Wheeler Real Estate Investment Trust, Inc. (WHLR) Q1 2013 Earnings Report, Transcript and Summary

Greetings and welcome to the Cedar Realty Trust First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cohen, Investor Relations for ICR. Thank you, Mr. Cohen. You may begin.

Good afternoon. At this time, management would like me to inform you that certain statements made during the call, which are not historical facts, may be deemed forward-looking statements within the meaning of Section 27-A of the Securities and Exchange Commission of 1933 and Section 21-E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Although the company believes that expectations reflecting any forward-looking statements are based upon reasonable assumptions, they are subject to various risk and uncertainties. The company can provide no assurance that expectations will be achieved and that actual results may or will differ. Many other facts and risks that could cause actual results to differ materially from expectations are detailed in the company's press release, which was put out this afternoon, and from time-to-time in the company's filings with the Securities and Exchange Commission. The company undertakes no obligation to revise or update any forward-looking statements reflected in any circumstances after the date of the company's release. It is now my great privilege to turn the call over to Mr. Bruce Schanzer, Chief Executive Officer and President. Bruce?

Good evening, and welcome to the first quarter 2013 earnings call for Cedar Realty Trust. The first quarter was another solid quarter for our stable DC to Boston portfolio of grocery-anchored shopping centers. Operating FFO for the quarter was $0.12 versus $0.11 in the comparable quarter of 2012, and same store NOI growth of 1.2%. Overall, leased occupancy and small shop leased occupancy were up slightly to 92.8% and 83.8% respectively on higher than typical lease volumes. In addition, both comparable new leases and renewals, significantly improved on a cash basis at 12.3% and 7.3% respectively. Leverage continued to tick down, ending the quarter at 8.3 times on a debt-to-EBITDA basis. Lastly, our divestiture program has proceeded to pace in 2013, with a closing of three assets through today. These results are a consequence of the many measures we have taken to reposition the company taking route and beginning to bear fruit. Whether it has improved net operating income, due to our intense focus on leasing and expense management, our reduced overhead due to improved corporate efficiency and reduced headcount, as well as our declining cost of capital and leverage, Cedar is beginning to resemble, what we were hoping to see consistently in the quarters and years ahead, that is a well managed company, that is highly analytical and strategic in its decision making judicious in its capital allocations, and prudent in its balance sheet management. As I note nearly every day, this remarkable transformation and ongoing progress is a credit to both my colleagues who are joining me on this call, namely Philip Mays, Brenda Walker, Nancy Mozzachio, Michael Winters, Tom Richey, and Stuart Widowski, as well as the balance of team Cedar, who have committed themselves to every day excellence. Before handing over the call to Phil, for a review of some financial highlights, I wanted to briefly touch on how we continue to add value through the implementation of our five part strategic plan. Our plan in summary is to focus on grocery-anchored centers between Washington DC and Boston; to drive strong results through leasing and operations; to create value through targeted capital investments into our existing portfolio; to intensify our footprint through selective acquisitions; and to continually improve and strengthen our balance sheet. First, as we have mentioned before, our definition of a grocery retailer changes, as the grocery business itself changes, and today includes more than the classic supermarket. Accordingly, you should expect our portfolio to evolve, just as the grocery business evolves, to include various types of retailers that sell groceries, and pursue different grocery strategies. This will manifest itself, as we execute our portfolio intensification and capital recycling program. I would also note however, that despite the nearly constant commentary about the impending demise of the traditional supermarket, we are seeing solid interest in leasing activity within that component of our portfolio. I expect there will be more specific information to discuss on our second quarter call in this regard. Second, in terms of leasing and operations, our renewed focus on these competencies has had a positive impact on all our metrics. We had another strong quarter of positive spreads on over 225,000 square feet of production. One particularly exciting new lease, is the 57,000 square foot Hobby Lobby lease, at Trexlertown Plaza. This lease replaces an expiring Cedar's lease, but also encompasses more than 30,000 square feet of very challenging space, that have been vacant for almost seven years. This lease and some of the small shop leasing at that center as well, are prime examples of how redevelopments, such as the one we are completing at Trexlertown Plaza, drive ancillary leasing, and therefore enhance the yield on invested capital, beyond what might be captured in a pro forma. On this topic of our dark anchor replacement strategy, we are very pleased with the progress we are making, and feel that this slow and steady approach to value creation within our portfolio, will result in a measurable improvement to the quality and diversity of our tenant roster. We expect to make meaningful progress during 2013 that we will discuss, when respective deals are finalized. Third, on the redevelopment front, during the first quarter, we made solid progress at Colonial Commons in Harrisburg, where we are removing a long vacant theater, and replacing it with soft goods concepts. We have signed a lease with Old Navy and are far along in our lease negotiations with another significant national tenant. We continue to aggressively pursue other redevelopments and value add opportunities at our [centers] and plan to disclose and discuss them, as they ripen. Fourth, I want to share with you how we are thinking about intensifying our geographic footprint, through selective acquisitions. As we have mentioned on prior calls, our objective is to improve our average asset quality by selling our weaker assets and acquiring stronger assets. When we think of asset quality, we are focused on a number of qualitative and financial characteristics. However, the element we should expect to consistently see in any acquisition, is that it is an asset in our DC to Boston footprint, with higher population density than our average density, and that is anchored by a grocery retailer. Over the past few months, we have been actively pursuing opportunities in our target markets, and are gradually building a pipeline of potential acquisitions that are consistent with these elements. Fifth, in terms of our balance sheet, we continue making strides in our divestiture and de-levering program. Broadly speaking, there are two significant assets that we still need to get under contract; the Shore Mall, near Atlantic City, New Jersey, and Oakhurst Plaza in Harrisburg, Pennsylvania. The Shore Mall is currently being de-malled and converted into a high occupancy strip center. We expect to have the project completed by the end of the third quarter and plan to take the asset to market at that time. Oakhurst, an unanchored strip center, is being further leased up in advance of taking it to market, though we have already started speaking with prospective buyers. In conclusion, we are confidently staying true to the course we described, when we first introduced the new Cedar back in November of 2011, on our third quarter call. Since that call, we are one of the best performing shopping center REITs, as measured by total shareholder return. That said, we have a long way to go, before we can point to an extended track record of consistent value creation, and hopefully, outperformance. To that end, I can assure you, that we are keenly focused on continuing to drive strong corporate and real estate results, in order to deliver robust total shareholder returns, over a sustained period. With that, I give you Philip Mays.

Thanks Bruce and good evening everyone. We are very pleased with our first quarter results. These results are the products of consistent focus, and execution in several areas, by many individuals on our team. Beginning with our financial results, operating FFO was $0.12 per diluted share for the quarter, compared to $0.11 for the same period last year. In order to fully appreciate this increase, consider two significant items. First, this quarter we had very little noise related to the unwinding of our RioCan joint venture, which took place in the fourth quarter of last year. All of the net proceeds received from the unwind, have now been utilized to repay mortgages. Further, the RioCan management agreement has ended, and we have delivered on our promise to reduce corporate costs by approximately $2.5 million annually, to replace the lost management fee income. Second, this increase in operating FFO was accomplished by reducing debt and our financial leverage. We ended the quarter with net debt-to-EBITDA at 8.3 times. More importantly, we remain on-track to achieve our near term target of getting below 8 times, upon the completion of our disposition program. When you consider both of these items, our increase in operating FFO, really is a solid outcome. Moving to property results; same property NOI increased by 1.2% for the quarter. Again, this excludes the timing impact associated with replacing the dark anchor at Oakland Commons. This quarter was also impacted by significantly higher snow removal costs. The snow removal costs for the first quarter of 2013 and 2012 were held constant, same property NOI growth would have increased by 1.8%. Now because of the size of our same property NOI, I [incurred] the valuation of our full year, and not to place too much emphasis on the results for any one quarter. These higher snow removal costs are a great case in point. Total snow removal costs increased about $1 million, but as we recover almost 90% of these costs, the net extent, impacting our same property NOI was only about $100,000. However, as the same property NOI was just under $20 million for the quarter, this does affect same property NOI growth, even though the amount was relatively small and had no real impact on FFO. With regards to leasing and occupancy; the lease percentage for our total portfolio increased to 92.8% at end of the quarter, to 92.7% last quarter and 91.3% a year ago. However, the occupancy percentage for our portfolio decreased slightly to 91.5% at the end of the quarter. The slight decrease in occupancy was related to seasonal moveouts and planned downtime to relocate some tenants. Bruce noted some leasing highlights for the quarter, but let me provide a few more details. During the quarter, we signed 40 leases for a total of 225,000 square feet at a weighted average rent of $12.12 per square foot. Excluding the one lease Bruce noted for 57,000 square feet, a space that has largely remained vacant for seven years, the weighted average rent for signed leases was $13.87 per square foot. On a comparable basis, we signed 36 new and renewable basis for 163,000 square feet, at a positive spread of 8.2%. This spread is very consistent with our comparable lease spread of 8.1% over the trailing four quarters. Now reviewing our balance sheet; on our fourth quarter call, I will walk you through the refinancing in February, of the last of our 8.875% Series A Preferred, with 7.25% Series B Preferred issued at a yield of 7.375%. Again, we are pleased with this execution, and that we have now retired all of our higher cost Series A preferred. This represents a significant step in our efforts to drive down our cost of capital. Further, we ended the quarter with about $74 million of capacity on our line of credit, and less than $15 million of debt maturities in 2013, excluding one mortgage, with an extension option. Additionally, I'd like to note, we could increase our line of credit capacity to approximately $130 million, by adding our recently unencumbered properties to our line of credit borrowing base. Before turning to guidance, let me make a quick note about our supplemental financial information we filed earlier today. In an effort to continue to improve the financial information we provide, we made several additions and changes to our supplement. I just want to highlight the most significant change. We are now including leasing spreads on new comparable leases, in addition to renewals. Further, as the sample size of new leases can be small for any one quarter, we are including this information for the trailing four quarters. And turning to guidance; we are reaffirming our full year 2013 operating FFO guidance at $0.46 to $0.49 per diluted share. The underlying key assumptions, such as property, same property NOI growth of 1% to 2% still remained consistent with those discussed on our last call. Finally, I want to briefly discuss one variable to consider in our guidance range, and that is the potential impact of dispositions related to our remaining assets held for sale. If we were to sell all of these assets at one time, it would not be a significant impact to our FFO guidance. However, as you would expect, some of these dispositions are dilutive, and other such as land and the assets being conveyed to the lenders are accretive. Accordingly, until we get a little further into the year, and gain a little more visibility about the timing of these dispositions, we are leaving our guidance range unchanged at this time. And with that, I will open the call to questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Todd Thomas from KeyBanc Capital Markets. Please proceed with your question.

Hi. Good afternoon.

Hi Todd.

I just wanted to dig into the leasing environment a bit. Bruce, you mentioned that the leasing activity in the quarter was a little higher than expected, and I was wondering if you or Nancy may be could speak to what's driving the sort of uptick in leasing volume here, and where it seems to be coming from primarily?

Hi Todd, it's Nancy. I think to set the stage, I mean, it's an improving economy. There is very little new development out there. We have access with supermarket anchors, and are value oriented retailers today, who have a very robust open to buy programs, and they are attracted to that type of asset. So I think that speaks to why we are seeing some volume uptick. As Bruce mentioned in his remarks, we were happy to report a new lease with Hobby Lobby, that's in one of our Pennsylvania assets, as you know, it's a redevelopment property. So we have worked hard with those two assets to put the right kind of mix in place, and we are seeing the fruit from those efforts. So I would say, when I look at the activity that happened in the last quarter, I'd say its spread pretty equally across the platform.

Would you say that it's also spread fairly evenly between the anchors and sort of non-anchors, and then, if you even look at sort of the inline non-anchor space, are you seeing any pickup in terms of leasing from local operators, or is it still primarily national and regional retailers?

When you say local, I think the definition of local has changed somewhat. I think its representative of franchisees today. You know, you have a number of reasons why there are individuals who have chosen the franchisee routes. I think brand recognition is one. It's less risky for an individual opening up a business, when you know that there is money that's in a program to promote that business. So that local operators there, they are just in a different format, they are in the franchisee, under the franchisee umbrella. But I'd say we are seeing that. We are seeing well capitalized franchisees, and local and national regional tenants.

Okay and then, I think along with guidance, there was the expectation for about a 100 basis point increase in occupancy at year end, and I think the small shop leased rate was 83.8%. I was just wondering, where you think that might be at year end, in terms of thinking about the 100 basis points overall?

I'd say we are probably expecting to be about 84 to 85, is a reasonable number for small shop.

Okay. Then, just switching over to acquisition. It sounds like there is some potential investments on the horizon. I was just wondering, Bruce, maybe if you could share with us some thoughts as to what we might expect from Cedar, as the company shifts from defense to offense here, in terms of the appetite of the company at this point, and maybe you could talk a little bit about pricing that you are seeing in the market, as you begin to evaluate deals?

Okay. I will answer that, and I would also like to add another wrinkle to our discussion of acquisition. So in terms of the type of acquisitions that we are looking at, I think I described them reasonably, completely, in my remarks, which is that we are looking to intensify our footprint, so they are going to be assets that fit within the DC to Boston footprint that the company currently has. They are going to be anchored, or a significant tenant is going to be a grocery retailer, which as I also added to my comment, doesn't necessarily mean a supermarket. And then the third element, which is a critical element is that, when we think about demographic, especially for a grocer as opposed to some other types of retailers, we are much more focused on population density over household income. That's not to say that we are not interested in household income, but we are much more focused on the density piece, and as we look at assets, I think that's going to be a feature. So probably, trying to get a little bit closer into some urban areas, might be a characteristic. But again, I don't want to get ahead of ourselves, let's get the deal done, and then we will announce the deals, then we will live the assets for a long time, where we will be able to tell you all about them. The one thing that I would add though, is how we underwrite acquisitions, just maybe a little bit of a deviation from how the company might have looked at acquisitions previously, which is that, clearly a big focus is how the return opportunity within the asset relates to our cost of capital, and so we have already started bidding on deals. We have had a lot of discipline from a pricing perspective, which is why we haven't announced any acquisitions and we will continue to bring a lot of discipline to how we price deals. But again, there is a very keen focus within the company on making sure that the returns and the opportunity embedded in the asset makes sense, considering our cost of capital. So I'd say that that's an important element to add. You'd asked about prevailing cap rates, and certainly that's a function of the markets, and different markets at different cap rate qualities. I would say broadly, that what we are seeing -- and this is a positive trend for Cedar is that, there is more of a dynamic move in the secondary markets, in which certain of our assets fit from a cap rate perspective, than we are seeing in some of our aspirational markets. So in our aspirational markets, we are seeing relatively low cap rates. Certainly, cap rates lower than in the markets in which many of our assets fit today. But those cap rates are relatively static. So there has been a compression in cap rates, but we don't see this ongoing severe compression in cap rates in many of our aspirational markets. That said, in the secondary markets, in which many of our assets currently sit, we are seeing a very dramatic compression in cap rates, and so we see this as a potentially very virtue with the dynamic, where the capital recycling program that we contemplated, in which we acquire better assets, and we sell inferior assets, the way this could play out is that, in fact the assets that we ultimately sell, could experience the cap rate compression, that allows us to minimize the dilutive impact of improving our average asset quality.

Okay. That's helpful. Then just I guess one last follow-up to that, I guess based on your comments, are you evaluating additional properties within the portfolio for sale today, that weren't initially contemplated in the original divestiture program?

Great question Todd, and the answer is a qualified yes. So what I mean by that is that, we are not actively looking to sell any assets. The divestiture program that we contemplated was really -- had two purposes, both of which continue to be the objective behind the program, which is why we are continuing to drive it through to a conclusion. One is to focus the company strategically, and the other is to use the capital embedded in tune of our assets, to reduce our leverage, and that continues to be the reason why we are pursuing that divestiture program. When we think about capital recycling, which again by definition involves selling certain assets and buying other assets, that is more of what I would call, just a classic portfolio management strategy. What we are looking to do is, just improve our average asset quality, and the average will improve both by adding assets that are better assets, and by divesting assets that are inferior assets. But that's going to occur over a period of time, and there is no intent today to necessarily sell an asset. That said, I can assure you that, if you think about the company over the next three to five years, we are almost without a doubt, going to be sellers of weaker assets, and hopefully buyers of better assets.

Okay great. Thank you.

You're welcome.

[Operator Instructions]. Our next question comes from the line of Craig Schmidt from Bank of America. Please proceed with your question.

Well thank you. I guess continuing with the conversation about your external investments, I am wondering, just given the competitive nature for acquisitions, are you going to be -- do you need to get projects with a little hair on them to buy them, and how do you balance that against redevelopment of your existing properties?

Hi Craig. That's a great question, and the answer is, I think something that you would probably find to be sort of intuitive, which is we don't compete for every center. We don't compete with people who have a significantly lower cost of capital than us, for the best centers, and that said, there is a significant universe of opportunities for us to improve our portfolio, where we are not necessarily competing with people who have significantly lower cost of capital than us. So we don't necessarily have to buy assets with hair on them, it's more that we have to be selective and thoughtful in which assets we acquire. One of the great things about Cedar, and one of the things that gets us excited is that, because we have a relatively small platform, it doesn't take very much from a positive perspective to really move the needle in a positive direction, so when we think about acquisitions, we are not thinking about a need to put out certain amounts of money in a certain period of time, or to buy a certain number of assets. Rather what we are thinking about is, being selective and thoughtful in making targeted investments, in order to grow the portfolio. So that's how I would think about the acquisition piece. We continue to seek to complement the desire to invest back into our portfolio with acquisitions. I think as a practical matter, the opportunity set to invest into our portfolio grows, as we grow our portfolio, and so there certainly is a virtuous relationship between acquisitions and redevelopment. But the other thing as a practical matter is that redevelopments take time, and so as we continue to pursue these redevelopments and as we contemplate growing the number of assets in which we are pursuing redevelopments, we just recognize that these are dual capital requirements that the company will have. These are dual ways for us to create shareholder value, but we don't see them as mutually exclusive.

Okay great. Then just -- what's the next step for Oakland Commons? I mean, it seems like there is two [tenders] there, you are 100% leased, unless the Bristol Ten Pin is rolling soon, or if you have expansion opportunities. I guess, it would seem like it might be a candidate for sale?

Craig, I have to tell you first of all, I commend you for having that detail of a familiarity with our portfolio. I am only disappointed, you didn't reference the fact that the Ten Pin pays $0.98 a square foot in rent. The answer is that, the way we look at that particular asset is that we are hoping to acquire the bowling alley, and if we can acquire the bowling alley, we could significantly improve the rent stream from that, and certainly if we could get it priced right, we would pursue it. It's not, and we concluded after a period of time, that it was not an option for us, and we would potentially look to sell that asset. To your point its -- it would be a pretty stable asset, that would actually be on the smaller side. So again, that's something that we are looking at, at that particular center, and certainly, there is a long way to go with regards to what you think the market rents are, there would be certainly, quite an improvement, if we can grow it from the less than $1 square foot we are currently getting at.

I am confident that Nancy could do -- okay thank you.

Thanks Craig.

[Operator Instructions]. Our last question comes from the line of Josh Patinkin from BMO Capital Markets. Please proceed with your question.

Hi good afternoon.

Good afternoon.

On the $1.1 million impairment reversal, would you mind explaining, what happened there during the quarter?

Yeah, Josh this is Phil. At the end of last year, we had -- the only mortgage that we had like this, that was -- mortgage receivable, that was secured by some lender in Ohio. The owners there missed the payment, and when we evaluated it, we wanted to be conservative on our marks on how much of it we could receive, and we reached a settlement with those guys, and they paid us $1 million, that was the reversal. The only other point I would make, because, you know, this is -- again, the only mortgage [lexis] we had, and it's also one that we impaired, when we got here. But a nice outcome, we got $1 million of cash, where we weren't sure we would get anything.

Okay. So does that stop some of the non-cash interest that you were paying on some of the assets out there?

So that's two separate issues there. This is a mortgage receivable, where the company had made a loan, and that it was secured by some lender in Ohio again, and the guys missed the payment on it. So we wrote it down very conservative, at the end of last year, and then we actually got $1 million in cash. The non-cash interest is related to four assets that we were returning to lenders, at about $20 million of debt of actually scheduling our supplement, that goes through those loans, what the amounts are for each one, and what the interest rates are, and we are not paying any of that, so that's just all non-cash interest that's going through earnings. One of the properties is vacant, so there is no cash there for the lender to take. The others, they actually have tenants, but the lenders (inaudible) the cash there too. But those assets are all under water, and that's why we were handing them back.

Okay. Sticking with some of the debt stuff, you mentioned that you could increase the secured line, if you added unencumbered assets. How big is the unencumbered pool today, and what percentage of NOI?

It's probably just over 35% of our NOI and that's up significantly from just fewer than 25%, when we started the disposition program. Further, what's interesting, if you look out over our maturities over -- while we have very little in 2013 remaining. If you look at 2014, 2015, 2016, there is about $100 million each year of mortgages coming due. So that will give us an opportunity as we move forward, to further increase the unencumbered portion of our NOI.

Are you thinking about pursuing an unsecured model here for Cedar?

I would just probably take one step at a time. As that happens, that would just be the outcome of pursuing a good business line.

Right. Okay, and then, finally, on the redevelopment program, you guys mentioned a couple of calls ago, that you consider about $100 million over the next up cycle, or the next few years. Any progress there, any thoughts that you would like to share at this point?

I think we are staying true to that prediction. I think we talked about doing $20 million to $30 million this year, and I think that that's probably going to be the level, if not better, at which we are going to pursue redevelopments in the years to come. So again, if our company grows, that component of our company will grow, one of the -- an element of the business, that contributes to earnings beyond the core portfolio, and what we drive out of leasing and good operation. So again, it will be a number that you could expect to stay at that level, or grow, as the company grows.

Okay, any big elephants, or is this just a bunch of small deals aggregated up?

It's really both. We have some deals that we are working on, that are not in this $20 million to $30 million number, that could be significant, call it $10 million, $20 million, may be even $30 million type endeavors, and then we have a whole slew of $1 million to $5 million investments, things like pad sites, very dramatic, façade renovations include other physical renovations at the center. So it's really -- it runs the gamut.

Okay. Great. Thanks very much gentlemen.

Thanks Josh.

Thanks Josh.

There are no further questions. I would like to hand the call back over to management, for closing comments.

Thank you everyone for joining us this evening. We sincerely appreciate your interest in Cedar. We look forward to continuing to clearly articulate goals, and then achieve those goals, all in furtherance of creating long term and sustainable value. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.