CDR
#Thanks, Nick.
Good evening and welcome to the fourth quarter 2016 earnings call for Cedar Realty Trust.
As I will discuss in a moment, it has been a very busy few months at Cedar with dramatic ad<UNK>ces on the leasing, redevelopment and capital migration fronts.
Before reviewing our results I want to take a moment and acknowledge my colleagues who are with me on this call; Phil <UNK>, our CFO; <UNK> <UNK>, our COO; Mike Winters, our CIO; Adina Storch, our General Counsel and Charles Burkert, our Senior Vice President of Construction and Development.
I would also like to take a moment and thank all of team Cedar for their continuing and tireless efforts to ad<UNK>ce the causes of this Company through their commitment to everyday excellence.
Before moving from the topic of team Cedar, I also want to take a moment to acknowledge Jim Burns our longest-serving Board member who let us know that he will not be standing for re-election to the Board.
Jim has been an invaluable advisor to management and has set an example of professionalism and probity from which we have all learned a great deal.
I'm pleased to report that Gregg Gonsalves, a retired Goldman Sachs partner in their Real Estate Investment Banking Group will be nominated to fill the soon to be vacated spot on the Board.
Moving to our results.
We are pleased that our 2016 full-year operating FFO of $0.57 per share is above the range of our initial guidance.
However, with the sale of Upland Square late in the year, we are net short, which will lead to some earnings dilution in the near term as reflected in our 2017 guidance, which Phil will elaborate on in a moment.
Correspondingly, we are now well situated to exploit investment opportunities.
Furthermore, we significantly de-risked our portfolio through the sale of Upland by reducing our exposure to a very large asset in a very thinly populated market.
Yesterday, we began the process of putting some of that capital to work with the acquisition of Christina Crossing in Wilmington, Delaware.
We acquired this approximately 120,000 square foot Shop Rite anchored center on an off-market basis from a local developer who is very active in its attractive urban market and with whom we hope to pursue future investment opportunities.
This 80% occupied center with 112,000 people within a three-mile radius offers us a significant upside opportunity as it will benefit from our lease up and re-merchandising efforts.
Moreover, the center will benefit longer term from a significant residential and commercial development activities surrounding it.
During the quarter, we made terrific progress on the leasing front with the leasing for three of our four vacant anchors discussed back in late November 2015 having been completed and the fourth anchor lease just about done.
As <UNK> will expand upon, we had a strong quarter on both the new and renewal leasing front with significant cash basis increases on a comparable basis.
Although, we will not see the true upside effect from much of this activity until 2018 these new leases, coupled with our leasing pipeline provides a solid foundation for earnings growth going forward.
More generally, our greater focus on merchandising mix in many of our centers, while leading to some temporary earnings drag is positioning us well in the face of the changing retail landscape.
We have also upgraded our leasing team and continue to make targeted hires in that department which positions us well going forward.
Similarly, as we get our large-scale redevelopment projects poised for commencement, we are highly optimistic about how the execution of these place making projects will fundamentally change how our Company and portfolio are viewed.
Specifically, we are ad<UNK>cing two distinctive urban mixed-use projects in each of Philadelphia and Washington DC.
Notably, much of the near-term NOI drag is coming from the measures we are taking now to position these projects for commencement by relocating certain tenants, buying out others or triggering co-tenancy rents.
In addition to these two projects, our pipeline of redevelopment and value-add opportunities is growing, I anticipate, there will eventually be a page in our supplemental and corporate presentations providing significant detail regarding many, if not all, of these pipeline projects.
In addition, similar to the leasing team we have and continue to make targeted hires in this department as well.
Our balance sheet remains healthy with no debt maturities for the next two years and a relatively benign maturity schedule thereafter.
This is not an accident.
With Phil as our steward we have keenly focused over the past few years on arriving at this point where we can comfortably execute our value creation strategy at the asset and portfolio level with the support of a strong and flexible balance sheet.
In summary, we continue forging ahead with our long-term strategy.
We are migrating our capital from the lower density to higher density markets in the DC to Boston corridor.
We are positioning ourselves for a pipeline of attractive value creation opportunities within our portfolio.
We continue executing on the leasing and operational initiatives that will support and grow value over time.
And we [obviously] manage our balance sheet to ensure that it can withstand market shocks and is accommodative of our business plan.
With that, I give you <UNK> to discuss our operations, leasing and redevelopments in greater detail.
<UNK>.
Thanks, <UNK>.
On this call, I will provide a brief update on our balance sheet and highlight our operating results before focusing on our 2017 guidance.
Starting with the balance sheet, during 2016 we continued to strengthen our balance sheet.
We ended the year with only six mortgages totaling about $140 million and 80% of our property NOI is now an unencumbered.
For the third consecutive year, we rolled down secured debt, in this instance primarily through closing a new seven-year $100 million of unsecured term loan.
Further, we ended the year with almost $170 million of availability on our revolver and no debt maturity for the next two years.
Additionally, we have not yet settled our forward equity offering completed in 2016.
As a quick reminder, our forward equity offering was for 5,750,000 common shares and we have until August 1, 2017 to settle it.
It is currently our intention to physically settle it in full by August 1 and the proceeds received will be $44 million, less any dividends paid prior settlement and some administrative costs.
With respect to FFO, for the quarter operating FFO was $12.1 million or $0.14 per share.
You may recall on our last call I noted that the disposition of Upland Square would be about $0.01 per share dilutive per quarter until the proceeds are redeployed.
In fact, this is why sequentially, operating FFO per share decreased $0.01 from the third quarter.
For the full year, operating FFO was $49.2 million or $0.57 per share.
This result is $0.01 above our guidance range for 2016.
Now moving to our 2017 guidance, we are establishing an initial 2017 operating FFO guidance range of $0.53 to $0.55 per share.
Let me first give you some details related to this guidance and then provide a high-level roll forward of operating FFO per share from 2016 to 2017.
Starting with the details, consistent with the prior year, we are only including acquisitions and dispositions completed through the date of our call even though we continue to actively migrate our capital from lower density markets to higher density markets.
We will update our guidance each quarter as acquisitions and dispositions close.
We are projecting same property growth of negative 1% to 2%.
The primary drivers here are as follows.
First with <UNK>'s oversight, our team has ad<UNK>ced redevelopment plans for some properties and identified other properties to target for redevelopment in the future.
Accordingly, we'll start incurring some intentional vacancy and we're signing short term less favorable leases with regards to rent, but with needed landlord recapture and/or relocation rights.
In the aggregate, these redevelopment activities are likely to reduce property NOI by $5,000 to $1 million.
Second, in addition to the vacant anchors we have previously disclosed, we intend to proactively pursue the potential re-anchoring and/or re-merchandising the certain other properties.
The impact here is a little harder to estimate, but could reduce property NOI by up to $500,000.
Third, our re-anchoring and re-merchandising cavities along with ad<UNK>cing our re-development efforts will temporarily trigger some co-tenancy causes for certain tenants until the new tenants take occupancy.
We anticipate temporary co-tenancy rent reductions between $1 million and $1.5 million.
Before leaving the topic of same property growth, I want to briefly provide some context regarding our same property pool and the timing of the impacts related to the items I just discussed.
Even though the vast majority of our properties are included in the same property pool, less than $1 million per year and $250,000 per quarter, equate to 100 basis points of growth.
Further, based on our anticipated timing the early quarters will be impacted the most.
Now let me provide a high level roll forward of FFO per share from 2016 to 2017, starting with our 2016 reported results of $0.57 per share.
First dispositions closed since the beginning of 2016 exceed our acquisitions and in our cycle of capital migration, we are net short as <UNK> stated.
This will cause a decrease of about $0.03 per share in 2017, net other related interest savings.
This adjustment alone gets you to the midpoint of our 2017 guidance.
Next our negative same property growth will be offset by a similar positive lift and interest savings from our refinancing activities.
Accordingly, combined these items still placed us right at the midpoint of our 2017 guidance of $0.54 which despite starting 2017 at a time in our capital migration cycle when we are net short, is still approximately the midpoint of the guidance we provided at beginning of 2016.
One last note here to assist with modeling.
Our recent acquisition Christina Crossing currently has occupancy of about 80%.
As <UNK> noted, we have a leasing plan for this property to increase its occupancy and NOI.
However, as a result of the current occupancy level this asset initially has a low yield and will not contribute significantly to earnings in 2017.
I hope walking through our guidance information both in detail and in high level was helpful.
And with that I will open the call to questions.
Yes, I think if you look at this year, it was about $18.2 million and in our operating FFO we have an adjustment for about $1.4 million for the COO transition.
So that gets you at around $16.8 million.
It won't be all that different from that.
It will be slightly higher maybe with those additions on the redevelopment team, so call it $17 million-ish.
Yes, and I think on that call I said it would be negative early in the year, but not likely for the full year.
I also added the same kind of context regarding the size of the pool that I did on this one.
But, yes, <UNK> has been here almost a year now and we're looking at redevelopments not just the ones that we hope to start in near term, but even several years out.
So, with that in mind, we're planning a lot earlier.
So with, more clarity on our redevelopment activities our re-merchandising activities, our re-anchoring activities, also with the anchoring ---+ the new anchors moving in, the free rent periods and all the related co-tenancy impacts from this, we just have a lot more clarity on that now.
So wow we're excited about the long-term value creation that that redevelopment pipeline is going to add it's disruptive in 2017.
Look, I think that once this thing gets going I would say the average annual capital spend is adjusting up, which is what we indicated we'd like to achieve and it gets closer to maybe $50 million a year.
This year I don't think necessarily it will be at that magnitude because again we're still laying the groundwork.
We don't yet have shovels in the ground, but certainly we'll be able to maintain the kind of run rate we've had in the past of 20% to 30%.
But these projects are going to be multi-year, multi-phase projects that will, you'll see average annual spend drift up closer to $50 million.
And again as I said shortly after <UNK> started our hope is to get it to be about 5% of enterprise value every year.
So we'd like to maybe even see that drift up and it has to be for projects that pencil and that makes sense and that deliver the appropriate risk-adjusted returns.
We're not really seeing ---+ we're seeing clearly implied cap rates pressured up just based on where REITs were trading in the markets.
We're not seeing that kind of upwards pressure.
So certainly on the transaction front, whether it's things we're looking to buy or things we're looking to sell, the cap rates aren't going down, but we're not seeing some dramatic uptick in cap rates.
I would acknowledge that one of the reasons why we feel pretty good about our platform and where we're taking it is that these development projects that we're pursuing are higher yielding and that with our cost of capital of they certainly deliver very attractive returns.
But even if there was to be a little bit of inflation even if you were to see cap rates truly drift up, we would still be creating substantial value for our shareholders by pursuing these redevelopments.
So I would say that for now at least we're not seeing the kind of upward pressure that might be implied by where REITs are trading right now.
Yes, so for the full year we're looking at negative 1% to 2%.
In the last half people start taking delivery, we would start getting additional rent from that and start secure some of penalties.
A lot of the co-tenancies have a lag even after the cure they don't necessarily stop immediately.
I'm not going to tell you for the full year it's going to be in that range and it will be a little higher early in the year.
Again, for one quarter, <UNK>, $200,000 moves in 100 bps.
So it will be a little high ---+ on the high end of that range or even a little higher than the high end of that range for the first couple quarters most likely.
We would expect 2018 to normalize that.
The one thing I'd add we always do, our same-store box in imperfect metric, we do it on cash and try to make is as helpful and as transparent as possible and a few of those anchors will have some free rent period, but we expect 2018 to be much more normalized.
Not on all of them.
We think it will probably take a couple of years.
The stabilized yield will probably be in the [mid-7s] if not higher.
It is very exciting about what's going on in Wilmington and it's the name of the center at Christina Crossing.
But what's going in Wilmington right now, especially right around this property is that the group we bought this center from is primarily a residential developer and some office.
This is was their only shopping center asset and they're in the process of master planning and developing a significant amount of residential and commercial around this shopping center.
And so our merchandising strategy is oriented towards a lot of the improvements that are going to be going on around the property.
And more generally with what's going on in downtown Wilmington, this center is literally walking distance from the Amtrak station in Wilmington and is we expect going to benefit from a lot of the exciting residential development that's going on in downtown Wilmington now.
<UNK>, I don't mean to be to be sarcastic, but I would worry more about (inaudible) talking their own books and I would ---+ where cap rates are going in secondary markets.
I think that what we have seen and we have exposure to secondary market shopping centers and urban market, primary market centers.
And I could tell you that the cap rate relationship has endured.
We've sold assets in these secondary markets.
We've bought assets in these primary markets and we continue to see, call it 150 to maybe 200 basis points of cap rate spread.
Pretty consistently across those markets.
And so I could tell you, we just don't worry that much about it.
We still have conviction around our basic strategy which is that we can buy assets in our target markets, sell assets in our non-target markets and continue to migrate capital, reasonable cap rate spreads between what we're selling, and what we're buying.
Look, we have a terrific pipeline of potential acquisitions.
Just to give you a feel for how these off-market deals come together.
Mike Winters, who's in the room literally has been chasing after this deal for, I don't know, four years, maybe five years already.
Pretty much since I was here we've been talking about this deal and this being a market that we wanted to get into.
And so these deals take time, and it's very hard, sometimes to predict when the stars will align.
So the key is to have enough of these deals in the pipeline where something hopefully breaks your way in a relatively consistent manner.
So, we can't tell you which one it will be, but we can tell you that with enough of them in the pipeline that something will break our way.
And so look, we're optimistic looking out through the balance of the year just based on what we're working on and the various things are underwriting that we should be able to take down another two or maybe even three assets this year.
But again as Christina Crossing is a great example, it takes time and patience to land these deals.
<UNK>, I think we've already done that and maybe it would be helpful since we're concluding here to summarize, we are focused on grocery-anchored shopping centers between Washington DC and Boston.
And as it relates to portfolio transformation we continue to migrate our capital from low density markets to high density markets and we continue to pursue redevelopments of the assets that we own or that we acquire in these high-density markets.
And that's the strategy for Cedar and that's going to be the strategy for Cedar for the foreseeable future.
And hopefully, we'll continue to build this foundation for creating value over time.
I've been at the Company now for a little bit less than six years and we've gone from 140 assets to 60 assets, we've executed our strategy that's been reasonably clearly articulated to the Street and we will continue to execute on that strategy until we feel that we need to evolve that strategy as the marketplace evolves.
Thank you all for joining us this evening.
We appreciate your continued interest and support as we successfully transform this company to an owner of first retail assets in the highest density markets between Washington DC and Boston through our leasing, redevelopment and capital migration activities.
