Wheeler Real Estate Investment Trust, Inc. (WHLR) Q4 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Cedar Realty Trust Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Nicholas Partenza. Thank you. You may begin.

Good evening. And thank you for joining us for the fourth Quarter 2018 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 may be deemed forward-looking statements, and actual results 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 2017, as it may be updated or supplemented 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, February 7th, 2019, 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 a reconciliation 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.

Thanks, Nick. Good evening, and welcome to the fourth quarter 2018 earnings call for Cedar Realty Trust. Before beginning with my prepared remarks, I want to sincerely thank my senior executive colleagues who I'm - whom I refer to as my kitchen cabinet, as well as all the members of team Cedar for their commitments to collaboration, congeniality and everyday excellence. There was a famous aphorism ascribed to the economist John Maynard Keynes, that states, the market can remain irrational longer than most investors can remain solvent. I was reminded of the same toward the end of this past December. On Monday, December 17th, we came to terms with a buyer for one of our bottom half assets. It was an approximately $10 million sale priced at a cap rate below 7%. Keep in mind, the consensus net asset value or NAV for Cedar of approximately $6.15 per share for our entire portfolio utilizes a 7% cap rate, which necessarily means that analysts in arriving at a cap rate for our portfolio, are using a cap rate above 7% for our bottom half assets. On that day, December 17th, after weeks of downward pressure on our share price, we fell over 12% in a single day drifting down to a low of $2.73 per share in the days that followed. This share price level implied a cap rate for our entire portfolio of well over 9%. We were literally selling for more than a 50% discount to our consensus NAV. Equipped with the real-time market color from that day's asset sale, we confidently announced a share repurchase plan the following day at an initial $30 million. Since announcing our share repurchase plan, we have been active purchasers of our stock and have bought in approximately 2.8 million shares or 3% of our outstanding shares at a weighted average price of $3.25 per share or an approximate 9% cap rate for a total of approximately $9 million. Essentially we sold one of our lower rated assets at a sub 7% cap rate and used the proceeds to purchase a pool of our better assets at a 9% cap rate. Notably, just last week, we came to terms for another roughly $10 million sale of another bottom half asset, this time at a 7.25% cap rate. As all will agree, selling our lower half assets at roughly 7% cap rates to purchase our better assets at an approximate 9% cap rate is compelling. Essentially this is the investment equivalent of shooting fish in a barrel and it is irrational. Today, you will hear from Robin and Phil about both our results and forecast. You will hear from them that there is no financial or operating distress at Cedar. In fact, as Robin will discuss in greater detail, we have a strategy being actively executed that we believe will meaningfully grow our NAV in the years to come. We owned retail real estate which admittedly is a challenging arena in which to operate. However, even with a recent spate of anchor bankruptcies that has hurt our occupancy, we are still 91% occupied. I imagine one of my children coming home and telling me he or she got a 91 on a test and my seeing this is a sign that things aren't going well. And keep in mind students generally get scored out of 100, while our effective full occupancy is well below that figure. So our occupancy is solid, with a little room for improvement and a leasing pipeline that causes me to be optimistic. Nonetheless, it is still not possible to reconcile observable and realizable private value for our real estate, which supports our consensus NAV at a minimum with the trading level for our shares. In my opinion, the explanation for this irrational public private disconnect is much simpler and it presents a compelling and sustained investment opportunity. Over the last few years, we have seen slightly less than half of Cedar's ownership drift into the hands of ETFs and index funds. This is a little greater than for REITs in general though it is consistent with the overall trend. In December, it appears that the downward drift in our stock was largely attributable to selling by these fund vehicles. The selling appears to be a function of fund flows and not fundamentals. Accordingly, it was truly an example of sellers who were so insistent on selling, they were selling without regard to publicly available information and intrinsic value. For Cedar, on the other hand, we have precise information regarding our portfolio. We know what our assets are worth and our underlying net asset value. Accordingly, we were presented with a unique opportunity, which we have and will continue to exploit on behalf of our shareholders. However, as the John Maynard Keynes saying highlights, we are constrained and fully exploiting this irrational buying opportunity by our responsibility to our shareholders to be conservative in our use of their capital. The fact is that this public private disconnect is irrational. We don't own B malls malls that are experiencing some fundamental secular decline, rather we own a portfolio of relatively stable grocery-anchored shopping centers that are retaining their value based not on our opinion or hope, but based on real transaction comps that we are executing in real-time. Although net operating income growth in our core asset type has moderated, the underlying assets are experiencing a steep value decline as I suggested by the trading in our shares. Taking a step back, one of the central principles of REIT capital allocation is that a REIT manager should only issue equity at a premium to NAV and should sell assets to purchase shares when trading at a discount to NAV. Although we are a small REIT and clearly aren't getting much value for our management platform, I am proud that we have done an unassailable job of staying true to these principles. As set forth in our corporate presentation, we have issued common equity twice in the last five years, both times when we were trading at a premium to our consensus NAV and are now repurchasing shares with the proceeds of asset sales, when we are trading at a meaningful discount to consensus NAV. This is textbook REIT capital allocation and we are proud of this track record though we would admittedly much prefer not to be trading at such a profound NAV discount. In that being, as we think about our long-term corporate strategy for growing our NAV and share price, we must not lose sight of the clear opportunity that is right in front of us as we continue to look down the road toward building the Cedar of the future. As many of you who have followed Cedar now, our long-term corporate strategy is to divest our grocery-anchored shopping centers in lower population density markets and migrate our capital into mixed use redevelopment projects in some of our highest population density submarkets within the DC to Boston corridor, specifically South Quarter Crossing and Riverview, both of which are in Philadelphia, as well as East River Park in Washington DC. In looking ahead to the second half of 2019 when we anticipate breaking ground on at least one of our three major redevelopments, our thinking around funding these projects is evolving as we consider our capital allocation alternatives. With a remarkable risk-adjusted return available to us in our common stock that is best exploited with the sale of our lower half assets, we have begun looking at identifying a joint venture partner for at least one of our redevelopments. On last quarter's call, I noted that our DC project sits within an opportunity zone and certainly that is a consideration for how we might tap attractively priced third party capital in order to fund a portion of our redevelopment costs. This is, of course, an evolving situation that will be a function of shifting dynamics in both the public and private capital markets. However, one of the hallmarks of Cedar is the nimbleness in how we approach and utilize the capital markets. You all can expect our opportunistic, yet highly quantitative and analytical approach to persist, as we weigh the various capital allocation alternatives to create value for our shareholders in 2019 and beyond. As we have discussed in the past, including during my earnings call comments last quarter, this year we are resetting our operating FFO per share on account of the dilutive effect to our operating FFO from the divestitures that will be required in order to fund our redevelopments. Although Phil will discuss our guidance in further detail, we are generally focused on maintaining our operating FFO per share through the execution of our redevelopments and will not simply dilute our earnings through asset sales to capitalize the projects. Accordingly, we think the combination of current cash flow from our core portfolio, coupled with a substantial anticipated construction in process, could support a share price that eventually reverts closer to our consensus NAV. In thinking about the progress we are making on our redevelopments and as Robin will discuss in greater detail, we are in active lease negotiations and poised to hopefully finalize anchor deals at all of our projects in the coming months. Unfortunately, the redevelopment process doesn't lend itself to regularly scheduled quarterly updates, so we certainly cannot brag about our progress with great specificity, though it is impressive and exciting. More generally, I can tell you that all of team Cedar is enthusiastically anticipating these projects, which for many years have just been pictures and numbers and will now start taking on a tangible form. Whether it is well timed share issuances and buybacks, carefully executed redevelopments or simply our disciplined balance sheet management, the one thing our shareholders can rely upon is that our capital allocation decision making will continue to be done with thoughtful analysis and with our hallmark nimbleness. Our capital allocation track record is one of which we are rightfully proud and we look forward to continuing to make what we hope will be viewed as smart decisions when viewed through the crystal clear lens of hindsight, as we embark on the next phase in our Company's evolution. With that, I will give you Robin to discuss our leasing results, as well as the progress we are making on our redevelopments. Robin?

Thanks, Bruce. Good evening. We entered 2018 with solid lease results again this quarter, despite the continued choppiness of having to contend with anchor vacancies. During fourth quarter, 44 leases were executed totaling 331,300 square feet. 40 comparable leases were signed with a total spread of 6.1%. Eight of these deals represent new deals with a comp [ph] lease spread of 21.4%, and 32 renewals were executed totaling 206,800 square feet with a spread of 3% after excluding two massive deals that were renewed with a negative spread. Despite their negative spread, these two deals were still at rents that were above market and kept the tenant in occupancy that was closing other locations across the country. We continue to observe that the bleak portrait of retail that we hear about in the news is not necessarily the reality we experience every day as we run a shopping center portfolio. Tenants are still doing deals, customers are still shopping, e-commerce retailers are increasingly validating the conventional shopping model by investing in brick-and-mortar locations and redevelopment such as ours continue to progress. That being said, we do still have to contend with those retailers in our portfolio, which have been less agile at repositioning sales to adapt to today's evolving retail environment, whether from a financial or merchandising perspective and as a result, they have had to close. In addition to the two Bon-Ton boxes we have spoken about in prior quarters, during the latter part of 2018, Fallas at Jordan Lane and Kings Plaza, as well as the Weiss at Oakland Mills closed their doors. Our leasing team is proactive and strategic regarding this type of returned possession. As a result, the entire Weiss at Oakland Mills has been released to LA Mart and their rent commences in March 2019. There are leases in various stages of negotiation for both of the Bon-Ton boxes and both of the Fallas spaces. Because of the continued strong leasing activity, we are still able to close the year with same property leased occupancy of 91.8%. As we enter into 2019, there are 16 leases totaling over 100,000 square feet not including deals related to our redevelopment projects that are in our current pipeline of leases under negotiation, 30,554 square feet of which are already executed. Our leasing team has also been focused on converting month-to-month tenancy to permanent deals where appropriate. The number of our month-to-month leases continues to decrease each quarter and currently is at 24 deals, excluding redevelopment, down from 30 last quarter. Same-center NOI is at $75.7 million without redevelopment and $91.7 million with redevelopments as of December 31, 2018. We anticipate this income level to remain flat with our redevelopments through 2019 and increase 1% with the redevelopment. This would be 2% growth, excluding costs for development, marketing and community outreach. This was achieved through the strong leasing pipeline in our core portfolio that I spoke about earlier, coupled with our disciplined approach to redevelopment execution. Although we will be a strategically taking down space to accommodate our redevelopments starting in 2019, as it is to be expected, our projects have been methodically planned in phases to sustain as much income as possible. Additionally, the stabilization of projects such as Groton Shopping Center with the a rent starting Planet Fitness and Carman's Shopping Center with the opening of 24 Hour Fitness, Popcorn Beauty at key food and numerous small shops, contributes steady momentum to the revenue stream. 2019 has the rent starts from the steady lease up we have achieved at the recently acquired Christina Crossing in Wilmington, Delaware, as well as the benefit of a full year of income from the recently acquired Senator Square across from our East River Park redevelopment in Washington DC. Cedar continues to make substantial progress on our urban mixed use redevelopments. Anchor leases are near execution, but tenant interest is exceedingly strong and we are growing close to the time where we will be able to pull back the curtain to share the specifics on anchors, deal structures, returns, merchandising and plans. The communities where we are executing these redevelopments have embraced the neighborhood improvements that we are advancing as we have reached out to community leaders and local officials to share and support our vision, and we are encouraged by the impact that it is certain to bring as we work to enhance these communities both socially and economically. With that, I will give you, Phil.

Thanks, Robin. On this call, I will briefly highlight operating results, recap recent balance sheet activity and provide detail on our 2019 guidance. Starting with operating results. For the quarter, operating FFO was $11.7 million or $0.13 per share. For the full year, operating FFO was $53.6 million or $0.58 per share. As a reminder, the full year included $0.05 per share of termination income relating to terminating a dark anchor. Same property NOI growth was negative 0.3% for the full year. This is consistent with our full year guidance of relatively flat growth. For the quarter same property NOI growth was negative 3%. As previously discussed, both our full year and quarter same property NOI growth were impacted by two Bon-Tons vacating and proactively renewing and extending five anchors at reduced or flat rents. Additionally, this quarter was impacted by Weiss vacating at Oakland Mills and a new replacement grocer not commencing cash rent until March 2019 along with Fallas vacating during the quarter. Now balance sheet activity. As Bruce discussed, in December, our Board of Directors approved a program to repurchase up to $30 million of our common stock. To date, we have repurchased 2.8 million common shares at an average cost of $3.25 per share. We will provide quarterly updates on our program to the extent there is additional repurchase activity. Further, we ended the year with $132 million of availability under our revolving credit facility. And with the refinancing activity completed in 2018, we have no debt maturities until 2021. And moving to 2019 guidance, we are establishing an initial 2019 operating FFO guidance range of $0.44 per share to $0.46 per share. This guidance is based in part on the following. As previously discussed, $2.5 million to $3 million of lease costs required to be expensed beginning in 2019 under new accounting standard. Same property NOI growth including redevelopments of 1% and relatively flat growth excluding redevelopments. The redevelopment growth is driven by two of our smaller redevelopments at the new anchors at Carman's Plaza and Groton Shopping Center commence cash rent in 2019. In addition, we have now completed the majority of the intentional vacancy needed to facilitate future redevelopment at our urban properties. Next development, marketing and community outreach costs at urban properties of approximately $750,000 reflected in redevelopment NOI. As Robin noted, same property NOI growth, including redevelopments, would have been 2% prior of these 2019 incremental development costs. Additionally, G&A will include an increase of approximately $1.5 million from additional personnel related to urban properties and legal expense associated with the termination of our former COO. There will also be a decrease in amortization income from intangible lease liabilities of $2 million. Please note this includes $1.5 million related to the termination of the dark anchor in 2018, and finally, dispositions of approximately $40 million. Now given the number of one-time and new items impacting results in 2018 and 2019, let me roll forward operating FFO at a high level. For the full year 2018, we reported operating FFO of $0.58 per share. Reducing this $0.58 per share is for the $0.05 of termination income in 2018 and a $0.03 related to the new accounting standard brings operating FFO to $0.50 per share before reflecting new 2019 operating activities and dispositions. Accordingly, this $0.50 per share will be further reduced by the following, $0.02 for dispositions completed in 2018 and projected for 2019, $0.01 for development, marketing and community outreach cost; a little more than $0.01 related to additional G&A as previously discussed, and a less than $0.01 reduced -- related to reduced amortization income from intangible lease liabilities exclusive of terminating a dark anchor. Combined, these additional items aggregate $0.05 per share and take operating FFO to $0.45 per share or the midpoint of our 2019 guidance range. Hope this additional guidance detail was helpful. And with that, I will open the call to questions.

Great. Thank you. [Operator Instructions] Our first question is from Collin Mings from Raymond James. Please go ahead.

Thanks. Good evening, everyone.

Hey, Collin.

Just to start Bruce, just as far as capital allocation priorities, can you maybe just elaborate a little bit more on how far you are along as far as identifying potential JV partners and how aggressively you plan to pursue that strategy? Do you –you’re certainly kind of keeping your back pocket thinking that if the share price and kind of that public private disconnect remains, that you might use it. Is it something you are kind of aggressively pursuing at this point?

Well, I wouldn't say we are aggressively pursuing it, but we're certainly here not waiting for people to come to us. So we're out there speaking or starting to prepare to speak to perspective joint venture partners, and ultimately like with a lot of things we do at Cedar, it's going to be a decision based on analysis. So when we think about our various capital allocation alternatives and our various sources of capital and what their respective costs are, we ultimately try to optimize both rates. We try to make our capital allocations into our highest returning opportunities and we try to fund them with our lowest cost of capital funds. And that will be how we continue to do it. So I think that the takeaway is more that with our share price where it is, there is a clear signal from the market that we should be more open-minded in thinking about how we fund our redevelopments considering that there is a clear opportunity to buy back our shares, which admittedly on a risk-adjusted basis probably offers us the best nominal return.

Appreciate the color there, Bruce. So just kind of stepping off from that point. Just as we think about kind of $40 million of asset sales contemplated in guidance, should we think about that review that is more or less a baseline from which disposition activity could grow, just if this current gap between your NAV and the stock price persists?

Hey, Collin, it's Phil. Yeah, I think that's right. The $40 million is what is in the guidance, but it could grow throughout the year based on what occurs.

Okay. And then, Phil, I do appreciate a lot of that -- the bridge there as far as the FFO in the prepared remarks, but just -- recognizing there's some moving pieces as far as timing, just on the $40 million of dispositions that are included in guidance, how should we think about the cap rate just for modeling purposes?

Also Collin, we gave you the cap rate on half of it, right. I described the $10 million at 7% and the other $10 million at 7.25%, so that gets you to about 7% and then 8%. If one other asset that we've identified and that we've taken to market and maybe you've seen that marketing blast, it's a net lease asset to a very high credit quality tenant that I would imagine we'll probably trade at a similar kind of a cap rate although I would be reluctant to tell you - to pinpoint that until we actually have a deal. And then the last asset, we have sort of soft circled which asset it is. It's probably going to be a slightly higher cap rate asset, but again, I'm reluctant to be more specific until we are in a market with it. Just based on the fact that half of the assets are in the low 7%s, I would imagine that on a blended basis, we'll probably end up in the 7%s maybe mid 7%s, maybe high 7%s depending on the mix with the second two assets that we bring to market, but it will probably be four assets at about $10 million a clip.

Thanks, Bruce. That's very helpful putting those puzzle pieces together there. One last one from me, and I'll turn it over and jump back in the queue. Just can you expand upon, is that expected increase in G&A related to the additional personnel related to urban properties, as well as just the expense that you referenced as far as the marketing and outreach costs that are contemplated in guidance as well?

Sure. So we have slated some additional hires on the development side, as well as asset management and marketing in order to push forward the initiative on our urban mixed use assets.

Okay. Thanks, Robin. I'll turn it over and jump back in the queue.

Thank you.

[Operator Instructions] Our next question is from Todd Thomas from KeyBanc Capital Markets. Please go ahead.

Hi. Thanks, good afternoon. Just first a quick follow-up on the dispositions. When are the two $10 million assets, when are they expected to close?

One of them is anticipated to close before the end of this month, and I'm looking at Mike Winters. I guess, the other one is probably going to be a second quarter close, I would think. He is nodding his head, yes.

Okay. Great. Then Bruce, in terms of the buybacks, you talked about the capital allocation decisions there, right, a solid 200 basis points spread versus the cap rate on the dispositions here. Your comment suggests that you'd look to remain active buying back stock at current levels. How does liquidity at the size of the Company and leverage factor into your decisions there?

Those are exactly the things that factor in and then I would just add a fourth item, which is -- we have to invest responsibly within the context of our corporate credit facility. So these are all the factors that we weigh and as the Keynes' saying goes, right, we have to make sure that we remain solvent. And so what I would tell you is that we are - we find the opportunity incredibly enticing, but we govern our actions with the limitations you described.

Okay. And in terms of the guidance, Phil, the same store NOI growth forecast for the year, can you just talk about the cadence of quarterly growth that you're expecting throughout the year? Do you expect the first quarter to be generally consistent with this quarter?

I don't think it will be quite as negative. We give guidance on a full-year basis for that, Todd, because just you know the pool is very small. So a couple of $100,000, one event can move it 100 basis points. So I don't think it will be as severe this quarter, but for the full year, we look at it to be relatively flat excluding the redevelopment. And then you know, positive 1% including the redevelopment and that 1% is taking the charge for the incremental development, marketing and outreach in all of the urban assets. That will be recorded at -- on their POI.

Okay. And just lastly, the impact around G&A that you're talking about and that marketing outreach, is that expected to be ratable throughout the year, how should we think about that?

Generally, it should be ratable and a fairly even run rate throughout the year. The marketing, I'll let Robin speak to that. The G&A piece will be pretty ratable.

Sure. Yeah, so the marketing piece will probably be more back loaded to the latter part of the year, probably more toward the third and fourth quarter, particularly for the events pieces. Some of those marketing dollars are more for community outreach and that part will be more ratable throughout the year. So I would say, that marketing spend will be a little bit split. Some of it will be ratable, some of it will be toward the latter part - toward the latter part of the year.

All right, great. Thank you.

Our next question is from Collin Mings from Raymond James. Please go ahead.

Thanks. Just one bigger picture follow-up for me. Just -- Robin, I'm just curious because you and your team has been out working on securing tenants and working together on some leasing activity for the mixed-use projects. Just maybe talk a little bit more about some of the biggest positive surprises and then maybe also some of the negative surprises that it sounds like to the extent, there are some, you might be looking to address some of these marketing efforts. So can you just maybe talk a little bit more about that a big picture? I recognize you don't like to get into too many details on specific tenants at this point, but some additional color on that would be helpful.

Sure. I would say positive surprise is just the amount of tenant interest and demand. As I mentioned in my prepared remarks, you know you hear on the news about the retail apocalypse, I'll say, that you hear about in the news and we actually have had a lot of interest in our urban projects. And that has been - that has been fulfilling as we've been working on these I would say, as far as the challenge, one has been the time that has taken to get these done as far as dealing with tenant demands, and the other challenge I think is, we kind of deal with the new retail world and dealing with what has evolved in the new retail landscape, is making sure that tenants are susceptible to the new demands of what is involved in a retail mixed use project and getting all of the tenants to play together and accept the clauses that you need, the exclusives that you need and getting through all of those specific challenges in order to get to an executed deal, and sometimes that may take longer than as a landlord would like. So I think those are the pluses and the minuses that we're seeing as we work through those processes.

All right. I appreciate the extra color.

This concludes the question-and-answer session. I'd like to turn the floor back to Mr. Schanzer for any closing comments.

Thanks, operator. I should clarify, just in case my children are listening to this call or when they read the transcript of my comments, but I hope you don't settle for a 91 and a test and aspire for more. I could tell you that team Cedar is certainly not settling for 91% occupancy and I look forward to reporting on our continued success on the leasing front among our many areas of focus in the quarters to come. Additionally, I would be remissed if I didn't conclude by giving a shout out to our good friend and colleague, Phil Mays who is celebrating a birthday today. Phil, I now I speak for all of team Cedar in wishing you many more years of good health and many more years at our benefiting from all of your contributions. With that, I thank you all for joining us and wish you a good evening.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.