Rithm Property Trust Inc (RPT) 2014 Q3 法說會逐字稿

Greetings and welcome to the Ramco-Gershenson Properties Trust third-quarter 2014 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Dawn Hendershot, Vice President of Investor Relations. Thank you. You may begin.

Good morning and thank you for joining us for the third-quarter 2014 earnings conference call for Ramco-Gershenson Properties Trust. With me today are Dennis Gershenson, President and Chief Executive Officer, and Gregory Andrews, Chief Financial Officer.

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. Additionally, 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 of the statements made. Although we believe that the expectations reflected in any forward-looking statements are based on reasonable assumptions, factors and risks that could cause actual results to differ from expectations are detailed in the quarterly press release.

I would now like to turn the call over to Dennis Gershenson for his opening remarks.

Thank you, Dawn. Good morning, ladies and gentlemen. Among this quarter's highlights, the acquisitions of four market-dominant shopping centers for $322 million at an average cap rate of 6.5% stands out for several reasons, all of which reinforce our Company's focus on growing shareholder value through the ownership of high-quality centers with built-in value-add potential which, when realized, will contribute to driving earnings and building net asset value over the next 3 to 5 years. These acquisitions, coupled with the superior returns we are generating from the expansions and improvements at those centers we acquired over the last 36 months, as well as our recent core portfolio redevelopment, complement the consistent growth we are registering quarter after quarter in our operating metrics.

The four shopping centers we acquired this quarter promote our goals of geographic diversification, demographic profile improvement, and increased average base rents. The shopping centers have an average household income of more than $85,000 and average base rents of $15.85.

Each of the shopping centers affords us the opportunity to add significant value by developing additional retail space, leasing up current vacancies, and land leasing or selling multiple out-lots. These acquisitions also bolster our presence in our 12 target markets.

The purchase of Bridgewater Falls and the Buttermilk Towne Center expands our footprint in metropolitan Cincinnati and, together with our December 2013 acquisition of the Deerfield Towne Center, promotes efficiencies of scale and leasing leverage. We now own three market-dominant shopping centers in the very desirable Northeast, Northwest, and Southeastern suburbs of Cincinnati. Each of these properties has a minimum of four anchors, which provides the additional benefit of broadening the representation in our tenant roster of such national retailers as Dick's Sporting Goods, LA Fitness, Home Depot, Michaels Crafts, Bed Bath & Beyond, Old Navy, and PetSmart.

Our Woodbury Lakes acquisition, located in an Eastern suburb of the Minneapolis-St. Paul market, also boasts a healthy lineup of national retailers and is our fifth shopping center with a lifestyle component. Woodbury Lakes was 88% leased at acquisition, and we have the ability to add an additional anchor.

Our acquisition of Front Range Village represents our third shopping center investment in Colorado. The center fronts on Harmony Road, the primary access artery of the I-25 expressway for the city of Fort Collins.

Front Range Village is an outstanding acquisition, with over 800,000 square feet offering a wide array of goods and services from Super Target and Lowe's to Sprouts Market, DSW, ULTA, Sephora, Panera Bread, and Mathnasium. The center is also home to the Fort Collins Public Library, which draws over 360,000 visits per year.

In addition to our acquisitions and as part of our efforts to continue the transformation of our portfolio, we have sold two properties since the end of the quarter, with a blended capitalization rate of 8%. Both sales represent an aspect of our stated disposition plan.

Northwest Crossing, a 100% leased property, is our only asset in Knoxville, Tennessee, a market in which we have no plans to expand. And the Fraser Center, located in metropolitan Detroit, is a small property anchored by a local grocer, which doesn't fit the profile of the type of shopping center we wish to own going forward.

Additionally, we have several properties under contract for sale, which should close either before the end of the year or early in the first quarter of 2015. Based on our acquisitions and dispositions this year, we anticipate that by year's end our efforts to broaden our geographic footprint will result in the reduction of our exposure to any one state to no more than 30% of base rents.

Thus, as one reviews our current list of shopping centers, they cannot help but recognize the transformation that has taken place in our asset base over the last several years. Today our high-quality portfolio consists primarily of market-dominant, multi-anchor shopping centers located at primary intersections in metropolitan markets with a lineup of best-in-class national and regional retailers.

The Company's announcement of a number of shopping center purchases with real upside potential to expansions and additional development is an indicator of future built-in growth for the acquirer who can truly execute on the identified opportunities. As evidence that we are such an acquirer, we are presently actively engaged in the value-add repositioning of five shopping centers purchased in 2011 through 2013.

For those of you who have reviewed our investor presentation, which is available on our website, it specifically outlines in some detail the value-add improvements we are making at Fox River, Harvest Junction, Town & Country Crossing, Mount Prospect Plaza, and Deer Grove Centre. The repositionings range from expansion projects to significant reanchorings.

We will spend $55 million on these five centers to produce an average return on our incremental investment of 11%. The improvements will generate an additional 7.1% of net operating income; and upon completion, the centers will show an increase in net asset value of 20%.

Each of these five value-add projects improves the centers' tenant mix, adds to the properties' customer draw, and generates a healthy return on the investments. Thus, our ability to consistently execute on opportunities conceived during the investigation phase of our recent shopping center acquisitions validates our expectations that we will be able to grow earnings and drive net asset value at our 2014 acquisitions as well.

In addition to our acquisitions and value-add repositioning initiatives, our operating results for the latest 90 days continues an unbroken string of 13 quarters of same-center NOI growth. Comparable new leases and lease renewals also continue to show healthy increases, and the spread of 110 basis points between spaces leased and those presently occupied in our core portfolio portends increases in cash rents over the next several quarters.

As important as the operating metrics growth we registered this quarter is the progress we are making in the ongoing evolution of the tenant roster in our core portfolio. In the fourth quarter, we will announce the reanchorings of four additional properties, which are located in Florida, Michigan, Illinois, and Wisconsin.

These projects are significant in that we are proactively bringing best-in-class national retailers to our properties, while simultaneously rightsizing existing tenants and replacing underperforming anchors. These activities will occur at centers that are already very well leased.

Our to-be-announced core shopping center reanchorings will complement redevelopments currently underway at Village Lakes, Merchant Square, and Promenade at Pleasant Hill. All of our value add-projects reinforce the desirability of our existing shopping centers, attracting the most exciting national retailers and establishing the basis for constant income increases in our core portfolio for years to come.

In conclusion, our third-quarter results reaffirms what we have been saying for some time: that we are disciplined allocators of capital; that our management team is creatively seizing opportunities to drive earnings through acquisitions, redevelopments, and releasings; and that Ramco-Gershenson has a portfolio of quality shopping centers that are sought after by the best of national retailers. With these qualities in mind, we are confident that we will be able to generate sustainable earnings growth over the long term, while simultaneously advancing our overarching goal of ever-increasing shareholder value.

I would now like to turn this call over to Greg Andrews for his remarks. Greg?

Thank you, Dennis. While the stock and bond markets have been exhibiting increased volatility, we benefit from the security and stability of owning a diverse portfolio of high-quality shopping centers supported by a strong capital structure and managed based upon a well-defined business plan. This three-part focused on asset quality, financial strength, and strategic clarity provides a solid foundation for delivering best-in-class results over time, regardless of the daily gyrations of the financial markets.

Let me start by covering our balance sheet. We financed our $322 million in acquisitions this quarter approximately one-half with proceeds from dispositions and the issuance of common equity and one-half with new and assumed debt. As a result our balance sheet metrics, including net debt to EBITDA of 6.1 times and fixed charge coverage of 3.1 times, remain healthy and well within our target zone.

Subsequent to quarter end, we amended our unsecured revolving credit facility. We expanded the facility's size, pushed the maturity date out several years, and recast pricing to current market levels. Our amended facility has commitments totaling $350 million from nine banks.

The final maturity date has been extended to October 2019. Spread pricing is covered by our leverage and is approximately 30 basis points tighter than before. The facility is supported by a pool of high-quality unencumbered properties that is currently valued at over $1.7 billion.

At quarter end, we had $122 million outstanding under our line. We anticipate closing a sale of $100 million of senior notes to New York Life in early November. This is our second direct private placement of debt this year.

The weighted average interest rate will be 4.23% for a blend of 10- and 12-year debt. With the closing of these notes, 97% of our debt will be fixed rate, and our average terms of debt maturity will increase from 6.1 years to 6.7 years.

Proceeds from this note sale, together with cash raised from our recently announced dispositions, will leave us with no outstanding balances under our line. As a result, we are well prepared to fund our business needs -- first and foremost among them, our $50 million development and redevelopment pipeline. We can also readily fund other projects that are currently in planning and that we hope to add to the development pipeline and redevelopment pipeline in the course of the upcoming year.

Now, let me turn to the income statement. Operating FFO for the quarter was $0.32 per diluted share, compared to $0.30 last year. The only adjustment between operating FFO and NAREIT-defined FFO in the third quarter consisted of acquisition costs of $1.2 million.

On our income statement, we have now separated these acquisition costs (technical difficulty). Cash NOI was $39.1 million or $6.9 million higher than in the comparable quarter. The majority of this increase reflects the NOI generated by our acquisitions since last year.

Same-center NOI increased nearly $1 million or 3.3% this quarter, driven primarily by 2.8% growth in minimum rents. Occupancy growth in the same-center pool moderated somewhat this quarter.

However, as Dennis observed earlier, we are seeing a number of opportunities to replace underperforming tenants that pay lower rents with more productive retailers that pay higher rents. Taking advantage of these situations is a high priority.

During the quarter, we recorded a provision for credit loss of nearly $300,000, which was higher than last year, when we collected a handful of previously written-off amounts. Nonetheless, our provision this quarter was in line with our recent average at 0.5% of revenue.

General and administrative costs were $5.4 million, or $100,000 higher than last year. We expect G&A expense, excluding acquisition costs, to be between $21.5 million and $22 million for the full year.

Lastly, interest expense was up $730,000 as a result of higher debt levels and longer debt terms, partly offset by the capitalization of interest expense at our development of Lakeland Park Center.

Now let me say a few words about our outlook for the balance of 2014. We are increasing our 2014 operating FFO guidance by $0.02 per share at the low end of the range, to a revised range of $1.24 to $1.26 per diluted share. Our guidance includes the impact of our recent acquisitions, development, dispositions, and equity financing as well as an increase in interest expense from our upcoming sale of senior notes.

With the total market capitalization of $2.4 billion, we have now garnered sufficient size and scale to run our business more efficiently, to borrow more competitively, and to offer shareholders better share liquidity. We have done so while improving our portfolio quality, strengthening our balance sheet, and keeping overhead costs in check.

Most important of all, we have done so while delivering the highest 5-year total returns to shareholders in the shopping center sector. We aim to maintain our position as a leader in delivering value to shareholders.

Having established a solid foundation, we are well positioned to seed, grow, and harvest the leasing, development, and redevelopment opportunities embedded in our portfolio, and confident that the talented team of professionals at Ramco-Gershenson is capable of executing on these opportunities for the benefit of all our shareholders. Now I would like to turn the call back to Jesse for Q&A.

(Operator Instructions) Todd Thomas, KeyBanc Capital Markets.

Hi. Good morning. Dennis, can you provide a little color on the property that you mentioned that is under contract for sale? Maybe the potential gross proceeds that would be raised if everything closes, and how pricing compares to the 8% cap rate that you mentioned was for the two property sales that closed after the quarter ended.

I will give you a little bit of color -- obviously, because it is under contract and until something actually closes it is never a sale. Number one, we will reaffirm that we still have an intention that maybe a deal might slip into the very early parts of the first quarter of 2015, just based on some due diligence requirements. But we are still within the range of guidance on the dispositions that we gave you, which is in the $50 million to $75 million category.

Secondly, several of the assets that we are dealing with are part of the number that I gave you relative to no one state exceeding 30%. So that probably gives you some indication of where that asset or assets are located.

Again, these are situations where they are smaller centers and the demographic profile nor the average base rents represent what the portfolio (technical difficulty)

Ladies and gentlemen, please stand by; we are currently experiencing technical difficulties. Thank you.

Todd?

Yes?

Did you hear my answer or no?

I heard most of it. It cut off at the end of it.

Well, again, just to summarize, we do have several dispositions in the pipeline. They are definitely shopping centers or assets that just do not fit where we plan to go. They are part of getting our metrics down to a point where no one state will represent more, at least by year-end, of 30%, and we feel relatively confident that this acquisition -- or this disposition or dispositions will close.

Okay. Then the reanchorings that you talked about, that you plan to discuss a bit more in the fourth quarter, I was just curious if those transactions are taking place prior to the original tenants' expiration, and if you expect any downtime in 2015. And also maybe what kind of returns you are expecting on the retenanting for those phases.

Yes, good question. Several of -- or, well, really all of them involve, and I mentioned, either downsizing of a very viable anchor who just has a different size requirement today. And we are going to put in several very exciting retailers, important national draws that will significantly add to the draw of our shopping centers.

They are outstanding retailers. In at least one case, we will be replacing an office supply operation with a major national credit draw.

There will be, of course, some downtime, and that will have an impact on our 2015 numbers; but we still expect to be able to post some very healthy increases for 2015, those downtimes aside.

Okay. Were these instances where the tenant approached you before expiration? Or are these mostly taking place at expiration?

Or did you approach them proactively with tenants in your back pocket? Has there been any change in retailers (multiple speakers) stores that are underperforming a bit?

I'm sorry. I apologize that I didn't include that in my answer.

For the most part, all of these are occurring during the tenant's ongoing lease, so these are not at lease expiration. And as I mentioned in my prepared remarks, what is very nice about our shopping centers is we have a host of high-quality retailers, new retailers to the market, new retail concepts, who are constantly approaching us and asking us for entrance into our centers.

Therefore what we do is we have approached a number of people who we know were either too large but still had significant time on their lease, or retailers who because -- like with the Office Depot and the Staples -- we meet with them at their headquarters on a -- at least a couple times a year. We understand which stores are doing well, which stores they want to downsize, which stores they would prefer to close. And we leverage off of that with some of these retailers.

Okay. That's helpful. Just lastly for Greg, in terms of guidance. I was wondering what the current forecast includes for land sale gains in the fourth quarter.

I think there was supposed to be second-half weighting, something more meaningful than what was realized in the quarter. Is that still the plan?

Yes, actually we have, I think, baked in a relatively modest amount in the fourth quarter. So I think our gains on land sales for the year will be less than our initial guidance at the beginning of the year.

I do think that we are negotiating in one situation a lease termination fee that could be meaningful in the fourth quarter. So that is, I think, the primary component that differentiates between the lower end and the higher end of the range.

Okay, great. Thank you.

Juan Sanabria, Bank of America.

Hi, good afternoon -- or good morning, sorry. Just wanted to ask a little bit about these retenanting opportunities you have in the fourth quarter and just generally how we should be thinking about the size or scope of the redevelopment or development opportunities, given these significant acquisitions you completed during the quarter, and how that should evolve over time.

Well, typically, Juan, what we do is, only at such time as we have executed a lease, we have commenced a redevelopment, do we really put a specific dollar amount on that. That is why when we talk about the $55 million that we are spending on the five centers that we are adding value to, those are all well in process. We have three additional projects that I referenced in redevelopment, and that is about $18 million to $20 million.

You can expect in a number of the value-add reanchorings that we are talking about -- in some of them the tenants are spending their own money; in others, we are doing the improvements. And that will probably, with the four that we are talking about, equal around $10 million.

And when we talk about the repositionings and the dollars we are spending, you need to appreciate that we are putting dollar amounts on specific redevelopments. But in a number of our shopping centers, where what we are doing is adding new anchors or adding modest square footage, we do not count that as a redevelopment.

So really the dollars spent to improve our portfolio, to bring in new tenants, etc., will exceed the $55 million as well as the $20 million that we are spending on the redevelopments that we have enumerated.

Okay, great. Then can you comment a little bit about what you are seeing in the acquisitions opportunities out there? Geographic focus?

Should we be expecting further acquisitions given the upsizing of the line of credit? If you could just talk about the environment and just generally what you are seeing, that would be great.

Okay. Well, number one, we are seeing a significant number of shopping centers that are coming to market, so there is no shortage of opportunities. But I am hopeful that, as you look across the centers that we acquired over the last 3 to 4 years, the centers that we acquired this year, because they each have a significant value-add opportunity -- there are a lot of centers that are for sale that for all intents and purposes are either 100% leased or 95% leased; we don't see any opportunity to add value; and thus we are really not going to be a player as far as those centers are concerned.

What is interesting about the acquisition landscape is that the people who will pay up significant dollars for acquisitions -- the institutional players and the representatives for those -- really don't like the challenges of the upside that we find is our forte. So we have to comb through a significant number of opportunities to find those centers that we truly, truly feel are worth acquiring.

And I think you can see from the acquisitions that we have made, including our desire to have entered the Minneapolis-St. Paul market, that we are focused on basically 12 markets. And I think at least for the near future, you will see that is where all of our efforts will be.

Okay, great. Thank you. Just lastly, you made the reference that no state will be above 30%. Is Michigan currently above 30%? I thought it was already below that, with the recent acquisitions. Where would you like to take that to, or what do you think is feasible over the next 12 months?

No, I think -- if in our conversations with you we mentioned that it probably really reflected the projection through the end of the year, we are very close. We are slightly above 30%. But come the end of the year, that is what we expect to be.

Okay, great. Thank you.

RJ Milligan, Raymond James.

Hey, good morning, guys. Just curious, Dennis. After you guys sell the $50 million to $75 million, how much more of the portfolio would you classify as noncore or nonstrategic assets that you would like to sell, looking into 2015 and 2016?

Well, I think, first of all, we will give you some more clarity specifically about 2015 when we give 2015 guidance. But what I will say is this, is that we are very pleased with the fact that all of our shopping centers in the portfolio are well leased.

And invariably, in any portfolio, you have a bottom 5%, 10%, 12% of the centers either that as the portfolio evolves don't quite fit, or are centers where we truly believe that we have maximized anything that we could do at those assets. So I am pleased to tell you that any assets that might have been challenged are long gone, and that what we will be doing going forward will be matching up our acquisitions with our dispositions, so that the dispositions will indeed help fund our business plan going forward.

And you can expect some dispositions; however, they will be shopping centers that are basically fully leased and just fall into one of those three criteria that I have mentioned on previous calls.

Okay, thanks, Dennis. For the 6.5% cap rate on the acquisitions in the quarter, where do you think you can take that? And how long do you think it will take to get there, given the value-add opportunities?

Well, let me just again refer you back to the centers that I mentioned that we bought between 2011 and 2013. That is, that we have been averaging low double-digit returns. We expect that we can continue on that track.

You are probably talking to realize the value on all four of these acquisitions anywhere from 24 to 36 months.

Great. Thanks, guys.

What's nice about that then is, as with the reanchoring of our existing portfolio, the rents we are able to push in the core, the redevelopments we have in the pipeline, the 11 to 13 acquisitions and these, we really are building into our portfolio a constant source of income increases that our shareholders will reap, again, for the foreseeable future, which I feel comfortable is at least 3 to 5 years.

Thanks for the color, Dennis.

Vincent Chao, Deutsche Bank.

Hey, good morning, everyone. I just had a question on the same-store side. Just looking at the same-store expenses, they were up 7.8% in the quarter.

Just curious if there was anything notable in that. Was that within expectations? It seems like overall year-to-date same-store NOI growth is right on track with your plan, but wanted to see if there was anything to note on the 7.8% this quarter.

No. I think that sometimes when it comes to some of the expenses, there can just be timing differences. Particular -- I mean, obviously not with more of the recurring items like taxes and so forth; but with the discretionary maintenance and repair kind of expenses. And I think that is what explained for this quarter.

I would just add though, Vince, that if you look at the recovery ratios, that even with the increases in expenses -- and some of that can be blamed on we have brought certain additional assets into the same-center numbers -- that if you look at the recoveries, the recoveries show some nice increases from the 3 months of last year as well as the 9 months year-to-date.

Yes; good point. Okay. Then just going back to the repositionings and also some of the comments between how you split out between what is redevelopment versus just ongoing type of investments, just curious. Do you expect TIs to materially move higher in 2015 as a result of some of these repositioning activities? Or do you think that should be relatively stable?

Again, and I hope I addressed this at least in part when RJ asked his questions or maybe Juan. And that is that some of these reanchorings that we are talking about will indeed require taking some of the space off-line, either as we are downsizing or bringing in the new tenants.

So do I expect that we will be able to continue to increase same-center? I do.

Do I expect to be able to show growth in funds from operations for next year? I do.

But you have to moderate all of the wonderful things that we are doing in 2014 with some of the downtime that will be required to bring these new retailers on-stream in 2015.

Right, okay. Then maybe just one last question on the acquisition side. You have been building up since -- you got a couple assets in Cincinnati, a couple in Colorado. I think last quarter we talked about a couple of the deals being marketed deals.

Just curious. At what scale or size of properties -- I mean number of properties, if you will -- do you think you will see maybe more off-market opportunities where you can potentially get a little bit better rate on the deals?

Vin, this is Greg. I think, for most -- let's look at what we bought this quarter: four centers, the smallest of which was $42 million. For owners of centers of that size and larger, it's extremely uncommon for them not to market the property. It is obviously a way to ensure they are getting efficient pricing.

And to the extent that something like that does end up being an off-market deal, it probably means that the pricing that offered exceeded their wildest expectations to begin with.

So we do work our relationships and our networks to identify certain deals; we have negotiated some of those. Nothing has come to fruition in that vein. But we certainly are working it all the time.

Okay. Thanks. That's all I had.

Mike Mueller, JPMorgan.

Hey, thanks. A couple things. First of all, on the dispositions coming Q4 and Q1, Dennis already mentioned the $50 million to $75 million. Was that $50 million to $75 million to come, or just reiterating more of a full-year number?

No, that referenced the 2014 number. We will give you guidance, though, in general on our dispositions for 2015 prior to the end of the year, when we give our 2015 guidance.

Got it; okay. Then if you're looking at the

Got it, okay. And then if you are looking at the redevelopment pipeline and thinking out over the next few years, what do you see as an average balance or an average amount under -- in progress at any given time?

I think that the number of $30 million to $50 million has been a consistent figure that we have put out there.

Okay. And that's a good number for going forward, then? Okay.

Yes.

That is it. Thank you.

Nathan Isbee, Stifel.

Good morning. Just going back to the question about the anchor repositionings next year, I guess asked differently, as you look at the deals you are doing for 2015, how much capital are you giving to these tenants to build out their space in 2015? Relative to where it was last year, let's say.

Well, first of all, Nate, I think that for a general statement I would say that the TIs, or tenant incentives, that we will be dealing with will approximate what we have given the retailers in the last few years. Some of our spaces, we are pleased to say, because of the quality of the asset and the interest in certain retailers coming into our shopping center, we will give little to nothing in certain instances.

But I think that in a downsizing of a specific retailer, you have to deal with the downsizing cost as well as what we will have to put into the new space. But again, I think that you can expect that the returns on those will be in the low double digits.

All right, thank you. Then could you just comment on the timing on when you issued those shares through your ATM during the quarter, and at what price?

We stated in the press release that that was in July.

Okay. Then have you tapped it so far this quarter?

We are not commenting on activity subsequent to quarter end other than we already have, Nate. But we stated in the press release that those shares were issued in July.

Right. Thank you.

(Operator Instructions) Thank you; it appears we have no further questions at this time. I would like to turn the floor back over to Mr. Gershenson for any additional concluding comments.

Ladies and gentlemen, as always, we greatly appreciate your interest and your attention. We are excited about the balance of the year as well as 2015, and look forward to speaking to you just after the first of the year. So if we don't speak before it, a healthy and a happy new year.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.