Rithm Property Trust Inc (RPT) 2010 Q2 法說會逐字稿

Greetings and welcome to the Ramco-Gershenson Properties Trust second quarter 2010 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. It is now my pleasure to introduce your host, Dawn Hendershot, Director of Investor Relations for Ramco-Gershenson. Thank you Ms. Hendershot, you may begin.

Good afternoon and thank you for joining us for Ramco-Gershenson Properties Trust second quarter conference call. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Ramco-Gershenson believes the expectations reflected in any forward-looking statements are based on reasonable assumptions. We can give no assurance that its expectations will be obtained. Factors and risks that could cause actual results to differ from expectations, are detailed in the press release and from time to time in the Company's filings with the SEC. Additionally, we want to let everyone know that the information and statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time, by itself, will diminish the quality the statements made.

I would now like to introduce Dennis Gershenson, President and Chief Executive Officer, and Gregory Andrews, Chief Financial Officer. Both of whom will presenting prepared remarks this afternoon. Also, with us today are Thomas Litzler, Executive Vice President of Development, and Michael Sullivan, Senior Vice President of Asset Management. At this time, I'd like to turn the call over to Dennis for his opening remarks.

Thank you, Dawn. And good afternoon, ladies and gentlemen. I'm very pleased to report that even in this continuing, uncertain economy, our balance sheet and operating statistics, be they debt ratios or liquidity, leasing velocity, rental comps, occupancy, same-center net income comparisons or operating margins, have all improved as compared to our numbers in the first quarter of this year.

Also, we have signed more tenant lease agreements this quarter, than in any comparable period in the last five years. Further, we have made substantial progress in completing our named value-add redevelopments. And we continue to fill our mid-box vacancies. In the second quarter, we signed three anchor tenant agreements. Bringing the number of new national and regional destination retailers, in excess of 20,000 square feet, to seven for the first six months of 2010.

At the end of the third quarter of 2009 and again at the beginning of this year, we articulated a commitment to achieve two specific goals for the near-term. First, we announced that we would take affirmative action to substantially improve our balance sheet. And second, we promised to chart a clear course to credible, sustainable earnings growth. We believe that our actions over the last nine months have demonstrated that we are well on our way to achieving both of these objectives.

Concerning our balance sheet, in addition to our asset sales and equity raised in the third quarter of 2009, our recent $79 million public offering in May, has substantially improved our debt position. Allowing us to pay down our term loan early, retire two long-term mortgages, with above market interest rates. And we added additional flexibility to our liquidity position, by reducing the outstanding balance on our revolving line of credit.

Our debt to EBITDA ratio improved 170 basis points from this time last year. And 30 basis points from, as recent as March 31. We told you last year, that we had set a goal for a debt to EBITDA ratio by year-end 2010 of between 7.0x and 7.2x. At the six month mark, we have met this objective.

Therefore, our capital activities for the second half of the year, will focus on generating additional funds, to meet the requirements of our business plan. As well as to further improve our liquidity. We anticipate that we will generate these sums through the sale or contribution to the joint venture of several fully valued assets. We are also reviewing the potential for selling one non-strategic center. Although we are pleased to report our progress to date, you should know that we continue to consider maintaining a strong balance sheet a primary objective.

As for our operations, I trust you can see from our supplement and press release that we have begun to gain real traction in 2010. Our same-center net operating income, portfolio-wide occupancy, and operating margins all show improvement over the first quarter.

Our leasing progress includes both large format users and smaller retailers. Who are taking spaces in all of our markets, with an emphasis on Michigan and Florida. Our lease renewal rate, to date, is above 75%. And although our rental rate for new leases and lease renewals averages are still negative, as compared to prior leases executed in much better times, our spreads are substantially improved as compared to Q1 of this year.

Our mid-box leasing activity in the second quarter includes the execution of agreements with Golfsmith and Fresh Market to fill the Albertson's vacancy. Which was created just last quarter at our Mission Bay Shopping Center in Boca Raton, Florida. These two new retailers bring an exciting destination use to the center and replace the supermarket void. They will also produce a double-digit return on our modest capital investment, after applying the termination fee we received from Albertson's. As both tenants are paying higher rental rates than Albertson's did.

Both Golfsmith and Fresh Market plan to open in February of 2011. Obviously, the good news is that we have traded a vacant, but paying Albertson's for two new tenants. The right move for the shopping center. The consequence of this transaction, is a loss of rental income for a period of time that affects same-center comparisons and net income overall.

I would like to take this opportunity, to briefly update you on the progress we're making to fill our Linens 'N Things and Circuit City opportunities. Of the 11 locations, seven Linens 'N Things and four Circuit City, we have signed leases for six of the vacancies with TJ Maxx, Ross Dress For Less, Golfsmith, Staples, Best Buy and in latest quarter, Total Wine. In addition, two locations are guaranteed by CVS. Leaving three non-paying vacancies. Of these three, we are presently negotiating letters of intent for two of the locations. One with a national credit and the other with a regional credit tenant.

Our success in attracting the lineup of quality, recognized destination mid-box retailers that I have just mentioned, is a testament to the strength and desirability of our shopping centers and their trade areas in Michigan, Ohio and Florida. Several of the aforementioned anchors have opened. Two others will open in the fourth quarter of 2010. And the balance will open in 2011.

As I have reported in the last several quarterly calls, our acquisition team has continued to comb through numerous opportunities. In an attempt to find a shopping center or centers that fit our criteria for purchase. As of this week, we have completed our due diligence on a supermarket anchored center.

This potential acquisition, reflects our interest in diversifying our portfolio into major metro markets, beyond those where we have a significant concentration. The demographics for the trade area are superior. The supermarket anchor is the number one grocer in the state. And we believe the cap rate for the center is above market. Also, there is an opportunity to lease up a number of existing vacancies. The purchase price for this asset approximates $15 million.

As pleased as we are with the results of our efforts in the first six months of this year, we are committed to extending this performance through the third and fourth quarters. Because new tenant leases and an increase in occupancy are the most obvious and cost effective means of driving our earnings. We will continue to convert the growing interest by national and regional retail chains in our centers into signed leases. These agreements will begin to impact our numbers in the latter part of this year and will achieve full year effects in 2011.

I would now like to turn this call over to Greg Andrews who will provide the details on our financial performance for the quarter. Greg?

Thank you Dennis. Before turning to our financial results for the quarter, I'd like to note that since starting in February, I've had a chance visit 75% of Ramco-Gershenson's portfolio. Including all of our Michigan properties and all but five of our Florida properties.

What I have found is-- First, well located real estate with solid trade area demographics. Second, strong anchor line-ups, evidenced by TJ Maxx, Publix, and Home Depot, as our top three anchors. And third, opportunities to add value both near-term and long-term. Through lease-ups, re-tenanting, reconfigurations, outparcel sales, and ancillary income. In the hands of our talented leasing, management, development, construction and acquisition teams, I am confident that our high quality real estate is capable of generating predictable cash flow for our shareholders.

Now, turning to the balance sheet. In mid-May, we issued 6.9 million shares of common stock at $11.50 per share. Also in May, we obtained a five-year mortgage loan, secured by our office building at The Town Center at Aquia. Net proceeds of approximately $76 million from the equity offering and $15 million from the mortgage loan, were used to pay down debt and improve our balance sheet as follows --

Number one, we paid down $37 million outstanding under our term loan, more than four months before the scheduled amortization payment was due. The current outstanding balance under our term loan is $30 million and is not due until next June.

Number two, we paid off two mortgages totaling $15.8 million, that were scheduled to mature later this year. One at Promenade at Peachtree Hill in Atlanta, Georgia and the other at River Crossing in Tampa, Florida. These properties are now unencumbered. We also paid off the mortgage encumbering Cypress Point, a joint venture property in Clearwater, Florida. Our share was approximately $4.3 million.

Three, we paid off our Aquia revolving loan down to zero. This facility remains available to us, but at a reduced commitment. Four, we reduced our line of credit borrowings by $7 million to $60 million. Our total line of credit commitment is $150 million and extends to December 2012. And five, we bolstered our cash to $12.7 million at quarter end.

As a result of these actions, we have greatly strengthened our balance sheet. Our net-debt-to-EBITDA, based on our consolidated EBITDA in the first half of 2010, is 7.2 times, down from 8.9 times last year. At the end of the second quarter, our net-debt-to-market capitalization was 54%. We have extended the weighted average term of our debt from 5.25 years to approximately 5.75 years. We have increased our unencumbered wholly-owned assets by two properties. And finally, as of today we have only one loan for less than $5 million, due for the remainder of this year.

I'd like to note, that our interest in fixed charge coverage ratios dipped slightly this quarter, compared to the first quarter. This reflects one time items in the both the numerator EBITDA and the denominator interest expense, that I will discuss in a moment. Adjusting for these one time items, our fixed charge coverage would have been 2.0 times for the quarter. And we anticipate it being at that level in the second half of the year.

In short, our balance sheet is stronger and more flexible today. We are now better positioned to execute our business plan. While at the same time maintaining a strong and flexible capital structure, with access to a wide variety of capital sources.

Turning now to the income statement. We reported FFO of $0.27 per share for the quarter. Same-center NOI for the consolidated portfolio decreased by 1.3%. For the first half, same-center NOI decreased by 1.5%. These results reflect a combination of lower occupancy in rent. Partly offset by tight expense controls and vigorous collection efforts.

Our provision for credit loss for the quarter was $768,000, compared to $618,000 in the first quarter of 2010 and $254,000 in the comparable period last year. The fact that the second quarter's provision was higher than the first quarter, is more reflective of a deliberately cautious approach to our receivables, than any trends in collections. In fact, we believe credit loss trends will improve in the second half the of the year.

Let me comment on a number of one time or unusual items included in the second quarter. In the plus column, we recorded lease rejection income from Old Time Pottery, as part of their emergence from Chapter 11, of $674,000. In addition we recorded a gain on the sale of an outparcel, at our River City Property of $499,000. That gain is included in FFO.

In the minus column, we had three items. First, our joint venture income was down compared to the first quarter. This resulted from both a higher provision for credit loss, due to the resolution of a tenant dispute. And higher interest expense, related to the Cypress Point mortgage loan that was paid off in the second quarter. Second, general and administrative expense was higher than the first quarter, because we incurred approximately $500,000 of legal expenses and severance costs that are non-recurring. Third, we booked a charge to interest expense of $167,000 for terminating a swap agreement, prior to expiration. We expect expenses in all of these areas to normalize in the third and fourth quarters.

Now, I like to comment on our outlook. Due to the non-recurring items mentioned earlier, our G&A expense will be modestly higher than previously expected. We now anticipate full year G&A expense will be in the range of $17 million to $18 million. Despite this change, we are maintaining our full year FFO guidance range of $1.04 to $1.12 per diluted share. Primarily, because our property operations are delivering results that are better than originally forecast.

Our guidance continues to be predicated on full year same-center NOI decreasing 2% to 3%. Which is somewhat lower than our year-to-date pace of a decrease of 1.5%. In addition, we continue to forecast the year-end occupancy of 90% to 91%. We are encouraged by our latest forecast. Because, we expect the gains made in driving our NOI above our earlier expectations, will be long lasting. Whereas the additional costs we recorded in G&A expense, are not likely to be recurring.

Now I like to turn the call back to the operator for Q&A.

Thank you. Ladies and gentlemen, at this time we will begin conducting a question-and-answer session.

(Operator Instructions)

Our first question come from the line of Vincent Chao from Deutsche Bank. Please proceed with your question.

Hi, good afternoon everyone. Just a quick question on the guidance. With the increase in G&A, with the maintenance of the FFO guidance range. It looks like the underlining core metrics of same-store NOI and occupancy, that hasn't really changed. So, I'm just wondering, is there a conservatism built in there? Or what else are you seeing that's making you more comfortable with the fundamental outlook?

I think we have not changed our guidance on our core -- in terms of same-center NOI or occupancy. But, I think we have a little bit of a bias, based on the trend so far this year, that we will be at the better end of those respective ranges. But, having said that, we've maintained the guidance. Just to build in, as you said, a little bit of a conservatism until we have a clearer outlook in the third quarter.

Okay. And just -- can you provide a little bit more color on the acquisition that you're potentially looking at? Exactly, where is that property? Is that one of -- is that an area you're going to look to expand in more? Or which areas are you really looking at or targeting?

Hi, Vincent. We obviously have attempted to be a little bit vague. It -- I will merely say that it is a trade area, where we already have representation. But, it is not in a trade area, where we have -- significant number of shopping centers. You will be very pleased by the metro market that it's in, as well as the anchor. Consistently, we look for assets with some upside. And we have consciously picked an acquisition, with a price that is well within the range, that would allow us to buy something to show some reasonable upside and yet not stress the balance sheet.

Okay, thanks. And just one last question on the JV contributions potential. It sounded like, in your prepared remarks, that it was more geared towards maybe repaying some 2011 maturities possibly? Is that fair to say? With only $15 million in this acquisition, is it safe to say that those contributions will be used more for balance sheet improvement?

Well, I think we continue to strive to maintain a strong balance sheet. But, at the same time, we continue to look for opportunities to invest capital in places we think we can make money. Like the acquisition that Dennis mentioned. If we can find another deal like that, I think it is certainly something we would consider using capital for. You know, just again, depending on the timing of proceeds from these sales or contributions and the timing of the potential acquisition opportunities.

Okay, thanks a lot guys. Appreciate it.

Thank you.

Our next question come from the line of Todd Thomas, from KeyBanc Capital Markets. Please proceed with your question.

Hi, good afternoon.

Hi Todd.

Hi Todd.

I noticed that you now include the weighted average lease term, with new and renewal leases in the supplement. And the lease term on the leases you signed this quarter, did increase from the first quarter. And I know you've previously mentioned that you were strategically signing some shorter-term leases. Has the need to sign shorter leases abated in your portfolio?

I certainly can have Michael Sullivan amplify any of my comments. But, I think what you would see, if you actually saw the list of retailers. Is that the majority of the reason for a slightly longer-term, is that we're signing more national tenant leases, than the regionals and the locals. And obviously, the nationals are interested in a five or ten year term. Michael, would you add anything?

I think that states it pretty well, Tom, unless you want to talk about something more specifically.

Todd, the other point I would make, is our rent spreads were greatly improved this quarter versus last quarter. So, on a comparable basis, only down 1.6%. Obviously, when you're getting better rent, you're more willing, I think, to commit to some term. Versus when you're getting comps that are down more, you view that in light of a shorter-term solution. And then you ultimately want to release that state to the better rent.

Okay and in terms of leasing spreads, how do you expect that trend to continue? Do you think we'll see positive leasing spreads in the third or fourth quarter?

Todd, Mike Sullivan here. We certainly hope for positive leasing spreads. We're seeing really gradual improvement in both the renewals and new lease spreads. We're hoping to break, toward the end of the year, into the positive territory. Q3 should be, again, another good quarter for us from a leasing perspective. We do see continuing improvement. I would like to push for flat, as opposed to positive. But, through the third we'll have some more indication how we're going to end up at the year.

Okay, and then just circling up to the guidance. You know, you maintained the negative 2% to negative 3% for same-store NOI. Is -- you mention the Albertson's. Is that -- can you quantify how much that will be, in terms of occupancy and NOI? And how that will drag in the back half of the year?

Todd, I don't have those numbers in front of me, on specific leases. But, clearly the fact that it was a rent payer last year and is not this year, it is going to contribute to that. And we also previously had talked about a couple of other vacancies-- the Wal-Mart at Village Lakes and the Old Time Pottery at Promenade. Which also are contributing to that. So, I think all of those things together are built into our projection. And we feel confident with the down 2% to 3%, as the range for the full year.

Okay. And then lastly, what did you -- what's the cap rate on the $15 million acquisition?

I didn't mention that. I might have forgotten to mention it. I'm not prepared to mention it at the moment. But, there's been very little information on cap rates for supermarket anchored centers. Again, this is in a metro market. And at the time, we truly are prepared to close and announce that, I believe you will see that as above market cap rate.

Okay. Thank You.

Thanks Todd.

Our next question comes from the line of Michael Mueller, from JPMorgan Chase. Please proceed with your question.

Yes, hi. Few questions. First of all, for the boxes that you were talking about -- the dark boxes that you leased up. When we're looking at the portfolio occupancy of, I think, on the consolidated, maybe around 89.7%, or so. How much incremental occupancy is to come from the boxes that are already aren't in place?

I'm sorry, Mike, the boxes that are not in place or not leased, you mean?

Well, yes, basically you mentioned a handful of them are leased. And some aren't leased. So, if we're looking at the occupancy, I know there's a difference between the occupancy and the lease stats.

Right.

So, particularly, focusing in on the occupancy, how much incremental occupancy is there from --

I can tell you that --

Go ahead, Greg.

Sorry to interrupt Mike. What I think your -- the question is, what's in the pool of signed leases that makes up that difference? And it is a combination of anchor boxes and shop tenants. And its -- I don't know the exact division, but there's certainly a representation of signed leases for shop space, as well as for anchored space.

Mike, I can just jump in. Q1-- for those boxes that we signed in Q1, the larger format that represent a pure filling of a vacancy, it was about 90,000 square feet. In Q2, it was about 75,000 square feet. So, these are junior anchor boxes that fill the pure vacancy, as opposed to a swap of Q1/Q2. For shop, it's about 85,000 square feet Q1 and about 92,000 square feet Q2. So, those are the total square footage of the lease assignments, still to pure vacancies in the portfolio.

Okay and focusing on the boxes, the 90,000 square feet and 75,000 square feet? Are they in occupancy or were they just signed and you're waiting occupancy?

These are signed. They are leased, not yet opened or delivered. And, of course, we scatter those openings to the best of our estimate, based on construction and permitting et cetera, et cetera

Got it. Okay. And then, Greg, when you give year-end occupancy guidance, is that for the consolidated portfolio? And is that leased or is that occupancy?

That's percent leased and it's in the same basis that we report our occupancy, which is the entire portfolio.

The entire. Okay great. Last question, when you talk about asset sales, can you give us an idea of what is baked into guidance for the incremental? Because, I know you talked about some potential joint ventures, and selling assets into joint ventures. Can you give us an idea of either magnitude, what may be in 2010? Or even what a base case could be? Thinking about, over the next year or so, in terms of what the potential for asset sales could be?

Well, we're estimating, Michael, somewhere between $25 million and $40 million. That would be a combination of assets that have some debt on it and cash.

Okay. And is that for this year? Or that's just the overall bucket, and when it hits, it hits? But you're looking at ---

You can't predict, with precision, the timing of closing of these kind of things. So-- But, those are sales that we're looking to close this year.

Okay great. Thank you.

Thanks.

Our next question come from the line of Rich Moore, with RBC Capital Markets. Please proceed with your question.

Hello. Good afternoon guys. On the maturities that you guys have next year, the mortgage maturities. Is the plan to try to refinance those with additional secure debt? Or would you be unencumbering those assets too, you think, and using the line of credit for that?

Well, I don't think we want to use the line of credit, which is really more designed for flexibility, not long-term financing. We certainly want to refinance any long-term debt that comes due, with long-term debt. What form that takes, whether it's additional mortgage financing or some other means, will depend somewhat on the market. But, I think we have a high degree of confidence in the refinanceability of all of that. I looked at, for example, the next two years of mortgage debt coming due from now until the mid of [2012]. And on average, the loan to value is moderate, it's around 60%. So, I think we're not going to have great challenges in refinancing that in the mortgage market, if that is indeed the path we choose.

Okay, and then Greg, on the $30 million term loan, does that eventually end up on the line of credit, you think? Or can you do something to sustain that in some sense?

Well, I think, again, you have variety of options, Rich. One would be to roll it into the line, at this point, and maybe expand the line. So, that it's not using up any of the existing capacity. But, you get a little bit of extra time to refinance that. You know, the other option might be to term it out with a another loan. So, I think there's some flexibility there. You know, we paid off two-thirds of the term loan at this point. And I think, because the balance sheet is so much stronger, we're going to have our choice of some options, as to what to do there.

Okay. Part of the reason I asked this, is it strikes me that you guys have a good balance sheet from an overall debt standpoint. But, in fact, you could fill the line up fairy quickly. And I'm trying to figure out if you would need additional common equity to take care of some of these things. I mean, how do you view that?

Well, I think it depends on what the opportunities are, that present themselves. But, there's substantial capacity on the line today with only $60 million drawn out of $150 million. So, I'm not sure what fairly quickly means. But, I think we feel like we have a fair amount of flexibility there. And I think we have the ability to turn -- you know, now that we've been building up some -- a little bit on the unencumbered side, we have some flexibility as to how we term out debt.

Okay, fair enough. Good, thanks. And then, staying with the balance sheet for a second , when we looked at the total amount of debt you have, it's obviously gone down. But, interest expense rose during the quarter. And I'm wondering, is there more capitalized interest that wasn't capitalized -- I'm sorry, that was capitalized and now is being expensed? Or anything different in there that would make interest expense rise, even though the debt is obviously shrinking?

Yes. I caught the same thing, as we prepared for our call and reviewed all our numbers. Couple things stand out, one of which you identified there. There was a little bit of additional interest capitalized in the first quarter compared to the second quarter. Not a huge amount, but it is one of the explanations. I think the bigger explanation, is we had our swap termination costs in our interest expense this quarter. And so, obviously, that's a non-recurring item. And then, thirdly, there were some fees related to the new loans and even unused fees on the line of credit. So, all of those things are in there. But, I think you will see interest expense reduced in the quarters going forward, Rich.

Okay good thanks. Did you give us all those numbers? I can't remember, for each of swap termination costs and all that, so we can back them out?

Yes, that was in my prepared remarks.

Okay, right. And then the last thing I had was, do you have a number for maintenance CapEx, TIs, leasing commissions, that kind of thing for the quarter?

Not total. We don't have a global number for that, Rich. But, what I can say, is that in terms of tenant allowances, obviously, you can't do leasing deals in this environment without offering something. And certainly, on the anchor deals, that's the piece that generates the biggest piece of allowances. I think, we feel very comfortable with the amounts that we're spending there, given a number of things. First of all, that we're filling these vacant boxes with primarily credit tenants. You know, like Staples, Old Navy and the like. Secondly, that the terms of the leases are ten year terms. And thirdly, that the costs are actually pretty reasonable. And I think, in line with market norms.

Okay, you didn't have any plans, Greg, to put those in the supplemental?

Well, we're looking at it, I think, generally that's a good disclosure practice of the peer group. I just want to make sure that before we do anything on that front, that we're gathering the data in an accurate and consistent manner, so that we're not misreporting anything. But, I think you can look to us adding some of that data at some point in the future.

Very good. Thanks guys.

Our next question is a follow up question, from the line of Vincent Chao. Please proceed with your question.

Hi guys. Just a clarifying question on the guidance. I thought I heard you say that the 90% to 91% was on a leased basis, not an occupied basis. Is that correct ?

Correct.

So, you're at 90.8% today. It sort of implies at midpoint, a little bit of a tick down in occupancy. If that's the right way to think about that?

I think this is at the guidance through end of the year, on 90% to 91%, really is physical occupancy of the entire portfolio, not leased. Leased, you get a better number --

Okay. So it's the percent occupied number that you guys were reporting, 89.7%.

That's correct.

Okay.

It might be that both numbers fall in that same range.

That's possible.

Because, the difference isn't that big. So, it may well be that we're on both a physical and a -- I'm sorry, on a leased and an economic basis, we're in the 90% to 91% range.

Okay. I mean, if you look at one versus the other, just relative to where you are today, it implies certain things about the trajectory of occupancy. That's why I just wanted to clarify that. But, thank you. And the other thing was on the contributions the $25 million to $45 million. The contributions/ asset sales. You said you were looking to close those this year. But, is that actually baked into the guidance range? The actual closure of those?

Yes.

They are? Okay. That was it. I just wanted to clarify that. Thank you.

There are no further questions in the queue at this time. I would like to turn the floor back over to management for closing comments.

As always, we thank everyone for their interest and their attention. And we look forward to talking to you, if not before, in about 90 days. Thank you again. Bye.

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.