Rithm Property Trust Inc (RPT) 2016 Q3 法說會逐字稿

Greetings, and welcome to the Ramco-Gershenson Properties Trust Third Quarter 2016 Conference Call. (Operator instructions.) As a reminder, this conference is being recorded. I would now turn the conference over to Ms. Dawn Hendershot, Vice President of Investor Relations for Ramco-Gershenson. Thank you, Ms. Hendershot. You may now begin.

Good morning, and thank you for joining us for the third quarter 2016 earnings conference call for Ramco-Gershenson Properties Trust. With me today are Dennis Gershenson, President and Chief Executive Officer; John Hendrickson, Chief Operating Officer; and Geoff Bedrosian, 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 third quarter press release.

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

Thank you, Dawn. Good morning, ladies and gentlemen. The end of the third quarter marks the successful completion of our 2016 capital recycling program, which focused on the disposition of non-core properties, a number of which are in non-strategic markets. The sale of two Michigan properties during the quarter brings our total dispositions for the year to $122 million, which is at the high end of the range of the guidance we provided in the spring. We also accelerated our disposition schedule, completing a number of sales earlier in the year than originally planned. Our continuing goal is to own a portfolio of high quality shopping centers with ever-increasing net asset value, which in turn will generate consistently strong same-center growth, is insulated from the risks of economic volatility, and is reinforced by a focused market strategy.

Our actions in 2016 are consistent with this goal, including the sale of non-core Michigan properties while almost simultaneously purchasing subsequent to quarter-end the Centennial Shops in Edina, Minnesota, an affluent sub-market in the Minneapolis MSA. The two Michigan centers had average base rents of $13.85 and $11.11. The Centennial Shops, which was acquired for less than the proceeds we received from our Michigan sales, is a high-quality upscale infill shopping center. The average base rent for Centennial Shops approximates $32 per square foot. It serves a five-mile population base of 107,000 people, and the average household income is $95,000.

In addition to its strong location and unique anchor draw, Centennial Shops shows a healthy 3% to 5% compounded annual NOI growth rate for the first five years as we bring leases to market. We are also investigating a number of long-term value-add opportunities at the shopping center. The swap of assets from non-core properties to a high-quality shopping center is part of our process to drive the portfolio's NAV.

As we look beyond the end of the year, we will continue to focus on driving the value of our portfolio by selling non-core properties, selectively buying high-quality centers, upgrading our tenancies, pushing rental increases, and actively pursuing strong value-add redevelopment opportunities. With these goals in mind, I would like to take this opportunity to inform you that we will be outlining our five-year business plan at an Investor Day in New York City at the end of February next year.

I would now like to turn this call over to John, who will provide color for our operating results.

Thank you, Dennis. Good morning, everyone. In addition to executing on the transactions that Dennis mentioned that will set us up for future value creation and growth, I think the third quarter also demonstrated continued solid operational execution. Same-center NOI, including redevelopment, grew 2.8% during the quarter and 3.1% year-to-date. For the full year of 2016, we still expect to achieve our original guidance of 3% to 4%, although likely at the lower half of the range, due to the lost income above our typical reserves for our four Sports Authority locations that cost us 80 basis points in growth. We are nearly complete with releasing most of our Sports Authority boxes. I will discuss this further in a moment.

Offsetting the short-term income loss with long-term quality improvement, same-center growth over [2015] continued to be driven by our redevelopment pipeline, higher rents, lower operating expenses with higher recoveries, increased ancillary income, and improved small shop occupancy. We ended the quarter at a physical occupancy of 93.6%, 60 basis points below last quarter, driven entirely by three vacant Sports Authority boxes totaling 128,000 square feet, or 90 basis points of occupancy.

While anchor-to-lease occupancy declined, small-shop leased occupancy increased 40 basis points to 88.2%, a 140 basis point increase over third quarter 2015. We expect very little additional fallout in the fourth quarter, with steady, strong demand, and thus we continue to expect that we will achieve our goal to increase small-shop leased occupancies 100 to 200 basis points during the year.

As we have discussed during the last couple quarters, our small shop occupancy continues to be helped by improved anchor merchandising, improving the 15 anchor leases totaling 375,000 square feet that were signed prior to the end of 2015. Of this group, 13 have opened through third quarter, with Nordstrom Rack at West Oaks, Ross at Shops at Fox River, and Aldi at Deer Grove Centre, each opening during the quarter. In addition to the active anchor repositions we have initiated, our Sports Authority locations and the third quarter bankruptcy of Golfsmith will provide for additional upgrades to our assets.

During the quarter, we executed a new 10-year lease with Dick's for a TSA box at Treasure Coast in Jensen Beach, Florida, in which Dick's had taken designation rights. While there will be down time in rent through the end of 2016 and first quarter 2017, Dick's now has possession of the space and will open in early second quarter 2017. At the other three locations, we are very close to finalizing [backfill] leases with multiple retailers at our Wisconsin and Michigan location, and expect new income to start in late 2017.

For our Fort Collins location, we are in active discussions with a number of traditional box retailers. However, we are being deliberate in our approach since we are also considering using the TSA box as part of the larger planned redevelopment of the center.

While not unexpected, during the quarter, Golfsmith filed Chapter 11. We have two locations totaling 67,000 square feet at an average rent of $14 per square foot. Both of these are at dominant centers for us, one at Troy Marketplace in Metro Detroit, and the other at Mission Bay Center in Boca Raton, Florida. While Dick's appears to be seeking designation rights on some of the 90 remaining Golfsmith locations, including one of ours, we currently don't expect either [of those] locations to [pit] for a Dick's concept.

Nonetheless, as has been the case with the Sports Authority boxes, we already have some solid leasing traction that will allow us to upgrade and diversify in the merchandising at each center. We do expect to replace or exceed the Golfsmith base rent, although as was the case with the TSA boxes, we will need to invest capital into the spaces.

In the end, the decline of these anchor retailers has created an opportunity to further improve our portfolio. In fact, as I said last quarter, we continue to believe all of our anchor upgrades, coupled with other redevelopment activities, offer accretive investments and also help drive value at the properties for years to come.

Regarding redevelopment, our current pipeline of projects is $79 million. During the quarter, we added two projects consisting of new outparcel pad building at River City Marketplace in Florida, and at our 2014 acquisition, Buttermilk Plaza. These projects, together with projects we expect to add in fourth quarter at Troy Town Center in Michigan, Woodbury Lakes in Minneapolis and elsewhere, help continue our consistent redevelopment pipeline of $65 million to $80 million of active projects.

In conclusion, our portfolio's performing well within this dynamic environment. Even the minor short-term setbacks and anchor fallout this year provides opportunities for additional improvements in our high-quality portfolio.

Geoff will now give more details about our operating results. Geoff?

Thank you, John, and hello, everyone. Operating FFO for the third quarter was $0.34 per share, down from $0.36 per share in the third quarter of last year. Cash NOI on a comparable basis increased $0.01 per share primarily from redevelopments coming online and a bad debt recovery from Sports Authority, offset by $0.02 per share on higher G&A expense and a $0.01 per share from higher interest expense.

G&A on a comparable basis for the third quarter of 2016 was higher by $0.01 per share as a result of higher long-term compensation expense and a one-time expense related to severance charges, coupled with a $0.01 per share savings realized in the third quarter of last year from the departure of the previous CFO. G&A was relatively in line with our previous two quarters, and is currently trending at the high end of our guidance range.

Additionally, we would like to highlight two add-back adjustments to operating FFO - first, an add-back of $0.01 per share from a loss on extinguishment of debt related to our conveyance of the Aquia office property to the lender via deed-in-lieu, which we've previously discussed on our second quarter call; and second, an add-back of $0.01 per share which reflects an impairment charge that substantially relates to certain land parcels available for sale at our Lakeland property.

On the capital recycling front, we had another successful quarter. As Dennis mentioned, we sold two wholly-owned operating properties, Livonia Plaza in Livonia, Michigan, and Shoppes at Fairlane Meadows in Dearborn, Michigan, generating total gross proceeds of $40.1 million, bringing our total gross property dispositions for the year to $121.9 million, which represents the high end of our guidance range.

Turning to our capital market activity, as previously discussed on our last call, we entered into an agreement to issue $75 million of senior unsecured notes in a private placement with two institutional investors. The notes have a 12-year term and are priced at a fixed rate of 3.64%. The sale of the notes will close on November 30 of this year. We intend to use the proceeds in conjunction with the draw on our line of credit to repay our Crofton and River City Marketplace mortgages totaling $126 million later this year. The repayment of these two mortgages addresses all of our 2017 debt maturities and will reduce our weighted average cost of debt at year-end to approximately 4% and extend the average term of our debt to seven years.

On the balance sheet front, our net debt to EBITDA at the end of the third quarter was 6.1 times, an improvement from 6.6 times at year-end 2015. Lastly, our coverage ratios remain stable as our interest and fixed charge coverage ratios ended the quarter at 3.8 times and 3.1 times respectively. So, as we look beyond 2016, our balance sheet will be in very solid shape, with manageable debt maturities of $37.6 million in 2018 and $13.5 million in 2019, the majority of which is represented by the current balance on our line of credit.

Turning to guidance, as we reviewed our year-to-date and expected performance for the remainder of the year, the Company is narrowing its 2016 FFO guidance by $0.01 per share at the bottom and top end of our range to $1.34 to $1.36 per share.

So, with that, I would like to turn the call back over to the operator to open the line for questions.

(Operator instructions.) Todd Thomas, Keybanc Capital Markets.

Dennis, as we think ahead to 2017, just curious if you can share some thoughts on the Company's disposition strategy, what we might expect over the next several quarters, just given your comments around continued asset recycling after this year's activity.

There's no question that, in 2017, we will continue our capital recycling program, still with an emphasis on geographic diversification, which obviously means that there'll be additional dispositions as it relates to Michigan. What's important to understand, and I think that you can see that in the third quarter, we're going to do our best to align our dispositions with an acquisition or two that will at least keep any potential dilution down to an absolute minimum.

And John, the two Golfsmiths that you mentioned where you don't expect Dick's to take either, what's the expectation on the mark-to-market for those boxes at $14 a foot? And what do you think's reasonable to expect in terms of timing to have those boxed re-tenanted?

So, I would hope that it would be at least in the high teens there, especially at these locations. And then, timing-wise, at this point, probably early 2018 from a rent start sampling. We're working on backfills now, but realistically it's probably first half of 2018 before we get rent-back started.

Did those two stores, did they close during the quarter? Are those included in the quarter-end occupancy?

No. They're still operating, and we expect them to continue to operate probably through the end of the year.

And then, just one last question, also I think you mentioned that three of the 15 junior anchors commenced in the quarter. For modeling purposes, how much of the expected annual rent is in the run rate this quarter from those commencements? What's the mid-quarter adjustment that we should make to fully bring the rent into the run rate?

Well, of the 15 that we've been talking about that we signed by the end of 2015, 13 have already commenced before the end of the quarter. Most of those, [that were] the difference between them, so we actually had -- I only named a handful, but we actually only had seven through the second quarter. And it was basically spread fairly evenly. Between [a seven and a 13], the rent start was fairly even during the quarter. So, I think you have a full run rate on the 13 obviously at the end of the quarter, and then we have the remaining two opening. One's actually already opened, and the other will in the next 30 days.

Okay, so there were six commencements during the quarter?

Right, exactly.

So the timing was ratable on those six boxes throughout the quarter?

Yes, Todd. For modeling purposes, I think that's probably the right way to look at it. Remember, those 15 for this year had $0.01 impact. So, to specifically model it out for the quarter, I think you're not talking about a significant amount of dollars, at the end of the day, from an impact perspective.

Collin Mings, Raymond James.

Just to start, could you just maybe talk a little bit more about the Centennial Shops acquisition and provide a little color around pricing? And then, it sounded like that there's some longer-term redevelopment opportunities there that might exist. Can you just expand upon that a little bit?

Sure. The purchase price was just over $32 million. The cap rate approximated 6%. Really, one of the interesting aspects of this, in addition to its outstanding location and its strategic position in the marketplace, is the fact that, really, contractual rents are the lion's share of the 3% to 5% compounded annual growth in income. So, we've got built-in same-center NOI growth from the get-go. There are also a couple of leases that are well below market that we believe we'll have no problem bringing up to market.

There's also an ability at the center, because of its configuration, to take a good look at a number of value-added improvements to the asset that we're investigating now. Obviously that will require cooperation from the community, and we would look forward to being able to talk to you about additional restaurants there in unused parking areas, the ability potentially to buy land adjacent to the shopping center where we could do expansions. And really, the key to this is it's an infill market and a very desirable location for a significant number of retailers who are not only not present in the area, but it would be impossible for them to see the development of a new assets.

Maybe a little bit more broadly, you referenced in response to Todd's question earlier about maybe looking to offset some dilution from future asset sales. Dennis, you've spoken a lot about the competition out there for the types of assets you're looking to own. Can you maybe just update us on your pipeline? Are there any opportunities you're currently evaluating that you think have a high probability of closing as we go into 2017?

Well, there's no question that we're looking at several assets. We've got our eyes on one in particular. But, whether or not we're able to finalize an agreement and close on that, we typically don't like to get too far out over our skis.

But, we believe that as we proceed to upgrade our portfolio, that's where the emphasis will be, and we'll be very focused on the type of assets, like Centennial, as well as larger assets where we have real redevelopment opportunities. But, they all will be in attractive sub-markets in major metropolitan areas, top 40 MSAs, some in our existing markets, such as Colorado, Minneapolis, Chicago, and southeast Florida, as well as the potential for a new market or two.

John, there was a pretty big jump in TIs in the quarter. Can you maybe just touch on what drove that?

It actually was just driven by two deals, including one being the Dick's deal that I mentioned. I don't know if you [heard my remarks]. When you take those two deals out, you actually go to a number that ends up being very similar to last quarter and below the average for the trailing four quarters.

John, just as it relates to the watch list going into the holiday season here, any changes on that front?

No. We feel pretty good about the stability of the portfolio for the remainder of the year. The one other bankruptcy that we had was minimal. It was the Logan's Roadhouse that we mentioned the last quarter. We have four locations, and it looks like they'll all be assumed. That's, I think, a good story, as that'll -- continuing as a [going] concern, at least for the near-term.

Craig Schmidt, Bank of America.

The cap rates on the two Michigan asset sales, you thought it might come somewhere in the A cap. Did that, in fact, happen?

As a matter of fact, that's basically the average cap rate of the two. One sold at a number below that, and one sold above, and a lot of that just based upon the tenant mix in each of the assets and its location in their individual markets.

And then, do you have a sense of where same-store NOI is going to go in the fourth quarter without redevelopment?

In the fourth quarter, no, we're not giving necessarily guidance specifically on that. I'd tell you, we should end up for the full year, as I mentioned on the call, that we would expect to be in the lower half of the 3% to 4% with redevelopment, and it'd probably be on a similar [sense] without redevelopment for the year, that being from the standpoint of being in the lower half of the guidance that we give.

R.J. Milligan, Baird.

John, in your comments before, you said that you expect to high the lower end of your same-store NOI guidance of 3% to 4% for the year. You guys are tracking 3.1% growth year-to-date. You guys put up 2.8% in the quarter. To hit that low end of the guidance, are you guys anticipating a reacceleration in same-store NOI growth in the fourth quarter? And is that due to those junior anchors coming online? How do you think about how fourth quarter trends?

Absolutely, R.J. It really is driven by that getting a full quarter of the growth from really those 15 assets that we've talked about. You'll see that, even with the Sports Authority adjustment, our physical occupancy from a same-center basis is basically even right now. So, we're basically going to get the benefit of those 15 driving growth in the fourth quarter.

Dennis, on that 8% cap rate for the dispositions, any change in the disposition market? Have you seen a movement in cap rates at all in some of those Michigan markets?

Interestingly enough, we're seeing an improvement in cap rates and more people coming to the table interested in the assets that we've put up year-to-date. And we don't see any reason that that shouldn't continue into 2017.

And Dennis, can you give a little bit more color as to the increasing or the larger pool of potential buyers? Who's looking for those types of assets?

Typically they're private buyers. We are seeing interest from a number of private REITs again for a certain type of asset class. But, primarily they're private buyers, and many of them are buyers that we have dealt with in the past, who come to the table with cash so that we're not running into financing contingencies.

Vincent Chao, Deutsche Bank.

Just want to go back to Todd's earlier question just in terms of the investment outlook for 2017. Dennis, should we interpret your comments to suggest that you would match fund dispositions in acquisitions, or you're not trying to be that precise?

Well, in a perfect world, I would say we would love to do that. Whether or not we're going to be successful in match funding on a consistent basis throughout 2017, that's in question. Let's put it this way. I'm hopeful that we can give you a lot more color at the Investor Day specifically as to what our plans are vis-a-vis dispositions. And I'd like to think, by that time, give us another three months, we may be able to talk more specifically about potential acquisitions.

And then, as we think about the spread between the cap rates you're buying at versus what you're selling at, sounds like maybe you're seeing additional demand, maybe a little bit of tightening of cap rates. I'm not sure if that's the right interpretation, but should we be thinking about that spread narrowing a little bit in 2017 versus 2016?

Well, again, I think a lot depends on the specific assets that we're attempting to sell. But, realistically, I think that spread is between 150 and 200 basis points.

And maybe a question going back to the Sports Authoritys. I think when we were on the road earlier this fall, it sounded like you had some good visibility on a couple of the boxes. I'm just curious, I think one of them was a split-up between national soft goods that had two formats, and I think one was maybe a grocer that was expanding. I was just curious, are those still on the table, or are we looking at different potentials for the Sports Authority boxes now?

No. We're still looking at the same concepts. For the locations where I talked about, our Wisconsin location and our Michigan location, we're just now into the documentation stage on those, and we're still heading in that same direction. One will be split between a soft goods retailer and a grocer, and the other is looking to be two concepts from a same retailer. But, we haven't announced it yet because we haven't fully signed the agreements, but we're close.

Just last question on the spike-up in the TIs, which you mentioned the reasons for that, one of them was the Dick's taking the box back. As we think about the releasing of the other Sports Authoritys, I guess on a net effective basis, do we think this is going to look like more of a wash in terms of rent?

I think on their face, the deals themselves are either a wash or maybe even slightly negative. I mean, we are seeing a 25% increase in base rent, but of of course that doesn't mean driving capital. We kind of look outside of the deal itself and the impact on the rest of the centers, and we certainly see them from an NAV standpoint as accretive overall to the whole properties.

George Hoglund, Jefferies.

When you look at your disposition plans and then potential acquisitions for 2017, is there a ballpark or target exposure to Michigan that you're looking to get to by the end of 2017?

Well, again, George, we had set out a target of 25%. I believe that when we speak in the first part of the year, we'll have set another goal even lower than that, much closer to 20%. But, I'd like to leave that conversation basically for when we meet in the spring.

Vineet Khanna, Capital One Securities.

Just on Centennial Shops, can you maybe talk a little bit more about the mark-to-market on the existing leases there, and then what the lease expiration schedule looks like?

So, basically the property is 85,000 square feet, with 85% of it is really made up from three anchor tenants. Only one of those really rolls in the next -- one of those anchor tenants rolls in the next five years. But, the rest of it is small shop, is really where we see growth opportunities from a mark-to-market standpoint, that we should be able to drive it, and so that they end up getting that growth of 3% to 5% annually.

And on the same-store recovery ratio, that was down 170 bps year-over-year. Maybe could you provide some color on that?

Same-center recovery ratio is actually up -- oh, quarter-over-quarter, because year-over-year it's actually up, but quarter-over-quarter, you're right, is down. That had more to do with the timing of a true-up that we did in 2015 that drove that number higher. We're actually trending year-to-date at a higher recovery rate. And that's really driven by partially the mixture of our occupancy, the increase in small shop occupancy, but also how our expenses -- real estate taxes are up, which tend to be higher recovery versus TAM costs are actually down, which would be in general lower recovered than the real estate taxes.

Maybe you guys can provide a little bit of color on your 11 Office Depots. How many of those Depots are in long-term holds, or redevelopment targets?

So, we have 11 Office Depots, and then there's also seven Staples boxes. We kind of look at them as groups, even though we do have more focus on the Office Depots. If you look at those expirations, of those 18 expirations, we only have three expiring over the next year, and one Office Depot that does expire in the next 12 months is already in the process of getting replaced with another tenant.

You've probably heard from our other peers, where now Office Depot and Staples have now engaged to actually have dialogue about the future after their merger now is in the past, so with that we are actively working with them to either right-size them or replace them where appropriate.

(Operator instructions.) [Mekita Bellai], JPMorgan.

Maybe if you could touch a little bit on development and redevelopment pipeline, what you're seeing for the next few years, where you see the most opportunity, and maybe what would be a good recurring amount to use for annual deliveries over the next few years, just to get a sense?

We're at $79 million right now. We have a fair amount of projects that we'll be placing in service before the end of the year, but we also have a pipeline that we'll be adding back. So, we'll certainly be within the range that we've always talked about, of $65 million to $80 million on the ongoing pipeline. And then, I think we have fairly good visibility over the next couple years on that. And generally how we think about it is the projects in general end up being 18 months from start to stabilization. So, from that, the place in service, you can get to using that math.

Floris van Dijkum, Boenning & Scattergood.

A question on your sale. So, obviously your dispositions, you've done actually pretty good pace here to date, $108 million of proceeds. You've got roughly $35 million of gains on that, which is actually pretty interesting to note. Does that mean that potentially you have to dividend out some of that via special dividend by the end of the year, or could you maybe talk about that?

We've been able to protect a good portion of that with 10-31. And right now we're not anticipating on having to declare a special dividend this year.

I suspect you'll probably touch upon some of these issues in February as well, but as I'm looking at your property list, I note that you have one asset in Kentucky, one in Indiana, one in Maryland. Should we expect to see those markets disappear and focus on markets where you have greater critical mass?

Well, Floris, start with the fact that the Kentucky asset really is metropolitan Cincinnati. I think, though, what you will indeed see is an emphasis on certain specific markets. And if we have one asset, or even in some markets two assets, that are not going to be a major focus for us, then on a measured basis, indeed we will be moving out of those markets.

At this time, I would like to turn the conference back over to management for any additional closing remarks.

Ladies and gentlemen, first of all, thank you again for your interest and your attention, look forward to speaking to you after the first of the year. And on behalf of John, Geoff, myself and the entire management team, we wish you a healthy and a happy holiday.

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