Rithm Property Trust Inc (RPT) 2015 Q1 法說會逐字稿

Greetings, and welcome to the Ramco-Gershenson Properties Trust first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Dawn Hendershot, Vice President IR and Corporate Communications for Ramco-Gershenson. Thank you. Please go ahead.

Good morning, and thank you for joining us for the first-quarter 2015 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 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 first-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, ladies and gentlemen.

As with the last 19 quarters, the first 90 days of 2015 have shown healthy growth in same-center NOI at 3.3% and positive comparable leasing spreads of 8.1%, including lease renewal increases of 7.4%. These comparable leasing spreads also compare favorably to those generated in Q1 2014 of 5.7%. In the first quarter of this year, we experienced a 40 basis point drop in core leased occupancy. This is due to a number of factors, including the sales [of Target in] Gaines Marketplace and the Village of Oriole, as well as the departure of an undersized anchor tenant from our highly successful Hunter's Square, which has created a significant re-leasing opportunity.

The last factor is the impact of a drop in shop occupancy resulting from a number of small-tenant expirations in Q1, which is typical for the first quarter of the year. What's important to remember about this number is that not only do we release these spaces and consistently drive our small shop occupancy even higher, but these departures create the opportunity to refresh our tenant mix with new and exciting retailers at healthy rental increases. Shop occupancy at the end of the quarter was 87.4%.

For each 1% increase in shop occupancy, or 49,000 square feet, at our average rental rate for these tenants of $20.34, we'll generate an additional $1 million in new base-rental income. In addition to this quarter's successful operating and financial metrics, what is not immediately apparent from the press release and supplement is the continuing transformation occurring in our core portfolio as we focus on those improvements that improve the quality of our centers and generate the greatest returns, including expansions, redevelopments, and re-tenantings.

At both Harvest Junction in Colorado and Fox River in metropolitan Milwaukee our shopping center expansions continue on pace. When we acquired both of these centers, we purchased additional adjacent land with the intent of pursuing these specific projects which diversify our tenant mix, add additional credit worthy tenants to our roster, and produce healthy returns on investment. This quarter we completed the redevelopment of Village Plaza and Promenade at Pleasant Hill, bringing two new anchors, Hobby Lobby and L.A. Fitness to the centers. We also commenced two additional value-add improvement projects.

At Spring Meadows, we're adding DSW by replacing and relocating smaller tenancies. And even after deducting the income that was in place before we repurposed the square footage, we still expect to achieve over a 9% return on costs. At our West Oak shopping center, we're pleased to announce the addition of Nordstrom Rack, our second Rack store in Michigan, adding Nordstrom Rack, our second Rack store in Michigan. Adding Nordstrom Rack will require the expansion of the shopping center, cause the relocation of David's Bridal and will right-size Gander Mountain. Even with all these changes and improvements, we expect to generate an 8% to 9% return on costs, while adding a significant retail draw to the center.

Also during the quarter, we signed a lease with Old Time Pottery for Martin Square in Stuart, Florida, a joint-venture asset with Clarion. We secured community approval to proceed with the expansion of L.A. Fitness at our Mission Bay center in Boca Raton, Florida. We commenced construction for the addition of the Stein Mart store at our Winchester Plaza in Rochester, Michigan, and we're in the process of replacing an Office Depot with a 23,000 square foot Ross store at our West Allis center in Milwaukee, Wisconsin. These are but a few examples of the anchor agreements we have signed and projects we have undertaken. Additional, exciting, significant national anchor leases at a number of our shopping centers will be announced over the next several quarters.

Both the agreements we've signed and the announcements we've made are, first, a testament to the interest by national retail anchors to locate in our shopping centers. Second, the number of anchors who seek to expand their stores at our centers demonstrates the success national retailers are experiencing at our properties. And, third, the ability at our multi-anchor shopping centers to enlarge their footprints and/or densify the sites, demonstrates our ability to be creative and add value.

I would also like to call your attention to the fact that at least half of our value-add projects involve shopping centers we have acquired over the last several years. As I've mentioned on a number of previous calls, our acquisition criteria typically includes the ability to add value to the new additions to our portfolio. Potential to add value is just that, potential, until one commences to act on that potential. We have proven time and time again that we have the insight, the creativity, and the tenant relationships to execute on those potentials. In the coming months we'll roll out our redevelopment and expansion potential for our 2014 acquisitions.

Of special interest relative to our ability to add value is our third-quarter 2014 acquisition of Front Range Village in Fort Collins, Colorado. The opportunities at this center include the ability to add significant new square footage, as we creatively pursue the densification of this site. We will reveal the extent of the potential for Front Range and our other recent acquisitions in the next iteration of our road show that we will feature during the ICSC conference this May and at [NAREIT] in June.

Finally, I would like to introduce to you a very exciting initiative we're implementing across our portfolio, which we've named Community First. Community First is designed to position our market-dominant shopping centers as the place the community considers first. Not just first for shopping, but also first for socializing and first for entertainment. In other words, based on a range of activities and programming at our properties that cater to a broad spectrum of community interests, we'll be the destination of choice as compared to our competition. The Community First initiative makes extensive use of technology and social media, which, to date, has drawn literally hundreds of additional residents to our properties on a weekly basis and rewards consumers for repeat visits.

Additionally, our Community First initiative has developed strong community, charitable, and tenant partnerships that tie into the Company's corporate responsibility goals and allows the program, over time, to be self-funding. Thus, in addition to having the dominant shopping center location and the appropriate mix of best-in-class retailers as a draw, and while creating a sense of place at our centers that generates excitement and provides charming gathering spaces where consumers want to linger and spend their time and time with their families, our Community First programming draws residents for physical fitness activities, charitable outreach programs, family entertainment, and tenant-sponsored events.

I look forward to discussing this concept with many of you in more detail when we meet over the next several months. In conclusion, whether it's continuing to achieve healthy income increases in our core portfolio through organic growth, our ability to uncover opportunities to add real value through redevelopment and re-tenanting, realizing upon the potential embedded in our acquisitions, or initiating creative programming that draws the community to our shopping centers for a variety of activities in addition to shopping, you can expect that we will be able to drive earnings increases and net asset value well into the future.

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

Thank you, Dennis. Good morning, everyone. Let me start by discussing our balance sheet.

During the first quarter, we used the rally [in REITs] to raise a modest sum of equity. Specifically, we received $17.1 million in gross proceeds from the sale of approximately 885,000 shares of common stock under our at-the-market or ATM program. The weighted average price was $19.29 per share. We also raised capital through dispositions, receiving $5.3 million from the sale of land at Gaines Marketplace and $8.3 million from the sale of Village at Oriole Plaza, a shopping center that was owned in our joint venture with Clarion. Proceeds from the transactions were used as follows: $10 million to pay down our line of credit balance; $7 million to reduce our accounts payable and accruals; and $12 million to fund development and redevelopment costs.

Our balance sheet remains strong. At quarter end our net debt to adjusted EBITDA ration was unchanged at 5.9 times, and our fixed charged coverage ration improved to 3.2 times. Both of these ratios are comfortably in the middle of the range for investment-grade REITs. We ended the quarter with $349 million available under our $350 million line of credit. The weighted average term to maturity of our debt is 6.3 years, and our fixed-rate debt represents 97% of the total. Both of these measures reflect our propensity to have predictable interest costs and debt with longer rather than shorter duration. As I noted last quarter, we expect to pay off mortgage debt of approximately $112 million, measured at our pro rata share, over the remainder of the year using proceeds from future unsecured financings. The debt markets in all forms remain accommodating, and our credit is strong. We will update you with our progress later this year.

Now let me turn to the income statement. Operating FFO for the quarter was $0.36 per diluted share, compared to $0.30 in the comparable period. Operating FFO excludes non-cash impairments on land which were $2.5 million this quarter. These provisions related to land available for sale at The Town Center in Aquia in Virginia, where the county implemented higher utility connection fees affecting development costs and, therefore, land values. Our land at Aquia is now on our books at $11.5 million, and we anticipate monetizing at least a portion of this during 2015.

Operating FFO this quarter includes a gain on land sale at our Gaines Marketplace center of $3.2 million, or $0.04 per share. This gain relates to the sale of land to Target where it had ground leased the land before and to the sale of an out parcel to a gas station operator. These parcels were subject to purchase options that the buyers had dating back to the development of the center. As such, they are best considered one time rather than recurring items.

Turning to the core line items driving operating FFO this quarter. Cash NOI was $41 million, or $6.4 million higher than in the comparable quarter. The majority of this increase reflects the NOI generated by our 2014 acquisitions and our development of phase one of Lakeland Park, net of disposition. Same-center NOI increased $1 million, or 3.3% this quarter, driven primarily by 2.5% growth in minimum rent. We also reaped the benefit of higher percentage [rent], bankruptcy claim proceeds, lower non-recoverable operating expenses, and a low provision for credit loss. For our wholly owned portfolio, our provision for the quarter was $102,000 compared to $157,000 a year ago, which we attribute to the high and improving credit worthiness of our tenant.

General and administrative costs were $4.9 million, or $658,000 lower than last year. The low expense this quarter is explained by two items. First, an update to our long-term incentive plan, which is mark-to-market based upon our performance and our share price, and second, the true-up of our bonus accrual. We still expect G&A to be higher in subsequent quarters and for the full year to be in the $23 million range pursuant to our original guidance. Interest expense was up $2.4 million as a result of our asset growth as well as our strategy of financing our assets with long-term debt. This strategy has resulted in an increase in our weighted average term of debt from just 4.2 years in 2013 to 6.3 years today.

Now let me say a few words about our outlook for the rest of 2015. We are affirming our guidance for 2015 operating FFO of $1.27 to $1.33 for per diluted share and our guidance for same-center NOI growth of 2.5% to 3.5%. In keeping with our initial guidance for the year, we still anticipate total land sale gains of $4 million to $5 million, with the remainder most likely occurring in the fourth quarter.

In closing, we continue to drive income quality as well as income growth in our core portfolio, all while maintaining a rock solid balance sheet. We appreciate your interests and would now like to open the call for your questions. Operator?

Thank you. At this time we'll be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question

Hi, good morning. Dennis, the first question, you talked about the shop occupancy rate a bit. I was just curious, where do you think that shop leasing or shop occupancy can get to over time when you think about the portfolio today? And how long do you think it will take to achieve that level?

Hi, Todd. I would say that a reasonable number is somewhere between 92% and 94% for shop occupancy. Easy for you to say. And I think you are probably talking 24 months. We continue to be in a very good environment.

Everybody always talks about the lack of new construction, but if you look at our portfolio, we're almost exclusively infield shopping centers. And as I've mentioned, with a number of very exciting announcements we're going to make over the next several quarters, relative to adding, vis-a-vis some re-tenanting of our shopping centers, that should not only increase what was already significant tenant interest, but it will drive even further the rentals that we're going to be able to achieve as we fill up those spaces.

Okay. And then in terms of acquisitions, it sounds like you are really focusing more on some of the redevelopments and finding opportunities to create value within the existing portfolio. Just curious whether you are still active in the acquisition market? And what we should think about in terms of deal volume throughout the balance of the year here?

Well, Todd, we have not really given any guidance for acquisitions. We certainly have reviewed a number of opportunities, cap rates continue to be aggressive. We do like to acquire shopping centers where we can add value.

I think if you look at a number of the centers that we have purchased to which we have added value, the seller probably thought that these were pretty well built out and that they'd maximized the ability to do something with the assets. So I would like to think that it's our experience in the industry that allows us to add additional value maybe where others don't see it.

So we're going to be very selective in the centers that we buy. And we're obviously very conscious of our cost of money. So I think you will see acquisitions unfold throughout the rest of the year, but I'm just not in the position really to try and quantify that at this juncture.

Okay. And then just last question. I was just wondering if you had an update on back-filling Mike Sullivan's role. It sounded last quarter that you were contemplating either back-filling his responsibilities with someone from within the organization to just handle his responsibilities. Or maybe also bringing someone in that could be helpful on a broader basis for the organization. Any updates on timing or thoughts at this point?

I would say two things. The first is that as far as Mike's position, specifically, we have some very competent people in asset management.

There will be some changes made in that area with some promotions that we're going to divide up the asset management function into several different categories. But relative to additions to the organization, look for an announcement in the very near future as far as executives in the Company are concerned

Okay. That's helpful. Thank you.

Thank you. Our next question comes from the line of R.J. Milligan with Robert W. Baird. Please proceed with your question.

Hey, guys, good morning.

Hi, R.J.

Dennis, I want to follow up on Todd's question about acquisitions. If you look back in the markets where you have been buying over the past two years, how far do you think cap rates have compressed since you purchased those assets?

I think that you're probably talking somewhere in the vicinity of 50 basis points. Cap rates in Colorado, as well as in metropolitan Chicago, were relatively aggressive to begin with. After saying that, we have not purchased anything with a five in front of it.

And I think it would have to be an awful compelling acquisition with very significant upside in order to even take a look at something like that. We have bid in the past on a number of projects that have broken into the [5's], and we've just backed off from continuing to bid on those assets. So I think somewhere between [6] and [6.5], I think, is the area that we're now playing in.

Okay. Thanks. And so if you flip that over to the disposition side, what are you seeing in terms of demand for the types of assets that you are looking to sell? Maybe specifically, for some of the assets as you look to reduce your exposure in Michigan. And are you seeing increasing private equity interests in the types of assets that you maybe are looking to dispose of?

There has been, for the last 18 months or so some very significant peaked interest in either secondary markets or even tertiary markets as far as private capital is concerned. Michigan is beginning to gain traction as far as sales are concerned. And a number of these transactions have been priced in the low [7's], so we're beginning to see some real traction in Michigan. And so for price visibility, I think that becomes very important.

As far as, the centers that we're selling, centers like the Village of Oriole and others that would be sold maybe later this year include some higher-quality, certainly high-quality assets that are going at reasonably low cap rates, as well as some centers that just don't fit our definition of what we want to own going forward that are probably in the mid-to high [7's].

Great, thanks. That's helpful.

Thank you. Our next question comes from the line of Vincent Chao with Deutsche Bank. Please proceed with your question.

Hey, good morning, guys. Just wanted to go back to the Community First initiative that you talked about, Dennis. Can you just tell us a little bit about how things are -- I understand the vision there, but what specifically is changing from your guy's perspective on how you are doing business to implement that initiative?

And what percentage of your centers do you think this really can apply to? It doesn't seem like every power center out there would necessarily be able to fit into that mold

Right. It's a good question, Vince. First of all, if you remember, we define the majority of our centers as what we call community centers. So therefore, the word community in part does imply connecting with the community. If it's strictly a commodity center, then those assets will probably be the last centers that we really apply this Community First concept to.

But we have, not an insignificant number of what we call hybrid centers, which not only have commodity, but specialty retailing as a part of it. So you are probably talking about, initially, 20% to 25% of the portfolio that we have already rolled this initiative out for, and we're looking at anywhere from another 15% to 20% that we'll roll out in 2015 and 2016. So we're really very excited about it as we look forward.

And it will be a number of pages in our road show that you can access online, as well as spend time with us talking about it. The success we're already experiencing here in drawing people to the shopping center is really quite staggering.

Okay, thanks for that. And maybe going back to your comment about the executive changes that are -- we expect an announcement relatively soon -- I think the question was specifically on Michael Sullivan's position, but the response has made me think that there was more than just that role that's being contemplated. Am I missing something, or were you specifically referring to Michael's position?

I would rather ask you to wait a few days. There's is expected an announcement in a couple of days, and I think you will get clarity on this issue when we make the announcement.

Got it. Thanks.

Sorry I can't go any further than that

No, understood. And just maybe one last question. I know I'm bouncing around here a little bit.

But obviously, there's been some M&A in the space here recently. I'm just curious what your thoughts are just in general about continued M&A activity in the shopping center space as we move forward here this year.

Well, we certainly have seen, over the last nine months or so, some very interesting news concerning a variety of public companies, both mall and strip center, at least in our sector. It really indicates that both public and private buyers really recognize the value of a quality shopping center portfolio, especially people such as [Blackstone].

I think what it says to us, is it really validates what we're doing, how we're proceeding, and how we're investing our money. And so we're very pleased that indeed the shopping center sector is front and center, and that I think that people should then begin to appreciate the type of cap rates that should be applied basically across the strip center sector.

Okay. Thanks, Dennis. Appreciate it.

Thank you.

(Operator Instructions)

Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question

Good morning, guys. Just a follow-up upon the question related to the acquisitions environment. Dennis, if you might provide a little bit of trends on the competition. Has that changed at all over, say, the last year? Are you seeing different players winning bids that you're not? What's going on there?

I would say that when we have been competing for the highest quality assets, the pension fund and pension fund advisers are the ones who are consistently moving in and beating us out on those. We have not, in the assets that we've looked at, ever really lost out to a competitive REIT.

So I think that the private money is the most aggressive bidder for these assets. But you have to appreciate that when we're looking at an asset that may have a little bit of hair on it, which means that it has some work to occur, then the field narrows significantly and the institutional buyers and the private buyers have a lot less interest at recently aggressive cap rates.

Okay, great. Thank you. And then as it relates to the shop space -- and thanks for the commentary early in your remarks -- I was just wondering, was there any strategic tenant move-outs? Or were there any specific tenant issues like Radio Shack that you would maybe quantify as less seasonal that impacted the results?

Well, yes. First of all, we have to remember that invariably, in the words of [Mel Cooper], there are always bankruptcies that are occurring in any industry, and retailing is no exception. We had 15 locations for Radio Shack. At the present time, we only have six that are either not assigned, leases executed, or in negotiation.

Those six account for only 13,000 square feet, and the average size is just over 2,000 square feet. The average rental is right around $17.50. And leaving aside under 10,000 square feet where our average rental rate is $20.34, once you get down into the 2,000 square foot spaces, you are talking about mid-to high [$20s]. And because we have been able to demonstrate how well we have been able to re-lease these spaces, it really is a significant opportunity to drive our rental rates.

Okay, great. And then as it relates to Community First, I was just wondering, is there any incremental G&A costs, or investment, or headcount change that we should be thinking about as it relates to that program?

As a matter of fact, we see no increase in headcount. What we have done in the states, especially where we have rolled this out, is we have managers at a number of the shopping centers that we have acquired who have the talents to be able to oversee the activities that we are rolling out. We have got officers in a number of those centers, as well as regional offices so that we're going to be able -- and remember I reference online -- so we're going to be able, between the offices we have and your access to our shopping center sites online to benefit from the various activities that we have.

And again, I look forward to spending some time with you to talk about our walking program, our baby boot camp, our variety of on-site activities that really are bringing a significant number of residents out to the shopping center. And after they participate in those things, then they go and shop. And we are also, as part of some of those promotions, giving out gift certificates. Again, this will be funded in significant part either in partnership with our retailers and the supermarkets, as well as the movie theaters et cetera, as well as our general retailers.

Great, thanks a lot, guys.

Thank you.

(Operator Instructions)

We'll pause for a moment to allow for any other questions.

Well, to the extent that there are no more questions, once again, I thank you all for your interest and your attention. We could not be more excited about the balance of the year, and we look forward to meeting with a number of you. And for the rest, we'll talk to you in approximately 90 days. Have a good day.

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