Cedar Shopping Centers, Inc. Q2 2008 Earnings Call Transcript

Aug. 1.08 | About: Cedar Realty (CDR)

Cedar Shopping Centers, Inc. (NYSE:CDR)

Q2 2008 Earnings Call

July 31, 2008 10:00 am ET

Executives

Leo Ullman - Chairman, Chief Executive Officer and President

Larry Kreider - Chief Financial Officer

Bartley Parker - Investor Relations

Analysts

Paul Adornato - BMO Capital Markets

Manik - Citigroup

Nathan Isbee - Stifel Nicolaus

Operator

Welcome to the Cedar Shopping Centers second quarter 2008 earnings conference call. (Operator Instructions) It's now my pleasure to turn the floor over to your host, Bartley Parker.

Bartley Parker

At this time, management would like me to inform you that certain statements made during the conference call, which are not historical facts, may be deemed as 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 reflected in 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 actual results may vary. Many of the factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time-to-time in the company's filings with the SEC.

The company undertakes no obligation to advise 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, CEO and President; Leo.

Leo Ullman

Thanks Bartley, as always we value your comments on these matters. Good morning and thank you very much for joining us on the second quarter 2008 earnings call. With me today on the call are Larry Kreider, our CFO and Brenda Walker, our Vice President of Operations. Also available to us by telephone are Tom Richey, our Vice President of Development and Construction, Nancy Mozzachio, our Vice President of Leasing, Michael Winters, our Vice President of Acquisitions and a number of other members of our management team.

Our second quarter continues this year’s march towards what we believe will continue to be strong operating results. Larry Kreider will focus on a number of the financials details subsequent to my comments. My comments are intended to reconfirm our primary focus on necessity retailing, representing what we call bread and butter shopping centers. Our bread and butter concept is focused on supermarket and drug store anchored community strip shopping centers.

Our properties have little exposure to any tendencies other than supermarkets and drugs stores. We have especially little commitment to home improvements or to discretionary categories such as fashion, luxury and alike. We have sufficient financial liquidity to adequately fund or continuing operations and substantial development pipeline. While still affording to us the flexibility to benefit from special investment opportunities as they may arise.

We also continued to stress risk aversion with respect to our development operations and commitments. Indeed risk aversion is a whole mark of all of our activities; this quarter evidence is again the benefit to having excellent supermarket operators as anchors in times of uncertainty. While reports of credit constraints and consumer problems are indeed rampant, our supermarkets continue to generates strong traffic and sales.

As mentioned in prior presentations our supermarkets and drug stores performed well in these challenging times and that consumer spend more on groceries and correspondingly less in restaurants and they traveled more to the local supermarket than to the faraway malls and big-box centers. As a result our supermarket tenants are experiencing some of the best quarter they have ever had.

Many of our supermarket operators are seeking to expand and we are working with a number of such chains in an effort to accommodate selective expansion project as part of our developing pipeline. Our occupancy for stabilized properties was a very solid 96% at the end of the second quarter. Our occupancy for the total portfolio including development properties remains 92%. This of course evidences the fact that we have had little in the way of vacancies during the current market turmoil.

Again note that the major store closings of chains such as Linens ‘n Things, Pier 1 Imports, Bombay, Goody, Shopper Image, Mervyns and Taylor’s , Blockbuster and Hollywood videos, various shoe concepts, Starbucks, Bennigan's, Steve & Barry’s and many other chains have had essentially no affect on our operations. We simply have few of such concepts in our portfolio.

We also continue to have very little in the way of lease maturities for the next 10 years due primarily to the long supermarket and drug store tendencies. These are lot of discussion about mom and pops stores and smaller tenants being especially vulnerable in this market. Again we have seen relatively little of that in our necessity driven portfolio.

Our mom and pops, to the extent that we have then in our centers and I’d estimate that mom and pops represents perhaps 15% to 20% of our non-supermarket, non-drug store GLA or probably less than 10% of our overall GLA, tend to be primarily pizza parlors, Chinese restaurants, Laundromats, dry cleaners, hairdressers, barbers, nails salons and other retailers that cater to the day-to-day necessities of the consumer.

For many of such tendencies there are in fact a number of potential back up operators, further such stores are located in our bread and butter shopping centers, where as previously discussed the supermarkets and drug stores are doing very well, enjoying additional traffic all of which should inure to the benefit of the so called mom and pops as well.

It is our experience that the owners of such so called mom and pops will move into the store before they’ll give it up. Further more in our portfolio such pizza parlors, Chinese takeouts, dry cleaners, video stores, Laundromats etc, are often part of a multi unit or be at a small number operation in one of our geographic regions.

Our development pipeline is doing well. We continue to progress on our development activities for key projects such as Blue Mountain Commons as well as our large joint venture development project in Pottsgrove, Pennsylvania which in the aggregate should accrue significant benefit to shareholders upon completion. Again with respect to the development projects we wish to stress the risk adverse nature of these properties where we generally do not take down a piece of land until and unless we have assigned anchored, generally a supermarket.

We were pleased during the past quarter to announce the completion of our $150 million syndicated secured revolving development credit facility. That facility together with our existing $300 million stabilized credit facility are in pending joint venture for the Ohio properties and the proceeds of our two re-financings, one of which was just completed and the other which is expected to be completed shortly should provide to us as previously reported and as Larry will also highlight substantial capital flexibility for the next couple of years.

Finally with respect to acquisitions, we have ramped down very considerably. Where as during the last few years we acquired some 60 properties at the aggregate we have acquired to-date this year only two, plus the Kimco's Interests in four joint venture properties. We previously indicated that we contemplated a $100 million at the acquisitions down from 200 million originally budgeted this year. We will probably just about reach that number.

This reflects a fair disconnect at the moment in the market between cap rates, which continued to be extremely aggressive for our type of supermarket-anchored properties in the Northeast, especially in the Washington DC to Boston corridor and the credit constrains which have pushed margins above treasuries or LIBOR as the case maybe to a level of 300 or more basis points for permanent debt, a level which we have not seen for years. Thus it is virtually impossible for us to acquire new properties even if we confine them on a one off base at a low sevens cap rate because the present debt levels do not afford to us any positive leverage.

While we have seen a fair amount of product recently and many more property seem to be available at this point than say just a couple of months ago, the cap rates for supermarket-anchored properties in our geographic area again are still extremely aggressive. There still appears to be a great deal of private and pension fund money in addition to foreign stores joint venture type money available for such properties.

We continue to find risk adjusted returns on capital to be much better on developing project where we can still build our generic supermarket anchored 90 to 100 square foot products to a 11% yield and where we can obtain more attractive floating rate construction lending either separately or through our new credit facility.

We are presently negotiating the sale of two adjusting stabilized properties in Columbia, Maryland and one in Dunmore, Pennsylvania. All of which should generate a modest profit to the company and should permit the company to recycle the proceeds into potentially better yielding properties.

The sales price of those three properties, if indeed concluded will be in the order of $22.5 million gross. With that update on our strategy and direction, I’ll now like to turn the mike over to Larry; Larry.

Larry Kreider

For full details of our financial results for the quarter ended June 30, 2008, I refer you to our press release issued last night as well as our supplemental financial information published on our website and also available at www.fcc.gov.

Our results in the second quarter showed a consistency of our operations and the progress we are making pursuant to our business plan despite the continuing uncertain economic and capital markets environment. Our FFO was $0.31 per diluted share for the second quarter of 2008 as compared to $0.30 per diluted share for the first quarter of 2008. The variances we had in the quarter were relatively minor when compared to items we reported in prior quarters.

With regard to our property operations, net operating income, we had a seasonal increase in our Camp collections, net of operating expenses of approximately $0.01 per share that was substantially offset by a seasonal decrease in percentage rent collections and additional bad debt expense primarily for a single tenant who ran a fitness centers.

Lastly, we increased our FFO by $0.01 per share as a result of our previously announced purchase of joint venture interest in four Pennsylvania supermarket-anchored properties and additional order ship interest in an unconsolidated joint venture. Our occupancies remain strong in the second quarter of 2008. We continue to have 96% stabilized portfolio occupancy and 92% total portfolio occupancy at both June 30, 2008 and March 31, 2008.

As reported in our supplemental package, we have modest levels of leasing activity as a result of these high stable occupancy levels. We continue to have good expense recovery results. We collected approximately 71% of our billable common area maintenance and real estate tax expenses in the second quarter of 2008 consistent with the first quarter. This provided a benefit to our FFO of approximately $0.01 per share because our overall expense level in the second quarter decreased substantially from the first quarter of 2008 which had snow removal costs.

The increase to FFO from Ohio expense recoveries was substantially offset by a higher provision for bad debt expense of approximately $0.01 per share principally relating to one fitness centers tenant. Overall we believe that we should continue to hold to a provision for doubtful accounts in the range of 0.6% to 0.7% of total revenue. Our bad debt expense for the first six months was 0.8% of total revenue.

With respect to same property results we hold 99 properties, both the second quarters of 2008 and 2007. Same property net income was $25.5 million in the second quarter of 2008 as compared to $26.3 million in the second quarter of 2007 reflecting the following significant items. A reduction in revenue and an increase in expenses related to the commencement of redevelopment activities at several properties including our property in Wyoming, Michigan.

Earlier recognition of percentage rent for one customer in 2007 than in 2008. An increase in bad debt expense related to the one tenant I just mentioned. A reduction in rent in conjunction with a lease termination, which the company expects to replace in more favorable terms, an increase in base rent which is inline with our expectations taking into account the above mentioned decreases in conjunction with the 2007 lease termination and the commencement of redevelopment activities, and a corresponding reduction in the straight-line rent revenue adjustment as a result of the above escalations in base rents.

With respect to our balance sheet and liquidity, we continue to position Cedar’s balance sheet well in the current environment to provide for the flexibility and liquidity we need to execute our business plan. At June 30 we had approximately $15 million of borrowing capacity available under our revolving credit facilities plus $7 million in cash. We implemented a new cash management system in the second quarter reducing our cash balances by approximately $16 million and corresponding or reducing our principle secured line of credit.

In the second quarter of 2008, we completed a $115 bank line of credit to fund our development activities that we expect to first borrow against in August in an amount in excess of $30 million. We have also just completed the syndication process for a $77.7 million development financing to fund our joint venture project located in Pottsgrove, Pennsylvania that we expect to close in August and first borrow against in September.

In July, we completed the mortgage financing of our Port Michigan property for $15 million and in August we will repay and expect to complete the financing of our $29 million mortgage at our Shore Mall.

In the fourth quarter, we plan to exercise our option to extend our stabilized revolving credit facility through January 2010. This will complete substantially all of our financing activities for 2008 and provide the funds we believe we need to complete the development activities in our present pipeline. As of June 30, 2008 our PRO RATA share of debt was $840 million, which amounted to 57.1% of our total market capitalization of approximately $1.5 billion. Floating-rate debt amounted to approximately 17% of total market capitalization.

With regard to other financial metrics, our EBITDA to fixed charge coverage ratio for the quarter ended June 30 remains consistent with the prior several quarter at approximately 2.2 to 1. Our net cash flow provided by operating activities for the quarter ended June 30, 2008 was $16.1 million as compared to $12.2 million for the quarter ended March 31, 2008.

As previously announced, the company expects to report FFO of $1.22 to $1.26 per share for the full-year of 2008. The company’s guidance excludes any impact on FFO from new or further development/redevelopment activities, new acquisitions or dispositions or new joint venture arrangements of existing properties. Should LIBOR continue at its current rate, the company’s FFO could benefit by up to $0.02 per share over the remainder of the year net of the interest capitalized applicable to our development activities.

Conversely, based on the expected contributions of properties to previously announced new Homburg joint venture in the fourth quarter of this year, the company could incur a net charge to FFO of approximately $0.01 to $0.02 per share.

I would now like to turn the call back to Leo for question-and-answer and closing remarks.

Leo Ullman

Our message is reflected in our ads. We are a bread and butter necessities based shopping center REIT. This means that we are purposefully and thoughtfully a risk of this company. Our portfolio both exciting and development properties is commented primarily to long leases with strong super market anchors and other retailers of daily necessity products and services. Our developments are premised on executed leases and caped construction costs for our anchors.

Our portfolio evidences almost no exposure to fashion, luxury, big-boxes, home improvements and the like. After many chains announcing store closings, almost none are included in our shopping centers. We have been careful to maintain availability and to husband our resources, so as to fund our strong exciting development pipeline and to be in a position to benefit from possible additional opportunities, which may arise.

We have a strong disciplined management team fully committed to executing our business plan and enhancing shareholder values while meeting the challenges of these uncertain markets and times. At this point operator Anthony, we would be pleased to accept any questions.

Question and Answer Session

Operator

(Operator Instructions) and we'll take our first question from Paul Adornato at BMO Capital Markets.

Paul Adornato – BMO Capital Markets

I was wondering, if there is anything to report with respect to discussions with the Inland Group and related to that can you tell us anything about the strategic review that is the valuation of the portfolio that you have started?

Leo Ullman

Okay; there are no ongoing discussions with Inland; although, I did have a call with Tom McCauley, about his 45th high school reunion, but we can’t get into that. There are no other pending continuing strategic discussions at this point. We continue to talk to investment bankers about the value of our portfolio, but again Paul there is no strategic initiative at this point.

Paul Adornato – BMO Capital Markets

Okay and with respect to the development pipeline, looking on page 12, if you were to just look at the development and redevelopment of lease-up percentage, it looks pretty flat. I was wondering if there were properties coming in and out of the pipeline; kind of if you could maybe provide a little bit of color on the leasing on the development and redevelopment properties.

Leo Ullman

Page 12 Paul, of the supplemental is the leasing page.

Paul Adornato – BMO Capital Markets

Yes. The broader one says redevelopment and another non-stabilized property 68%?

Leo Ullman

Right which brings us to the 92% overall. I think what you should be aware of that our big project of course is Pottsgrove and there the pre-leasing for committed leasing is at a level of about 45% with additional LOIs going far beyond that. For our Blue Mountains Commons project of course we have the jointly signed up and a couple of other small ones. Other than that I think that is relatively a little new to report at this point.

Our leasing seems to be going well, as you know we are 96% leased for our stabilized properties, so we have relatively little to work with, but the one project that we did announce previously was the supermarket closing in one of our Western Pennsylvania properties, where we had at lease buyout and we are working actively on the replacement for that supermarket, by another supermarket with a larger store with additional rent and that’s proceeding very well. Other than that there is relatively little I think to report that’s substantial and unique.

Paul Adornato – BMO Capital Markets

Okay, would you describe the leasing activity in the pipeline as inline with expectations given the percentage of completion of the projects?

Leo Ullman

Yes and again in that regard, I appreciate that what we focus on is that supermarket anchor and getting that out of the ground and we generally do not do the small store leasing until we could show substantial progress on the supermarket anchored construction, but for the out parcels we do, do the out parcels.

Paul Adornato – BMO Capital Markets

And you reported the same property NOI basis including the development and redevelopment properties. I was wondering, if you were able to exclude that lumpiness, what would the same store numbers look like?

Leo Ullman

Well, I think we reported Paul, I think it’s about 779,000 decrease in NOI and of that approximately 300,000 is due to the redevelopment properties that are operating, but included in our development pipeline.

Paul Adornato – BMO Capital Markets

So even exit that, it would a slight negative on the same-store?

Leo Ullman

Yes for the items that I mentioned.

Operator

And we will take our next question from Philip Martin at Cantor Fitzgerald

Philip Martin – Cantor Fitzgerald

First of all Larry on the bad debt expense expectations at 0.6% to 0.7% of revenues; how does that compared to ’06 and ’07?

Larry Kreider

Well, if you look at ’07 year-to-date, I think we actually had more favorable bad debt experience this year than last year. I think it’s inline with our ’06 and ’07 experience. I’ll just elaborate a little bit; what we have experienced since the middle of last year through maybe the first quarter was some collections from our improved collection activities. I think there was a focus in the middle of last year and I think we did have some recoveries of prior build announce and I think that could explain some of last year’s more favorable results in the second half.

Philip Martin – Cantor Fitzgerald

Okay how about in terms of higher percentage of late pays; you have a higher percentage of late pays versus historical average or is that running at above the norms?

Larry Kreider

No, it’s running above the norm. We take a very formulaic approach in the way we compute our bad debt expense and then we subtract whatever recoveries we get from prior reserved amounts and we have that one large tenant and other than that it’s a number of smaller items that don’t rise to the level of mention.

Philip Martin – Cantor Fitzgerald

Okay, okay and Leo on the acquisition front you mentioned certainly that the pension funds are out there and potentially are a competitor for you, but of the acquisitions where you think you have a chance or may likely close, can you give us a characterization of what those acquisitions are like; are they more value added, something that the pension funds may not want to go after, more opportunistic?

Leo Ullman

No, I think I’m just thinking of some of the stuff that we’re working on. One is where are in existing supermarket and we’re adding the balance of the shopping center, that’s in one of our Virginia properties. We are working on a property that’s close into Baltimore, that supermarket anchored that we’ve been working on for an awfully long time and that has some value added opportunities. We’re working on a couple; one in Maryland on the shore side we’ll say and one in Massachusetts that we contemplate doing in joint venture mode, hopefully with a British group and that’s about it.

Philip Martin – Cantor Fitzgerald

And then maybe it’s too early to tell, but are there better opportunities possibly on the value add and redevelopment side just because you’re not competing with pension with funds or money that’s looking for lower risk?

Leo Ullman

Well as I mentioned we’re looking much more to the opportunities in development rather than redevelopment at the moment, because we think that those are going to be yielding better. The redevelopment stuff is very serendipities. It may come here and there and I think that maybe one of the opportunity areas as the sector becomes more distressed, but again in our Northeast area we’re not seeing that kind of distressed property portfolios and the stuff that we’re seeing is basically mature properties with grosser and development opportunities for ground up here and there especially Maryland, Virginia, Delaware for grossers that are aggressively expanding.

Philip Martin – Cantor Fitzgerald

Is it fair to assume that by year-end we can see additions to your development pipeline?

Leo Ullman

I think you’ll see modest additions, not enormous, but we do contemplate acquiring a tracked in the Greater Allentown area we call it that we believe one of our supermarket tenants will commit to and a couple of smaller properties that are going to be drug store-anchored, a property we’re working on in Virginia that’s again with a supermarket signed lease. Those are the kind of things we contemplate, nothing extraordinary.

Operator

And we’ll go next to Michael Bilerman at Citi.

Manik - Citigroup

Hey guys this is [Manik] here with Michael and Ambika. Just to follow up on the bad debt, do you have any concerns about other Fitness tenants given that you have to take that charge with the Fitness tenant?

Leo Ullman

We don’t at this moment. We have of course several L.A Fitness facilities in our portfolio and they seem to be performing very well. The risk maybe to the local operators, we’ve had one in our watch in the New Bedford properties; other than that we don’t see any that might be a problem.

Manik – Citigroup

Okay thanks for that. Your development pipeline last quarter you had said there was a $300 million to $400 million with deliveries factoring in the next 18 months to 24 months. This time you kind of shrunk that up and said delivery will be in the 8 months to 17 months and $350 million to $400 million; can you just detail what’s changed?

Leo Ullman

No all that’s basically happened, the numbers haven’t changed; what’s changed is just the time schedule has accelerated as we’ve gone further into the year, but we do expect for example Blue Mountain comments as an example, the supermarket to be delivered in the early part of that stretch.

Manik – Citigroup

And then on your development yields, you guys have been saying 9% to 11%; can you split that up into going-in yield and a more stabilized yield?

Leo Ullman

No, I mean the thought is that once these projects are stabilized and tenants in occupancy and paying rent, that’s the time at which you basically determine what you’re yield is going to be. So, our going-in yield is when these are stabilized and that’s at this 9% to 11% determination. It’s not necessarily a look back analysis, it’s that moment that they’re all in occupancy and paying rent.

Manik – Citigroup

And your delivery timing assumes that same scenario?

Leo Ullman

Yes. I think there could be a period while we get the last few tenants and that would not be the initial occupancy perhaps when we put a property into service, but we have it yet in the reporting to reflect your question. We had not fine tuned our reporting to reflect the question that you raised.

I think I should say at this point. We’re how aware that you and Beaker and Michael on your group and correspondingly a number of other analysts have desired us to publish more information on our development activities to help you. We’ve always said that we wanted to do that and we do still contemplate within the next couple of months issuing at least for the detailing on the project cost by project and the amount of that we have spend on a cash basis by project and we’re just fine tuning those numbers now with considerations such as legal fees etc to be sure we’re giving you right numbers, but we do plan to do that.

We do not plan to provide delivery dates faster than on an annualized basis, except in special instances were for example at Blue Mountain Commons, if we deliver the supermarket in X month of ’09 we’ll of course announce that.

Manik – Citigroup

Okay, we appreciate that. Are there any contingencies to close the Hamburg JV; anything left for you guys to wrap up or is it just a matter of timing at this point?

Leo Ullman

At this point its just timing and we contemplate that happening at the end of the fourth quarter, probably the end of November at this point.

Manik – Citigroup

Okay and then recently you’ve been added to the S&P 600, would you consider an inclusion for it?

Leo Ullman

At this moment, we haven’t thought about that, but we learned last time that we were included in the 600 and we’re of course grateful for that, but we’re not contemplating anything other than seeing what happens.

Operator

We’ll go next to Nathan Isbee at Stifel Nicolaus.

Nathan Isbee – Stifel Nicolaus

Can you give us a sense on that 4Q ’07 lease termination; I know you are talking about a replacement tenant there. How long do you thing it would be until you get somebody in there?

Leo Ullman

That takes a while, but at this point for example we’re working with that tenant on engineering drawings for the new store and the drive on this side and the parking on that side and where employee parking will be and the relationship with other tenants in the center, those are the kind of things we’re working on right now.

So, once the engineering is squared away then I’d assume we move to a lease and then of course we’ve got to get some additional approvals, than we got to get bids out and so forth or at least figure out what the bidding will be to build this thing, so we’re talking six to nine months before we’ve broken ground at this point I imagine and then six months to build the thing.

Nathan Isbee – Stifel Nicolaus

Okay and just one last question; the doubtful account, that fitness center, I don’t know if you mentioned this before, I logged in a little late, which property is that in?

Leo Ullman

Well, the doubtful account is in our Washington Township property in Southern New Jersey and that was a local operator and the one that’s on our watch is in New Bedford Massachusetts.

Nathan Isbee – Stifel Nicolaus

Okay, have you reserved anything in Bedford, at all?

Leo Ullman

Our same formulaic conclusions where if they’re behind by certain date we write it off, but I don’t think they were behind in the second quarter.

Operator

Our next question is a follow-up from Michael Bilerman of Citi.

Manik – Citigroup

Hi, guys one last question. In terms of percentage runs that were down in the quarter, how should we think about that for the rest of the year and what drove that decrease?

Leo Ullman

Down in the quarter versus last quarter or versus last year?

Manik – Citigroup

Just in generally that was one of the variances you guys kind of gave to why assets in Ohio were down and other things?

Leo Ullman

Well the percentage rate was down this quarter versus last quarter versus the first quarter, it’s just a seasonal thing. The first quarter of the year is when much of the reporting is made and versus last year’s second quarter there was one tenant who we just had information sooner than we have this year, so we expect to report that tenant later on this year. It was a one single tenant timing issue with respect to last year.

Operator

We have no further questions left in the queue.

Leo Ullman

I think I’d like to leave it at this point. We very much appreciate all of you who have listened in. We value your support where appropriate and we’re going to keep executing our plans. So thank you very, very much and hope to talk to you soon.

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