CDR
#Thanks, Nick, and welcome to the First Quarter 2018 Earnings Conference Call for Cedar Realty Trust.
As always, I am joined this evening by my Senior Executive colleagues who I'm ---+ who I refer to as Cedar's kitchen cabinet.
In addition, the balance of team Cedar is dialed into the call or participating online.
Before jumping into my prepared remarks, I would like to take a moment to thank all of team Cedar for their help in strengthening our culture of collaboration and collegiality as well as their commitment to everyday excellence.
Beyond team Cedar, I would like to also recognize our Board of Directors for their leadership by example in setting a tone in overseeing the company that reinforces these very values.
On the topic of the board, it is fitting to take a moment to acknowledge Paul Kirk, who, as was previously disclosed, advised us of his intent to retire from the board effective as of this year's Annual Meeting, which occurred yesterday.
It has been an honor to have Senator Kirk as a board member.
The senator is the rare example of a truly great American.
He was the chair of the Democratic National Committee, one of the organizers of the modern-day presidential debates, and a United States Senator from Massachusetts.
His association with Cedar has been a source of pride for all of us, and we will miss him very much.
While we will never be able to replace him, the search for his successor is well underway, and I look forward to announcing our new Director in the coming weeks.
Although <UNK> and Phil will spend time on our leasing, redevelopments and finances, I just wanted to take a moment to highlight a few items: first, leasing volumes this quarter were the highest since I have been at Cedar.
This is largely a function of our decision, as previously disclosed, to renew 5 anchor tenants at reduced or flat rents in order to ensure they remained at our centers.
These are all strong anchor tenants, and we concluded that the tradeoff of some rent relief for assurance of term was likely to result in a materially better economic outcome than the alternative of losing the anchor and expending capital and resources to retenant the vacant space.
In a related vein, I will let <UNK> expand on the status of the retenanting of our 2 Bon-Ton boxes.
I will, however, comment on how pleased I am with the proactive approach taken by our leasing team, which has resulted in excellent momentum and letters of intent or solid prospects for all of the vacated Bon-Ton space.
More generally, I am very proud of the work of our leasing team and commend Tim Havener, our head of leasing, for the energy and focus he has brought to the team since joining Cedar just over a year ago.
Second, the reinvention of Cedar as an owner and redeveloper of urban mixed-use assets is continuing at an impressive pace.
<UNK> and the development team are making remarkable strides.
Numerous letters of intent for anchor and junior anchor spaces have been completed with lease negotiations underway at all the projects, and our target of breaking ground towards the end of the year remains within reach.
I simply cannot overstate how significant this positive momentum is for our company.
Currently, we are viewed by many as the owner of a portfolio of predominantly grocery-anchored centers with middle-of-the-road demographics.
We are in fact at the cusp of beginning our transformation into the only retail REIT with a majority of its capital invested in urban mixed-use assets.
This makeover will take a number of years as we sell our assets in lower density markets to fund our redevelopments, but the transaction from talk to action is at hand.
Before passing it to <UNK>, I wanted to comment briefly on our 2 held-for-sale assets.
Both assets were bottom quartile assets and did not warrant further investment of financial or human capital.
Notably, Carll's Corner was the last of our 5 vacant anchor properties.
Although we were negotiating a lease with a high quality supermarket anchor, the reality was that as the lease negotiations ad<UNK>ced, we got to the point where we were simply not creating meaningful value and were ending up with a deal that filled a large vacancy and improved an occupancy statistic without achieving an adequate spread to our underlying cost of capital.
Accordingly, consistent with our rigorous focus on disciplined capital allocation, we decided to divest this center so we can focus our financial and human capital on better value-creation opportunities.
And on the topic of better opportunities for value creation, I will hand the call over to <UNK> to discuss all the various ways we are doing just that for our shareholders.
<UNK>.
Thanks, <UNK>, good evening.
Our central mission has been and continues to be value creation for our shareholders.
We have been methodically and steadily working towards that goal through a combination of thoughtful leasing, employing a disciplined operational strategy and aggressively ad<UNK>cing both our large-scale and smaller scale value-add redevelopment projects.
On the leasing front, we had a strong leasing volume this quarter with 48 leases executed totaling 578,700 square feet of which 10 were new deals comprising 46,900 square feet.
The average new lease spread was 3% with an ABR of $14.22 per square foot excluding one 2,000 square foot cell phone tenant at Oakland Mills that was leased in a difficult space with a challenging configuration.
More generally, during my tenure, we have been highly focused on cultivating stability by reducing turnover and the frictional costs associated with it.
Rather, our focus has been to keep our strong tenants in place as a stable core off of which to grow occupancy and drive positive rent spread.
Accordingly, under Tim's leadership, the leasing team has emphasized maintaining current occupancy by reducing the number of tenants that simply return possession at the end of their terms rather than renew.
This quarter's results is a good example of those efforts with 38 executed renewals totaling 531,800 square feet.
Beyond the 5 anchor renewals <UNK> referenced in his comments, there were 33 renewals for both small shop and anchor tenants executed, totaling 228,700 square feet.
The renewal lease spread for those 33 deals was 3.5% with an average ABR of $15.59 per square foot.
The other 5 anchors were executed at flat or reduced rents in order to assure their continued tenancy and with it, the vitality of their respective centers.
These renewals were key anchor centers in the grocery, fitness and home-improvement categories that demanded a flat or reduced rent.
As <UNK> described earlier, in agreeing to these renewal rents, we made the strategic determination that accepting the reduced rental rate to achieve the renewal with a better option than the potential vacancy.
The ABR for the 48 total comparable leases for the quarter totaled $13.06 per square foot, representing a negative 7% spread, which adjusts to a positive 2.8% spread upon removal of the 5 strategic anchor renewals.
Notwithstanding the volatility in the macro retail market, we have nonetheless maintained solid leasing traction achieving a portfolio that was 91% ---+ 91.6% occupied and 92.6% leased as of the end of the first quarter.
We had a 50 basis point decline in physical occupancy and a 100 basis point drop in lease occupancy quarter-over-quarter, which was primarily due to the closing of Tops at Tiffany Plaza in Gardner, Massachusetts on the heels of their bankruptcy filings.
We are actively pursuing backfill options for this tenant and have already identified some attractive prospects.
We have been employing a proactive strategy for backfilling vacancies created by tenant bankruptcies.
For example, even prior to the Bon-Ton bankruptcy filing, which will result in 2 of our stores closures in second quarter 2018, we had begun to negotiate leases with 2 tenants to backfill the 62,000 square foot Bon-Ton box at Trexler Mall, which are in a mature phase of discussion.
And with 1 tenant to take the entire 54,500 square foot Bon-Ton box in DuBois, Pennsyl<UNK>ia.
NOI growth for the quarter was flat year-over-year, which was consistent with guidance.
Beyond the basic blocking and tackling of leasing, our core portfolio today, the other area of focus related to value creation is, of course, our redevelopment pipeline.
We continue to be excited about the momentum we have on both our large scale and smaller value-add redevelopment projects.
East River, Port Richmond and South Quarter Crossing are moving forward favorably.
The political support and community enthusiasm for these projects is palpable.
The strong tenant interest in our signature mixed-use project has been overwhelmingly positive with multiple high-quality anchor and junior anchor LOIs and lease negotiations underway.
This phenomenon has demonstrated the importance of migrating our capital into higher quality markets and assets in order for our portfolio to have leverage relative to tenants given today's choppy-retail environment.
Upon completion of the execution of our leasing deals, we will commence the first phase of construction.
We anticipate the timing to be end of 2018 or beginning of 2019.
The value-add renovation at Carman's Plaza is still underway with the second phase currently under construction and last phase expected to be completed in September 2018.
Team Cedar has been very busy.
The groundwork is laid for strong strategic growth for this company.
I'm very proud of the team we have to work with from Tim Havener, heading up our leasing efforts, to Charles Burkert and Oody Kupperman heading up our development and construction.
We take our company's values to heart and truly strive for everyday excellence with a disciplined strategic focus.
I will now turn the call over to Phil.
Thanks, <UNK>.
I'm going to add just a few brief highlights to <UNK> and <UNK>'s remarks before opening the call to questions.
Starting with operating results.
For the quarter, operating FFO was $11.9 million or $0.13 per share, and same property NOI when compared to the comparable period in 2017 was flat.
Both of these figures were in line with our expectations and full year 2018 guidance discussed in our last earnings call.
During the quarter, as <UNK> discussed, we classified Carll's Corner and West Bridgewater Plaza as held for sale.
In connection with this, we recorded an impairment of $21 million.
Notably, once we began moving forward with the marketing of West Bridgewater Plaza, we negotiated and accepted, just after the end of the quarter, a $4.3 million termination payment from the dark anchor that had occupied 55,000 square feet or slightly more than 40% of the property.
Clearing out this dark anchor should reduce the marketing, negotiating and closing time required to complete the sale of the property.
Further, we believe that the termination payment received along with the now anticipated sales proceeds will be very similar to the standalone sales proceeds, we would have received if the property were sold with a dark anchor still in place.
Finally, the termination of this dark anchor will have a positive earnings impact of $4.7 million or $0.05 per share, consisting of the $4.3 million cash payment received along with GAAP accounting adjustments for accelerated below-market lease amortization and straight-line rent offset by the foregone rental payments for the remainder of 2018.
Moving to the balance sheet.
We ended the quarter with almost $100 million of availability under our revolving credit facility and debt to EBITDA of 7.9x.
Our debt to EBITDA is slightly elevated from the end of 2017.
As we previously discussed, this is the result of utilizing the proceeds from the sale of 2 million shares of our 6.5% series C preferred stock in mid-December of 2017 to temporarily reduce the outstanding balance on our revolving credit facility until we could complete the redemption of an equivalent number of shares of our 7.25% series B preferred stock in January of 2018, after giving the requisite 30-day notice period.
One last balance sheet note and reminder, we are in the enviable position of having no debt maturities until 2021.
And now with regards to the guidance, we are updating our full year 2018 guidance to an operating FFO range of $0.58 to $0.60 per share.
This is essentially reaffirming our initial 2018 operating FFO guidance adjusted for the favorable $0.05 per share impact resulting from the termination of the dark anchor at West Bridgewater Plaza.
With that, I'll open the call to questions.
Sure.
So as we've talked about before, we are proactively going after our anchor tenants that roll.
And as we look out, we don't have any others that we are anticipating rent reduction, as we see the horizon today.
That being said, given the current climate, I never say never, but based on the purview that we see as we look out at our current lease roll that's out there for the rest of '18 and '19 and the conversations that we're having currently, I think we have taken the biggest brunt of it already.
Yes, yes.
If you take our original guidance and add $0.05 to the high and low, you'll get our current guidance that's out there.
Sure.
So as I mentioned in the prepared remarks, for the Trexlertown box, we're looking at taking that 62,000 box and splitting it between 2 tenants.
We do expect to have a fairly positive rent spread there.
And then, the capital outlay to get that done between landlord work and TI will probably be in the $3 million to $4 million range between both landlord work and TI.
But as I said, we are expecting a rent spread there that, looking at almost 40% to 50% range because we did have a pretty ---+ we had a pretty low rent there from the previous Bon-Ton box.
And then at DuBois, we had a higher existing rent from Bon-Ton, so not expecting as positive a lease spread there and a little lighter on the capital, so that deal won't be quite as attractive.
But we do have a tenant that we're looking at, that will take the entire 55,000 square foot box.
And we're expecting rent starts on both to be late 2019.
I mean, as we go ---+ as these deals happen depending on what market it is, who the tenant is, what leverage we have, some will be positive, some will be negative, some will be flat, but as I've mentioned in previous calls, one of the things that we do try to do in all of our new deals and even in the renewals, is try to get annual rent bumps of 2% to 3%, so that we have that contractual rent bump coming through there in all of our leases to have that contractual rent growth coming through there.
So we do have that.
And so I would expect to see somewhere in upwards of 3% as a baseline and then from there, it honestly just depends on what shopping center you're dealing with, who the tenant is, and what the situation is.
And so it really does vary quarter-to-quarter depending on which deals we did that quarter and which pool of leases you're looking at as we present it from quarter-to-quarter.
This is going to be on a per pound basis.
These are both not significantly occupied centers.
And in terms of timing, call it 4, 5 months to get them done.
So between the 2 deals, we might end up with $10 million or $12 million at most.
And so I would imagine ---+ and that's inclusive of the termination fee.
And so I would say that we're just going to kind of use it for regular corporate purposes.
Well, so some of what you're asking probably isn't necessarily illustrative of anything, but just to give you a feel for the deal dynamics and our thought process.
So we were effectively at just about the finish line with these folks in terms of doing a deal.
So this wasn't the kind of thing where it was highly speculative or theoretical.
We were pretty much down to the very, very final details.
The challenge with a Carll's Corner is that the market is such that even after installing this terrific anchor tenant, we weren't going to get to the kind of cap rate nor be able drive the kind of rental activity that would justify the very aggressive capital expectations that the tenant had.
And so where we were ending up is that we weren't really ---+ we weren't able to achieve a meaningful spread to our cost of capital.
So essentially, we were going to invest capital and not have created meaningful value at the center.
And as a company that has articulated ambitious plans for what we plan to do with our capital for which we expect to get very meaningful returns, we try to be pretty thoughtful about how we spend our money and to put out meaningful capital without generating an attractive return just didn't seem like a good ---+ as I described, a good use of either our financial capital or of our human capital for that matter.
Yes.
Yes.
So our same-store NOI's $20 million a quarter.
So $200,000 bounces it up 1% or down 1%.
It generally will be pretty flat each quarter, maybe slightly positive, slightly negative, but close to flat each quarter and close to flat for the year, maybe ramping up a little bit better towards the end of the year.
I would say that it's pretty consistent with how I described it in February.
As you know, from listening to all of our calls and spending a lot of time with us, <UNK>, we very carefully track the deal activity in our markets.
So just to give you a feel, since, call it December of last year, we've seen about 25 deals that, broadly speaking, we would call comps in our market.
And it's pretty clear that there's no fire sale going on right now.
There's still very strong demand for grocery-anchored shopping centers and more broadly, with certain limited exceptions, demand for retail has held up reasonably well and a lot of it's a function of the continued supportiveness of the conduit market.
So there still is financing available to buyers for most of the retail assets that are trading.
That said, as I mentioned in February, there clearly has been some softening in the market, but we're literally talking about basis points truly.
So the highest quality shopping centers that we're tracking and a great example is, Regency just bought an asset in Dobbs Ferry, New York and that was a sub-5% cap rate deal.
We have been tracking that for a while.
And so we're hoping that we'd see some widening in the cap rates, but in fact, the pricing held up.
For solid quality assets with grocers, we've seen a little bit of slippage, but again, we're talking about 15 to maybe 20 basis points in terms of observable cap rates relative to where things were.
And when you look at our bottom quartile assets, as I described in February, it's pretty much held steady at a widening, call it 25 to maybe 50 basis points.
And so pricing is still pretty solid.
Certainly, we're not seeing things priced as aggressively as we had been, call it, over the last 2 years, but it hasn't gotten to a point where we're panicky or where we're terribly concerned about pricing, but more we're just observing that there seems to be more of an equilibrium and a balance between buyers and sellers right now.
Obviously, we've spent a lot of time dealing with construction and pricing and staying in tune with what's going on there.
Generally speaking, we think that there could potentially be 3% to 4% of inflation due to labor uncertainty, material costs, inflation and things of that nature, but we factor that into our pricing on our redevelopments.
And so we're fairly comfortable with what's going on there.
We also think that the timing of when our projects hit the market going into 2019 that there could be some softening in the market relative to that timing just based on in talking to other folks and what's going on in the construction market.
So based on those factors, we're pretty comfortable with what's going on in the market and how we've priced our projects accordingly.
First of all, <UNK>, that's a terrific question.
So thank you for asking it.
It's of course, something that we think about.
It's one of the reasons that we so carefully monitor cap rates.
As you appreciate the lower quartile assets that we'll be selling are fairly yieldy assets and so they kick off a substantial amount of net operating income.
And in a similar vein, the widening of the cap rates for these high cap rate assets don't dramatically change their value.
Because of that thought process, so on the one hand, these assets generate a fair amount of annual cash flow, and because they're relatively high cap rate assets already, even with cap rates widening, we're not seeing a meaningful erosion in value.
It continues to make sense for us to hold onto these assets to benefit from the cash flow they generate and to only sell them when we need the capital.
Now that said, if there was some strategic ---+ larger strategic benefit to doing a portfolio transaction we might do it, but we wouldn't sell these assets as a large portfolio before needing the capital out of a concern that cap rates are widening based on the information that we have in front of us today.
So my only qualifier is that if, for some reason, we see cap rates really falling out of bed and widening to a point where our premise is off.
In other words, where the cash flow that these assets generate doesn't offset the slight value erosion that we're seeing with cap rates widening we might change our opinion, but for right now considering the facts on the ground, we think the best strategy is to hold onto these assets until we need the capital.
You're, of course, correct, as an absolute statement, <UNK>, that because we're more levered than a lot of the other companies that if cap rates were to go up it would have a disproportionate impact on our NAV, and we're, of course, mindful of that.
And the way we think about our cost of debt really works its way into our analytics on 2 fronts.
So first of all, we of course have a corporate forecast model and we incorporate the forward yield curve or the forward LIBOR curve, I should say, into our interest rate projections.
And of course, the forward curve, as it always has been, is upward sloping, and that suggests that interest rates are going to go up.
And so in terms of our earnings forecast, we assume interest rates are going up.
As a participant in the market beyond that, when we think about, for example, our weighted average cost of capital, we assume that interest rates are going up.
So we take our in place cost of debt and we add roughly 75 to 100 basis points to that when we think about our weighted average cost of capital.
But all of that said, the impact that rates might have on our cap rate and the fact that we have more leverage, what it might do to our net asset value, are all just considerations that we weigh in thinking about our capital allocation alternatives.
And so it's not something that would cause us to change what we're doing dramatically, but rather it's just another factor as we think about how to invest that dollar ---+ that next dollar, if you will, of capital that we have to invest.
I would say that the ---+ our thoughts around share buyback are probably very similar to how our peers think about it.
So we do think about share buyback as a tool in our toolbox, so to speak, but it's just a tool in our toolbox, right.
What we're trying to do when we invest a dollar of capital is we're trying to maximize the return.
And so we have measured the return opportunities that are presented by various capital alternatives and certainly that's one of them that we weigh.
What you're referring to when you say that we can't do it as readily as others is of course that considering our leverage and considering more significantly our relatively small size, there are other things that get factored in when thinking about share buybacks, and we do think about all those things as we evaluate share buyback as an alternative.
Thank you for joining us this evening.
We appreciate your continued interest in Cedar and look forward to seeing many of you at the upcoming ICSC and NAREIT Conferences.
