Cedar Realty Trust, Inc. (CDR) Q2 2021 Earnings Conference Call July 29, 2021 5:00 PM ET
Jennifer Bitterman - Investor Relations
Bruce Schanzer - Chief Executive Officer
Robin Zeigler - Chief Operating Officer
Philip Mays - Chief Financial Officer
Conference Call Participants
Todd Thomas - KeyBanc Capital Markets
Floris Van Dijkum - Compass Point
Welcome to the Second Quarter 2021 Cedar Realty Trust Earnings Conference Call. As a reminder, this conference is being recorded. [Operator Instructions] I will now turn the call over to Jennifer Bitterman. Please proceed.
Good evening and thank you for joining us for the second quarter 2021 Cedar Realty Trust earnings conference call. Participating in today’s call will be Bruce Schanzer, Chief Executive Officer; Robin Zeigler, 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 maybe deemed forward-looking statements and actual statements 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 2020, 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, July 29, 2021 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 will now turn the call over to Bruce Schanzer. Bruce?
Thanks, Jennifer and thank you all for joining us this evening for the second quarter 2021 earnings call for Cedar Realty Trust. Before jumping into my prepared remarks, I want to thank my team Cedar colleagues for their continued commitment to everyday excellence, collegiality and collaboration. This period of time is unique in our personal and professional lifetimes, with opportunities and challenges we could never have imagined. I have never been prouder to be on Team Cedar and I am thrilled at the professionalism that has been exhibited up and down this organization.
I would also like to acknowledge and thank our Board of Directors for their guidance and stewardship. As you are aware, earlier this year we expanded our board to 8 members and added 3 new directors. Having now had two meetings with our newly constituted board, I am happy to report that our new directors and our legacy directors have built a high functioning team and as the beneficiary of their input in my capacities as a CEO and as a shareholder, I am thrilled to see this high performing group navigate the company at such an elevated level.
The second quarter of 2021 is noteworthy for a number of reasons, most significantly because it marks over a year since the onset of the COVID-19 pandemic. The year-over-year comparisons of our results highlight how far we have come from the depths of the pandemic, when we simply had no idea what the future held and whether we would even survive as individuals, let alone as a company. As we look ahead, we are first and foremost grateful that we have been spared and we remain hopeful that any resurgence is short lived.
Here we are a year later with a remarkable economic tailwind, a robust leasing pipeline, and validation of our essential guiding strategy of focusing on grocery anchored shopping centers, both through their strong performance over the last 12 months and the resultant investor appetite for these assets. Significantly, during the second quarter, we closed on the sale of the Camp Hill Mall for roughly $90 million, representing an approximate 6.5% cap rate. And this transaction was most definitely not an outlier. Since then, we have seen any number of single asset and portfolio sales that confirm this market comp and if anything, suggest our purchaser might have been ahead of his time in recognizing this market trend.
What we are seeing drive this trend is a confluence of three complementary dynamics. First, there is significant tenant demand for space in our grocery anchored centers, since they have proven themselves to be resilient and productive through the most challenging market dynamics. Second, the other investable real estate classes, specifically multifamily housing, industrial and net lease have gotten so costly that they don’t offer reasonable yields and investors are avoiding offices, hotels and malls, because they are seeing as too risky. Third, the debt financing markets are still remarkably constructive for our asset types, with low rates, flexible terms and high leverage levels. This trend in the grocery anchored asset sale market only highlights the profound disconnect between our share price and our underlying market value. As I commented publicly when we sold Camp Hill, this is a disconnect on which we continue to focus and regarding which we will take further appropriate measures to exploit if it persists, which appears to be the case.
Moving over to leasing, as I alluded to earlier, our leasing pipeline is robust to say the least. We anticipate growing NOI and occupancy over the coming quarters with a pipeline of leases that have either been signed or under negotiation or are close to being finalized that when taken together will result in substantial occupancy and NOI growth within our core grocery anchored shopping center portfolio. While capital is generally required to effectuate these leases, the unlevered returns on invested capital are remarkably attractive and are certainly warranted considering the value creation at the asset level and our underlying cost of capital. My heartfelt thanks to Tim Havener and the entire leasing team for their contributions to this remarkably strong effort and I urge you to continue putting the pedal to the metal in order to finalize the leases in hand and grow the pipeline further.
Robin will elaborate on our major mixed use and value-add redevelopment. As you know, we announced in the second quarter, but before our last earnings call, a joint venture with Goldman Sachs and Asland for construction of the DGS office building, representing the first phase of the Northeast Heights project in Washington DC. We continue making steady progress in advancing what will be the later phases at Northeast Heights as well as Revelry in Philadelphia. On the value-add redevelopment side, we have achieved important leasing and construction milestones at Norwood, Valley Plaza, Yorktowne and Fishtown Crossing, all of which Robin will elaborate on in her prepared remarks.
Before handing it over to Robin, I must once again thank the team and the Board for their productivity during this unique period. And I would conclude by repeating our commitment to maximizing value to our shareholders in the face of the manifest disconnect between our share price and our underlying real estate value. With that, I give you, Robin.
Thanks, Bruce. Good evening. We have seen good progress in both operations and leasing as we experienced second quarter emergence from the pandemic. During this quarter, we collected 97% of build rent. And as we have discussed in prior quarters, we continue to have strong rent collection performance on a relative basis. In recent weeks, we have noticed an increase in leasing activity that we anticipate will bring us back to pre-pandemic performance if not better. The leasing volume this quarter is strong, with 40 total leases being executed totaling 209,100 square feet. 15 new comparable leases were executed this quarter as compared to 4 new leases executed in each of the last two quarters.
While volume has certainly increased, the spread on this quarter’s 15 new deals is a negative 18.7%. This is primarily due to several restaurant and service type retail deals that began lease negotiation several months ago during the pandemic and were ultimately executed this quarter. We expect to see better spreads as we continue to move through the process, assuming there are no additional shutdowns or impact to retailers due to new coronavirus variant. 23 renewals were completed at a positive spread of 2.6%. These renewals include 3 anchor deals, Big Lots at Timpany Plaza, TJ Maxx at Groton Shopping Center, and LA Fitness at Swede Square. These deals totaled 95,407 square foot feet collectively at a positive spread of 6%. An additional two non-comparable deals were executed this quarter, including a salon at Trexlertown Plaza in previously unreleased space and a new [indiscernible] deal at Fishtown Crossing for the new Popeye’s prototype.
Post second quarter, we executed a non-comparable deal with Honeygrow, a stir fry salad fast casual restaurant at Fishtown Crossing. Additionally, 3 anchor leases were executed after June 30, with Hobby Lobby and Grocery Outlet at Valley Plaza and Porter and Chester, a technical school at New London mall. These anchors totaling 95,207 square feet are replacing a former Kmart at Valley Plaza and a former A.C. Moore at New London.
As of the end of second quarter, we have a leased occupancy of 88.7%, a 0.9% increase from prior quarter. Same-property leased occupancy is 90.9% as of June 30, which is a 0.8% increase from prior quarter. While occupancy is trending in the right direction, our occupancy is still affected by preparing our redevelopments for execution. The leased occupancy for our redevelopment portfolio is 79.6%, while same-property leased occupancy is 90.9% resulting in the overall leased occupancy of 88.7%.
We continue to work on our value creation portfolio of renovations at Valley Plaza, Carmans, Norwood, Yorktowne, New London and Fishtown Crossing. They are each progressing nicely enhanced by the leasing this quarter of the 2 new deals at Fishtown, the 2 new anchors at Valley Plaza, 2 new small shop deals at Carmans, and a new anchor at New London. As we detailed in last quarter’s earnings call, this quarter we closed on our $114 million refinancing, the dispositions of both the Carmans Shopping Center and Camp Hill Shopping Center and the joint venture for the Department of General Services known as DGS at Northeast Heights. The DGS joint venture represents the first phase of the Northeast Heights redevelopment. Construction of this first phase is underway and we anticipate delivery in December 2022.
With that, I will give you Phil.
Thanks, Robin. On this call, I will briefly highlight operating results and provide an update on our balance sheet. Starting with operating results, for the quarter, operating FFO was $8.5 million or $0.61 per share and property NOI was $20.8 million. Operating expenses included $0.2 million of demolition costs incurred at Norwood Shopping Center. These demolition costs relates to raising big wise old space and delivering them a path to build a new larger grocery store. That will be a significant enhancement to Norwood Shopping Center.
As is our practice, our computation of operating FFO adds back redevelopment items such as these demolition costs that increase the value of a property, but are required to be expensed under GAAP. Excluding redevelopment properties, same-property NOI increased 8.2% over the comparable period in 2020 and 10.2%, including redevelopment. These increases were driven by our portfolio having substantially recovered from the effects of the COVID-19 pandemic.
Moving to the balance sheet, in May, we closed $114 million non-recourse mortgage loan cross-collateralized by 5 grocery-anchored shopping centers. This 10-year loan with Guardian Life was completed at a 65% loan to value with 5 years of interest-only payments and a fixed interest rate of 30.49%. Utilizing the proceeds from this loan, along with the aggregate proceeds from the recent sales of Camp Hill and the Carmans, we repaid a $50 million term loan that was scheduled to mature in February of 2022 and reduce the outstanding amount on our revolving credit facility from $179 million to $12 million. Our revolving credit facility now with only $12 million drawn on it matures in September and represents our only 2021 debt maturity. Accordingly, we have begun discussions with our bank group about refinancing our revolving credit facility and are optimistic that we will do so prior to its maturity. Additionally, we are discussing the potential early refinancing of a $50 million term loan maturing in 2022. However, I should note, we have a 1 year extension option for our revolver and could exercise this option and address the revolvers’ maturity later this year or in the first half of 2022.
And with that, I will open the call to questions.
[Operator Instructions] And our first question is from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.
Hi, good afternoon. First question, Robin, the leased rate improved sequentially by about 80 basis points, that’s a solid move. Do you feel that that momentum should continue? Do you see leasing trending higher from here? And then can you also talk about the pricing power you commented on the new lease spreads in the quarter? You worked through some lease signings, it sounds like that you began negotiating earlier in the recovery, would you expect to see new lease spreads inflect higher now that you have worked through some of those?
Yes, thank you, Todd. So related to volume, we definitely are seeing kind of increased volume, I would say in the last couple of months, some of which are at the tail end of Q2 and going into this next quarter. So, I would expect that we are starting to see retailers look at expanding their operations, opening new stores, opening new restaurants, etcetera. So, we are seeing good momentum there. Related to spreads equally, as I mentioned many of the deals that – or several of the deals that were closed during the second quarter were started during the height of the pandemic as far as the economic terms. And so I do expect to see an improvement in those terms relative to spreads as we go through the coming month.
Okay. If we look at the total portfolio, I realized there is some development – redevelopment projects in there, but the 88.7% leased rate for the overall portfolio at June 30. If we look out over the next, I don’t know, year, maybe, maybe six quarters sort of end of ‘22, where do you – where would you sort of loosely project the portfolio to be leased up at?
Sure. So, we have momentum outside of the redevelopment that we talked about. So, we expect to see some lease occupancy increases, increases there. And then related to the drag so to speak from the redevelopment, I would say that relative to kind of our value-add renovation portfolio, the majority of the impact of that tenancy is already reflected in the numbers. And the only thing that I would expect that we would see probably not this year in ‘21, but maybe as we get into ‘22, some occupancy drag from removing the tenants at Northeast Heights as we move into the next phase. But I think that’s still a ways away. But related to kind of what’s going on currently, there may be some small ebbs and flows in the redevelopment side, but largely the tenancy that’s impacted by the redevelopment is already factored in.
And Todd, just to interject and to amplify that point, our leasing pipeline is very strong. The occupancy statistic that we report and Robin did a really good job of walking people through at a high level is distorted just because of some of the intentional vacancy that we incur and some of the vacancy that we have on account of our value-add redevelopments. But as that starts working itself out, as we do two things as we effectuate those value-add redevelopments and as we execute our leasing pipeline, again, controlling for the major mixed use redevelopment, I think you are going to see occupancy that’s going to continue to creep up into the low to mid 90s. And I think that, that’s going to be really a function of just the strength of the grocery-anchored portfolio and the strength that we are just seeing in the leasing pipeline right now.
Got it. So at the end of ‘19 the portfolio, I realized it’s a different portfolio, different mix right now and with things on the redevelopment side and otherwise, but you are at 93.2%, so, call it 450 basis points or so, you see it being reasonable and achievable to get back to sort of low to mid 90% range over the past [Technical Difficulty]?
Right. So to be clear, the answer is yes. But what I would differentiate is between the headline statistic and what we are seeing in sort of the non – the assets where there is no action like obviously when we intentionally vacate a tenant, there is – they can see in those spaces, but as a broad characterization, the core grocery-anchored portfolio that we are operating is trending exactly as you described and is realistically going to get to that kind of a level again.
Okay. And then – that’s helpful. And then Bruce, you discussed the sale of Camp Hill for 6.5% cap rate, it sounds like you plan to look to further exploit the disconnect between public and private market valuations, is that through additional disposition similar to Camp Hill or is there something else being contemplated to exploit that disconnect?
What I would say, Todd, and you’ve followed us for a long time, and hopefully you can appreciate it from a management discipline and analytical perspective, we really look at everything. And we continue to look at everything. And so what I am struck by and what our board is struck by is, again, this just disconnect that we need to reflect on and think about as we are making capital allocation decisions and as we are making strategic decisions. And so it runs the gamut. But certainly, it’s a big area of focus for us considering this disconnect and considering the strength in the asset sale market, as evidenced by the Camp Hill deal.
Okay. And just I guess lastly, talking about the Board and regarding the Board turnover and some of the new members that have joined the Board over the last several months, you’ve been talking about the disconnect in public and private market valuations for quite some time. But in the last few months those – the two meetings with the new Board members, I guess, what kind of input have they had? What’s their emphasis in terms of areas of impact and thinking about the company in the business?
First of all, I would say that as a broad statement, we have really gone from strength to strength with the Board change. So we had a terrific Board before and we have terrific new Board members and they are very thoughtful and they are independent. And one of the great things about the Cedar Board, and I often say this to our Directors is that if any of our shareholders were in this room, listening to debates and conversations that we all have, they would be thrilled at how our Board approaches topics. And again, we haven’t really missed the beat. These new Directors are terrific additions. And they have integrated well with the legacy Directors as I was describing earlier. And it’s a lot of the same. This was a topic that we are focused on pre-COVID before the whole activist or when the activist situation heated up or we commented on the fact that we have literally run a process prior to COVID. So certainly, the Board, the Board of Directors prior to this change, was very focused on this issue. And the new Directors began very thoughtful, high integrity folks have picked up that conversation, and it’s continues to be one of the areas that we focus on in our Board deliberations.
Okay, alright. Thank you.
[Operator Instructions] Our next question is from Floris Van Dijkum with Compass Point. Please proceed with your question.
Floris Van Dijkum
Hi, good afternoon, or good evening, guys. Thanks for taking my question. Just a little bit of more information on the leasing pipeline, if you will. How robust do you see or how much demand do you see? Obviously, one way to look at it is looking at your lease to occupied spread, but if you can also maybe give us a little bit of an update in terms of your total pipeline as it stands right now and the mix of that pipeline?
Let me do this. Robin, why don’t you maybe take a first step at it, and then I will just amplify to the extent necessary?
Sure. So, thanks Floris for the question. I would say kind of, I guess, starting at the end and going to the beginning of your question. The types of deals that we are seeing in the pipeline are everything from anchor deals to national smalls or national anchor deals to national small shops to the local retailers. So, we are seeing a wide breadth there, the types of deals coming through. And a lot of the activity that we talked about, at first, retailers were kind of dealing with their low hanging fruit and the things that were already in process pre-pandemic, are now focused on growth and expansion. And so we are seeing the benefit of that both in fellow wise coming through that are executed the deals that are just in negotiations that are in the pipeline. So, I think, as we had said before, I think we do expect over the coming quarters to get back to kind of that pre-pandemic, low-90%ish occupancy related to really add to that on the leased occupancy side. And then related to just deal structure, again, we are seeing better spreads. And then we did kind of during this quarter, we are seeing deals that are – that represent better spreads based on what we have seen thus far. So, we are expecting that activity to continue.
Floris Van Dijkum
So Robin, just so the spreads were obviously there. Maybe there were some one-offs in that. But if I look at your leasing costs, I mean they are also really elevated. They are almost 2x, of what you were in terms of your new leases. Obviously, you are not buying your spreads, because it was still a really negative spread. But how much insight does that provide into what you are going to be doing on a going forward basis for your leasing activity?
Yes. Thanks for the question Floris. So, we really look at capital related to leasing deals on an individual basis and making sure that each deal has a positive net effective rent over the term of the lease. With that being said, with some of our kind of comparable deals that the space has been vacant for a while, we often have capital and needs to be applied just to get it to a leasable white box. We try to limit how much capital we give above that, but for some spaces in our older shopping centers, or if it’s a space that hasn’t been leased in a while, there may be a sizable amount of capital to put to the space just to get a total leasable white box. And we still apply that all 100% for this deal. But it certainly provides for the lease ability of the box going forward even beyond this deal. So, in some individual circumstances, the leasing costs may feel elevated. We also obviously have the impact of increase in commodity pricing for construction and so some of that is factored in. But again, we do look at it very stringently on a deal-by-deal basis to make sure that capital outlay makes sense for that particular deal.
Floris, I was just going to add that I mean, I don’t think that there is some larger trend going on in terms of elevated capital levels. We have a small enough sample size in any given quarter that as Robin was saying. It really is a deal-by-deal type of analysis. And certainly, when we think about the capital we are putting into our lease deals, the returns are fairly attractive as I referenced in my prepared remarks. And they certainly work well with our cost of capital. And again, we look at capital outlays on a deal-by-deal basis and generally speaking are focused on positive net effect of the grants. And assuming that we satisfy ourselves from that perspective, we proceed. So, when you look at it in sort of an aggregated basis, on a single quarter basis, you are not necessarily can identify a trend, it’s rather just sort of a big bowl of soup with a lot of different ingredients in it.
Floris Van Dijkum
Great. I appreciate that, guys. Thanks. By the way, I want to follow-up maybe on the mortgage financing. $157 million mortgage that you did on the five assets and Phil maybe if you can comment on that. Guardian Life was the lender. How restrictive does this mean? And if you want to sell one of those assets, do you have to sell the whole – the whole package or how much flexibility do you have to swap assets or to substitute things or do you have to pay off the whole loan? Could you maybe walk us through that?
Yes. Floris, one of the reasons we went with the life company was to keep flexibility. And so we do have substitution rights there. So, we can substitute an asset, requires our approval. But we can work through that with them and find an asset of equal or necessary, slightly larger value. But we do have substitution rights. So, it’s not prohibited from selling any of those on an individual one-off basis.
Floris Van Dijkum
Thanks. So, maybe the last question in terms of, obviously, the success in the Camp Hill sale. Maybe Bruce, if you can just – why not do more of that? I mean, you have got, as you like, we like to point out more of your portfolios for sale every day. So, why not start to break it up a little bit and what’s preventing, is the climate still not right in your view or do you think that we are – is it becoming more of a seller’s market now?
Well, you are asking two different questions. So, maybe I will answer. Then individually, your first question was, why don’t we sell more real estate and as I alluded to, it’s certainly is something that we are reflecting on. With the classic playbook, with REIT is, if your stock is below your real estate value, you sell your real estate. And if your stock is above your real estate value, sell your stock. And of course, in this context, the playbook would point us to selling our real estate. And so that is something that we continue to think about. And I haven’t been secretive about that. We pretty much made that explicitly clear, both in our actions in selling Camp Hill. And in my remarks and saying that we are going to think about doing more of that. More generally, is it a seller’s market, I think it does appear to be a situation where the real estate investment community is recognizing that grocery anchored retail in particular, doesn’t necessarily suffer some of the challenges that other categories of retail seem to be suffering. And so certainly, when you compare, as I mentioned in my remarks, the opportunities for reasonable return out of the grocery anchored retail, shopping center relative to industrial or multi-family or net lease, especially with very supportive financing, it does seem to me that it’s a pretty auspicious time, both to be a seller and a buyer, frankly, of a grocery anchored retail. So, maybe rather than characterizing it as a seller’s market, I would say that we are in an interesting state of equilibrium, where a lot of the cap rate trends in grocery anchored are informed as much by the return opportunities on other assets as they are by the riskiness of this particular asset type. So again, to the extent that industrial and multi-family and net lease continue to deliver 4% returns, I think that the cap rates in grocery and retail will continue to trend down. To the extent that those cap rates were to drift up, I think you would probably not see a grocery anchor drift – grocery anchored cap rates drift down. So, I think that they relate to one another in a pretty significant way.
Floris Van Dijkum
Thanks, Bruce. Appreciate that.
And we have reached the end of the question-and-answer session. I will now turn the call over to Bruce Schanzer for closing remarks.
Thank you all for joining us this evening. We wish you an enjoyable balance of the summer and look forward to continuing to share with you our progress in delivering strong results for our shareholders.
And this concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation.