Cedar Realty Trust, Inc. (NYSE:CDR)
Q2 2016 Earnings Conference Call
August 04, 2016 05:00 PM ET
Nicholas Partenza – Assistant Controller-Financial Reporting
Bruce Schanzer – President and Chief Executive Officer
Robin Ziegler – Chief Operating Officer
Philip Mays – Chief Financial Officer
Todd Thomas – KeyBanc
Floris van Dijkum – Boenning & Scattergood
Collin Mings – Raymond James
Welcome to the Second Quarter 2016 Cedar Realty Trust Earnings Conference Call. As a reminder, this conference is being recorded. At this time, all audience lines have been muted. We will conduct a question-and-answer session following the formal presentation.
I will now turn the call over to Nicholas Partenza. Please proceed.
Good evening, and thank you for joining us for the second quarter 2016 Cedar Realty Trust earnings conference call. Participating in today’s call will be Bruce Schanzer, Chief Executive Officer; Robin Ziegler, Chief Operating Officer; and Philip Mays, Chief Financial Officer.
Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements, and actual results may differ materially from those indicated by such forward-looking statements.
These statements are subject to numerous risks and uncertainties, including those disclosed in the Company’s most recent Form 10-K for the year ended 2015, as updated by our subsequently filed quarterly reports on Form 10-Q and other periodic filings with the SEC. As a reminder, the forward-looking statements speak only as of the date of this call, August 4, 2016, and the Company undertakes no duty to update them.
During this call, Management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Cedar’s earnings press release and supplemental financial information posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.
With that, I’ll now turn the call over to Bruce Schanzer.
Thank you, Nick. Good evening, and welcome to the second quarter 2016 earnings call for Cedar Realty Trust. During the quarter and since our last call, we have made exciting progress on leasing, redevelopment, capital migration, and balance sheet fronts. In addition, our second quarter operating FFO of $0.15 per share allowed us to once again raise the low end of our full year guidance to a range of $0.55 to $0.56 per share.
Before getting into more detail, I would like to take a moment and thank Team Cedar for their collective commitment to everyday excellence. This team focus on excellence in all our endeavors is what has allowed us to post another quarter of solid results.
More specifically, I would like to acknowledge my senior executive colleagues who are with me on this call. Phil Mays, our CFO; Robin Ziegler, our COO; Mike Winters, our CIO; Charles Burkert, our Head of Construction and Development; Lori Manzo, our Head of Leasing; and Adina Storch, our General Counsel. These professionals certainly lead by example when it comes to being committed to excellence.
Although the four vacant anchors we have previously discussed continue to weigh on our leasing metrics, we are systematically pursuing leasing opportunities at all four. Given our progress, we remain optimistic we will have these vacant anchor spaces fully leased in due course. Notably, excluding the impact of those four vacant anchors, our same-store NOI growth for the quarter would have been over 3%.
As previously disclosed, we anticipate the lease-up of these vacant spaces, as well as leasing of some associated space, to drive meaningful NOI growth in 2017. More generally, on the topic of leasing, with a quarter under her belt, Robin has spent a fair amount of time putting her imprint on our leasing efforts, and I will ask her to elaborate on these in a moment.
On the topic of redevelopment and value-add investing, we are just about done with the construction of a new Aldi supermarket at our Groton Connecticut center and are putting the finishing touches on our plans for two more significant redevelopment projects; and we anticipate kicking off in 2017 and 2018.
Given Robin’s track record and expertise in executing the sorts of large-scale redevelopments we have been advancing for a couple of years now, upon her arrival at Cedar, I asked her to take a step back to lend a fresh perspective to these projects.
I am pleased with the refinements she has made to these projects and am even more confident than ever that these redevelopments will yield attractive returns for the Company and its shareholders, which I look forward to describing more fully in the coming quarters.
Beyond these near-term projects, we continue to plan for the redevelopment of our recently acquired East River Shopping Center in Washington, DC, and are, more generally, creating a laddered pipeline of redevelopment and value-add investment opportunities that we hope will serve as a significant source of value creation and earnings growth for years to come.
In terms of capital migration, we closed on Glenwood Village during the quarter, which we announced before our last earnings call. We are making solid progress on the lease-up at Glenwood and are pleased with its performance thus far.
More generally, we are seeing a number of interesting acquisition opportunities in our DC-to-Boston footprint that offer attractive, risk-adjusted returns and enhance our portfolio composition. Mike and his team continue to successfully source off-market opportunities and, thanks in large part to their efforts, we have a very solid pipeline of potential acquisitions.
A recurring theme we see with many of the acquisition opportunities we are underwriting is that they present chances for us to leverage our platform by completing the lease-up of the subject property, either by taking over the final phase of leasing up and stabilizing a development project, or because of previous under management. These lease-up opportunities enhance our overall deal-level IRR and allow us to acquire what are generally low-cap-rate assets, while still leaving upside opportunity to create shareholder value.
Lastly, in terms of capital structure, I tip my hat to Phil for navigating our balance sheet to its current position. With our soon-to-be drawn $100 million term loan and our roughly $40 million in to-be-drawn forward equity offering proceeds, coupled with our anticipated disposition proceeds, we are poised to enter 2017 with an essentially undrawn revolver and no significant debt maturities for the next two years.
One need only compare the debt summary from our supplemental in 2011 when Phil and I started here to the same page in our supplemental today, not to mention how it will read once we repay the five mortgages that are prepayable before year-end, to appreciate how much simpler and more flexible our capital structure is today.
With the uncertainty and volatility in both domestic and international markets, we appreciate that U.S. based REITs, such as Cedar, appear to have become recognized as safe havens. This has been helpful in recent times and has allowed us to opportunistically access capital in a manner that is consistent with our prudent and thoughtful attitude towards risk management and capital allocation.
We have successfully driven down our cost of capital to a level where it is competitive with the other players in our target markets and have evolved our balance sheet to a point where we can continue to forge ahead in volatile markets with confidence. This will serve as the foundation for much of the value creation at the asset level and capital migration at the portfolio level that we expect will occur in the coming quarters and years.
With that, I give you Robin to discuss her first full quarter at Cedar and some of the progress we are making on the leasing and redevelopment fronts.
Thanks, Bruce. Good evening. I have just recently completed the 100 day mark at Cedar, and I continue to be invigorated by our exceptional team, the caliber and potential for value creation within the existing portfolio of assets, as well as our strategic plan to prune and enhance the portfolio through redevelopment and capital migration.
As I discussed last quarter, my major focus in these early days has been on four key areas – existing redevelopment, identifying new redevelopment opportunities, leasing, and operations. We have now brought a fresh perspective to ongoing redevelopments, which has resulted in meaningful progress to move these redevelopments forward. Additionally, as Bruce previously mentioned, construction is well underway for a new Aldi at Groton Shopping Center, coupled with some complementary re-tenanting and modest property improvement.
A new PetSmart is under construction at Brickyard Plaza, and Planet Fitness is underway and will replace a portion of the former Price Shopper box at Webster Plaza. We are in advanced lease negotiations with another national tenant to take the remainder of this box, thereby filling the entire anchor vacancy.
We are also identifying new redevelopment and value-add investment opportunities within our portfolio. I have traveled to almost all of our assets at this point, which has resulted in comprehensive strategy and value-creation initiatives that involve leasing, redevelopment, and operational directives, to improve asset quality, merchandising, and long-term value.
From this effort, over 15 what I would call base-hit redevelopments, or property-enhancement projects, have been identified that we will further vet and analyze to determine if they pencil financially. I feel it is important to note that of our 62 shopping centers, almost one-third appear to have additional inherent opportunities to be mined.
On the leasing front, during the quarter we executed 137,800 square feet of new and renewal leases. We achieved comparable cash-basis leasing spreads of 8.4% year-over-year. ABR for the full portfolio has increased by 4.1% to $13.52 per square foot.
We ended the quarter at 90.3% occupied and 91.2% leased. These metrics are substantially impacted by the four vacant anchors at Trexlertown, Carmen, The Commons, and Webster Plaza, that we have discussed in prior calls. Excluding these four boxes, occupancy increase is 220 basis points, and lease percentage increase is 200 basis points, to 92.5% and 93.2%, respectively.
Our leasing team is working aggressively on all fronts, with a particular emphasis on back-filling these anchors, for which we either have deals in negotiations or multiple deals percolating. We are pleased with our leasing pipeline and recent progress but recognize that there is still work to do. We have a specific roadmap in place that we feel is achievable to increase occupancy year-over-year, to reach a satisfactory sustained occupancy level. As most of these deals involve anchor tenants, it will take some time for you to see the impacts, but the momentum has started.
We were fortunate to not have any exposure to the Sports Authority bankruptcy. In fact, during the quarter we were able to successfully execute assignments of all of our grocer anchors affected by the Ahold-Delhaize merger. As a result, our exposure to Ahold decreased by 1.25% overall, and we have added new, high-credit quality grocers to our tenant roster.
Lastly, operationally we are working to anticipate challenges, determine quick solutions, and push decision-making down to the department heads, who are closer to the real estate. We are refining processes, policies, and procedures to create efficiencies for G&A and operate more proactively and effectively. Our leasing development and operations teams are working together every day as part of Team Cedar to deliver consistent and ever-improving results.
I will now turn the call over to Phil.
Thanks, Robin. On this call, I will highlight our operating results for the quarter, discuss our improving balance sheet, and update FFO guidance.
Starting with operating results. For the quarter, operating FFO was $12.6 million, or $0.15 per diluted share. This quarter did include $350,000 of lease-termination income. While we frequently receive this type of income, the amount this quarter is higher than usual, so I wanted to briefly note it.
At the property level, same-property NOI growth for the quarter was 1.5% excluding redevelopment and 0.6% including them. The lower growth including redevelopment was driven by temporary downtime and vacancy that often occurs early on in the redevelopment process.
As Bruce noted, and consistent with prior quarters, excluding the impact of the four anchors that vacated in the fourth quarter of 2015, same-property NOI growth for the quarter was greater than 3%.
Now moving to the balance sheet. We have worked diligently to strengthen our balance sheet and increase financial flexibility by reducing leverage, staggering and extending debt maturities, and growing unencumbered property NOI.
Most recently, we closed an equity offering on August 1. This equity offering was completed utilizing a forward agreement, under which we agreed to sell 5,750,000 common shares for net proceeds of approximately $44 million. This forward agreement provides us with up to 12 months to issue the shares and receive the net proceeds.
We utilize this structure primarily to align the issuance of the shares and resulting proceeds with acquisitions and redevelopment expenditures over the next year. This equity offering, along with our undrawn $100 million unsecured 7 year term loan, and disposition proceeds expected later this year, places us in an enviable financial position. However, as these items are not reflected in our balance sheet at the end of the quarter, let we walk through their significant positive impact.
First, at quarter end our balance sheet shows approximately $135 million of debt maturities in the next 12 months. After adjusting for just these items, we have no significant debt maturities for two and a half years, and effectively an undrawn revolving credit facility.
Second, our reported debt to EBITDA of 7.4 times decreases by approximately half a turn with the expected disposition. Further, while we generally plan to time the forward equity proceeds with acquisitions or redevelopment spend, it is instructive to note that simply used to reduce debt, such proceeds would further reduce our debt to EBITDA by an additional half a turn, driving it down to about 6.5 times.
Third, our remaining $300 million of secured debt will be cut almost in half by year end, as we roll maturing mortgages to our undrawn 7 year unsecured term loan, after which approximately 80% of our property NOI will be unencumbered.
Hopefully, walking through the impact of these items that are not yet reflected in our balance sheet was helpful and highlights the additional strength and flexibility they will provide us.
Before leaving this topic, I should note that we did not just find ourselves in this favorable position. Rather, it is a result of actively managing our balance sheet in a manner similar to the approach we are taking with our property portfolio, which is proactively planning, maintaining a long-term view, and being selectively opportunistic.
And finally, guidance. With another quarter behind us, we are once more raising the low end of our full-year 2016 operating FFO guidance to an updated range of $0.55 to $0.56. This range does reflect our expected disposition in the second half of the year but does not include any additional acquisition.
Again, this does not mean that we will not acquire any additional assets prior to the end of the year, but that we will update our guidance each quarter based on closed acquisitions.
With that, I’ll open the call to questions.
[Operator Instructions] Our first question comes from Todd Thomas from KeyBanc.
Hi, thanks, good afternoon. First question, I guess, regarding acquisitions, it sounds like the pipeline’s growing, and I’m just curious, are you seeing more deals because Mike and his team are gaining momentum and sort of turning over more opportunities, or are you finding the sellers are more willing to transact in the current environment? I guess, what’s the increased pipeline really a function of?
I’ll speak for Mike, here; and obviously, Mike, feel free to add. We’ve maintained a pretty solid pipeline all along. It happens to be that – just, I would say it’s actually probably coincidentally that a bunch of deals that we’ve been chasing after all appear to be breaking our way. But we – Mike and his team [indiscernible] pretty productive in terms of maintaining leads.
One thing that I preach to the team is that we don’t have to do a lot of deals in the year. We just have to make sure we do the right deals, and it appears that the right deals are breaking our way coincidentally at this time. And so we’re feeling pretty good about the pipeline. But again, the discipline that we bring to all these processes is a willingness to cut bait at any time if these deals don’t pencil. And so we just continue to slog through the diligence process in the objective of trying to bring high quality assets into our portfolio.
Okay. And you mentioned, I guess, where are the IRRs that you’re targeting for these deals? You mentioned that there’s some lease-up opportunities in a lot of what you’re looking at. Where are the IRRs that you’re sort of targeting for these transactions?
So broadly speaking, we target unlevered IRRs in the sevens on our acquisitions, and that’s pretty consistent for pretty much everything we’re looking at.
Okay. And then, Phil, just regarding the stock offering, those shares can be settled in phases as you sort of need the capital, or do you plan to issue the shares all at once?
It gives us the flexibility to pull them down in multiple increments and different sizes. So we’ll align those throughout the next 12 months, more around redevelopment spend and acquisitions. But it gives us a lot of flexibility. We do not have to pull it all down at once.
Okay. So any insight as to how we should sort of think about the cadence of issuance? I mean, is it sort of ratable, or would you expect to have most of it pulled out by the end of this year?
It’s a little tough because a lot of it will be driven by the acquisition, and so that can be lumpy when it does happen. If you’re modeling it, I wouldn’t do it any quicker than ratable. You might even do a little slower, might be prudent.
Okay. All right, thank you.
[Operator Instructions] Our next question comes from Floris van Dijkum from Boenning & Scattergood.
Floris van Dijkum
Great, thank you. Question – Bruce, maybe you can answer this, or maybe it’s Robin, but what gets you more excited right now, the acquisitions that you’re potentially looking at, or is it the redevelopment potential in the portfolio?
That’s a great question for us. I’ll tell you what gets me excited, and then I’ll let Robin, who’s relatively new, speak to what’s getting her excited, although one of the things that gets me excited is the fact that I have Robin on my team. But look, we are very excited, really, on both fronts, and I’ll tell you why. We embarked on a plan now starting a handful of years ago to transform this portfolio.
And we’ve had a lot of success, and I really tip my hat to Mike and his team for both divesting, call it 80 assets when we first started this process in order to fix our balance sheet, and now to continue to cycle through our portfolio, migrating our capital from lower-density markets to higher-density markets. And that really requires crisp execution on the sales side and just an incredible ability to source off-market opportunities in very attractive markets, which again is a testament to his track record and expertise.
Now, it’s no secret that those transactions are dilutive to earnings. And so the redevelopment piece is a critical piece that complements the capital-migration piece as a way to grow our earnings and to maintain and grow the net-asset value of the Company.
And that’s where Robin’s introduction to the Company is incredibly important, because of her track record. I’m very excited about the prospects for all these redevelopments as complements to what we’re doing on the portfolio-transformation side. But I’ll let Robin speak to what’s getting her excited about being here.
I would just echo the sentiment that Bruce just shared. They’re both equally exciting. On the redevelopment front, the idea of looking at what I would consider the core portfolio and being able to extract additional value out of those is obviously invigorating in a lot of ways and provides ongoing value.
And the cash flow that comes out of that obviously greases the engine for us to be able to continue to acquire more assets. And the types of assets that Mike is bringing into the Company also have interesting things about them that also have value-add opportunities. So they both – they’re different types of animals, but both have exciting attributes to them to be able to create value and produce long-term profits for the Company.
Floris van Dijkum
And in terms of returns, they’re very similar, in terms of IRRs that you’re looking at?
I would say that the redevelopment IRRs are at least 100 basis points higher, on average, than the acquisition IRRs. And so when we think – and Floris, we’ve spoken about this before, not necessarily on earnings calls, but – we think about the suite of capital-allocation opportunities and decisions that we made at Cedar on a risk-adjusted basis relative to our underlying cost of capital.
And so when we look at redevelopment expenditures or, frankly, any expenditure at the Company, we think about achieving a warranted risk-adjusted spread to our underlying cost of capital. And so we think that the return on a redevelopment expenditure should be greater than the return on just a stabilized asset acquisition.
Floris van Dijkum
One more follow up question for you guys. What caused the renewal spread to be higher than your new leasing spreads? Typically, it’s the other way around. Was there something unusual in the quarter?
It probably just has to do with sample size. Phil is looking into the supplemental right now, but typically in any one quarter, we don’t really have enough new leases to really extrapolate too much. I don’t know, Phil, if there’s anything about any of the new leases that are worth highlighting.
It’s not particular – the new leases in any given one quarter is not necessarily great for a run rate. I’d like at it more on a kind of a trailing four quarters to get a larger sample size and a better sense of what those spreads are running floor. So any quarter, one deal could move it up our down. So it’s always better to look at more kind of a trailing four quarters.
Floris van Dijkum
Okay. That’s great. I mean, look, I think – I’m trying to think of the disposition case that you guys are going. You’re sort of saying that you’re including dispositions in the latter half of the year in your estimates. What sort of range should we expect? And based on the current environment, would you think that you might actually step up your disposition plans over the next 12 months?
Hey, Floris, it’s Phil. At the beginning of the year, we laid out $100 million for dispositions. Thus far, we’ve done one for $15 million. I think the $100 million is still a good target, but the remainder will be late in the year.
Floris van Dijkum
Great. Thanks, guys.
[Operator Instructions] Our next question comes from Collin Mings from Raymond James.
Hey, good afternoon.
First question just for Bruce. I think in the past, going back to the conversation around the redevelopments, some of the optimism that the team has as far as identifying some more projects. I think you talked about ramping that up to $20 million to $30 million of spending per year on prior calls. Just given some of the projects previously identified as well as some of the ones now that sound like are coming into that bucket. Should we move that target range up a little bit going into 2017 or thinking about 2017 and 2018, that $20 million to $30 million a year – should it be higher than that now?
Let me answer that question in two ways, and I don’t want to make Robin sweat on our first earnings call, but I would tell you that the $20 million to $30 million is still a good number for modeling purposes. In other words, we’re very comfortable that that’s a number that we can deliver. And that’s based, just to be clear, Collin, on visibility we had previously into the redevelopment opportunities that we were pursuing, that we expect – will start bringing on line.
Now, I’ve charged Robin with growing our pipeline of identified opportunities so that we could potentially grow that number in excess of $30 million and maybe get it up as high as cost 5% of enterprise value. But that’s more of an objective and not something that I would put into a model. So I would stick with the $20 million to $30 million. We’re comfortable with that number, and I can only tell you that we hope to be able to deliver more than that on an annual basis. But we’re not there yet.
Okay. And then, maybe Phil just – how do you think about the dry powder going back to some of the other questions. The dry powder that you have now in context of just the recent capital markets activity for redevelopment spending, additional acquisition activity in context of the leverage that you want to maintain? I recognize that you still have some more flexibility around dispositions, but beyond the additional disposition activity already including guidance, how should we think about the dry powder before you’d want to come back for additional equity or start ATM activity, or something like that?
Keeping in mind that capital is fungible we’re set for a good time. So we generate free cash flow of $20 million, maybe a little higher now, a year, just from our current portfolio. So that can really fund the redevelopments to a large degree, and so accelerate a little more with some of the larger ones.
And then if you just were to roll forward our line of credit, there’s about $90 million on it at the end of the quarter, $135 million of mortgages maturing. We’ve got the $100 million term loan to take it down. That will leave you with a balance of about $100 million, $125 million again. And a disposition in the equity offering would take it all the way down to zero.
So we would be left, literally, with a completely undrawn line of credit. That would give us plenty of dry powder there. And then along free cash flow to help fund the redevelopment, we’re in good shape. And absent something really large, we’re covered for a while.
And Collin, just to amplify Phil’s thoughts – as we’ve discussed, our business plan, generally speaking, doesn’t require us to tap the equity markets. Our dispositions, generally speaking, fund our acquisitions. Our free cash flow funds our redevelopment capital spend.
And so the equity offering was opportunistic. We thought it was prudent, considering the run up in all the shopping center REIT share prices on the heels of Brexit to just over-equitize our capital strategy a little bit. But it wasn’t something that was necessary, and we’ll again continue to be opportunistic while at the same time respecting the fact that our shareholders expect us to grow earnings per share. And so we wouldn’t just dilute ourselves willy-nilly.
Okay. That’s very helpful. Appreciate the additional color there. Two other just real quick ones. I asked it last quarter. I don’t think there’s been any change, but just thinking about what you’re expecting in terms of spreads on the four anchor boxes. I think you talked about roughly 20% with some potential for upside. Is that still what you’re looking at as you’re in negotiations and finalizing those?
Yes, that’s exactly where we are, is right around 20%.
Okay. And then just going back to the other questions – just in context of some of the cap-rate trends out there – and again, we’ve talked at length as far as pricing and IRR and just how you think about acquisitions – but just in terms of what you’re looking to sell, are you noticing any – I mean, to the extent that you’re still not all the way to the closing table on some of the asset sales and looking into potentially doing more into 2017, have you seen a down-tick in terms of what you’re looking to sell as far as the pricing you can get in the marketplace?
Well, look, we have – we’ve talked about how ultimately we’re going to be divesting much of the bottom two quartiles of our portfolio, sort of our bottom 30 assets. And I can tell you that just having sold as much real estate as we’ve sold over the last five years, some assets do better than we expect. Some assets do worse than we expect.
And so I wouldn’t broadly characterize the market for our assets is being getting stronger or weaker. I would say that sometimes we’re pleasantly surprised, sometimes we’re slightly disappointed. But broadly speaking, we have a pretty good feel for what our stuff is worth, and it hasn’t really violently moved from where it’s been for the last couple years.
Okay. Thank you.
Thank you. At this time, I’ll turn the call back over to Bruce Schanzer for closing remarks.
Thank you all for joining us this evening. We wish you an enjoyable balance of the summer. We look forward to continuing to deliver strong results for our shareholders and to sharing these accomplishments with you in the coming quarters.
Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!