Earnings Call Transcript - WHLR Q3 2020

Operator, Operator

Ladies and gentlemen welcome to the Third Quarter 2020 Cedar Realty Trust Earnings Conference Call. As a reminder, this conference call is being recorded. At this time, all audience lines have been placed on mute. We will conduct a question-and-answer session following the formal presentation. I will now turn the call over to Nicholas Partenza. Please proceed.

Nicholas Partenza, Chairman

Good evening, and thank you for joining us for the third quarter 2020 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 2019, as updated by our subsequently filed quarterly reports on Form 10-Q and other periodic filings with the SEC. As a reminder, the forward-looking statements speak only as of the date of this call, October 29, 2020, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Cedar's earnings press release and supplemental financial information posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. With that, I will now turn the call over to Bruce Schanzer.

Bruce Schanzer, CEO

Thanks, Nic. Good evening and welcome to the third quarter 2020 earnings call for Cedar Realty Trust. It has been a remarkable quarter and year-to-date, and I wanted to thank the members of Team Cedar, not to mention our terrific Board of Directors for their focus and efforts on behalf of the company during these unprecedented times. As you all realize, this has been and continues to be a time of incredible stress, with many folks worrying about contracting a frightening virus and managing all of the personal challenges this pandemic has caused. Although we usually describe our grocery-anchored shopping center assets as being resilient, I can proudly say that the members of Team Cedar, our most valuable assets, have proven themselves to be even more resilient than our shopping centers, as they have performed their jobs with a characteristic focus on everyday excellence, collegiality, and collaboration. Since the outset of the pandemic, we have focused on a number of pressing matters to emerge from this period on the strongest footing possible. First and foremost, we have endeavored to help our tenants survive the economic shutdown and ideally pay their rents or at a minimum agree to a forbearance arrangement, whereby we have the right to collect the rent in the future. Secondly, we have awaited the reopening of the real estate debt capital markets in order to arrange the refinancing of our $75 million term loan maturing in February 2021, as well as address our other upcoming debt maturities. Third, we have advanced our redevelopment projects, while exploring joint venture arrangements for the initial phases, especially the recently announced DGS building. Fourth, we have used this period to take a rigorous zero-based approach to many G&A categories and identified substantial savings that we anticipate benefiting from not only in 2020 but more generally in 2021 and beyond when we see the full-year impact of some of these measures. Before walking through each of these areas of focus during the pandemic, it is worth reflecting on a remarkable revelation afforded by this period. At Cedar, we have consistently articulated a two-pronged long-term business strategy that we have steadfastly pursued for many years through the ups and downs of the market and our stock price performance. First, we have focused on a core portfolio of grocery-anchored shopping centers in the D.C. to Boston corridor and have therefore systematically divested non-core assets. Secondly, we have pursued mixed-use urban redevelopment projects in high population density submarkets within our D.C. to Boston footprint, with a particular focus on building affordable and market-rate workforce housing at these projects. Remarkably, the pandemic has highlighted the very trends we have anticipated and been building towards with our two-pronged strategic plan. Specifically, the accelerated secular decline in many brick-and-mortar retail categories has led to grocery-anchored shopping centers being the strongest performing category within retail real estate. Notably, our grocer anchors have experienced a growth in sales during this period, and the inline tenants and junior anchors in our centers have benefited from the increased traffic and overall center vitality resulting from the strong grocer performance. Additionally, the pandemic triggered a wave of de-urbanization from city centers and significant pressure on higher-end multifamily while highlighting the inequality of housing opportunities within our cities and the growing need for attractive and reasonably priced workforce housing. Thus, the particular multifamily market opportunity which we are targeting with our mixed-use projects has strengthened during this period. Now some comments on our four primary focus areas over the last few months. First, on the collections front, as was mentioned in our earnings release, we have been particularly effective in growing our collections efforts to 91% for the third quarter. This appears to be among the better collection rates for all retail REITs in the third quarter. Cedar's relatively high degree of success is a direct result of the tirelessness with which the team approached the challenges presented by the pandemic, as well as the aforementioned decision made when we arrived at Cedar back in 2011 to hone our portfolio to focus on a core portfolio of grocery-anchored shopping centers in the D.C. to Boston corridor. At the outset of the pandemic, we formed a cross-functional committee within Cedar that engaged with all of our tenants in an effort to ensure that they endure and come out of this crisis as favorably positioned as possible. In addition, this cross-functional committee laid the groundwork for a highly detailed and analytical approach that included using legal tools, center and tenant monitoring, as well as repeated tenant outreach. As they say, the proof is in the pudding. Apparently, our approach has proven effective as measured by our rent collections over the past two quarters. Second, on the refinancing front, as we also disclosed in our earnings release this evening, we retired our $75 million unsecured term loan scheduled to mature in February 2021 by borrowing from our unsecured revolving credit facility, as we advance a long-term refinancing with mortgage debt. We felt this was a prudent move because while we are comfortable that the mortgage debt markets are open and attractive, we didn't want to have to worry about the closing dragging on, nor do we want to have to deal with the possibility of further dislocation in the capital markets owing to a second wave of COVID in the coming winter months. As Phil will describe, there appear to be interesting and attractive refinancing options for both the term loan, as well as our other near-term financing needs. Third, as was announced in July and discussed in our second quarter earnings call, we have finalized a 20-year built-to-suit office deal with DGS at our Northeast Heights project in Washington D.C. This building will serve as an anchor for the project and also represents the first phase of the development. We have been actively engaging with various debt and equity financing sources and are optimistic that we will be able to finalize an arrangement later this year or early next that will allow us to break ground and get started with this exciting project. More generally, much like our strategic decision early on to focus on grocery-anchored properties to the exclusion of other retail asset types has proven to be a sound choice, our particular redevelopments have also been well-positioned as we begin to hopefully emerge from this pandemic period. Fourth, we have taken a zero-based approach to our G&A in evaluating many corporate expenses. A great example of how this approach has borne fruit is our decision to relocate our headquarters from a leased building in Port Washington, Long Island to a space at Carman's Plaza Shopping Center in Massapequa, Long Island, where we will be converting a space that has been essentially unrented during my tenure into office space we will occupy rent-free. Considering that our full-year rent expense is approximately $500,000, this represents a terrific G&A savings opportunity. More generally, we anticipate reducing year-over-year G&A by over $2 million through the zero-based cost savings approach. In summary, we have navigated through this period of unprecedented personal and professional stress remarkably well thus far. First, we have managed to bounce back from the initial shocks to our business with collections at 91% for the third quarter, representing among the best performances for retail REITs. Second, we have addressed our near-term debt maturities and are optimistic about closing on a permanent refinancing later this year or in early 2021. Third, we are focused on finalizing both the debt and equity financing needs of our redevelopment projects, especially the DGS building, which will position us to commence the project in early 2021. Lastly, we have tightened up our overhead in response to these challenges, with full-year G&A savings anticipated to exceed $2 million in 2021. Our progress to this point is not an accident. It begins with my colleagues on Team Cedar, who have conducted themselves with exceptional resilience and professionalism during this time of great stress. They are supported by decisions we made many years ago to focus strategically on grocery-anchored shopping centers in the D.C. to Boston corridor, and on urban mixed-use projects with an affordable or market-rate workforce housing component. In the coming months and quarters, we look forward to announcing continued progress on all these endeavors, while we hope that there is no second wave, and that this terrible pandemic recedes into the rearview mirror. With that, I give you Robin to provide greater detail on many of these topics.

Robin Zeigler, COO

Thanks Bruce. Good evening. Not only are we living in unprecedented times, but we are operating shopping centers in unprecedented times as well. While our team has been focused on working with tenants through deferral negotiations and the collections process, we are also laser-focused on what happens on the other side of this pandemic. What do our tenants need from their landlord to maximize their ability to survive? How can we help our tenants pursue omnichannel operating measures to hedge their risk and pivot into a new operating environment? What cost-saving measures can we implement that assist both tenants and landlords from a CAM and capital expenditures standpoint? These are among the topics we are addressing as we deliberately, thoughtfully, and strategically advance our operations. The professionalism of our team has been exemplary as they manage not only ordinary course business challenges of daily operations but also balance those with video teleconferences, field visits, and the ongoing impact from social unrest in some of our urban markets. Our centers remained open during the third quarter with 96% of our tenants open for business. The uses that have not reopened are mainly movie theaters, fitness centers, and buffet-style restaurants. We have had another successful quarter of rent collections, reaching our highest collection rates yet during COVID at 91%. Moreover, October collections are currently also at 91%, which does not fully account for one high-credit anchor that pays at the end of the month, which should bring us to approximately 92.5% for October. To ensure tenant health and occupancy, we have actively engaged with nearly all of our over 800 tenants during the pandemic. We completed 105 deferral and waiver agreements through September 30, 2020, totaling $3 million of deferred rent with a required payback period ranging between July 2020 and March 2021. The average number of months for these agreements is four, with an average payback period of ten months. Additionally, $900,000 of rent was waived as of September 30, 2020, which averages to about four months. These agreements were made with tenants in an effort to not only sustain their viability but also to achieve some landlord-favorable concessions, including sales reporting, an additional lease term, and modification of key lease provisions. Despite the pandemic, our leasing momentum has remained strong. In total, we signed 32 leases this quarter, consisting of eight new deals totaling 72,800 square feet, and 24 renewals totaling 167,300 square feet. The new deals executed reflect a positive spread of 21.5%, with notable performances including two anchor deals at spreads of 44% and 23%. The renewals, however, were done at a negative spread of 3.1% when analyzed in total. This negative spread is a result of anchor and junior anchor renewals with tenants such as home goods and Goodwill, undertaken to maintain these crucial occupancies during the pandemic. The spread increases to a positive 2.8% excluding three specific tenants. As of September 30, 2020, our current lease same-center occupancy stands at 91.7%, representing a 0.2% increase from the prior quarter. We continue to have momentum on our redevelopments and value-add renovations. At Fishtown Crossing, Starbucks had their grand opening in September, GameStop and T-Mobile have relocated, and Nifty Fifty's was delivered in August. Additionally, we expect the IGA grocery store facade renovation to be completed by the end of the year, and the remaining facade renovations for the rest of the center to be completed in 2021. Progress is also being made on site plan amendments at our Revelry project in Philadelphia. Our original site plan was based on a movie theater anchor. Since the pandemic shutdowns, United Artists cinema and Revelry has not yet reopened. We are in discussions with a potential replacement anchor for this project, and we expect to regain possession of the theater space effective November 2020 due to the termination of their tenancy. We believe that this potential new anchor will be a significant catalyst for the Revelry redevelopment. Northeast Heights continues to progress at a steady pace as well. We previously announced that a lease was executed with the District of Columbia for a 260,000 square foot office building, including ground floor retail for the Department of General Services. This government agency comprises over 700 skilled professionals with expertise in construction, building management and maintenance, portfolio management, sustainability, and security at district-owned properties. This office building is slated to be built as part of the first phase of Northeast Heights. The DGS lease structure includes a 20-year, 10-month term based on a net rent of $22.52 per square foot and a gross rent of $56.43 per square foot, which includes a TI amortization of $14.09 per square foot. Plans are underway to commence construction in early 2021. The DGS building is a central element of Cedar’s vision to realize a true transformation for Ward 7 and is symbolic of the type of neighborhood we aim to create with Northeast Heights. As always, our team remains focused and motivated to continue creating value even during these unprecedented times. With that, I will hand it over to Phil.

Philip Mays, CFO

Thanks Robin. Today we announced sequential quarterly improvements in both FFO and same-property NOI. FFO increased to $8 million or $0.09 per share compared to $5.7 million or $0.06 per share reported for the previous quarter. Same-property NOI decreased 9.1% compared to the same period in 2019, marking an improvement from the 14.6% decline we reported in the previous quarter. Both of these improvements were driven by our strong cash collections, which Bruce and Robin discussed. Last quarter, I provided a detailed explanation of our cash collections and revenue recognition process and received helpful feedback in understanding our results. Accordingly, I want to take a moment to revisit our revenue recognition in detail. Our total tenant billings for base rent and recoveries combined for this quarter were $31.6 million. During the quarter, we collected and recognized as revenue $30.1 million, which amounts to 91% of these billings. Additionally, we recognized another $1.1 million or 3% as revenue that we determined to be collectible, most of which is covered by signed deferral agreements. Accordingly, for this quarter, we recognize 94% of our billed rent and recoveries. The $1.9 million or 6% that we did not recognize consists of $1.8 million that was not paid by tenants, which we have determined should be accounted for on a cash basis, and $100,000 that we agreed to waive. As a reminder, placing certain tenants on the cash basis does not mean we will not collect anything from them. While some cash basis tenants may fail, we expect some will make inconsistent or partial payments, which we will recognize as revenue if and when received. Moving to the balance sheet, we previously discussed exploring secured debt to refinance our $75 million term loan that is set to mature in February 2021. As secured financing markets have opened for grocery-anchored shopping centers with high cash collection rates, we have engaged with two financial institutions to assist with securing necessary debt. We are diligently working towards closing secured loans in amounts equal to or greater than $75 million in early 2021. Earlier this week, we utilized our revolving credit facility and retired the $75 million term loan due in February 2021. Our revolving credit facility matures in September 2021 and has a one-year extension option. As Bruce noted, this provides us with flexibility concerning the timing of closing these secured loans, especially if a second wave of COVID temporarily disrupts capital markets. Another note worth mentioning is the receivable we now have for deferral agreements. As Robin mentioned, we have signed deferral agreements for $3 million, of which approximately $250,000 was repaid this quarter. The remainder of the amount is scheduled to be repaid in 2021, with approximately $700,000 due in each Q1 and Q2, and about $500,000 in Q3 and Q4 of 2021. The collection of these amounts will enhance our cash flows from operations in 2021 but will not impact earnings since they have already been recognized. Finally, as indicated in our press release, our Board of Directors has approved a 1-for-6.6 reverse stock split, which will be completed by the end of this year. This reverse split will not only help maintain compliance with the New York Stock Exchange listing requirements but will also reset our share price above the $5 minimum threshold used by some investment funds, all while keeping more than 10 million shares outstanding to assist with trading liquidity. With that, I'll open the call to questions.

Operator, Operator

The first question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

Todd Thomas, Analyst

Bruce, first question. You mentioned that you expect to be in a position to break ground on the DGS office building in early 2021. Can you provide us with an update on your thinking around funding that build-out and sort of how you're weighing all of your options today?

Bruce Schanzer, CEO

Thanks Todd, and I appreciate you calling in and asking about that. Regarding DGS, the plan is fairly straightforward. We are engaging with classic capital partners on the equity side for a partnership and will couple that equity joint venture with construction financing. So we are advancing those conversations.

Todd Thomas, Analyst

Is there any update on pre-leasing for the ground floor retail? Are you moving forward with additional phases at Northeast Heights?

Bruce Schanzer, CEO

I will let Robin handle that.

Robin Zeigler, COO

We are actually considering relocating several of our East River tenants to the ground floor of DGS. We are in the process of negotiating some of those deals, so it would involve existing East River tenants that we want to retain on the project while relocating. If we complete that relocation, we would have about 5,000 square feet left in the DGS retail, and we're looking at fast-casual restaurant service-type users, which should be suitable for office tenants, as well as fast-casual-type eateries for the balance of the 5,000 square feet.

Todd Thomas, Analyst

Okay, that's helpful. In terms of dispositions, could you talk a little bit about the market for asset sales today? What are you seeing, and should we expect an increase in activity in the coming months, including Glen Allen and pricing for that disposition?

Bruce Schanzer, CEO

The Cedar disposition program is one topic, and I can provide some context on the broader market. The transactions we have been advancing are consistent; they are single-asset pad deals aimed at addressing liquidity concerns, similar to what others have done at the outset of the pandemic. We've been able to market these pads and receive compelling offers, and we're closing on those deals that we took to market in the spring. Regarding Glen Allen, this asset closed at a net lease price reflecting the mid-5s. This is indicative of the appetite for high credit quality net lease grocers, and the grocery-anchored center market is relatively strong right now. Even though there hasn't been an abundance of transaction activity, several deals are ready to close, and most are priced in the low sevens. Overall, we believe there will be clarity on the warranted cap rate for Cedar's portfolio by the end of the year, allowing us to better assess the gap between our share price and our net asset value.

Todd Thomas, Analyst

Understood. Phil, can you clarify how much borrowing capacity you have remaining? Are there constraints on drawing down the remaining amounts available? Also, can you discuss the terms you're seeing in the mortgage market today?

Philip Mays, CFO

Yes Todd, as disclosed in our recent reports, we have about $45 million in remaining capacity on our line, plus some cash, approaching $50 million in liquidity when combined with cash on hand. Keep in mind the line operates on a rolling four-quarter covenant, which will decline over the next quarters due to COVID impacts. However, we expect this will be offset by the pad sales we discussed, along with an upcoming asset buyout in Maryland that will add further capacity. Regarding secured financing, we are seeing strong demand for grocery-anchored centers with high cash collections, creating a favorable CMBS and life company appetite. Loan-to-value ratios are generally between 60% to 65%, and rates are in the mid-3s.

Todd Thomas, Analyst

Regarding the percentage rent in the quarter, it was significantly higher. Was this due to moving certain tenants to sales-based rent?

Philip Mays, CFO

Yes, some tenants transitioned from base to percentage rent, particularly one tenant due to a co-tenancy provision contributing significantly to that figure. This transition should correct itself by year-end.

Operator, Operator

The next question comes from Floris van Dijkum from Compass Point. Please go ahead.

Floris van Dijkum, Analyst

Can you provide an update on refinancing? It seems to be going through CMBS, and it sounds non-punitive, which is encouraging. Regarding the number of assets held for sale, how much liquidity do you believe you can raise and the timing on selling those listed assets?

Bruce Schanzer, CEO

These are all relatively small assets, but the activity since the pandemic's onset shows these single sales accumulate. We've raised about $30 million from small asset sales since the pandemic began, and I would estimate that the four assets held for sale could bring in $18 to $20 million when sold. The way to approach this part of our portfolio management is dynamic. Initially, we marketed these due to uncertainty at the start of the pandemic, recognizing the deadline for approvals was extended while financing for single-tenant net leased assets remained robust. We will continue to monitor the situation closely. Phil, do you want to expand on the secured financing?

Philip Mays, CFO

Yes, Floris, our preference for secured debt will lean towards life companies over CMBS, but we will consider both. If we secure loans at around 65% loan-to-value, we usually see a bit more capacity on our revolver, but at 60% loan-to-value it's typically neutral. Right now, we are seeing competitive loans close at 65%, so if market conditions hold steady, we can pursue this secured debt and enhance our line capacity.

Floris van Dijkum, Analyst

Do you expect the buyers for your assets held for sale to be financial assets or cash buyers?

Philip Mays, CFO

Some of these are indeed being sold at a lower value, likely attracting cash buyers. Stabilized assets, however, might still allow for financing opportunities, although not at the same level as our core portfolio.

Floris van Dijkum, Analyst

Lastly, with leasing momentum and new lease spreads being positive, I noticed the TI numbers were down. Is this sustainable, or were there one-off scenarios?

Robin Zeigler, COO

Yes, that’s correct.

Bruce Schanzer, CEO

Yes, we’re signaling to each other here. In leasing and TI, I can't predict from quarter to quarter. We always strategically analyze each deal to ensure we achieve the best net effective rent while minimizing capital costs. Therefore, while we take a case-by-case approach, I can't definitively say that TI will be lower or higher in the near future.

Operator, Operator

Thank you. This concludes the question-and-answer session. I would like to turn the conference back over to Bruce Schanzer for closing remarks.

Bruce Schanzer, CEO

Thank you all for joining us this evening. We wish you all good health and look forward to continuing to advance the interests of Cedar and its shareholders in the months ahead.

Operator, Operator

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.