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Cedar Realty Trust (NYSE:CDR)

Q2 2012 Earnings Call

August 9, 2012 05:00 p.m. ET

Executives

Brad Cohen – ICR

Bruce Schanzer – President & CEO

Phil Mays – CFO

Nancy Mozzachio – VP of Leasing

Analysts

Nathan Isbee – Stifel Nicolaus

Todd Thomas – KeyBanc

Josh Patinkin – BMO

Operator

Greetings and welcome to the Cedar Realty Trust Second Quarter 2012 Earnings Conference Call. (Operator Instructions).

It is now my pleasure to introduce your host, Brad Cohen of ICR. Thank you. Mr. Cohen, you may begin.

Brad Cohen

Good afternoon. At this time management, would like me to inform you that certain statements made during the call which are not historical facts may be deemed forward-looking statements within the meaning of Section 27A of the Securities and Exchange Commission of 1933 and Section 21E of the Securities and 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 factors 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. In the end, the company undertakes no obligation to revise or update any forward-looking statements reflected in any circumstances after the date of the company’s release.

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

Bruce Schanzer

Thanks, Brad, and welcome to the second quarter 2012 earnings call of Cedar Realty Trust. On this call, we will review our second quarter 2012 results, provide an update on the strategic plan we first described last November, as well as some of the other measures we are taking to preserve and enhance shareholder value. Before beginning my remarks, I would like to acknowledge and thank all of my colleagues for their outstanding efforts on behalf of the company.

I am joined, as always, by our senior management team, specifically, Phillip Mays our CFO; Brenda Walker, our COO; Nancy Mozzachio, our Head of Leasing; Mike Winters, our Head of Acquisitions; Tom Richey, our Head of Development; and Stuart Widowski, our General Counsel. The balance of team Cedar is dialed into the call.

In a moment, Phil will discuss our financial results and update guidance in greater detail, however, I would just highlight the continued consistency of our portfolio, driven in part by strong leasing and property operations. One of the effects we expected when we undertook our strategic initiatives to streamline and focus the company is exactly what we are starting to see, as evidenced this past quarter, namely that our leasing and operating people are more effective because they are managing a portfolio of fewer assets that are more homogeneous by type and more geographically concentrated along the Washington, D.C. to Boston corridor.

I think the numbers are compelling and really convey much of this story. Our operating portfolio is now 91.9% leased, a healthy 170 basis points above our occupancy of 90.2% and a 10 basis points improvement over last quarter. In addition, we achieved the positive spread on our 31 lease renewals this quarter of 8.6% on a cash basis, which is our highest renewal rate spread in 12 quarters and continues our remarkable streak of positive renewals, at 26 quarters in a row.

Over the past six months, of the 77 comparable new and renewal leases, we achieved a positive spread of 5.9%, excluding the one dark anchor replacement deal we have discussed.

Two things I would highlight as we look a little deeper into these numbers relate to our small shop occupancy focus and our dark anchor replacement initiative. In terms of small shop, we are now 83.8% leased, a year-over-year improvement of 110 basis points, with a growing proportion of national retailers among our new small shop lease signings. We believe the steady progress we are making in small shop occupancy is a direct result of the intense focus we are placing on this component of our portfolio.

Similarly, we continue to make progress on our dark anchor replacement initiative, having executed our second lease termination agreement. We will provide further details on this once we finalize the replacement tenant lease, which is when the termination will become effective. Notably, and as we mentioned on our last call, this initiative negatively impacts some of our metrics as we go through the rotation from a dark anchor to a replacement tenant. We feel these are acceptable short-term costs for the long-term benefit of having an operating anchor with higher credit quality.

One last point. Of what were originally six dark anchors, five are SUPERVALU contents. We have already executed two lease termination agreements with SUPERVALU and are negotiating others, further reducing our risk profile. As we make progress in replacing our dark anchors with operating anchors that are of a higher credit quality, we are also reducing our exposure to the relatively riskier SUPERVALU credit. In terms of SUPERVALU, more generally, we are carefully monitoring the situation, though we are comfortable with our exposure considering the leases in question.

In addition to the terrific momentum we have had on the leasing front, the disposition and de-levering strategy we first announced in November of 2011 to sell approximately 50 assets and realize approximately $150 million for debt reduction continues to move forward on schedule.

This past quarter and through today, we have put under contract for sale two of our three enclosed malls, as well as four of our land development parcels, including our Heritage Crossing development, which represents roughly half the aggregate value of all the land and development parcels we are divesting. We also closed on one land parcel and one small improved asset during the quarter. Accordingly, we now have sold, put under contract or teed up to return to a lender 43 of the 50 assets, representing net proceeds of approximately $124 million. We have one mall, two unanchored centers and four land parcels remaining.

One last item to touch on relates to the possible unwind of our RioCan joint-venture, which encompasses 22 assets containing 3.7 million square feet. As we mentioned on our first quarter call, we are very focused on this situation and on making sure that Cedar shareholder value is maximized. That said, we do not have any further details to provide at this point regarding the RioCan relationship.

With that, I will hand the call over to Phil for a review of our second quarter results and certain other financial matters.

Phil Mays

Thanks, Bruce, and good afternoon, everyone. I will briefly review our operating results and then provide an update on our balance sheet and guidance.

Starting with operating results. Operating FFO was $0.16 per diluted share for the quarter. This includes $3.4 million of income related to the anchor replacement at Oakland Commons, consisting of a $3 million termination fee and $400,000 of accelerated intangible lease amortization. Excluding the $3.4 million, operating FFO was consistent with the previous quarter at $0.11 per diluted share.

Same-center cash NOI excluding redevelopments increased 1.1%. This growth excludes the termination income and was negatively impacted by the downtime associated with replacing the dark anchor. Same-center cash NOI would have been 1.9% if not for this temporary downtime.

Replacing the anchor at Oakland Commons also impacted our occupancy. We ended the quarter with total occupancy of 90.2% and same-center occupancy of 92.4%. Absent another dark anchor replacement before year-end, we expect both total and same-center occupancy to increase as we narrow the 170 basis points by which our total lease percentage exceeds our occupied percentage. More specifically, Kohl’s moving into our redevelopment at Brickyard, Walmart replacing SUPERVALU at Oakland Commons and a small shop progress made by our leasing team will all contribute to occupancy gain.

Now, moving to the balance sheet. We remain focused on lowering our cost of capital and during the quarter, we began the process of reducing the cost of our preferred stock. We issued 400,000 shares of a new 7.25% Series B for $9.2 million of gross proceeds. These Series B shares were issued at a discount to yield approximately 7.9% and the proceeds were used to partially redeem our Series A Preferred that yields about 100 basis points higher.

Additionally, we established an ATM program for our new Series B, under which we have raised another $4.6 million, also at a yield of 7.9%, and we have used about two-thirds of the proceeds to repurchase additional Series A shares on the open market. It’s important no note that with the execution of our Series B, we were more focused on rate than on the amount of the proceeds. Our Series A Preferred is callable in whole or in part at any time and we are willing to be patient in order to maximize the value of this call option. As yield on Preferred Stock continues to decrease, we will look to opportunistically issue Series B or additional Series B and redeem more Series A.

Turning to guidance. We are increasing our guidance for operating FFO to a range of $0.46 to $0.50 per diluted share. This reflects our solid results for the first half of the year and a $3.4 million of termination-related income recognized this quarter. This range continues to be subject to the timing of our remaining dispositions and reflects relatively flat same-center cash NOI growth for the remainder of the year.

And finally, just a quick note on the change we made to our reporting terminology. Due to the progress we have made and expect to continue making related to our dark anchor initiative, our near-term results may have more variability from lease termination income and temporary anchor vacancy. Accordingly, going forward, we will use the term operating FFO as opposed to recurring FFO. To be clear here, we’re simply changing the label.

And with that, I’ll turn the call back to Bruce.

Bruce Schanzer

Thanks, Phil. Before opening the call to questions, I would just like to take a moment to frame everything you have heard. When Phil and I started at Cedar a little over a year ago, we, along with our new colleagues, undertook to reinvent and reengineer Cedar into a much better performing shopping center REIT that delivers consistent and compelling results for shareholders and, over time, regains the trust of the REIT investor community. We feel that the measures we have taken to-date have positioned the company to achieve these objectives. We recognize this process takes time and we look forward to continuing to achieve what we expect will be a remarkable turnaround, executed by a highly motivated and energized management team that aspires for excellence every day and in everything we do.

With that, we will open the call to any questions you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Nathan Isbee of Stifel, Nicolaus. Please go ahead.

Nathan Isbee – Stifel Nicolaus

Hi, good afternoon.

Bruce Schanzer

Hi, Nate.

Nathan Isbee – Stifel Nicolaus

Can you just give us a little bit of sense of where you stand with the other dark but paying boxes in the portfolio? What are some of the...

Nancy Mozzachio

Hi, Nate.

Nathan Isbee – Stifel Nicolaus

Okay, go ahead.

Nancy Mozzachio

Hi, it’s Nancy. I can tell you that we’re having conversations with two of those dark anchor boxes. And as Bruce mentioned in his remarks, we do have a termination agreement that was struck with SUPERVALU that we can activate and expect to activate that and replace that with another grocery tenant.

Nathan Isbee – Stifel Nicolaus

Okay. And as you look across those remaining boxes, what type of rent roll-downs or perhaps ups would you expect to generate?

Nancy Mozzachio

I think that appreciate that they’re in different regions, so I can’t really make a blanket statement about that. But I can tell you that we very carefully analyze how we’re structuring these termination agreements as compared to the rent that we believe that we can achieve here. So our hope is that those combined components will give us in some cases a push and in some cases we might be even and in some we might be a little bit less. But as Bruce mentioned, this time, I mean we are looking to replace these anchors to add some vitality into these centers, so it’s an important component for us.

Nathan Isbee – Stifel Nicolaus

Okay. And as you look at the SUPERVALUs that are still open and operating, if there were to be some additional closures in the portfolio, would you expect the time lapse to be as severe as you’ve experienced here or do you think those would move quicker off the market?

Bruce Schanzer

I guess, Nate, what I would say is the following. We carefully monitor our SUPERVALU exposure. As I mentioned, most of our dark anchors are SUPERVALUs. In terms of the balance of the portfolio that is rented to SUPERVALU, we’re comfortable that these are leases that are generally at or below market. And so it’s our view that, again, it really would depend on the location, but if you were just to ask us to make a generic characterization, I think we would say that on the whole, we’d probably be better off having those spaces back with the ability to rent to them somebody new, as opposed to continuing to receive rent here.

So look, we’re not too worried about this. We have keyed in on the centers where these leases are above market and those happen to be generally also the dark anchors and so those are the ones that we’re focused on re-tenanting. But again, I think we’re comfortable with the exposure. And to the extent, as a generic statement, that we were to have another SUPERVALU go dark, I think as it relates to the operating anchors, I think that we’d be comfortable that we’d be able to release those pretty quickly.

Nathan Isbee – Stifel Nicolaus

Okay. Thanks. And then just moving to Shore Mall, can you update us in what your plans are for that asset? Are you planning on selling that? There’s been some press reports recently about some pretty strong tenant response to some of your plans there, so I’m just trying to get a sense of what the short to middle-term plan is for the asset.

Bruce Schanzer

Okay, I’m glad you brought that up, Nate. We have the Shore Mall, as you know, on our disposition list and we undertook to sell it. And what we discovered is that the value-add opportunity at Shore Mall, which specifically contemplates knocking down the enclosed portion of the mall and converting it into a strip center, was something that we were not getting adequately rewarded for in the pricing that we were seeing and so we decided to do it ourselves.

And it’s a very manageable project for us; it’s something for which we already have plans. And so we’re going to execute that de-malling, which effectively contemplates knocking down a vacant anchor and knocking down a mall that has some relatively low-quality tenancies to it. And at that point, we’ll bring the Shore Mall back to the market as a, hopefully, 100% occupied strip center with a fair amount of developable land behind the center where the old enclosed mall sat.

So as you would imagine, there’s some resistance to that from folks who now occupy the mall in the in-line space. But again, from an economic perspective, it’s a very clear path for us and we expect to get a very handsome return on the incremental capital that we’re investing, so it really makes a lot of sense from an economic perspective for Cedar to pursue this approach at the Shore Mall.

Nathan Isbee – Stifel Nicolaus

How much do you expect to spend there?

Bruce Schanzer

Probably about $3 million.

Nathan Isbee – Stifel Nicolaus

And that would include just demolition?

Bruce Schanzer

That includes basically demolishing the enclosed mall and the anchor space and then effectively fencing in the strip mall and just cleaning up what will then be just vacant land.

Nathan Isbee – Stifel Nicolaus

So you would not be pursuing any sort of ground-up development there yourself.

Bruce Schanzer

Nope, that’s not the plan.

Nathan Isbee – Stifel Nicolaus

Okay. Thanks.

Operator

Thank you. (Operator Instructions) And the next question is from Todd Thomas of KeyBanc. Please go ahead.

Todd Thomas – KeyBanc

Hi. Thanks. Good afternoon. Just a quick follow-up on the Shore Mall. What’s the timing expected for the de-malling and what kind of returns on the incremental spend do you anticipate?

Bruce Schanzer

The timing is as follows. We have leases that run through the end of the year and so we’re going to leave the mall open, generally speaking, until the end of the year, at which point all the leases expire. And at that point, we’ll proceed, assuming that we get all the appropriate permits, to demolish the enclosed mall and the vacant anchor space there.

In terms of the return, again, it’s a $3 million investment and I think that we’ll certainly exceed our low double-digit required unlevered return threshold probably fairly substantially. Again, we’re optimistic we’re – we wouldn’t be investing the incremental capital unless we were highly optimistic of getting the return. And I think in this instance, we think that we could do very, very handsomely relative to the kind of returns that we require for putting out incremental capital. Which to be plain with you, Todd, is exactly why we’re undertaking this is because, again, we just see a great opportunity to, in a relatively short period of time, put out some capital and get a really terrific return.

Todd Thomas – KeyBanc

Okay. And maybe a question for Nancy. Just in terms of leasing, can you give us a sense of where the demand is coming from in the small shops? It sounded like it was mostly nationals and regional, so I was just wondering if you’re starting to see any more demand from some local retailers that are willing to sort of set up and take risk today.

Nancy Mozzachio

We’re definitely seeing local retailers appreciate when we put this focus with our team on small shop lease-up. We’re out campusing. We’re talking to local tenants. We are trying to take those local tenants from a competing center and bring them to our shopping center, using the strength of our grocery tenant anchor as the lure. And if you recall, a couple of quarters ago, we started an ATM program, where we were offering some reduced rents; there was no capital in on our part. That’s been quite successful. As a matter of fact, this past quarter, we did have the ATM program produce one tenant.

So we are finding those small shops. I will tell you, though, we probably have, as Bruce mentioned, a sizeable number of national tenants in our small shop numbers this particular quarter, but we do have small tenant, local tenants who are committing to space, but we’re still finding capital. I will tell you that even though they are local tenants, they tend to be a tenant that has multiple locations, so in some cases, they have the ability to finance themselves; we are seeing that.

Todd Thomas – KeyBanc

Okay. And then in terms of, I guess, guidance, where do you forecast the lease rate and physical occupancy for the overall portfolio to be at year-end?

Phil Mays

Hey, Todd, it’s Phil. So our total current occupancy’s 90.2%. We talked about we have 170 basis point spread, which would get you close to 92%. We hope to narrow the majority of that gap and get close. Same-center, we’re at 92.4%. There’s about 120 basis point spread on that one, which would put it around 93.5%. And we’d hope to narrow the majority of those spreads on both of those.

Todd Thomas – KeyBanc

Okay. And then I’m also just kind of thinking towards year-end, can you give us an update – I know you’re still in the process of selling land and other properties, but can you give us an update with where you expect debt-to-EBITDA to be at year-end and also how much you expect to have drawn on the line of credit?

Phil Mays

Yeah. I mean it’s a little rough with timing just because we have to get loan approval with the banks and the special servicers and all that, so it’s little – I mean we’re at 8.7. It will improve. So if everything closes without a lot of hassle from getting assumption approval, maybe low eight.

Todd Thomas – KeyBanc

Okay. And then just...

Bruce Schanzer

Todd, II was just going to add that keep in mind that virtually everything that’s not selling by the end of the year is land and the Shore Mall, which is a very low-yielding asset. And those are really the assets that are going to push us over the top in terms of getting into the high sevens, as we told you. And so it’s really those last transactions that are really the transactions that get us to our target leverage level.

Todd Thomas – KeyBanc

Okay, that’s helpful. And then just a quick clarification, in terms of your revised FFO guidance. Only the $3 million lease term fee is included, not the accelerated amortization, not that portion; is that correct?

Phil Mays

Yeah, let me walk through it. So the midpoint of our old guidance is $0.425. If you took the term fee plus accelerated and less of the rent we’re losing for downtime, it ends up being about $0.04 and we raised the mid-point about $0.055, if that’s helpful.

Todd Thomas – KeyBanc

Okay, yeah, that’s helpful. And the balance of the increase, is that just due to better than expected performance within the core portfolio?

Phil Mays

Yeah, it’s a little better performance, plus it’s the timing of the disposition; some of them that are dilutive in time, that with some that are not. Plus, you just get to there’s less time left in the year, so regardless of the kind of the timing of when those happen, they won’t have as much of an impact to the remainder of the year.

Todd Thomas – KeyBanc

Okay, understood. All right, great. Thank you.

Operator

(Operator Instructions) And the next question is from Josh Patinkin of BMO. Please go ahead.

Josh Patinkin – BMO

Hi, guys. Thanks. Looking at some of your debt rolling over next year, the Upland Square maturity, have you had any discussions there; could you talk to us a little bit about what you’re thinking?

Phil Mays

Yeah, there’s about $120 million that matures next year, half of that is Upland. We have a one-year option on that, so we can extend that out one year. We’ll probably exercise our option on that.

Josh Patinkin – BMO

Okay. And you think it’s fairly similar terms?

Phil Mays

The terms remain the same. It had an option built in when we closed the deal, so we’ll just exercise the contractual option that’s already in the agreement.

Josh Patinkin – BMO

Okay. And then on the other, I guess, half that’s rolling, what do you think, is it going to roll down in interest or what’s your thoughts there?

Phil Mays

We’re trying to – there’s about another $60 million. The rates I would trade on that probably about 6. If we were to put those on mortgages, we could do a little better. We may actually end up rolling those into the line, just to keep our flexibility there to have outstanding there s we do go through the dispose to be able to immediately pay down debt. But it will be at the same rate or better.

Josh Patinkin – BMO

Got it. And then generally speaking on SUPERVALU, as you look at the quarter you have identified, what’s your opinion on any real estate opportunities within that conglomerate there?

Bruce Schanzer

That’s a pretty broad question. What we find is that the value is really in the leases and so to the extent that there is a below-market lease, that’s clearly an opportunity for us to the extent we can recapture the space to lease it at-market. To the extent that there’s an above-market rent and they were to go away, that would clearly present a challenge in terms of matching the rent that we had been receiving. And at the market leases are, generally speaking, as the word connotes, at the market and therefore there’s no real opportunity to write them up.

So I guess as a generic comment, I would say that the opportunities are that a lot of the SUPERVALU flags are flags that have been around for a fair amount of time, with leases that have been around for a fair amount of time, which are oftentimes are below market. And so to the extent that we or another landlord can recapture them, that’s where the value opportunity really lies.

Josh Patinkin – BMO

Is there a lot of real estate owned by SUPERVALU in your corridor there?

Bruce Schanzer

We have – there are two or three centers that have SUPERVALU as shadow anchors, but it’s not meaningful and they’re not really in centers where we would aggressively pursue opportunities to capture those assets.

Josh Patinkin – BMO

Got it. And then as standalone entities of Farm Fresh and Shaw’s brand, what’s your thoughts on how they might be valued in this scenario?

Bruce Schanzer

Well, again, we don’t have a distinct view on each of the flags and what the EBITDA produced from each of the flags is. I would tell you that in addition to Shaw’s and Farm Fresh, there’s of course ACME and so we have exposure to ACME as well. These are all relatively well regarded flags. Farm Fresh in Virginia’s a very, very strong performer. Similarly, with ACME; in the mid-Atlantic states where we have ACMEs, again, a very strong performer. Shaw’s has struggled a little bit, but again, it’s been around a fair amount of time. But the SUPERVALU flags are, generally speaking, well regarded and, in their markets, typically perform reasonably well.

Josh Patinkin – BMO

Okay. Thank you. I appreciate it.

Operator

Thank you. (Operator Instructions) It appears we have no further questions at this time. I would like to turn the floor back over to Mr. Schanzer for closing remarks.

Bruce Schanzer

Thank you, everyone, for joining us this evening and have a good evening.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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