either go into re-tenanting or redevelopment as the case maybe, of our 119 properties, 105 are included in the stabilized portfolio, which has remained at 95%, although it’s a rounded number.

Nate Isbee – Stifel Nicolaus

Right. That was my next question, I was going to ask you if you could extend that out maybe a little bit just to give us a sense, I mean you can go from 95.4% to 94.6% and still call it 95%.

Leo Ullman

You are absolutely right and for the last two quarters as of the end of ’09 we were at 94.7%, at the end of the last quarter we were just about 94.5%.

Nate Isbee – Stifel Nicolaus

Okay, thank you

Leo Ullman

Thank you, Nate.

Operator

Moving up we’ll take our next question Todd Thomas from KeyBanc Capital Markets

Todd Thomas – KeyBanc Capital Markets

Hi. Good morning. I’m on with Jordan Sadler as well.

Leo Ullman

Good morning, Todd and Jordan.

Todd Thomas – KeyBanc Capital Markets

Good morning. I was wondering if you could characterize the acquisition market that you’re seeing today. And I was also wondering if you or RioCan have lowered your return requirements somewhat in the last couple of weeks as cap rates from high quality assets seem to be coming in a little bit?

Leo Ullman

Well, I hate to speculate on exactly what RioCan was hoping for, but I suspect that they are highly aware of the cap rates had been compressing. We were quite lucky buying the first property in Temple at a better than well above actually 8% cap rate. And I dare to say that the ones we’re working on now are below 8% in terms of ingoing cap rates. For the kind of properties that we expect to acquire in this joint venture mode, they are going to be signature properties in their respective markets, we’re looking for long stabilized tenancies, new properties, strong lease parameters, good demographics, etc.,

And for those kind of properties, yes, we’re going to be going below 8% and probably closer to 7.5% on an ongoing unleveraged yield basis on current 12 months NOI, using our parameters of underwriting, where we apply a let’s say 3% credit/vacancy factor without regards to the actual vacancy and where we apply a certain management fee level, let’s say 4% and we underwrite conservatively generally with respect to lease renewals etc., So we look at those properties and we value them together based on a potential 50% to 60% LTV ultimately in terms of a loan on the property and the rest coming in at equity at our respective clause and factoring in for us at Cedar, a substantial yield for property management and other fees that I have mentioned.

Yes it’s going below. Are we seeing properties? Yes. We have been fairly pleasantly surprised by the number of properties we’ve seen recently. We’ve been bidding sometimes on properties that have not yet come to market, very often, we get the chance to bid first and last, if it’s a multiple bidding arrangement, because we’ve been in the market so long and these are our core areas. We’re seeing a fair number of properties. The thing that has made life a bit easier is that there is a great deal of credit available at the moment at reasonable prices. We are able to get quotes, largely through the efforts of Brenda Walker at our shop, but also through the RioCan folks at rates from 5% to 6% with five-year terms and maybe a little bit higher than that going 7% to 10%, but it’s permitted us to bid on some of these properties and yet look at a leverage double-digit kind of yield.

Todd Thomas – KeyBanc Capital Markets

Okay, that’s helpful. Where’s like the pipeline with a sort of look like right now? What kind of volume on a gross basis might we expect in the back half of the year?

Leo Ullman

Well we’re hoping to conclude and again, we don’t announce these things until we go hard, as we call it, the deposits become nonrefundable. We’re working several. Again, our target remains the $500 million that was announced and that’s over a two-year period and we think that will be spread relatively evenly, but it’s serendipitous.

Todd Thomas – KeyBanc Capital Markets

Okay, sure. And then moving over to leasing and looking at your development properties, so the four that are in lease up, it looked like Heritage lost some occupancy. I was just wondering if you could talk about what happened there. And also just give us an update on Upland Square’s leasing and the balance of that, what’s going on at that project?

Larry Kreider

If I could, in fact, Todd, heritage did not lose occupancy. We adjusted the square footage and likewise on a particular tenant and likewise we adjusted the revenue per square foot as you’ll notice on the same chart so that the revenue that we had that we reported for first quarter is indeed the same as for the fourth quarter.

Leo Ullman

For heritage, Todd, that’s quite a small property that we developed with and named Larry Hirshland and Hirshland properties [ph]. It’s got a Walgreens that’s open; it’s got a McDonald’s that’s being built as we speak. It’s got a kinder care of 10,000 feet. The total that’s built so far is about 28.5 thousand square feet. We contemplate building another 22,000 feet there. We have a couple of tenants that are smaller tenants for that space, but that is not yet been built. So that’s relatively small, but the leasing is going fine and there are strong tenancies, it’s a nice little property.

Upland, we are 79% as we speak. We have basically leased 79% if you’re at 498,000 square feet. If you use 426,000 square feet, which is the amount that’s presently built, we’re at 85.6% leased, so that’s going very well. The property in Stroudsburg, which is Crossroads too, there again, we’re now at 79%. I think we previously announced that we’re 65%. That’s of 124,000 square feet or so and that’s talking about actual signed leases.

Todd Thomas – KeyBanc Capital Markets

Okay. That’s helpful. Thank you.

Operator

We now move to take our next question from RJ Milligan with Raymond James.

RJ Milligan – Raymond James

Good morning, guys. The renewal spreads were up pretty nicely, up 5.6%. Do you guys have the, what was the spread for the new leases?

Leo Ullman

Well, we did announce that. In the press release, we indicated that for the leases that were new, that’s the amount of –

Larry Kreider

Yes, well, we have 69,000 square feet of new leases, RJ, at $13.13 per square foot versus terminated leases, which are different leases of course at $11.42 per square foot.

Leo Ullman

So we’re showing for those basically better than 10% increase. And again the difference between the 69,000 square feet and the 175,000 square feet is different properties at different tenancies and the 175,000 square feet does reflect the fact that the Sam’s Club and the Giant Store at Oakhurst are vacated at this point.

RJ Milligan – Raymond James

So, if it was the empty space prior on a same space basis, what were the spreads? I mean how do I get to that math?

Leo Ullman

We don’t report in that fashion. It’s a fair question, but, in general, on an overall basis, we’ve been up almost all the time because our overall for the entire portfolio is in the $11.5 range. We’ve been –

RJ Milligan – Raymond James

So I’m sorry to cut you off, Leo. The spreads were positive then for leases in same spaces?

Leo Ullman

Yes. And Nancy, if you are on the phone, perhaps you could address this directly?

Nancy Mozzachio

We absolutely are staying positive that where vacant spaces and re-tenanting of those vacant spaces. I think the numbers that we reported just recently that we have mentioned, I mean reports of about 15% upward movement, but I would say same-store to same-store, we’re definitely seeing significant upward movement in replacement tenants.

RJ Milligan – Raymond James

Okay, great. That’s helpful. And for the same store NOI guidance for the year, you guys last quarter were talking flat on a cash NOI basis. Do you guys still see that happening? How do you guys see that trending over the next three quarters?

Leo Ullman

Our guidance is typically for the full year for all of our properties and that we’ve reiterated our guidance between $0.60 and $0.70 and I would say that we still see flat same-store results for the coming year, but we don’t actually specifically report that kind of guidance.

RJ Milligan – Raymond James

Okay, fair enough. Thanks, guys.

Leo Ullman

Thank you.

Operator

Moving up we’ll take our next question from Arthur Friedman from Friedman Asset Management.

Arthur Friedman – Friedman Asset Management

Hi, good morning.

Leo Ullman

Good morning, Arthur.

Arthur Friedman – Friedman Asset Management

How are you?

Leo Ullman

Fine. How are you, sir?

Arthur Friedman – Friedman Asset Management

Good. Good. I have a couple questions. The first one is under the credit facilities; you mentioned that the $285 million credit facility was due 2012. The $150 million credit facility for development, when is that due?

Larry Kreider

That’s due 2011 with a one-year extension. And of that $150 million withdrawn about $90 million, so we still have some $60 million availability under that facility. And that facility is at $225 million over LIBOR whatever LIBOR is whereas the other facility has it LIBOR floor of $200 million. Along with the development facility, we are borrowing at very, very attractive rates still.

Arthur Friedman – Friedman Asset Management

The other thing when I look through the reports, I find your quarterly reports very helpful, there’s a lot of data. It helps me understand the business strategy. But I always at some point, try and reduce it down to the simple question of how did they do? And one of the headlines for me on this particular quarterly report is the reduction by $186 million on the stabilized credit facility. That seems to me very important strategically.

What I wanted to understand was in doing that, from an accounting perspective, are you allowed to do this accounting wise to put aside $6 million of the amount you reduced it by and have reported that as income, so as for the quarter not to have come out down $3 million, that possibly like up $3 million sort of balancing out the year-over-year results? You see what I’m getting at?

Larry Kreider

I do. It would have been nice to increase our income by $186 million, why not? The trouble is we are shackled by GAAP accounting and we’re incredibly supervised by both Ernst & Young who have been very good over the years, very thorough and spend an awful lot of time at our offices plus our own accounting group and finance group, and of course, our audit committee, which is very strong headed by Jim Burns

We are very, very conservative with respect to our accounting. It would be nice to move some monies into income, but we can’t. And to your point, the most significant thing that we will have done we still believe is driving down our debt and specifically, driving down our floating rate debt under that credit facility. It puts us in such a wonderful position at this moment because we have all this availability and we can do deals and it’s moved us from being defensive to being in a very strong potentially proactive acquisition mode.

Arthur Friedman – Friedman Asset Management

Thank you very much. That’s what I was looking for. I was trying to understand that. Thank you very much.

Larry Kreider

It’d be nice to move few million dollars into income for repaying debt. We have to introduce that to our audit committee.

Operator

(Operator instructions) We move on to Jim Rosenwatt [ph] from Private Fund Management [ph].

Jim Rosenwatt – Private Fund Management

Hey, guys, thanks for taking my questions. Appreciate it.

Leo Ullman

Thank you for calling.

Jim Rosenwatt – Private Fund Management

On that same-store NOI page, in your supplemental, I believe it was Page #13. Can you kind of go through that with me and can we kind of go through what were the main determinants in that same-store NOI down over 10%? I know you kind of alluded to the increased expenses from the snow removal. What about on the revenue? I see the base rents down pretty significantly, I guess.

Larry Kreider

Well as I said, in my remarks, first of all I would direct your attention on Page #13 to the chart that’s underneath the income statement that shows the NOI before the straight line rents and amortization of lease liabilities, but I can take you through the component, as I said it was $500,000 related to the two tenants, Brickyard and Oakhurst, and those are the properties that are subject to re-tenanting that we talked about that also caused a 1% drop in our overall occupancy and that’s up in the revenue line and that’s the $500,000 that you see there (inaudible).

Netted against a couple of numbers is reduced collections of expenses related to heavy snow costs, that’s another half a million, but that’s a little more obscure because you have to net the expense recoveries against the operating maintenance and management expenses and the real estate taxes. And then also I cited last year we had some unusually favorable revenue that’s nonrecurring and you see that in the other line, you see $482,000 in other revenue and then there was an additional couple of $100,000 for tax settlements and so forth. That’s the $700,000 that I cited in my remarks. So all those add up to about $1.7 million.

Jim Rosenwatt – Private Fund Management

But the base rent figures are due to decreasing occupancy?

Larry Kreider

Yes, right. Two tenants. And then also for overall NOI, you noticed underneath, did you see the non-cash items are as reflected in our guidance, our amortization of intangible lease liabilities has decreased fairly significantly a million dollars in the quarter and that was all in our guidance.

Jim Rosenwatt – Private Fund Management

Okay, got it. And then on that Page #9 of your supplemental I think you reference this a little bit, the funds available for distribution. I guess now that you’ve reinstated the dividend of $0.09 and the funds available for distribution at least in that first quarter was $0.11 I guess you said. That was 86% or so. So kind of when I’m looking at this, just from a high level perspective, it looks like you list the past five quarters here. Gone nine, eight, seven, seven, six and funds available for distribution. But the share count has gone from 46 to 60.

So I’m just kind of saying going forward, if you’re going to attempt to grow the dividend here, isn’t it that’s kind of cutting it a little close in terms of at least trend wise, a little bit disturbing, right? How do you try to reconcile being a REIT and paying out your income as dividend, but still trying to grow that dividend when it looks like the trend line has kind of pointed to maybe paying out a little bit more than you’re able to generate?

Larry Kreider

Well we’re paying out less than we are generating.

Jim Rosenwatt – Private Fund Management

Right, right, right now but it’s –

Larry Kreider

So we’re paying out less. We have growth opportunities through the RioCan joint venture and the acquisitions that Leo has discussed and I would refer you to our guidance. This is all in accordance with our guidance.

Leo Ullman

Our guidance is 60 to 70. Let’s say for the moment, it's sort of the midpoint of that guidance is also more or less our AFFO, which is essentially a cash metric. We have been targeting 75% for the year more or less of payout for dividends from our cash available for dividends. So that 75% is relatively comfortable and we contemplate again growing this company and growing our cash flow. Not just from the RioCan, but from internal growth and also as these development properties continue to lease up and generate additional income, we expect to have additional cash flow. In our minds at 75% kind of level for the year and we’re looking at this on an annual basis. This quarter had a little bit of noise because of the snow and a couple of tenancies that were terminated, but on an annual basis, we feel pretty comfortable.

Jim Rosenwatt – Private Fund Management

Okay. But just kind of like high level if I was looking this year, this quarter 2010 versus first quarter 2009, funds available for distribution of $9.2 million in 2009 versus funds available for distribution of $6.8 million in first quarter 2010. Wasn’t first quarter 2009 like a pretty difficult time in this (inaudible).

Larry Kreider

No, first quarter 2009 was one of our better quarters.

Leo Ullman

It was a good quarter. (inaudible) after the first quarter.

Jim Rosenwatt – Private Fund Management

Okay. So it’s kind of been like a, you guys are on a little bit of a delay I guess from the broader markets?

Leo Ullman

Our operations have been really unaffected by this downturn. I mean we’ve had these retenanting situations on the horizon for a while and we’re going to deal with them.

Jim Rosenwatt – Private Fund Management

Just moving on to some quick portfolio questions. Can you get into what the cap rates were on those Ohio discount drug sales?

Leo Ullman

They were basically with a couple of exceptions 9% to 10%. Again unlevered etc., etc. They all had debt on them. Basically, all had debt on them, which was CMBS debt. So it was important for us to realize a bit of cash, but also to get some debt off our balance sheet. And as I said we’re continuing to look at those opportunities, but in the meantime, they are cash flowing and the vacancies there are being addressed pretty effectively at the moment. We think we’re going to be filling a lot of holes in what’s left in that portfolio.

Jim Rosenwatt – Private Fund Management

Right, okay. That makes sense. In terms of, I know you’ve spoken, I guess maybe two or three quarters ago, I can’t really remember, on some of the video store impact. Obviously movie gallery, Hollywood video liquidating entirely. I think you guys have like seven or eight of those–?

Leo Ullman

Well I can tell you exactly, our total video store exposure for blockbuster movie gallery etc., is a little bit less than 70,000 feet, of which 55,000 square feet is blockbuster and approximately 15,000 is movie gallery. We have one movie gallery, that’s still operating. The other three have closed. We had just four. We attend blockbusters and we’re dealing with those in terms of arranging some buyouts and so forth. In all, this represents less than 0.5% of our revenues.

Jim Rosenwatt – Private Fund Management

But that’s something like 75 bps to 100 bps of occupancy, if you were to say all, were to be closed at the same time?

Leo Ullman

If they all closed at the same time its 70,000 feet out of 13 million, that’s 0.5%.

Jim Rosenwatt – Private Fund Management

Okay, great. And then just lastly, I think the first question you spoke at length about how you get that 95% in your portfolio because like the Sam’s Club at Brickyard, you put it into that retenanting zone and the 95%, and –

Leo Ullman

That one will actually be a redevelopment because we are going to be knocking down that building and putting in one or two new tenants for that one. You should note that in that same property, for example, home depot has renewed.

Jim Rosenwatt – Private Fund Management

Okay. That’s kind of what I was getting at. So, those big lease termination ones, they move into the retenanting because they’re under that 80% occupancy threshold?

Leo Ullman

Yes, that’s right.

Jim Rosenwatt – Private Fund Management

But my question is like say something like a West Bridgewater Plaza, if I’m correct, there used to be a Shaw’s there at the anchor tenant, correct? But there’s no longer physically there.

Leo Ullman

Yes.

Jim Rosenwatt – Private Fund Management

So, even though you’re reporting them as 90% plus occupancy for West Bridgewater isn’t occupancy actually significantly less than that in terms of people that are actually in there? Shaw’s isn’t there. I know they’re still paying you.

Leo Ullman

Yes, yes, you’re right. But Shaw’s leased their (inaudible) till 2027, believe it or not, and it’s a 57,000 square foot store with a base rent of 500,000. It is dark but they and we are working on re-tenanting that.

Operator

And we take our next question comes from the Nate Isbee from Stifel Nicolaus.

Dave Fick – Stifel Nicolaus

Hi. It’s Dave Fick with Nate Isbee. I had to jump off another call so I apologize. But I have a couple questions and one observation that reiterates something Nate said. Taking properties in and out of the comp group is misleading at best. This is normal course of business stuff. Tenants come, tenants go, and arbitrarily deciding what you’re going to include and what you’re not going to include in the comp growth is taking liberties that I think aren’t warranted.

My questions are first related to the Shore Mall. You, Leo, personally sold that from a partnership that you had to the REIT several years ago with very high expectations in terms of the opportunity for redevelopment and upside in the NOI. Can you share with us what the NOI was at the time that you sold it to the REIT? And what the NOI is today? And can you share with us what the current plans of those redevelopment plans are?

Leo Ullman

Okay, I really don’t know what valuation was when it went into the REIT. Its cash flow has declined from the level of the high #3 million plus level to a level of below $3 million. The principal tenant there has always been, David, I’ve been involved with this property since 1984. We’ve always intended to redevelop this property and I think we finally have a plan that could work. It’s 125 acres. It’s beautifully located at the confluence of the Garden State Parkway and the Black Horse Pike. It’s got the No.1 Bosco of Stores still. We closed the value city on purpose and that hit our numbers a little while ago.

We also still have a Burlington coat that’s at the anchor there with 85,000 square feet or so. The mall tenants have been declining ever since we purposely closed the value city and we expected that. This is a redevelopment that we contemplate in a year or two to result in essentially a strip of larger tenancies with a new road that will be financed as part of the government’s financing program and we expect that to take place probably in 2011. It’s being supported by the two New Jersey Senators and we are on the list. If we get that road improvement, we will proceed promptly with a de-malling of that property and that’s our intent, it would be downsized, it would be de-malled and we might indeed ultimately sell out the 50 acres in the back.

Dave Fick – Stifel Nicolaus

Would it be on the same scale as what you did in Camp Hill?

Leo Ullman

Probably not. It will not be as large. I don’t think as Camp Hill. Camp Hill is basically sort of a half a million square feet here. We are probably talking about 300 million square feet to 350 million square feet.

Dave Fick – Stifel Nicolaus

I think your description of the road opportunity and the upside opportunity as well as the need to take NOI offline are pretty identically consistent with what you said several years ago when this came into the REIT. Has it moved substantially down the road in terms of, it sounds like you’re still working on trying to get the funding and the road changes and –?

Leo Ullman

It’s moved significantly. What’s basically happened conceptually of it is that we had previously always contemplated redirecting the exit from the Garden State Parkway so that it would flow into our property rather than taking cars away from our property as is now the case. We have moved from that concept which would require redirecting that exit ramp as well as pulling a boulevard to the backend of the property. We have gone to the other side, let’s say away from our gate and closer towards the Hamilton area conceptually and contemplated widening that road and extending a strip facing that road.

Dave Fick – Stifel Nicolaus

Okay. And then my last question is related to how you look at your cost of capital and the market opportunities today. Obviously, we’re starting to see good community shopping centers trade in the sevens. Great ones trade in the sixes again. You have a new partner who is aggressively bringing capital to you. How do you sort of balance and make decisions about acquisitions from here? Are you an IRR investor? Are you a cap rate investor? Do you have to cash flow positive on day one? How do you look at your piece of the investment in terms of the return enhanced by fees and so forth?

Leo Ullman

Okay. In general, we are looking at stabilized properties with an ingoing unleveraged cap rate of, let’s say, somewhere between 7.5% and 8% depending on the properties, supermarket anchored with long leases hopefully or else club anchored here and there as you’ve seen with a target type of shadow anchor, if not included in the property.

We think that the cost of capital for our equity is slightly above 8%. Our debt costs are in the 5.5% range at the moment for some of these properties trending towards 6%, let’s say. When we buy a property, we basically look at the likelihood that we will finance it to the extent of 50% and that we will put in equity of 50% for our portion of the equity, which would be 20% in the RioCan joint venture. We would look for it to be enhanced by fees which would generate between 40 basis points and 50 basis points on an overall basis for our underwriting. So, property that we would be buying at 7.75 if you add in our fee structure, we would look to for our portion to get at probably 8.25. Again, going in unleveraged.

Dave Fick – Stifel Nicolaus

Are there circumstances under which you would be buying on your balance sheet at this point?

Leo Ullman

Yes. As a matter of fact we are looking at a couple of properties on balance sheet, smaller and we’re looking for some development type opportunities or redevelopment or properties with a little hair that would be on our balance sheet and not in the RioCan joint venture. And that’s in discussions with RioCan.

Dave Fick – Stifel Nicolaus

Thank you. And just circling back on that initial comment I made, I really don’t want to beat you guys up, but we don’t know anybody else who’s doing it. There was one REIT that historically used to put properties in and out based on redevelopment and retenanting and so forth and they were hammered for that in the marketplace, and I believe had a discount for their multiple. It’s just not warranted. I don’t know who’s advising you on that but it’s just simply at best it smells and will cause people to question whether you’re playing with the numbers. Thanks.

Leo Ullman

David, as you know, taken all your comments to heart and we will do so with respect to this. We think that the reporting is not unfair because development properties are all over the place as you go through development and redevelopment and the very strong preponderance of our properties are very, very, very stable and predictable cash flowing to the nickel and that’s what we wanted to show. Meanwhile, we’re ramping down very considerably on the development stuff. And also in accordance with your thoughts previously, we have delevered as you’ve noticed monstrously without unduly diluting our shareholders and we think we’ve done a pretty good job at that, while continuing to have very strong operations, so we do listen to you.

Larry Kreider

For all the investors on the call, I would also point out that we are very transparent in showing our overall total occupancy on Page #25 of our supplemental and there is another page where we show it and that shows every single property and we have done that consistently for all the quarters.

Dave Fick – Stifel Nicolaus

We don’t mean to imply that you are actually trying to hide anything. We just want to make sure the optics don’t show that. Thank you.

Leo Ullman

But, we would like to move a lot of money from repaying debt into income as suggested by a prior call.

Operator

And at this time, it appears there are no further questions. I’d like to hand over to our speakers for any additional or closing remarks.

Leo Ullman

Thank you very much. First of all, I wish to thank everyone on the call. Secondly, I again would like to thank our various constituencies for their support, our shareholders, our lenders, our real estate partners, our board of directors, our auditors and counsel and of course, the fine members of our Cedar employee staff. All of these constituencies have supported us through the headwinds of the past year and have helped us to continue to become a very, very strong business enterprise.

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Source: Cedar Shopping Centers Inc. Q1 2010 Earnings Call Transcript
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