Site Centers Corp (SITC) 2002 Q1 法說會逐字稿

Good morning, and welcome READY - Start transmissionto the JDN 1st quarter earnings conference call. This conference is also being recorded at the request of JDN Realty Corporation. If anyone has objections, you may disconnect at this time. I would now like to turn the call over to Mr. Craig Macnab, President and Chief Executive Officer of JDN Realty Corporation. Thank you sir. You may begin.

Sandy, thank you very much. Good morning, everybody, and welcome to JDN Realty's first quarter earnings conference call. Statements made in this conference call that relate to future plans, events, or performance are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, for example, statements regarding liquidity, the availability of capital resources, capital expenditures, ongoing relations with tenants and prospective development projects. Listeners are cautioned not to place undo reliance on these forward-looking statements, which speak only as of today's date. Risks, uncertainties, and other factors that could cause actual results to differ materially or those projected are detailed from time to time in press releases and in reports filed by the JDN Realty Corporation with the Securities and Exchange Commission, including Form 10-K for the year ended December 31, 2001 and the Form 10-Q for the quarter ended March 31, 2002, which was filed last night. From this conference call this morning are Lee Wielansky, President and Chief Executive Officer of JDN Development Company, who will provide a brief update on the continued progress we're making on leasing and building our Legacy development project. He will also provide a general update on new projects we have in our pre-development pipeline. Jay Harris, our Chief Financial Officer, will provide comments arising from yesterday's earnings release. And following Jay, John Lambert, a recently hired Senior Vice President who's responsible for the leasing and management of our portfolio, will review some of the key metrics of our operating portfolio. We will begin by making a couple of comments about the 1st quarter. Firstly, during the quarter we proactively negotiated a large termination fee with Albertson's in [Fort Ogglefork], Georgia. Albertson's had acquired this location from another retailer, and last year they closed this store along with a nearby store in our portfolio in Chattanooga. In terms of their store in Chattanooga, Best Buy has already replaced Albertson's in this market, and we certainly expect to have success in Fort Ogglefork. Besides the obvious advantage of the termination fee, we now control our own destiny and the real estate in Fort Ogglefork. Based on the size of the lease termination fee, we have many years of cushion to replace this tenant. While we are confident in the real estate attributes of the location, you may see us announce similar lease terminations again in the future, even though in the short-term it negatively impacts our percent leased rate. I'm confident that our capable leasing team will capitalize on this well located opportunity. Secondly, our gains from non-operating real estate sales, that is sales or parcels contiguous to developing properties, were less this quarter than what one might expect if you simply take what we expect to close this year as referenced in the press release and divide by four. Our dedicated team focusing on our land and out parcel inventory continues to do a commendable job building a healthy pipeline of out parcels under contract or letter of intent. Although many of these transactions are scheduled to close later this year. The Development Company, I'd like to remind you that over the last 12 months we've been selective and cautious about committing to new projects in the face of a weaker retail environment. However, our development directors have developed a solid pipeline of projects, several of which will be presented to our investment commitee in the next couple of months. This approach is consistent with our internal mantra of quality, not quantity. Anchors for these projects in our pre-development pipeline include leading quotas, as well as value-oriented discounters. On the leasing side, all of our colleagues are busily preparing for the ICSC convention later this month. Our schedule is full for this event, and we are all encouraged with the recently improved environment for deal making. A tragic events of September 11 last year clearly impacted the leasing environment. However, we have recently seen a noticeable uptick in activity. On the financing side, our team has a very busy calendar, as we look to refinance our debt later this year. We have initiated these discussions, and at this early stage I'm pleased with the reaction that we're receiving from capital providers. A couple of events occurred in the 1st quarter which qualitatively improved and impacted our credit worthiness and will help us in the balance of this year. As previously reported, we have successfully completed our settlement with the FCC, and we no longer have any major litigation items outstanding. Also, we were gratified that Fitch and Standard & Poor's joined Moody's in reaffirming our rating with an improved outlook. We are pleased with the external recognition of the progress we have made. However, we are of course mindful that there are always opportunities for improvement. Lee Wielansky, President and Chief Executive Officer of our Development Company.

Thanks, Craig, and good morning. In the last 18 months, we have worked diligently on tenanting and leasing our Legacy project. In a difficult environment, we have done a great job. Here today, we have had rent commence on more than 250,000 square feet of secondary anchor boxes, with new rent in excess of $1.9 million. We have under LOI, letter of intent, almost 660,000 square feet of anchor and secondary box transactions, totaling an excess of $5.4 million in annual rent. For the balance of 2002, we will deliver an excess of 500,000 square feet of secondary and anchor space, with rental in excess of 7.1 million dollars. This excludes redevelopment in our retail-side shops. In addition, we've made considerable progress in reducing our out parcel inventory. We expect to meet or exceed the the amount we accomplished in 2001, which was approximately $30 million in sales. And we expect our gains in 2002 to exceed $5.5 million. As we work on rebuilding our new development pipeline, we expect to announce several projects in the coming quarter. As we reported in our press release, we will start more than five new projects in 2002. Last, I want to mention the two properties on our supplemental schedule. Grandville and Lansing, Michigan. In recent weeks, we have made good progress in leasing our side shops. With this progress, we expect these properties to be 75 percent leased when we report at our next quarter. We are all excited about the number of new projects we're working on for 2002 and 2003. New development takes time, patience and hard work. Thanks to many JDN employees who have worked diligently on our current projects and our future projects. This work will pay rewards for our great partners, our shareholders. Thanks for your continued support, and now I'd like to turn this over to Jay Harris.

Thanks, Lee. Good morning, everyone. During the quarter, we had two accounting pronouncements affecting our income statement: FAS 142 and FAS 144. FAS 142 is a new standard on goodwill. As of the beginning of the first quarter, we had approximately $172,000 in unadvertised goodwill reported related to past purchases and subsidiaries. Under the new statement, we wrote off this amount recorded as a cumulative effect of changing accounting principles. FAS-144 is a new standard on impairment. Among other things, this standard requires that any material property for sale should be classified as discontinued operations in the income statement, and the prior period results of these properties should be reclassified as discontinued operations. Accordingly, we have a new section in our income statement for discontinued operations and two shopping centers. One of which was sold during the quarter, one of which was sold subsequent to the end of the quarter. Nate Reid] has determined that the adoption of the new standards should not affect FFO, so even though the operations of these properties are classified as discontinued operations, the associated income expense are also included in the FFO. As noted in the press release, FFO was effected by lease termination fee income at a charge that increased our reserve for abandoned development projects. Craig briefly talked about the lease termination fee income, and John will have, probably, some more comments later, but this fee related to the termination of three leases at three different shopping centers. The increase in our reserve for abandoned projects represents an additional charge that we felt was necessary to cover exposure on development projects in the pre-development stage. There are a couple other items to note from the quarter. Recovery from tenant as a percentage of operating maintenance and real estate taxes decreased from the 4th quarter of 2001. This occurred as a result in the increase of non-reconverable real estate taxes, primarily on land holdings, lower overall occupancy levels. We are close to completing the actual canned billings for 2001, and will adjust our accrual rate based on actual billings beginning in the second quarter. During the quarter, we funded the $4 million guarantee in relation to class action litigation, and we are currently pursuing litigation from third parties to recover some or all of this amount. Just as a reminder, we had reserved for this $4 million guarantee, so even though we paid in cash, it had no effect on our income statement. During the quarter, we paid off a $6.5 million mortgage loan that carried a 9.25 interest rate, and closed on a construction loan secured by our Grandville, Michigan project. It bears interest at liable plus 200. In addition, effective March 1st, the spread on our credit facility decreased 12.5 basis points, due to a reduction in overall program leverage. As a result, the effective weighted average interest rate on our outstanding debt decreased from 7.44 percent as of December 31, 2001, to 7.22 percent at the end of the 1st quarter. In other financing activities, we expect to refinance the $23 million loan secured by our Denver, Colorado project on a long-term basis during the second quarter, and to close on an additional three construction loans during the second quarter, as well. We also expect place permanent financing on another stabilized shopping center late in the second quarter or early in the third quarter. As Craig mentioned, we continue to have discussions with our banks on refinancing our credit facility and expect to close the refinancing during the second hald of this year. Now, I'll turn it over to John.

Thanks, Jay, and good morning, everyone. I would like to first make some general comments about operations and then provide some operating portfolio statistics from the first quarter, briefly describe our position in the current retail environment, provide some statistics relating to our disposition program, and finally talk a bit about our redevelopment initiative. As you may be aware, I recently joined JDN Corporation as Director of Asset Management, and my primary responsibility is the performance of our operating portfolio. Since I joined the company three months ago, I continue to be very pleased with the dedication and loyalty of our excellent team, who strive everyday to to increase the bottom line and to maximize the value of our portfolio. Over the first few months, I've been primarily focused on creating value through process improvement, the implementation of best practices, implementing an additional revenue program, as well as the proactive asset management of our shopping centers. I'm extremely pleased to be part of the JDN team and look forward to creating value for our shareholders. It is still too early to see the results of some of these iniatives that we have been implementing, but I am optimistic that we will reap the benefits in the near future. In addition to the activity described in the release, I'd like to note that in the 1st quarter, we signed 78,613 square feet of new leases and lost only 30,700 square feet due to expiration The net of this activity is over $690,000 of new annualized base rent, which will take effect throughout the second and third quarters of 2002. The percent lease rate from the operating portfolio decreased from 94.4% at the end of 2001 to 93.2% at the end of the 1st quarter. Most of this decline is due to the termination of a 48,000 square foot dark Albertsons in Fort Olgglefork, Georgia for $2.5 million, the termination of a 78,000 square foot warehouse lease in West Alice, Wisconsin for 300,000, and the termination of a 6,400 square foot bank in Milwaukee for $186,000. It is important to note that almost one-half, a little over 47%, of all of the portfolio vacancy is held in projects that are currently under redevelopment. 53,000 square feet has been leased but is not yet generating rents, and the balance is expected to be leased or sold when the redevelopments are complete. Finally, utilizing JDN's strict definition that only includes fully stabilized properties, with no TLA change, same property, NOI, was up 1.87 percent over the fourth quarter of 2001, and down marginally one quarter of a basis point, or $31,000, from the same quarter of 2001. In terms of our retailor customer, JDN has made great strides of the past several quarters to beef up the larger vacancies in the portfolio. In Cartersville, Georgia Ross [Jesperlev] recently opened a 27,200 square foot space, which was a former Eagles grocery store that have been relocated within the center. In our University Hills Shopping Center located in Denver, Colorado, Pier 1 opened in early April, and Linens 'N Things is ready to open, successfully retenanting the 53,000 square foot vacated home plate space with high-quality credit tenants. Industrywide, retail sales have shown some resurgence since March 2002. The trends continues to reflect positive same-store sales trends and the value-oriented necessity item market segments, such as drugstores, wholesale clubs, and discount chains. According to the Bank of Tokyo, Mitzubishi's tally of same-store sales from a universe of 81 retailers, March year-over-year numbers reflect a 6.4% gain. However, a significant portion of this increase is believed to be attributable to the Easter shopping season that occurred in the first quarter, which was two weeks earlier than compared to last year. We continue to see industrywide same-store sales concerns pertaining to apparel and department stores, as well as in many of the higher-end retail sectors. It is early; however, we are beginning to see numerous signs of increased leasing activity across our portfolio. As noted in our press release last quarter, JDN has 5 K-Mart leases in our portfolio, representing 2.85% of annualized based rent. Based on a list of store closings, JDN has one K-Mart lease Stockridge, Georgia, for 86,479 square feet of leaseful area that will close. The lease represents approximately $327,000 in annualized base rent. In addition, JDN is in preliminary negotiations with K-Mart regarding rent reduction at one other location. We are agressively working on retenanting the Stockridge space, and I'm cautiously optimistic that we'll recover the rents in the next 12 months or so. We remain confident in the credit quality and discount nature of our portfolio of assets, consistenting primarily of the highest quality of tenants who have proven that they can not only weather economic downturns, but can often excel in them, as evidenced by our strong occupancy and same-store sales trends. With this type of tenant base, our portfolio is in excellent shape, and we see opportunities to improve our occupancy rate and same-property NOI growth in 2002. To touch briefly on the disposition portions of our capital recycling program, as Jay noted, in the 1st quarter we sold one property for a total of $2.9 million. Since then, we've sold an additional property for $13.2 million. The weighted average cap rate for both of these properties was 10.12%. Our goal in 2002 is to sell approximately $60 million in operating portfolio assets at a weighted average cap rate of approximately 9.75%, resulting in capital recycling that's immediately accretive. Based on our current discussions, we may have an opportunity to improve on the 9.75% cap rate. Finally, I would like to discuss briefly our redevelopment strategy. In addition to our major retenanting successes last year, JBN has successfully completed the redevelopment of Ground Air Center in metro Milwaukee. The incremental return on cost is approximately 12%. JDN currently has four other redevelopments that are in the planning or early implementation stages, all of which are scheduled to begin in 2002. All four projects involve retrofitting existing shopping centers and altering the existing tenant mix. These projects will collectively resolve an incremental return of well above our weighted average cost of capital. These redevelopment projects exemplify JBN's ability to identify opportunities and to react quickly to the ever-changing retail environment. Thanks very much for listening, and I look forward to answering any questions that you may have. Craig?

Jamie, we would like to open it up for questions. Thank you very much.

Thanks. At this time, if you would like to ask a question, please press star followed by one on your touchtone phone. You'll be announced by name prior to asking your question. Once again, to ask as question, please press star followed by one on your touchtone phone. One moment please. Our first question comes from Tim Gobel. You may ask your question.

Congratulations on the quarter. Wanted to ask, at Fort Oglethorpe, What is the situation there between K-mart and the dark space of Albertsons? What are your plans for the property?

We've been aggressively evaluating that market. We've had asset managers and Senior Leasing Agents in the market. We've developed a list of prospects, and we are in the process of discussing opportunities.

Okay. Is the K-Mart space a going concern at this point, or is it one of the ones that are under consideration for close?

It's and going concern at this point, and we don't know of any opportunities or any -- we don't know that they plan to close that store.

Okay.

It's a well located center based on the sales for the last 12 months. We're optimistic that it will remain a K-mart.

Okay. Great.

Thank you.

Thank you. And again, if you would like to ask a question, please press star followed by the one on your touchtone phone. Rich Moore, you may ask your question.

Hi. Good morning, guys. Congratulations on a great quarter. Looking at land sales, what do you guys think for Q2? I mean, How do you divide that $5.5 million up over the rest of the year?

Land sales are inherently difficult to predict. We feel comfortable with the aggregate for the year. If you look at historically how land sales have trended, for whatever reason, they have bunched up more in the second half of the year than the first half of the year, and I don't think that's an unreasonable expectation for the current year.

Okay. Great. As far as -- you didn't mention anything about acquisitions in the press release. Are you guys thinking in terms of acquisitions at all at this point?

Rich, in the last 18 months or so, we opportunistically made one small acquisition whereby we bought a limited partnership in, or a partnership interest in a well located city in North Atlanta.

Yeah, right. I remember that.

Having said that, I think going forward it is possible that we may integrate acquisitions into our strategy going forward, particularly as we look at opportunities to take well located real estate and retenant it. This would play into some of the personnel strengths we have here at JDN. As you may recall, Andrew Rothfeder is leading that effort, and we're having some good success in that. So, acquisitions are possibly going to integrate into our strategy going forward.

Okay. Great. A couple of other questions here. In same-store -- in your same-store numbers, how much roughly of the 11 million square feet is in same-store?

Just hold on a second. We'll get that exact number. About 6.5 million.

6.5 million, okay. And what was I looking at here? Hang on just a second. In your "other expenses", you had the $800,000 from the abandoned projects, but that number still seemed higher. It was $1.3 million, so the net of that is about $500,000. That seemed higher than ususual. Is there something else in there, as well? What should we think about going forward?

Are you comparing 1st quarter '02 to '01?

Yes.

I think there are a couple of reasons for that. Number one, given the category it's kind of a catch all, so I'll just kind of go down the list. Interest income reduced this quarter compared to the year quarter previously. As a result, the fact that we're doing a better job of managing our cash and timing cash and managing flow. And in addition, we stopped accruing interest subsequent to the first quarter of '01 on an impaired note receivable. We also, comparing quarters, had reduction in our brokerage commission income and a slight increase in some of our corporate state franchise taxes.

Okay. That's great. Thanks. And then do you have, Craig, an occupancy target for this year? Where you guys are thinking you're going to end the year at in terms of occupancy?

Yes. We are targeting about 95% occupancy and at the end of the year.

The goal -- we've had some opportunities, obviously in the 1st quarter was impacted by the lease terminations. In addition to Albertson's, there was 78,000 feet which was a large amounts of storage space in the back of one of our properties in Wisconsin. By the same token, we've previously talked about retenanting the home place space at our excellent University Hills site in Denver, and Pier 1 has already taken that space this quarter. We expect Linens 'N Things to grow into paying tenants by the end of this quarter. Anyway, so by the time you add all of those things up, we've got pretty good visability above the 93%. But to get to 95% is in progress for the end of the year.

Great. Thanks, guys, very much. Nice quarter.

Thank you. At this time, I am showing no further questions.

Thank you very much. We appreciate all of you listening and appreciate your support to JDN. We look forward to talking to you at the end of the 2nd quarter. Thank you very much.