Rithm Property Trust Inc (RPT) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Ramco-Gershenson Properties Trust Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the conference over to your host, Dawn Hendershot, Senior Vice President of Investor Relations and Public Affairs.

Thank you.

You may begin.

Good morning and thank you for joining us for the Third Quarter 2017 Earnings Conference Call for Ramco-Gershenson Properties Trust.

With me today are Dennis Gershenson, President and Chief Executive Officer; John Hendrickson, Chief Operating Officer; Geoff Bedrosian, Chief Financial Officer; and Cathy Clark, Executive Vice President of Transactions.

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 for his opening remarks.

Thank you, Dawn.

Good morning, ladies and gentlemen.

As we are approaching the end of 2017, I felt that it was appropriate to give you a full year's view of where we stand with our business plan and how we're positioned for the future in light of the ever evolving retail landscape.

First, in this challenging retail environment, wherein we've experienced an elevated number of anchor and small shop bankruptcies, we are confident that we will achieve our operating FFO guidance.

This result reflects the resilience of our high quality shopping center portfolio and our ongoing ability to backfill both small shop and anchor vacancies with more desirable tenants, which John will discuss in greater detail.

Second, we set a goal in January relative to our capital recycling program to match our dispositions with an equal amount of acquisitions.

We also outlined our intention to reduce our geographic footprint in Michigan.

In the third quarter, we closed on the sale of 5 non-core Michigan shopping centers for approximately $90 million and sold a datacenter in metropolitan Chicago for $6 million.

Further, we're in contract to sell an additional Michigan shopping center for approximately $50 million with the expectation of completing this transaction before the end of the year.

Upon closing the sale of this $50 million Michigan asset, we will have sold a total of approximately $175 million.

Our sales in 2017 will not include our Jackson Crossing properties.

The primary asset of which is a partially enclosed shopping center.

[Earlier in the year], MC Sports, a 25,000 square foot tenant filed for Chapter 7 bankruptcy.

We determined that our ability to maximize proceeds from this property would best be served by first releasing the sporting goods vacancy.

We are currently talking to several retailers for this space.

Our acquisitions in 2017 included 2 centers purchased in the first quarter for $168 million.

As I mentioned, it was our plan to buy and sell an equivalent amount of assets this year.

Because we approached the opportunities for additional acquisitions with a conservative capital allocation perspective, I do not believe that we will make another acquisition this year.

That said, our acquisition team continues to analyze opportunities that would be consistent with our goals of both owning shopping centers to best position our company to benefit from an omni-channel world and to acquire assets that add value for our shareholders.

Relative to our interest in promoting a geographically diverse portfolio, it is our expectation by year's end, our exposure to Michigan will approximate 20% or less.

The accomplishment of this objective as well as achieving our overarching goal to substantially complete the transformation of our market profile and shopping center mix positions us as we head into 2018 with a strong foundation for growth.

Currently, over 90% of our shopping centers are located in the Top 40 MSAs, often in most affluent submarkets.

That said, we continue to focus our attention on what we believe to be the most successful shopping center format for the future.

These include dynamic town centers and urban infill environments supplemented by grocery anchored community shopping centers.

These asset types position our company to take advantage of the current and future rationalization by retailers of their store counts and store sizes allowing our shopping centers to provide the best of value, variety, convenience and experience, which includes place making and entertainment, all of which are located in the most viable markets.

I'd now like to turn this call over to John for his prepared remarks.

Thank you, Dennis.

Good morning, everyone.

I want to spend a couple minutes to provide color on a few operating metrics, including same-center, occupancy and other leasing statistics for this quarter as well as cover our expectations for the rest of the year.

First on same-center.

Same center NOI with redevelopment grew 1.4% during the quarter.

The most significant driver of this growth was minimum rent, which were a strong 2.7%, thanks to a number of redevelopments coming online.

Year-to-date, same-center with redevelopment growth was 2.3% impacted 30 basis points due to the timing of recovery income last year that will reverse itself next quarter.

For the rest of the year, we have clarity on nearly all variables that could impact future results, including our watch list and, as Dennis mentioned, on our disposition activity, which solidifies our expected year-end same-center pool.

Therefore, because of our comfort in the balance of this year's result and the retention of a few properties including our Jackson Michigan assets, we now have tightened our same-center NOI guidance for the year to 2.5% to 3%.

Regarding occupancy; at the end of the quarter, physical occupancy was 92.6% and lease 93%, both lower than last quarter, due primarily to the closure of Gander Mountain in Jacksonville, Florida and 81,000 square feet.

We are presently in active negotiations with multiple tenants for this space and expect to have at least half of the square footage released before the end of the year.

Remember we also lost a 61,000 square foot Gander Mountain this quarter in Michigan, but already have the full space leased at a 23% rental increase, and expect the new tenant to open by the end of this year or in first quarter 2018.

Looking forward, as I mentioned last quarter, we will be getting back 1 of our 2 remaining Kmarts at the end of November.

As was the case with the Gander boxes, we anticipated this possibility, which allowed us to initiate a search for the replacement.

In fact, we are now documenting new leases with 3 quality value-oriented retailers that will significantly improve the merchandising of the center, while providing 37% more rents than we have been receiving.

We expect to have these signed before the end of the year and are pushing for second half 2018 opening.

Largely as a result of these box repositioning, we will likely finish the year at a physical occupancy of around 92% and a lease occupancy around 94%, as we finalize deals on these boxes and other vacancies through year end.

Lease up of new space in today's environment is taking longer, but we continue to focus on and opportunities remain for long-term value creation in the portfolio.

Turning to rent spreads, during the quarter, comparable rental growth was 12.3%, including renewal spreads of 7.7%, 140 basis points better than 2016's full-year average.

Looking forward to our expectations for next quarter, we continue to believe our result in leasing spreads for the year will be comparable to last year with high single-digit roll-over spread despite lower total transaction.

As I mentioned the last quarter, total transactions for the last 2 quarters have been lower largely because of the timing of renewals.

In 2016, we were able to get ahead of future expiration and thus we have less expirations now than in the recent past.

Thus, reported renewal transactions are down even as we continue to experience above average renewal rates and are farther ahead of expirations for the balance of this year and next.

As we near the end of 2017, retail shopping center real estate remains in transition.

However the opportunities in our portfolio and tenant demand remains strong setting the stage for the company's sustainable growth in the second half of 2018 and into 2019, as we open new anchor and execute on our development pipeline.

That's all I have in prepared remarks, now I'll turn the call over to Geoff.

Thanks, John.

Good morning everyone.

I'm happy to report our operating results for the third quarter are in line with the financial objectives we outlined earlier this year.

Operating FFO for the third quarter was $0.34 per share, unchanged from the third quarter of 2016, as higher cash NOI from our redevelopments of $0.01 was offset primarily by higher interest expense amidst increased borrowings on our line of credit of $0.01.

Operating FFO was down $0.01 on a sequential basis as we recognized the impact of our dispositions during the quarter.

Our same store operating portfolio continued to record solid minimum rent growth of 2.7%, reflecting the quality improvement in our portfolio.

On the transaction front, we generated net proceeds of $94 million from all of our property dispositions in the quarter.

The execution of these dispositions also facilitated the completion of our 1031 exchanges returning an additional $26.1 million previously held in escrow.

In total, the company generated $120.1 million in net proceeds from property sales in the quarter.

Turning to the balance sheet.

Net debt to adjusted EBITDA decreased to 6.6x at the end of the quarter as a result of our disposition activity and we are on track to meet our year-end target of net debt to EBITDA of 6.5 to 6.7x.

From a coverage ratio perspective, we ended the quarter with solid interest in fixed charge coverage ratios of 3.6x and 3.0x respectively.

During the quarter, we amended and extended our $350 million unsecured revolving credit facility to a new 4-year term.

The credit facility matures September 2021 and can be extended 1 year to 2022 through 2 6-month options.

Pricing on the facility is unchanged as we maintained our previous leverage-based pricing grid.

Borrowings are currently priced at LIBOR plus 135 basis points.

Additionally, the facility allows for increased borrowing capacity of up to $650 million through an accordion feature.

We are very fortunate to have the consistent support of a strong bank group that helped facilitate this transaction.

From a debt management perspective, we will continue the unencumbered assets as outstanding mortgages mature.

We anticipate repaying $36.8 million of mortgage debt in the fourth quarter and accessing the long-term debt markets through a private placement of unsecured notes.

Proceeds from any notes offering will be used to offset our mortgage repayments and reduce the balance on our revolving credit facility.

The repayment of our mortgage debt in the fourth quarter will result in no debt maturities in 2018 and only $3.4 million in 2019.

Turning to guidance, we are narrowing our operating FFO guidance from $1.34 to $1.38 per share to $1.35 to $1.37 per share.

Our range reflects the tighter band on our same-store NOI guidance, John mentioned, of 2.5% to 3% and asset sales of approximately $50 million in the fourth quarter.

As Dennis mentioned earlier, we are very focused on completing our capital recycling objectives for the remainder of the year, as we position the company for long-term growth.

This concludes the teams' prepared remarks, I'd like to turn the call back over to the operator to open the line for questions.

Thank you.

At this time, we'll be conducting a question and answer session.

(Operator Instructions) Our first question comes from Collin Mings with Raymond James.

Just to start can you maybe discuss the expected cap rate on the $50 million asset that's under contract to start right now.

And then just more broadly just provide us an update what you're seeing as far as the transaction market in terms of cap rate trends and just buyer appetite out there?

Yes, sure.

This is Cathy, I'll answer that.

For our fourth quarter acquisitions, it should be cap rate -- disposition I'm sorry, and the -- a high [7], I think it's where it will come out.

As far as the market for acquisitions, I think that environment remains very competitive for the kind of properties we're trying to buy.

Cap rates there are generally about the same.

So we are happy that we were able to buy our 2 properties early in the year.

And we continue to look at properties as they come to market and off-market but we remain disciplined in what we're looking for.

On the disposition side, we are just seeing a high volume of properties in that space and buyers are taking a little longer to complete their diligence, lenders that are a little more conservative, so this resulted in a little bit longer timeframe to get to closing.

But having said that, we will end the year at right about $175 million in dispose, and we will reduce our Michigan percentage to 20% or less.

Okay, that's helpful.

And just recognizing, you don't have 2018 guidance out there yet, but you said we approach 2018, given your goals around leverage as well as redevelopment spending that continues, would you expect to be a modest net seller in 2018 or should we expect more details at the Investor Day?

One, you will certainly get more details at the Investor Day.

But I think our strategy will remain the same that we want to match our dispositions, either with acquisitions or with our redevelopments.

So that we are truly in a position not to suffer any real dilution.

Okay.

2 more quick ones from me.

John, can you just maybe touch on the big jump in TI during the quarter, I apologize if I missed that in the prepared remarks?

Sure.

When you look at the recent activity this quarter, there was an anchor in that and with anchor deals these days, require more TI.

If you think about for the full year, as we lease up our anchor boxes that I talked about, you should look for a little higher average TIs than where we are today on a 4-quarter average.

But if you remember, that 4-quarter average right now is $39, last year was -- for the full year was $53 a foot.

So we probably expect to be somewhere, maybe, in between there.

Okay, that's helpful.

And then just last one, Geoff, can you just maybe touch on the expected pricing update -- us on the expected pricing as it relates to the [debt by] replacement?

Yes, Collin, I think it's probably safe to say, treasury is plus 200 - 220 basis points.

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

Just following up on that private placement area, Geoff, any sense on the size of that and what about the timing?

So as far as timing, it's been consistent to what we articulated earlier in the year as guidance in the fourth quarter.

So I would expect something between now and the end of the year for sure.

And then on the sizing standpoint, it would be approximately $75 million.

And then John, the Gander Mountains that you talked about.

So 1 is completed already, 1 is in the works, when might we expect the cash rent to commence for the 1 that's already leased, and you talked about the 37% higher rent spreads for the Kmart box that you're expecting, what are your expectations on the 2 Gander boxes?

So first off to the Gander box that we did the lease already, that was a 23% spread.

And the tenant had actually worked and we were able to deliver the space immediately after Gander closed, and they're working to try to get open this year but it may fall in the first quarter of next year for the actual rent commencement.

For the other box, the other Gander box, we are actively working to finalize a lease for half the space, it's probably slightly higher over rents on a per square foot basis and we're pushing to try to get that opening before the end of 2018, but again that also may fall in anchor boxes, because we have to demise the space in a fixed time for delivery that might fall into the first quarter of 2019, but we're pushing to get that opened at end of 2018.

Regarding Kmart, we're finalizing those leases and, as we had mentioned, we have a 37% spread on that Kmart box, and again, we're documenting the leases and we're pushing it off to get those open at the second half of '18 and feel pretty good about that.

Okay.

And then you mentioned that leasing is taking a little bit longer in the current environment here, can you just provide some additional color on that comment?

Sure.

I mean, the reality, it's hard to measure exactly in any given quarter, how many trivial transactions we do, I mean, I look at our volume more on an annual basis than any given quarterly basis.

But you'll see, besides the renewal spreads that I talked, I mean the renewal transactions that I talked about leasing this quarter, new leasing is a little down this quarter.

But when I look at our volume of deals that we have for the fourth quarter, it is truly in pace for the full year that we've done in 2015 and 2016.

So, I feel good about where we'll end up for the full year, it's just the fact that, I mean, the reality is that deals that we had already queued up, we didn't get a sign by the end of the year, I mean, the end of those quarter, for different reasons for every deal.

But feel very good about our momentum overall.

And how is the leasing is shaping up for your 2018 expirations, how far through that pipeline are you at this point?

Well, we're ahead of, as I mentioned, related to the comments on the renewals, we're ahead of where we were at this time last year, related to finishing out 2017 expirations and also dealing with 2018 expirations.

So I feel good about it.

Our next question is from George Hoglund with Jefferies.

Yes, one question on Ascena, the number of leases went down to 27 from 29 last quarter's, was that related to asset sales or did they close any stores?

It's related to asset sales, George.

And then just, what's kind of your outlook going forward, one related to the Ascena, and then also how were kind of the store closures and rent adjustments with some of the retailers that came out of bankruptcy as the Gymboree, Payless and rue21?

Sure.

So, first off on Ascena, we've done a portfolio review with them.

We have 27 locations as you mentioned.

And as we go do their review, I mean, the reality is, they're looking to close as they've reported 10% to 15% of their store.

So for us, it will likely be 2 to 3 maybe 4 small shop locations that close between now and mid-2019 is the expectation.

So it's not something that will be an over -- too big of an impact for us, obviously, it's somebody that we're keeping very close eye on, in general, to see -- make sure their operations don't deteriorate more.

Looking generally at your question about other impact of closures this year, rue21, of the 12 locations we have, we actually had 8 of them close.

And the other ones have continued to operate, and I don't believe there was any -- if there was any rent relief there to keep them open, it was minimal.

With Payless, we didn't lose any of those locations, and there wasn't rent relief in general.

As we're talking about rent relief , in general, the timing, we haven't had any general rent relief issues.

Our tenant is coming except in the case of bankruptcy right, before they file bankruptcy they always call, and try and see about getting a rent reduction.

And obviously the biggest tenant now for us is Toys that's currently in bankruptcy.

We have two locations, the conversations so far with them have been conversations about remaining in both locations but we might actually have some rent reduction there, specifically at one location, which will have a fairly minimal impact overall to a '18 numbers.

Our next question is from Vincent Chao with Deutsche Bank.

Just a question on the renewals again, so, obviously, a lower level of renewals leading to lower volumes this quarter, but I was just curious if there's been any changes in either the move-out rate or retention rate everyone is thinking about it over the past couple of quarters?

No, and this is John.

No actually, it's actually higher this year than it has in recent past.

So as I probably mentioned in past, that's something I keep a very close eye on if that starts to slip, but in general that has remained high and the impact are a little higher than typical.

And then on the rent spreads that you recorded for some of the backfill larger boxes, you also talked about higher TIs for those kinds of boxes, so I guess on a net effective basis, what kind of economics were you looking at for, for some of the deals that you mentioned, the Ganders and the Kmarts?

It depends on the deal, but especially on the larger boxes like a Kmart, we will have to be putting in capital to split the box.

I mentioned we have 3 tenants, so that will be splitting the box.

So they end up having more capital, so that's probably a push from a net effective basis, but Gander Mountain example that I gave you, is certainly value accretive from a net effective standpoint, because we didn't split the box and we still got a strong and fairly minimal capital for boxes these days and still had that strong 23% spread.

And then maybe just a question on the trajectory of same store NOI growth, which sounds like you have good visibility on, you mentioned a 30 basis point swing a negative in this quarter for timing of recoveries versus maybe a plus 30 benefit next quarter, so a net 60 basis point swing from the third quarter to fourth quarter.

That gives you sort of 2%, and then as the rest of the upside implied by the guidance range, is that just coming from known commencements that will boost the numbers there in the fourth quarter?

Sure.

Yes, that's correct.

But I'll keep in mind, 30 basis point swing was on our year-to-date number, so there will definitely be an uptick in the fourth quarter.

If you look back at the 2016 recovery rate, you'll see it was choppy up to the third quarter recovery rate was much higher than what you saw for the full year and that was simply the timing of recoveries.

So we do have a dip in occupancy overall in the portfolio to the box closures that I mentioned.

But there still is [rent] commencement related to our redevelopment pipeline, that gets you back to your overall ending back within the guidance we gave.

Got it.

And just 1 question on that, in terms of the openings, we've heard from a couple of your peers that openings are getting delayed for a variety of reasons, and that's actually [dinged] some people in terms of their NOI outlook.

I was just curious if you are experiencing a similar trend in your portfolio?

Generally not, expect the 1 example I gave you of was like Gander box I talked about but I don't know, yes there are still pushing to get opened this year, it might fall into next year, but in general, we have pretty good visibility on our openings that we feel very good about.

Our next question is from Craig Schmidt with Bank of America.

Thinking about your watchlist, I'm wondering how that compares to your watchlist a year ago?

And just in general how you're feeling about store closings relative to the aggressive pace in '17?

Hi, Craig, it's John.

It's a good question.

When you are looking forward at the watchlist, there are still a few names on there, they've been on there for a while now, like Sears, of course, is still on there, but we'll be left with just 1 box to deal with next year, if we do get it back at a very low rent but we do have to to address that.

So, in general, there's been things that have settled out.

Obviously, Gander was on our list last year, Golfsmith was on our list a year ago and those have settled out.

But there is other new names that we're taking a look at, that still makes us cautiously optimistic that we're getting to the end of the workouts here and we're certainly -- both our eyes wide open and trying to do what we did with both the Gander and Kmart is to get ahead of issues, so that we can be well prepared once if there are any issues.

Our next question is from Michael Mueller with JPMorgan.

Dennis, your comments on asset sales on a go-forward basis, I know you are going to give more details at the Investor Day.

But the way I took your comment, and I just want to see if I'm reading into it the correct way.

I think you said something like you wanted to match fund asset sales with acquisitions and redevelopment and I wasn't sure if that was a statement for post 2017 you are back to the normal routine of doing that or who was just meant as being just a bigger picture over time statement and not necessarily after this round of asset sales, we're kind of back to normal course.

I mean, what's the right way to read what you said?

It's the former, the former was that we are back to the way we handled things before.

Basically, the transformational aspect of what we had hoped to accomplish in 2017 will be complete with the 1 exception of the Jackson Michigan assets, So as soon as we're are in a position, we'll [tee] those up.

But other than that, there is always that either fully mature assets or what we would perceive as lower quality assets, there are always those in the portfolio.

We have talked about and will talk about at the Investor Day, what we believe are those assets that we want to own for the future and so we will be just on an opportunistic basis trading out some of those non-core assets for much better opportunities be they acquisitions or redevelopments.

Our next question is from Floris van Dijkum with Boenning & Scattergood.

Obviously, the market likes your results.

So, kudos.

I wanted to follow-up on the dispositions question, it seems that, obviously, you're trading at a significant discount, you are trading at a very low multiple.

You could argue that your stock is not being valued appropriately and certainly, you're not getting much credit for your earnings.

Dennis, what would you say about increasing your dispositions and maybe at some point, if you get your debt to EBITDA ratios down further, maybe even looking to buy back stock at a 25%, 30% discount, what's preventing you from doing that instead of reinvesting?

Well, Floris, we always take a very conservative approach to our capital allocations.

We definitely had an objective for 2017.

I don't want to say that stock buybacks are necessarily financial engineering, but when we have generated free cash flow and we can use that for a potential stock buyback, which is, of course, we would need our Board to fully support such a concept, at this juncture we have a significant opportunity in our redevelopments.

And so we plan to deploy our capital in those areas at such time as we think it, we do have the cash available for a stock buyback as opposed to selling off strategic assets, and we'll do so.

One more comment.

We will be lowering our debt ratios and that will come from more organic growth, as we bring these new tenants, that John referenced, both in '17 and in '18 online.

The other question just out of curiosity, I mean, the Kmart's rent spread, I know that Seritage has been doing a lot of the stuff, may typically get 3 or 4 times multiples on rents.

What is different about this Kmart box to not get or you guys not putting as much capital into the space or I'm just -- I don't know the location, maybe if can you give us a little bit more color about -- 37% rent pop is not bad, but it doesn't seem to be as high as some of the other ones that are being achieved by some of your peers?

Sure, Floris, it's John.

I personally [have] disappointed the 37% spread.

But, obviously, it's market dependent, in this case, we're taking an 86,000 square foot box in a market outside of Milwaukee.

And so that we are not putting probably as much capital, I'm not sure, if you are comparing it to from a Seritage standpoint of how much capital they are putting in and what markets they are in.

But certainly we feel good about the spreads we're generating and believe that even generating 86,000, typically keep in mind too on these Kmart boxes, they are not the most efficient to split up.

And that you often lose square footage, but in this case that spread demonstrates that we're able to actually utilize most of the space and overall on a growth rent standpoint, make that increase.

I think the other box in Crofton that we have is the rent that's even lower than what we're dealing with here.

And in a market, different than, obviously, what we're dealing at Crofton, Maryland by the way, that we're dealing with in the Milwaukee.

So I think there will also be very good opportunities there, even if we do lose some square footage in the box.

(Operator Instructions) There are no further questions at this time.

I'd like to turn the call back to Dennis Gershenson for final comments.

As always, I'd like to thank you for your continued interest in the company.

We hope that you'll join us for our Investor Day in New York on December 11.

As part of that event, we'll be outlining our specific plans for 2018, as well as the rationale for our positive outlook on growth and value creation over the next 2 to 3 years.

Have a good day.

This concludes today's conference.

You may disconnect your lines at this time and we thank you for your participation.