Rithm Property Trust Inc (RPT) 2014 Q4 法說會逐字稿

Greetings. Welcome to the Ramco-Gershenson fourth-quarter and year-end 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 and Corporate Communications.

Thank you, Dawn. You may begin.

Good morning, and thank you for joining us for fourth-quarter and year-end 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 fourth-quarter press release.

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

Thank you, Dawn, and good morning.

Our Company's efforts in 2014 were concentrated on increasing the quality of our portfolio and intelligently growing our asset base while remaining focused on maintaining and improving our capital structure. By every measure, we believe that our actions in the areas of acquisitions and dispositions, development, value-add redevelopments and reanchorings, as well as balance sheet management produce a very successful year for our Company and set the foundation for additional high-quality growth in both asset value and net operating income for 2015 and 2016.

Several of the more important drivers in promoting quality and intelligent growth were our acquisition and capital recycling efforts. Last year, we acquired four high quality well-anchored shopping centers for $322 million and sold five non-core centers for $32 million.

These transactions taken together increased our average household income from $72,000 at the beginning of 2014 to $78,000 at year-end. And we achieved an increase in average population from 63,000 persons to 67,500. Average base rents for our four acquisitions was $15.96 per square foot while rents at those centers we sold averaged $8.67.

Further, we started 2014 with the state of Michigan representing approximately 36% of base rents and we ended the year with no one market exceeding 29% of rentals. We believe this number will be driven even lower in 2015.

It is also noteworthy to point out that each of our 2014 acquisitions included the opportunity to add substantial net asset value to on-site expansions, outlet development or sale and the ability to lease-up existing vacancies. Thus combined, our 2014 acquisitions and dispositions demonstrate the positive results of our efforts to drive the quality of our markets, the demographic profile of our shopping centers, average base rents, and the composition of our tenant roster.

Last year, we also commenced and completed construction of the 210,000 square feet Phase 1 portion of our Lakeland Park shopping center development in Lakeland, Florida which opened last fall with an occupancy rate of 98% and included leading national retailers, Dick's Sporting Goods, Ross Dress for Less, Old Navy, Alta, Shoe Carnival and PetSmart adding approximately $3 million to our income stream and producing a 9% to 10% return on incremental dollars invested.

As I've mentioned, the shopping centers we've acquired not only improve our portfolio as quality profile, but also present the opportunity to add real value. The responsibility for successfully converting these opportunities into reality falls to our leasing and asset management teams.

They are also responsible for uncovering value-add opportunities in our core portfolio listed on the redevelopment and expansion page in our supplement are seven projects where we're in the process of executing on opportunities in both acquisitions and core portfolio assets. These redevelopments, expansions and re-tenantings produce an average return on cost of 10% to 11% and will add over $5.1 million to our net operating income over the next 12 to 18 months.

Additionally, we are replacing underperforming tenants, such as adding Ross Dress for Less in place of Office Depot at our West Allis shopping center in Milwaukee, Wisconsin, rightsizing anchors, including enlarging LA Fitness at Mission Bay in Boca Raton, Florida, and downsizing Gander Mountain at our West Oaks center in Novi, Michigan to make way for a fashion retailer. We are also expanding our Town & Country shopping center in St. Louis by adding a new Stein Mart store. These projects are backed by a pipeline of additional opportunities, a number of which we will be announcing throughout the year.

Realizing upon these value-add opportunities at both acquisitions and in the core portfolio take on even greater importance as a means of driving net operating income, increasing asset value, and providing a growth vehicle in a portfolio that has an occupancy rate of over 95%. Also, based upon the rental spreads we've achieved where we are replacing underperformers, and our ability to minimize downtime as we expand or downsize existing tenants, we will experience very little drag on our income as we bring these exciting new retailers to our sectors.

An additional benefit at those centers where we are delivering on value-add initiatives will be our ability to command higher rental rates from existing tenants as their leases come up for renewal. As a result of our successes in 2014, we have grown our portfolio, increased the quality and value of our shopping centers, generated additional opportunities for growth through value-add improvements and maintained an investment-grade balance sheet. Thus, we're well-positioned for a very productive 2015.

This year's guidance indicates a same center NOI growth of between 2.5% and 3.5%. The achievement of this goal will mean that we will have recorded 18 consecutive quarters of same center NOI growth. We anticipate rental spreads on a comparable basis to be between 6% and 8%, approximating those achieved in 2014 and we project an occupancy rate of 95.5% to 96.5%.

We will selectively review acquisition opportunities and plan to sell a number of non-core centers to fund the equity for these purchases, as well as our value-add improvement pipeline and the balance of our business plan. We are very excited about our prospects for 2015 and we look forward to delivering another year of healthy returns for our shareholders.

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

Thank you, Dennis. Good morning.

Owning a diverse portfolio of high-quality shopping centers continues to provide security and stability in an uncertain world. But that is not enough.

A strong capital structure to finance the centers and an efficient organization to lease, manage and redevelop them are essential foundations of our Company. With these foundations supporting great assets, our goal is to deliver best-in-class financial results in the future just as we have over the last five years.

Let me start by covering our balance sheet. In the fourth quarter, we closed our third private placement borrowing $100 million of 10- and 12-year notes from an affiliate of New York Life. We used the proceeds to pay down our line of credit to just $10 million at year-end.

During the quarter, we also expanded our line commitment to $350 million and extended the final maturity to 2019. As a result, we entered the new year with low leverage, strong coverage and ample liquidity. At year-end, our net debt EBITDA was 5.9 times. Our fixed-charge coverage was 3.0 times and our line availability exceeded $335 million.

We also take particular comfort in our weighted average term-to-maturity of 6.5 years and our proportion of fixed-rate debt at 96%. All of these metrics compare favorably to our peer group.

In 2015, our pro rata share of maturing mortgage debt is approximately $94 million. In addition, we anticipate paying off $18 million of mortgage loans at two properties where the interest rates would otherwise adjust upward. We expect that paying off the combined $112 million of mortgage debt with unsecured financings will reduce our interest expense while unencumbering more of our net operating income, which is currently 76% unencumbered today.

Now, let me turn to the income statement. Operating FFO for the quarter was $0.33 per diluted share compared to $0.30 last year. And driving operating FFO, we adjusted for acquisition costs in impairment provisions.

Here are some of the key items driving operating FFO this quarter. Cash NOI was $40 million, or $7 million higher than in the comparable quarter. The majority of this increase reflects the NOI generated by acquisitions, net of disposition and our Lakeland Park development, all completed since last year.

Same center NOI increased $850,000 or 2.8% this quarter, driven primarily by 2.2% growth in minimum rent. Same center NOI growth for the full-year 2014 was 3.3%. The lower figure in the fourth quarter resulted primarily from our year-end true up of recovery income.

Real estate taxes and operating expenses for the year were modestly higher than expected and our share of those costs resulted in a lower recovery rate for the quarter. With regards to our receivables, we've recorded a provision per credit loss of $139,000, which was slightly higher than last year.

Nonetheless, our provision this quarter ran lower than our recent run rate due to strong collection efforts on the part of our lease administration team. As previously reported, we've recorded a lease termination fee of $2.1 million related to the departure of a tenant at the Town Center at Aquia Office building. We have released roughly one quarter of the available space and are working diligently to secure replacement tenancies for the remainder.

General and administrative costs were $5.6 million or $337,000 higher than last year. More important though is the fact that we have driven the ratio of G&A expense to property revenue net of our fee income down from 10.1% to 8.5% over the last year. We continue to be watchful over expenses and focused on organizational efficiency. And lastly, interest expense was up $2.1 million as a result of our asset growth, as well as our strategy of financing our assets with long-term debt.

Let me spend a moment on our impairment provisions which are excluded from operating FFO. During the quarter, we took impairment provisions on land and on several non-core operating properties slated for disposition. The provision on land related primarily to our 50-acre development site in Heartland, Michigan.

As a result, we can now approach our alternatives at this site, be they development, sale or hold or some combination with full flexibility because the land that's been marked to fair value. We continue to market other similar parcels of land in our portfolio and expect to monetize them over time.

Now, let me say a few words about our outlook for 2015. Our guidance for operating FFO is $1.27 to $1.33 per diluted share. Our guidance is based upon same center NOI growth of 2.5% to 3.5%.

In addition, we expect gains on land sales to contribute approximately $0.05 per share to FFO. Offsetting these items, the loss of the office tenant at the town center at Aquia is expected to detract from FFO by approximately $0.02 per share and modestly higher interest costs related to extending the average term of our debt also detracts slightly from FFO.

As in the past, our guidance excludes the impact of potential acquisitions and dispositions. We approach these activities with an opportunistic mindset. At the same time, our redevelopment and re-tenanting activities are intended to drive income growth and quality, and we feel confident that we will replenish the pipeline over the course of the year. Through prudent investing, redevelopment, leasing and management, our high-quality portfolio can be expected to deliver solid results on behalf of all our shareholders.

With that, I'd like to turn the call back over to the operator for Q&A.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Greg Schmidt, Bank of America.

Thank you.

Listening to the call and reading Dennis's quote in the press release, it seems to me that there may be a shift from acquisition to actually more effort on the redevelopment of those assets that you acquired. A. Is that true? B. How much may you be funding those redevelopments through dispositions? Would you have a sense of how many dollars in dispositions may occur in 2015?

Hi, Greg.

First of all, we intended to indeed telegraph that the emphasis will be placed in 2015 on realizing not an insignificant number of opportunities in the acquisitions that we made in 2013, and 2014. The 2014 will begin to start to mature as far as real projects later this year.

Indeed, we are much more focused on the opportunities in the portfolio. However, we will continue to look at the potential for acquisitions, but we'll be very selective in the way we approach that.

As far as dispositions are concerned, we obviously have not been given specific guidance. Our pipeline for the redevelopments in the supplement were around $50 million and then I identified a number of re-tenantings, and there will be some additional projects that we'll announce a little later in the year.

So you can count on somewhere in the vicinity of $50 million a year as a minimum that we'll dedicate toward redevelopment. As far as the dispositions are concerned, we review the bottom 5% of the portfolio on a consistent basis. These are usually the smaller assets, as you can see from the dispositions that we talked about have the lower average-based rents and potentially the lower demographic profile, and those are the ones you can expect that we'll be selling in order to fund these activities.

Okay, thank you.

Todd Thomas, KeyBanc Capital Markets.

Hi, thanks. Good morning.

A couple of questions. Good morning. First, just back to the Aquia office asset, I was just curious what type of demand you're seeing for office space there. Greg, you mentioned that the impact on FFO is $0.02 per share. Are you forecasting any additional leasing to take place at that site during the year and what kind of rents do you think are achievable for the remaining office space?

So the office market in the DC area and Northern Virginia, I think it's fairly well-recognized to have its challenges and this property is in that market. So it's subject to those overall market forces.

I did note that we released a portion of the space that was vacated already. I think that lease, the tenant moves in late spring. So we have mitigated a little bit, but there's more to go.

We have conversations going with several other tenants in the market who are interested. That area is fairly sensitive to defense contracting and so many of the tenants lease space based on whether they get a contract or not.

So it's a little early for us to predict, but I think what we've -- the information we've given you tells you what our best case expectation is for this year.

Okay. And then, Greg, in terms of $112 million of mortgage maturities that you mentioned, is the plan to continue paying them off on a line and then looking for bank financing or private placement later in the year? Is that still the best execution for the Company? And then also are the mortgages, are they generally all open for prepayment 90 days ahead of maturity?

They vary in terms of the prepayments, somewhere between 30 and 90 days on most of them. Most of them do come due towards the end of the year, so the impact in 2015 from that is relatively minor. Yes.

We still feel like there's great execution in the bank-term loan market and the private placement market. We still have -- I think you may recall we did a kind of shelf deal with Prudential last year that leaves about $15 million for us to be able to borrow there, and I think we've seen interest from other private placement lenders and the bank market remains strong. So we'll continue to move in the direction we have of -- on securing the balance sheet, which I think gets us good execution and good flexibility.

Any updated thoughts at all on pursuing a rating?

We continue to look at that alternative. I think as we said in the past, the bond market is attractive if you borrow in size, and for us those are relatively large amounts. The index eligible bonds are $250 million.

So the private placement market's been just an excellent alternative. I think, in fact, our execution during 2014 in that arena probably bettered what we could've done in the bond market.

Okay. And then just lastly, for Dennis maybe, I was just wondering if you could speak to the resignation of Michael Sullivan, and maybe discuss what the Company's plans are to backfill his role in asset management.

Sure. Michael had been with us for around eight or nine years. He felt that -- he came from a restaurant background originally, and so he wanted to pursue interests in that area. We had a very amicable parting.

We had a significant depth in the asset management area, so there was not one moment of concern that we wouldn't be able to handle the responsibility with our assets. And what's nice about that is that we now, in looking at the organizational structure, have the flexibility to see exactly how we want to either refill that responsibility, or some other individual that may come in who can be helpful to the organization on a broader base.

Okay, thank you.

(Operator Instructions) Vincent Chao, Deutsche Bank.

Hey, good morning, everyone.

Just a quick question on the same-store NOI guide is 2.5% to 3.5%. I know some of the redevelopments are excluded from that pool, but when you think about the re-tenantings that you're also doing that could be a drag, now how much or can you quantify what that drag is on same-store NOI growth for 2015?

Vin, this is Greg.

We don't have a number to give you here and I don't think that it's substantial in the way that your question implies. In each and every year, there's some downtime from re-tenanting, and then new tenants come in, and then there's some downtime somewhere else. So I don't think that there's sort of a particularly unusual amount of that activity in 2015 that somehow has an outside impact during the course of 2015.

Okay, thanks. And then maybe if you could just talk about your Office Depot and Staples exposure, the number of leases rolling here in the next couple years, maybe the mark-to-market to leases as you see it today?

Sure.

So we have leases out with both Office Depot and OfficeMax, and combined they would -- the combined company would be our second largest tenant initially at about 2.9% of base rent. We have 23 leases with the combined entity, and the good news, I think, on our front is kind of twofold. One, that the leases expire over the next six or seven years in a fairly even rate, a little bit more between, I think, 2017 and 2019, but certainly no big concentration in one year.

And the second thing that we like is that the average base rent is really quite reasonable at $11.80 a square foot. So to the extent we get stores back due to closings, or downsizings, we think we'll do at least that well or better on average across that.

So the other couple of points I would make about our exposure to the office supply stores is that across those 23 on average there are five other anchors at the shopping center. So to the extent there would be a closing and some downtime, it's not going to have a huge impact on a center with five other anchors.

And the other stat that I thought was quite interesting is that the median distance to the next office supply store is five miles. So there's, I think, good spacing in general. There are some that are closer than that, but on average it's five. And I think only about -- less than a third are within two miles.

So we feel pretty comfortable that this is going to manage itself well and in fact present opportunity as we get space back. We have a lot of tenant interest. We've been proactively trying to work with both Office Depot and Staples to get space back to address that interest. And we'll continue to do that.

Okay, thanks. That's very helpful. And then just one other question. I don't know if I missed it from earlier, but did you disclose a cap rate on the three dispositions for the quarter?

We did not.

Is that something you can share with us, I mean, not on an individual, but maybe just all three?

Yes. I think on a blended basis, it was between an 8% and a 9% cap.

Eight to nine? Okay, thank you.

Collin Mings, Raymond, James and Associates.

Thanks. Good morning.

Just a quick follow-up here. Just going through the supplemental, it looks like the expected yield on your Harvest Junction North project came down about 100 basis points from what you had previously estimated and the product stabilization's been pushed out a little bit. Can you maybe discuss what's driving that and just more widely talk about what you're seeing as far as construction costs and what's going on there?

Yes. This is Greg, Collin.

So Harvest Junction is centered in Longmont, Colorado. It's a beautiful property and a really nice area. And as you often find in those kind of communities, the cities have pretty stringent requirements of what they like to see.

So the increase in cost is really largely due to some of the requirements that the city demanded in terms of finish and the like. And that also, I think, helped drive the fact that there's -- the project's pushed out a little bit. But it's fantastic property, fantastic area and we're so excited at those levels of returns about what we're doing there.

Okay. I know that's helpful. But just more broadly just as far as construction costs and what're we seeing as far as the broader environment there?

I would say that construction costs may be up modestly, but we took that into consideration when we put our original pro-formas together relative to contingency numbers on construction costs. So we do not expect with the projects that we've got going to see any real changes in our numbers

Okay. No, that's helpful. And then you touched just again as far as the progress made in 2014 as far as reducing that Michigan exposure, you outlined kind of plans that are an intent to continue to reduce that into 2015. Is there a target or a way we should think about that over the intermediate term on where you would like to get that?

Yes. We have said for some time that we're interested in having no one market or state more than 25%.

So we do intend to drive that number lower. What you need to understand, however, is that there are a significant number of assets in the state of Michigan that we consider core.

And therefore, the changes that you're going to see will either involve some very small centers in non-strategic markets in Michigan or as we reallocate assets to other states and make other acquisitions, that was the primary driver in the 2014 year. And I think you'll see similar type of moves in 2015.

Okay. Very helpful. Thanks.

Chris Lucas, Capital One Securities.

Good morning. Greg, if I could, on the operating margin or tenant recoveries for the quarter, I guess I was wondering if you could maybe provide a little more color in that is there any one-time items in there?

Is this fourth-quarter number a good run rate going forward? And then on the taxes, I think you mentioned as being one of the primary drivers of that. Is that related to 2014 acquisitions, or what is exactly going on there?

Yes, good morning, Chris.

Let me start with the first part, which is I think the recovery rate was depressed a little in the fourth quarter, and if you're looking for a run rate, I think you should focus more on the full-year number.

Basically what happened is we got some costs in the fourth quarter a little bit higher than we expected including some tax bills that had been estimated earlier, but came in higher. And in particular, some of that were the centers that were less occupied than the portfolio average and so we have to pick up a share of that.

So I think we have a little bit of a blip, a little bit of a one-time adjustment in the fourth quarter when we trued things up. But, I think if you look at the full year, you'll have a better run rate for projecting going forward.

If I could just add something to Greg's comments? Some of those costs really were acquisitions that we had made at the tail end of 2013 with -- in shopping centers that were in the 80% leased category. So, we knew that we were buying centers where we had the opportunity to lease-up those assets.

We're making significant progress in 2014 to see occupancy start to occur in 2015, and so that will ameliorate some of the landlord costs vis a vis the real estate taxes that we had to pick up

Okay, great. Thanks, Dennis. And then maybe, Dennis, I'm sort of taking a step back for the bigger picture.

In the markets that you operate in, are you seeing any change to sort of new development round up, new development starts taking place. And we've seen a couple of the public peers announce some new land acquisitions for new development. I'm curious to your thoughts about where you are in that cycle at this point.

Well, first of all in our markets what we're really seeing is that any construction that is really taking place is more along the line of people acquiring really distressed assets and then attempting to turn them around to make them much more viable shopping centers. That's where the lion share of the development we're seeing.

In our markets, we really have not seen much, if any, new development commencing. One of the things, of course, to remember is that if we took a look at a piece of property today and said, "Boy, that might be a good opportunity for development," between entitlements, finding the right kinds of tenants, building the shopping center, opening it and stabilizing it, you're talking anywhere from three to four years.

But again, we're not seeing anything necessarily on the horizon. Our development activities, really, at this juncture involve acquiring land adjacent to our projects. You can see that in Fox River, at Harvest Junction, as well as some on-site development and I talked about that in St. Louis, etc...

That's where our focus will be, in not necessarily going to a greenfield site and running around attempting to find retailers for those locations, but more what you'd probably call expansions of existing centers whether it's on-site or an adjacent property.

Great. Thanks a lot.

Thanks, Chris.

Michael Mueller, JPMorgan.

Hi, everything else was pretty much asked already, but I was just curious, are you close to anything on the acquisition side at this point?

At this juncture, we have nothing specific in the pipeline.

Got it. Okay. That was it. Thank you.

(Operator Instructions) There are no further questions at this time. I would now like to turn the floor back over to management for any closing remarks.

Ladies and gentlemen, as always, thank you for your interest and your attention. We look forward to talking to you again at the end of the first quarter. Have a wonderful day.

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