Rithm Property Trust Inc (RPT) 2019 Q4 法說會逐字稿

Greetings.

And welcome to the RPT Realty Fourth Quarter 2019 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Vin Chao, Vice President of Finance.

Thank you.

You may begin.

Good morning.

And thank you for joining us for RPT's Fourth Quarter 2019 Earnings Conference Call.

At this time, management will 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 could cause actual results to differ from expectations.

Certain of these factors are described as risk factors in our annual report on Form 10-K.

Certain of the statements made on today's call can also involve non-GAAP financial measures.

Listeners are directed to our fourth quarter press release, which includes definitions of those non-GAAP measures and reconciliations to the nearest GAAP measures, and which is available on our website in the Investors section.

I would now like to turn the call over to President and CEO, Brian Harper; and CFO, Mike Fitzmaurice, for their opening remarks, after which we'll open the call for questions.

Thank you, Vin.

This morning, I will provide highlights from what can only be described as a resoundingly successful and transformative year for RPT and end my comments with a discussion of the key focus areas for the company in 2020.

After that, I will turn the call over to Mike, who will provide more details regarding our fourth quarter operating and financial performance, discuss our recent financing activities and share more color on our 2020 guidance.

As you know from past calls, our leasing and development teams have been laser-focused on 2 primary operating initiatives: first is targeted remerchandising, and second is our small shop initiative.

And I couldn't be more pleased with the progress we've made on both fronts in 2019.

With regard to our targeted remerchandising program, at the start of the year, we circled 20 vacant anchor boxes as remerchandising opportunities and successfully signed leases on 18 of the 20 boxes in 2019.

We will realize the full rent benefit of this activity by the end of the first quarter 2020.

Through this program, we improve the quality and lower the risk of the portfolio by replacing former Pier 1, Gander Mountain and Kmart spaces with tenants like Athleta; Cycle Bar; ULTA; SOW Plated, which is a REIT-strong regional restaurant; and Planet Fitness.

And we did so at double-digit returns on capital.

With regard to our small shop initiative, I'm happy to report that we ended 2019 at an occupancy rate of 87.4%, up 170 basis points versus last quarter and up 270 basis points year-over-year.

The increase in shop occupancy will not only directly benefit our NOI growth in the coming years but will position us for higher sustained growth, given the stronger demand we are seeing in the market for smaller spaces and the more attractive lease terms with small shop tenants.

Increasing the mix of shop tenants in our portfolio also enables our leasing teams to better curate unique customer experiences at our centers, making them more attractive to shoppers and tenants alike.

While I'm thrilled by our leasing wins this past year, I'm equally thrilled that we were able to close on a new joint venture with GIC.

This partnership not only validates the progress we have made as an organization but also of the viability of the open-air shopping center as a vehicle for income and growth.

Our new joint venture also provides capital to accelerate our acquisition plans as we continue to reshape our portfolio towards high-growth markets like Austin, Nashville, Orlando, Minneapolis, Richmond, Raleigh and Boston that will improve RPT's long-term sustainable growth profile.

The completion of this deal was the product of a carefully thought-out plan to seek alternative sources of capital in support of our strategic investment goals and to partner with a world-class organization.

We started the [day-to-day] process, as I like to call it, about a year ago, where we met with and discussed ideas with dozens of potential partners.

It soon became clear that cultural fit and a shared vision would be the key to a successful long-term partnership, making GIC the ideal partner.

The reaction from the real estate community regarding the deal has been overwhelmingly positive, and we are thrilled to be entering the next phase of the company's evolution with one of the world's most respected sovereign wealth funds.

Moving on to transactions.

As announced in last night's release, we acquired Lakehills Plaza, a 76,000 square foot community center sitting on 7.2 acres and is shadow-anchored by Target in Austin, Texas for $33.9 million.

Lakehills Plaza represents our first acquisition on balance sheet as a new management team and the company's first acquisition in the high-growth Austin market.

The center boasts strong 3-mile population and income demographics of 125,000 people and $94,000 respectively, and has an average ABR per square foot of $26 or about 70% higher than our portfolio average.

Following the acquisition, we are still tracking an acquisition pipeline of almost $500 million as we continue to comb our target markets for opportunities to grow both the wholly owned and our joint venture portfolio.

We have 5 very dynamic grocery centers under contract or in negotiation that we expect to close in the first half of 2020.

We are also currently under contract to sell our Market Plaza property in Glen Ellyn, Illinois for $36 million and expect to close on the transaction in the first quarter of 2020.

In effect, we traded out of suburban Chicago and an ABR of $16 and into Austin at an ABR of $26 with a strong growth profile.

This was a pretty good trade in our opinion.

The Lakehills transaction was a true off-market deal, which upon closing of the Market Plaza sale will have been purchased on a leverage and earnings neutral basis but will position RPT for better long-term growth.

Moving on to our outlet and expansion plans.

We made great progress on our project at Parkway shops in Jacksonville, adding it to our in-progress pipeline this quarter.

We have now secured all entitlements for 280 residential units, for which we are finalizing a ground lease with a leading residential partner, and Aldi will be the first phase to open in March.

Here, we expect to spend roughly $7.4 million in total at 11% to 12% yield or $0.01 a share.

As we have hinted at over the past few quarters, our tolerance for putting capital at risk has fallen, given where we are in the cycle.

As such, we have significantly reduced the retail scope of the Parkway Shops project, enhancing our development returns while reducing our capital at risk.

Additionally, as we think about capital allocation in light of our reduced risk tolerance, we continue to prefer the risk reward afforded us within our existing portfolio leasing opportunities, where we can get double-digit returns on capital with much better visibility on lease-up and with less downtime than with ground-up development or redevelopment.

Some of the larger leasing deals we are working on today include the replacement of former Petco, Sports Authority, OfficeMax and others with higher quality and higher-paying tenants that will further drive momentum in our business and should result in upper teens rent spreads upon completion.

Before turning to our operational outlook for 2020 and given the heightened focus on troubled retailers on peer calls, I want to provide some additional color regarding our tenancy.

2019 saw a rash of store closures.

But thankfully, we did not feel a major impact in our portfolio, which we believe is the direct result of our proactive management of troubled tenants.

For instance, RPT now has exposure to only 2 Pier 1 locations, representing only 20 basis points of annualized base rent, which is down from 5 as of second quarter 2018.

Although we have not heard directly from Pier 1 following their recent announced bankruptcy, neither of our 2 remaining locations were on the 450 store closure list.

In fact, we have tried unsuccessfully to get these last 2 stores back ahead of expiration, as we are seeing incredible demand for these spaces.

Mike will provide more color on how we are treating Pier 1 in our forecast in his prepared remarks.

Additionally, I'm happy to report that RPT has no exposure to the recently announced bankruptcies of A.C. Moore, Fairway, Lucky's, Earth Fare, Papyrus, Bar Louie or to troubled tenants, even like 24 Hour Fitness, Modell's, Sears and Bose.

Where we had exposure to headline closures like Dress Barn and Charming Charlie, we're making good progress on backfilling these spaces.

We've already signed lease with Five Below in one of our 2 former Dress Barn locations and are in advanced negotiations on the other.

We are in negotiations on 3 of our 4 former Charming Charlie spaces, where each were paying about $11.60 per square foot, offering us tremendous upside upon re-lease.

All this said, we are encouraged about the demand we are seeing for open-air centers from both traditional and nontraditional tenants.

We are increasingly recognizing the strong value proposition offered by the open-air model.

As always, we will continue to actively monitor our tenant watch list and stay ahead of known store closures where we can.

Looking into 2020, our operational focus will continue to be on maximizing the value of the existing assets on the best risk-adjusted basis, which we expect will sustain the strong momentum from 2019.

We will do this by closing out the targeted merchandising program at double-digit yields and driving closer towards our 91% to 92% small shop occupancy target.

On the external front, 2020 will see us shifting from playing defense through noncore asset sales to playing offense by acquiring in exciting high-growth markets where we see the best retailer demand.

With our foundation set, our portfolio upgraded and our balance sheet prime for growth, we are excited to see the full potential of the organization being realized in 2020 and beyond.

And with that, I'll turn the call over to Mike.

Thanks, Brian, and good morning.

Today, we'll discuss our fourth quarter 2019 operating and financial results in more detail, recap our financing activities for the year and end with additional color regarding our 2020 outlook.

Same-property NOI growth was consistent with our internal projections at 3.9% for the quarter, driven by base rent growth of 2.7%.

As expected, we continue to experience significant momentum with our operating fundamentals as we create value and stabilize our portfolio.

We ended the quarter at an occupancy rate of 94.3%, up 120 basis points sequentially.

Anchor occupancy was 97.2%, up 90 basis points sequentially.

And small shop occupancy was 87.4%, up 170 basis points sequentially.

On the leasing front, we generated blended rent spreads of 12.3%, an improvement over last quarter 7.1% and second quarter 6.2%.

Operating FFO for the fourth quarter was $0.24 per share, bringing operating FFO for the full year '19 to $1.08 per share.

Fourth quarter and full year operating FFO per share was a bit below our internal forecast due to higher-than-expected G&A due to our above-target performance against our short-term incentive plan, which detracted $0.02 from fourth quarter and full year 2019 operating FFO per share.

It's important to note the higher G&A recognized in the fourth quarter is not part of the go-forward run rate.

Turning to the balance sheet.

We ended the fourth quarter with ample liquidity of $464 million to fund our business plans, including our fully unused $350 million line of credit and $115 million of cash and restricted cash.

Our net debt to annualized pro forma adjusted EBITDA was 6.3x at the end of the quarter, down 0.3x from last quarter, given the closing of the GIC transaction, which netted RPT $118 million in gross proceeds.

As we deploy these proceeds into acquisitions, we would expect our leverage to move back towards the mid-6x level, all else equal.

However, we will continue to look for creative ways to proactively delever closer to the midpoint of our long-term range of 5.5 to 6.5x as opportunities present themselves.

Following these transactions, we extended our average debt maturity by 1 year to nearly 6 years, reduced debt maturities through 2022 to just $90 million or about 10% of our debt stack, lowered our weighted average interest rate by roughly 20 basis points to 3.85% and reduced our floating rate risk to 0%.

The 20 basis points in interest rate savings equates to about $1.9 million in cash interest expense savings, which translates to less than 1 year payback on the $1.4 million of prepayment penalties paid in association with all of our refinancing activity.

In regard to the financial impact, these activities, in addition to our delevering activities in early 2019 has resulted in $0.03 per share of lower interest expense in 2020 relative to 2019.

We will continue to look to aggressively push out maturities, reduce refinancing risk and delever as opportunities arise but have no other capital market activities embedded in our 2020 outlook.

We initiated 2020 guidance for same-property NOI growth of 2.5% to 3.5%, which comes on the heels of our strong 4.1% growth in '19.

We are optimistic about our growth prospects in 2020, given the embedded upside from our active 2019 lease commencement schedule that will flow fully into 2020 results.

In addition, visibility of our plan remains high with over 70% of our leasing plan for the year already signed and another 10% in legal review.

While we do not provide quarterly guidance, I think it's important to note that we expect growth to dip in the second quarter and to reaccelerate in the back half of the year.

Also, we ended the year with signed not open ABR of about $1 million.

While lower than it's been over the past few quarters, the decline in our leasing backlog does not reflect a slowdown in our business but rather highlights our ability to quickly turn signed leasing activity into rent paying occupancy as well as the shift towards greater small shop leasing in 2020 versus 2019, given our near-stabilized anchor occupancy of 97.2%.

Our same-property outlook in 2020 embeds 75 basis points of unplanned rent loss as a percentage of same-property NOI, which equates to just over $0.01 per share.

We also conduct a highly granular analysis of every lease in our portfolio when determining our base NOI forecast that assumes the move-out of tenants based on our assessment of each tenant's probability of vacating.

For example, our 2 Pier 1s that Brian mentioned, although neither were at the previously announced store closure list of 450 stores, in light of the bankruptcy announcement, our baseline forecast assumes that Pier 1 will vacate midyear.

Turning to the bottom line.

We also initiated operating FFO per share guidance of $1.07 to $1.11, which at the midpoint equates to roughly 1% year-over-year growth despite the impact of our initial contribution of the 48.5% stake in the GIC asset and the realization of $0.04 of noncash below-market rent acceleration benefits in 2019, which we do not expect to reoccur in 2020.

Excluding these noncash benefits from 2019 operating FFO per share and on an apples-to-apples basis, our operating FFO per share growth in 2020 would be 5%, demonstrating our platform's ability to flow same-property NOI growth to the bottom line.

Other major assumptions underpinning our 2020 operating FFO guidance range are acquisitions, dispositions and G&A expense.

At the midpoint of our operating FFO per share range, we're assuming $125 million of acquisitions at a pro rata share that we expect to close during the first half of the year.

We currently have approximately $125 million of assets under contract or negotiation at our share, giving us comfort in hitting our acquisition targets.

As Brian mentioned, the only disposition embedded in our plan is Market Plaza in Chicago, which is under contract and expected to sell in the first quarter of 2020 for $36 million, subject to satisfaction of customary closing conditions.

Regarding our 2020 G&A expense, we expect to remain flat to 2019 at about $25.5 million when adjusting our 2019 nonrecurring charges, including severance expense, executive management reorganization costs and GIC JV expenses.

Before turning the call over to the operator, I would like to address changes made to our supplement in the fourth quarter following our joint venture with GIC.

We are presenting our same-property NOI growth on a pro rata basis as if the assets contribute to the GIC joint venture were owned at 51.5% share for all presented periods.

We think this represents the cleanest picture of the organic growth of the company based on our economic ownership of the assets.

In addition, we are now showing the vast majority of our operational metrics on a pro rata basis.

To help, the statistics that are provided on a pro rata 100% and consolidated basis are clearly indicated on each page of our supplemental disclosure.

We've also provided a pro rata income statement, balance sheet and other supplemental details for our unconsolidated joint ventures.

We hope that you find these changes helpful as you update your models going forward.

And with that, I'll turn the call back to the operator and open the line for questions.

(Operator Instructions)

Our first question is coming from Todd Thomas of KeyBanc Capital Markets.

First question, I just wanted to dig in a little bit on the GIC, R2G Venture.

You talked about the pipeline.

It sounds like the timing is mostly first half-related.

But maybe I missed this, but is anything under contract today?

And then you talked about plans to continue growing both the wholly-owned book at the same time that you're deploying capital for the joint venture.

Can you just remind us of some of the restrictions or rights that GIC has as you look at sourcing investments, just given you're both looking at sort of similar high-growth markets?

Yes, Todd.

Yes, we have a couple of deals under contract for the GIC venture.

And of the 5 that I said we're negotiating or under contract, those are grocery-anchored and will go into GIC.

Essentially, I think the way to be looking at it is, they have a first right on any grocery-anchored center and over $25 million in top 75 markets.

So assuming that it's grocery, it will be going under GIC.

And then in markets like in Austin or Minneapolis or the other markets that I talked about, we do like the business of what we bought in Austin and Lakehills, the shadow anchor nongrocery, where we can drive rents and take $26 ABR in a $40 market.

So that will be on balance sheet.

We are very thoughtful of growing both sides.

Yes, so that's where we're at.

Yes.

And the one thing I would add there, Todd, is that the $125 million, that share that we have assumed for acquisitions, it seems to be going to the GIC joint venture.

And on top of that, as we discussed in past meetings with you, we do earn fees for this joint venture, so it's about $0.01 or so that we're assuming for 2020.

Okay.

And just a sort of a technical follow-up, I guess, on that.

Will investments be press released?

Or will they tend to be sort of announced alongside earnings once they're closed?

Yes, we'll do press releases.

I think you will see a -- several in, kind of call it, one press release is the way we've kind of thought about going forward.

Got it.

And then, Mike, both the leased and economic occupancy rates, they were both up in the quarter, which is good.

But the spread narrowed considerably between the leased and occupied rates there, implying there were a lot of commencements in the quarter.

Can you just help us sort of from a modeling standpoint understand the potential timing in the quarter around those commencements, maybe how much ABR was attributable to those commencements?

And can you talk a little bit more about what sort of potential move-outs or offsets you might be anticipating in the first quarter?

Yes.

No, Todd, good question.

So we ended the year at about 94% occupancy.

That will trend down a little bit in the first and second quarter, just given the seasonal move-outs, really related to the small shop occupancy, and then that will trend back up towards the end of the year.

Really, if you look at our signed not commenced bucket today, it's about $1 million or so, and 90% of that is small shop.

And then the additional about $1 million that we have in legal review, all of it is related to small shop.

So again, you'll see that small shop trend down over the first couple of quarters.

And then through the signed not commenced bucket coming online later in the year, you should see that small shop occupancy reach right around 89% or so.

I can say the legal backlog is large for tenants that -- leases signed that are still either opening this year or into 2021, and some of it's large as it's ever been.

So it's a very good pipeline, where we saw enormous leasing activity last year of leasing 18 of the 20 boxes, which is going to be fully recognized on our cash flows in 2020.

Yes.

And we're -- right now, our anchor occupancy is at 97%, but signed not commenced is going to be smaller, just given where we're at, at that occupancy.

We get a little bit of room on the anchor occupancy but really this all can be related to -- or the upswing can be related to small shop going forward.

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

I wonder if you could give us the cap rate on Lakeland Plaza.

And given the high occupancy and the strong ABR, what are the near-term path for growth in that asset?

Yes.

I mean we're not going to give cap rate.

I mean I think the way to look at it, Craig, is Austin and our deal in Chicago were traded from an earnings neutral basis, so it was really a push.

We look at Austin and, look, this is 7.7 acres of very, very loose restriction with Target on future land use of going vertical on one of the most dynamic intersections in the city.

But for the near term, we sit there and say, this is $26 ABR with a lot of roll, and we can curate an amazing tenant portfolio or tenants that we know that want to be in that intersection.

So we think that 26s could be upwards of high 30s to low 40s from a rent perspective, and the CAGRs are extremely healthy.

Okay.

And then just given the 4.1% same-store NOI versus the midpoint of 3.0%, what would be the drag on that 1,100 bps?

Yes, I think occupancy gains.

I think last year, we experienced -- last year being 2019, experienced more occupancy gains.

This year, to give you the components what's driving our 2020 midpoint of 3%, Craig, it's about 175 basis points of average occupancy gains, layer on contractual increase is about 125 and then re-leasing spreads of 75.

That's offset by 50 basis points from other property income due to a onetime event that we experienced in '19.

And then we're assuming higher bad debt expense, which detracting another 25 basis points.

So you add all that up, you can see the 3%.

Our next question is coming from Floris Van Dijkum of Compass Point.

Can you maybe just talk about your dividend?

And when based on the activities that you guys have done, including the GIC joint venture, obviously buying into higher-growth markets like Austin, these should be positive steps.

But when does your model tell you that you're going to be fully funding your dividend going forward?

Sure, Floris.

And thanks for the question.

First and foremost, when you are managing a continuously stable portfolio, you see leasing CapEx come down in '20 and '21.

Last year, we got to about $40 million to $50 million leasing CapEx.

We came right at the midpoint of 45%.

In '20, we expect about $35 million of CapEx at the midpoint, $20 million is ongoing CapEx predominantly connected to our lease-up of small shop, and then we have another $15 million or so from discretionary spend tied to our targeted remerchandising program.

And then in '21, you can see that come down even further to about mid-20s, maybe even lower, $15 million will be tied to ongoing CapEx and an additional $10 million or so will be tied to targeted remerchandising.

So we could cover this year, but definitely '21 will be the year that we will be in low 90s is what our model and forecast are telling us right now.

Right.

Maybe it might be helpful to -- your CapEx obviously has been elevated.

What are the things -- is it as your occupancy goes up in your portfolio that your CapEx requirements are diminishing?

Yes, that's exactly right.

We inherited a portfolio when we started here, Floris, of 90%.

We're already at 94%.

And based on our small shop trajectory today and a little bit more fit on the anchor occupancy, we'll get to 95%, 96%, and we'll be stabilized at that point.

And then you'll see an AFFO payout ratio below 100% accordingly.

And let me jump in.

I mean it was 90% total, 84% small shop.

We're getting mid-yield returns so -- on both small shop and our remerchandising initiative.

We -- some call that development.

We call that leasing.

We think that's the purest way to put that capital, and we're seeing significant returns.

Maybe is there much of a difference in your view between small shop CapEx versus boxed CapEx?

A lot of your peers have talked about the elevated boxed CapEx.

And as you're now nearly at full occupancy, not quite yet obviously, but does that diminish?

Is that part of what's driving the reduced CapEx requirement?

Yes.

That is.

You're correct.

I mean we are doing much less of box lifting as we have -- are rightsizing our portfolio and splitting those boxes into multiple small shop spaces.

So you are correct that that's what's the main cause of the lowering of the CapEx.

Our next question is coming from Michael Mueller of JPMorgan.

Couple of questions.

First of all, the acquisition guidance of $125 million, I know that's a pro rata number.

For the $125 million of properties that are under contract to Five, is that a gross number of which on your pro rata basis is going to be half of that?

Or is that $125 million at your pro rata share?

So it would basically take care of the full year guidance by midyear.

Yes, that's our pro rata.

That's your pro rata.

Got it.

Okay.

Yes.

And then just something on Pier 1. Is Pier 1 in or out of that 75 basis point reserved?

Because I know you talked about them moving out midyear.

Yes, good question, Mike.

It's out of my 75 basis points.

It's assumed that they would vacate midyear within our baseline assumption.

(Operator Instructions) Our next question is coming from Linda Tsai of Jefferies.

On the same-property breakout, recoverable operating expenses were up a bit, 18% in the quarter and 10% for the year.

What's driving that?

That's really due to the recoverable expenses, like you mentioned, but it's due to the insurance expense.

As we gain visibility on an expense later in the year, we have a better idea of what it was going to be, so resulting in us adjusting that up in the fourth quarter, which really captured the 12-month expense.

So moving forward, you should see that normalize to more of a third quarter level from last year '19.

And then it seems like your operating expense recovery ratio improved in the quarter and also on a year-end basis.

Is there a level you'd like to target?

Yes.

It's the same reason there, Linda, as we close out the year, we got better visibility in occupancy expense.

So we had a better idea of what our recovery were for the year, so resulting in us adjusting those up and capture the 12-month benefit on the fourth quarter.

So we ended the quarter right around 93%, 94%.

Moving into '20, that's going to taper down back to 90%, 91% for the year, which is consistent with what you saw for full year 2019.

At this time, I'd like to turn the floor back over to management for closing comments.

Thank you, operator.

Some say that doing the same thing over and over again and expecting a different result is the definition of insanity.

We agree, and I purposely question how we execute every aspect of our business.

We're taking an open-minded approach towards value creation, studying the playbooks of our peers and relying on a data-driven approach to underpin our decision-making.

This differentiated approach allows us to take calculated risks that drive our performance as evidenced by our sector-leading same-property NOI growth and our initial same-property outlook in the coming year.

This is further evidenced in our pivot on our Parkway redevelopment project where the data demanded less retail GLA and pointed to value in a smaller-scale project.

With our new found capital partner, we will look to reshape our portfolio in a way that further differentiates us from our peers in the markets we choose and the assets we acquire.

While we are ecstatic about 2019 performance, we believe the future at RPT is even brighter, and we are looking forward to another strong year in 2020.

Thank you to our employees and our Board as well as to all of our stakeholders for making 2019 a resounding success.

Thank you for joining our call and enjoy the rest of your day.

Ladies and gentlemen, thank you for your participation.

This concludes today's event.

You may disconnect your lines and log off the webcast at this time, and have a wonderful day.