Q3 2019 Earnings Call
Good morning, and welcome to the site centers third quarter 2019 operating results conference call.
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After today's presentation, there will be an opportunity to ask questions. Please note that is being recorded I would now like turn the conference.
Good day Investor Relations. Please go ahead.
Good morning, and thank you for joining us on today's call you will hear from Chief Executive Officer David.
Chief operating officer, Michael Knott fan and Chief Financial Officer, not the restaurant.
Please be aware that certain never statements may contain forward looking statements I mean at the federal Securities laws. These forward looking statements are subject to risks and uncertainties and actual results may differ materially from our forward looking statement.
Additional information about these risks and uncertainties may be found in our earnings press release issued this morning and in the documents, we file with the FCC, including our most recent forms on Form 10-K , and thank you.
In addition, we won't be discussing non-GAAP financial measures on today's call including.
Operating in same store net operating income.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release. This release and our quarterly financial supplement are available on our website at www Dot <unk> centers dotcom.
For those of you want to phone who would like to follow along given today's presentation. Please visit the event section of our Investor Relations page and sign into the earnings call webcast. At this time, it's my pleasure to introduce our Chief Executive Officer David.
Good morning, Thank you for joining our third quarter earnings call I'm extremely pleased with our performance over the last three months.
Which was measurably above our expectations due largely to better than expected property NOI and lower gionee.
Our ongoing operating momentum is leading us to once again increased our same store NOI growth and that's all guidance.
I'd like to first comment on how our quarterly results tie into the three major components for a five year business plan leasing redevelopment and acquisitions.
Before discussing a couple of key capital transactions, and then I'll hand, the call over to Mike to discuss our operations in greater detail, Matt will conclude with some comments on the balance sheet quarterly results and our guidance increase.
First same store NOI growth the largest component of our business plan was 1.6%, marking the trough, we forecasted preceding a number of anchor openings expected in the fourth quarter.
The midpoint of our new 2019 guidance range is now ahead of our five year average we laid out at Investor day, helping validate the most important part of our growth.
In terms of future growth, we continue to advance the lease up of our 60 anchor opportunities identified at Investor Day.
Given that there are 48 now leased one advanced negotiations at a blended 36% leasing spread and that several of the remaining spaces are held for redevelopment. We are nearing the end of our work on these spaces.
We also continue to advance our investment program.
As a reminder, our five year plan calls for $75 million at the annual investments funded the a capital recycling. Our goal we achieved this year through share buybacks and the acquisition of three joint venture asset.
As I mentioned last quarter, we have begun working on additional acquisitions, one of which closed in October .
Vintage Plaza in Austin is a small transaction in terms of dollars, but that's a good case study at the how we're looking at deploying capital.
First we expect the properties vacancy and below market leases to produce and why growth well in excess of our portfolio average.
Second the adjacent seats Adele headquarter campus represents a natural anchor dry and thousands of consumers commuting to and from work and allowing that center itself to be more focused on smaller service oriented shop space.
And finally analysis of the trade area demonstrates that the centers actual customers our mix of Dal and other office employees, who are both much more affluent and draws from a much wider trade area than the traditional three mile demographic analysis would suggest.
We hope to have a few other investments to discuss in the upcoming quarter.
All of which will highlight our bottom up format agnostic approach to finding investments that generate compelling returns above our cost of capital.
Finally, we're continuing to make progress on our redevelopment plans, which represents the third component of our five year growth strategy.
Three new anchors opened in September at NASS, South Park in Princeton, New Jersey, a quarterly and work continues to work on other three active projects.
We're also advancing the pre leasing and entitlement of our pipeline of larger scale projects in Atlanta, Washington, D.C. and Boston.
Like the sale of Duvall village in Prince George's County discussed last quarter, we remain focused on realizing value on these projects whether it means capturing profits early through a sale mitigating risks through a joint venture or executing projects on our own.
I'd like to now touch on two transactions since our last call both of which materially improve sites future growth capacity.
First on October 1st we announced an agreement to unwind the existing 1.1 billion dollar joint venture relationship with T. I a crop.
This venture began in 2007 in the portfolio has underperformed our core for quite some time now, especially post spin.
The end of the venture improves our growth rate and provides us with $170 million a gross capital to redeploy it assets with much more compelling returns.
The second transaction is the 195 million dollar common equity offering we completed last week in order to repay our outstanding 6.5% series J preferred stock.
This deal with a product of our consistently articulated desire to continue to de leverage without inflicting meaningful earnings dilution.
The replacement of the preferred with common accomplishes this goal lowering our leverage without materially impacting our CFO after FFO or any be per share. These two transactions add to the list of decisive steps we've taken over the last two plus years to position the company for outperform.
Vince.
In summary site close the third quarter extremely well positioned for the future. We have a great team focused portfolio poised to benefit from occupancy uplift driven by solid tenant demand and now an even better balance sheet that provide the enormous flexibility to invest opportunistically. We have made great progress on our.
Five year business plan and with that I'll hand, the call over to Mike Makinen to discuss our operating results.
Thank you David I'm very pleased with our reported core operations. This quarter, which were ahead of plan due to lower than expected tenant bankruptcies earlier than expected anchor rent commencements and higher than expected ancillary and other income.
We feel great about the momentum in our core operations, both in terms of anchor and shop leasing volumes.
We opened 13 consolidated anchor tenants in the third quarter. The majority of them earlier than expected and we plan to open an additional four in the fourth quarter.
As David mentioned 48 of the 60 original anchor opportunities we identified at Investor Day have now been leased Oregon advance discussions with Commencements expected in the fourth quarter 2020 and 2021.
Providing a multiyear tailwind.
Shop leasing activity was especially robust in the quarter. The 51 shop leases, we signed marks a three year high for this portfolio and we achieved a new lease rents per square foot over $30 a foot for the first time in our company's history, especially impressive given the high volumes.
All this leasing curious strong economics, with new and renewal spreads as well as net effective rents right in line with our historical averages it's hard work getting such high volumes and rents, but our job is made easier by today's stronger wholly owned portfolio and a great operations team.
Strong leasing activity and modest bankruptcy in the quarter generated a 30 basis point increase in the pro rata leased rate to 94.2% and while our commenced rate increased by 110 basis points to 91.1% the gap between the two numbers, which is the best indicator of low risk future growth is still a healthy.
310 basis points.
This spread provides us added confidence in our ability to achieve our five year, 2.75% same store NOI growth target, even with a 1.5% annual NOI reserve for tenant bankruptcies.
We are especially focused as well on our shop lease rate, which fell 90 basis points sequentially. This quarter to 88%. Despite the activity I. Just described the decline was entirely attributable to the fact that the tenant bankruptcies in the quarter were concentrated in our small shop portfolio with nine Avenue and seven charming Charlie closures since the end of June .
Yes.
We are already in conversations with tenants for each of these locations and feel great about backfill prospects with that I'll hand, the call over to Matt.
Thanks, Mike I'll comment first on our balance sheet, then touch on some earnings matters and I'll close with some thoughts on guidance.
First on the balance sheet, our position remains strong with pro rata debt to EBITDA in the quarter at 5.8 times compared to 6.5 times in Threeq you 18.
Beyond improved leverage our maturities are also in great shape with a weighted average consolidated term of 5.5 years.
Last week's equity offering will generate further improvement lowering pro forma net debt plus preferred to EBITDA by almost half a turn.
In addition to the deleveraging impact of the recent offering and EBITDA growth, we have two other sources of future capital.
First is the $160 million remaining preferred investment in our liquidating Blackstone joint venture, we did increase the valuation reserve against the remaining preferred investment by $6 million to $85 million, which compares to the original $76 million reserve. We originally established in 2017.
However, the increase this quarter was due largely to the loss of an anchor tenant at one of the Blackstone assets rather than a change in market conditions for these shopping centers.
A second additional source of deleveraging is the $217 million of capital. We eventually expect to receive through the ultimate liquidation of RV Guy and the related repayment of our receivable and preferred investment.
We received 107, we received a $17 million payment from RDR this quarter, representing receipt of half of the 34 million dollar original receivable.
All these factors growing EBITDA the Blackstone preferred return of capital from RV I means we continue to see six times debt to EBITDA as a long term leverage maximum.
I'd like to now turn to some earnings related items first while bankruptcies have had a much smaller impact so far in 2019 than we anticipated something which is helping fuel our guidance increase we did recognize $169000 revenues in the third quarter from Avenue and charming Charlie stores that have since close and will therefore, not recur in the fourth quarter.
There will be significantly less capital and downtime associated with these non anchor closures and we're excited about the backfill and mark to market opportunities, though they will still act as a drag on 2020 growth.
We also recognized 484 $481000 or revenue from dress barn, and forever 21, and we expect to all of these locations to close in the fourth quarter.
I'll turn now to our increased guidance.
Given the greater clarity we have at this point in the year as well as significant outperformance in the first three quarters, we're increasing our AFFO and same store NOI growth estimates specifically, we have increased our AFFO guidance by a penny at the new midpoint. Despite short term dilution from our equity offering. We've also increased the expected same store NOI growth rate that underpins our.
What that Fogo guidance to a new 3% midpoint to reflect better year to year to date operations and expected increases in anchor openings in the fourth quarter.
These openings will be partially offset by the $650000 of total quarterly revenues from bankrupt tenants, which we expect to continue into the first half of 2020.
We also made a number of smaller guidance weeks for JV fee income RV fees and interest income with the change in JV fees related to better than expected performance and clarity on the timing of the DDR Tc wind down.
We provided guidance for 2020, JV fees with the DDR Tc announcement and remain comfortable with the $16 million to $20 million range, we provided at that time.
In terms of RV I fees based on asset sales completed to date RV fees will be at most $20 million in 2020, assuming no. Other assets are sold through the though the company continues to execute on its business plan to realize value. So I'd expect the lower full year figure.
Finally, we typically don't discuss quarterly changes in FFO, but I wanted to call out too specific items that will impact our fourth quarter first the equity offering close last Thursday, but the preferred redemption won't take place until the end of November as such we will be sitting on the proceeds for over a month, which will be short term dilutive.
Second our DNA expense assumption for the year is unchanged, reflecting our expectation that this line item, which nets out mark to market of the Prs use will increase in the fourth quarter and be higher than any other quarter. This year.
With that I will hand, the call back to David for some closing comments.
Thank you Matt in conclusion, the last nine months provide increasing evidence of this organizations ability to pivot to growth. We are now demonstrably ahead of schedule and executing on the operational redevelopment and opportunistic investing goals that underlie our plan to produce compelling growth over the next five years and with that would be.
Maybe to take questions.
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This time, we will pause momentarily to assemble.
Roster.
Our first question comes from Todd Thomas with Keybanc capital markets. Please go ahead.
Hi, Thanks, good morning.
David you touched on investments a bed, which was.
Part of the rationale behind the common equity offering.
I was just wondering if you could provide a little more detail on investments talk about what you're seeing on what the appetites like moving forward.
Sure I'll be happy to Todd.
The first of all I guess had mentioned that the equity offering was really earmarked to replace the the preferred equity stack.
But it does obviously give us a bit more flexibility, we continue to recycle assets and have been in the market looking for properties.
I hate to give too much insight.
Other than the fact that we're heavily focused on convenience oriented properties I think we've got a very good window now into whats available in the market and we're heavily focused on return I think we recognize that our cost of capital has a hurdle to it and I think that we're able to find properties that can be.
Hurdle.
Can you talk about.
What that what that hurdle is.
A little bit more and then in terms of the types of property. So you mentioned the small shops in the convenience.
Which would you highlighted from the property in Austin.
You know wouldn't new investments I guess have a greater skewed toward towards small shops and the current portfolio today.
Well for this particular quarter with one asset purchase that happened the mills be entirely shops I can see that's a reasonable question. The reality is for us to make investments in retail real estate and make money that has double digit IR ours, we need to be format agnostic I don't think that there's a tailwind for the industry that is guiding us into.
Certain property type or even certain submarkets were really looking for return.
And the older the asset classes get the more there's.
Mark to market opportunities or kind of a tenant roster changes that we think can drive value and that's that's why we're less focused on format and were more concerned about rent roll.
Okay, and just one question for for Matt.
As we see the anchor leasing kick in here over the next.
Few quarters are a lot of that was for for vacant space.
The the same store expense recovery rate was just over 86% in the quarter how much more.
No I margin expansion should should we expect over the next several quarters here as expense recoveries pickup.
Hey, Todd I don't I don't have a specific forecast for that I mean, we do get you know anchors in particular, you do see a real improvement in terms of leakage of operating expenses. So I would cease I would expect some margin improvement I don't think it's going to be monumental.
Okay. Thank you.
Our next question comes from Christy Mcelroy with Citi. Please go ahead.
Good morning. This is Katy Mcconnell Christy can you talk about what drove the earlier than expected timing of anchor openings. This quarter and maybe talk about how much of an impact to that had on that in person in same store guidance versus the lighter than expected.
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Sure Katie good morning, I can give you a preamble by saying that.
Our five year business plan was heavily front loaded by anchor leasing.
A year ago at Investor Day, we talked about 60 anchor opportunities I think Mike did a great job of assembling not only at great team of leasing experts that really can handle the box leasing, but on a legal and construction side, which is really the majority of the work once the deal making happens with a handshake.
And we're quite a bit ahead of our schedule that we laid out a year ago and it was entirely due to a much faster permitting process focused effort on the construction and legal teams to get the the spaces opened and frankly the retailers themselves. We're very aggressive in wanting to get open in 19, and so we ended up.
With a bunch of retailers opening up a couple of months earlier than anticipated.
On your variance question I would say the less than expected tenant fallout tends to outweigh most things we had a pretty as as we as we've discussed from the very beginning of the year all the way through now we've had pretty conservative assumptions about about tenant fallout, so 150 plus basis points in your numbers.
Kind of being able to eliminate that gradually throughout the year or most of that throughout the year, obviously has a as an outsized impact.
Okay, Great and then can you also just touch on how releasing spreads have trended on the box progress you've made today and how does it.
You'd expect remaining space based on the level and quality of backfill demand you're seeing today.
This is Mike I think in general we've been very pleased with the leasing spreads that we've seen on the anchor Backfills and we were expecting those to be pretty impressive simply because of the mark to market that we anticipated and we anticipate to see a positive leasing spreads on the anchors as we go forward as well.
Okay. Thanks.
Our next question comes from Daniel Santos with Sandler O'neil. Please go ahead.
Good morning, Thanks for taking my questions. The first one is I was wondering if you could give us just a little bit more color on how you're thinking about the capital markets in raising equity in the future.
Sure Daniel Good morning.
We were a pretty price sensitive group I think that.
We recognize that shareholders should look to us to be good stewards of their capital and I think over the last couple of course of this year, we've kind of proven that to be the case remember we bought back stock at a price of 11 73 back in January and we issued last week at 15 28. So.
I think for us the price sensitivity is an important feature.
But if we take action going forward it really has to be for a specific purpose and in this case.
The purpose of taking out the preferred what's really no dilution to the common shareholders was a great feature for us.
Okay should we expect to see more buybacks in the future.
Well like I said were price sensitive I would.
I would find a strange to discuss buybacks a week after we issued but in the future I think we're always going to be looking at the price the stock and.
We're going to be looking at uses of capital that we think are important so unless the price and the use are tied together I wouldn't expect us to be to be announcing anything.
Okay and one last question some of your peers have noted some increase affinity for shopping centers are you seeing similar trends for power centers.
Well, we haven't we haven't sold any.
Properties.
That would fit that category out of sight centers.
Thank you.
Our next question comes from West Golladay with RBC capital markets. Please go ahead.
Hey, Good morning, guys can you comment on how the local shop tenants are doing more like more so the the franchise worse.
I'm, sorry, whats yet one more time, it's hard to give you Oh, sorry can you comment on how the local shop tenants are doing more like the the sandwich shops and more of the franchise worse.
This is Mike I think I think in general the answer is they are doing very well and a lot of it just really stems from the additional traffic were being.
Experiencing from an anchor lease up the anchor tenants are really driving heavy traffic and that translates well to the shop tenants doing well and we've seen.
That really helped drive our increased shop leasing as well.
Okay, and then looking at your out I guess five year plan, if we do a refreshed today what would be the biggest change based on you're able to access the capital markets you well unwound, a JV I guess my assumption would be 75 million investment would probably be a little conservative at the moment is that a fair statement.
I mean, I would say that the the biggest change from our Investor day, a year ago is simply the pace.
We just been able to execute a lot faster than we anticipated remember that the plan was was front end loaded by an ally growth that then feeds into FFO growth and at this point. We're ahead of schedule on the NOI growth section.
I'd also say that you saw us sell duvall village.
This quarter, we announced last quarter I would say on the margin when you look at our kind of internal capital planning, you're seeing some movement from spending money on redevelopment into instead using that harvesting capital and then recycling that capital into acquisition.
Okay. Thanks, guys.
Our next question comes from Hong saying with JP Morgan. Please go ahead.
Yes, hi, guys.
I guess in your Investor Day last year, you touched on potentially funding your redevelopment pipeline through the sale of mixed use development rights is that still expected to occur.
Good morning Huh.
We have a number of projects that are undergoing municipal entitlements and member that's how the first leg of the stool.
You need to prepare a project is to get the permitting for it so.
Several those prices moved along pretty quickly, namely Fairfax outside of DC.
Then a project up in Boston in one down in Atlanta.
How we execute on those whether we put capital to work in a joint venture whether we sell the air rights or whether we do a project on around I'm really hasn't been decided I think we'll make that decision the closer we get to to having project that shovel ready.
Got it thank you.
Our next question comes from Richard Hill with Morgan Stanley . Please go ahead.
Hey, guys that I'd, just jumped on a little bit late given out another earnings call, but I'm sorry. This has been repeated but not one of the things that struck me.
It was slower than anticipated bankruptcies. So I'm wondering if that's transitory and something has fundamentally changed.
In the strip market or if you're still cautious because.
Back to what about your analyst day, a year ago, and you're pretty cautious so I'm just wondering if.
If if things have been pushed out or are there has been a fundamental change over the past 12 months that makes you more bullish on the store closure environment over the over the medium to long term.
Rich that is a great question I think we've we've wrestled with that subject for the entirety of this year.
Now, there's there's a dilemma and one is that weve curated portfolio through a spinoff down to less than 70 wholly owned assets and then the land location or those 70 wholly owned assets. It made them really desirable from Tennessee. So if you think about 60 vacancies, we announced last year and we've leased.
We're getting close to concluding the leases about 48 of them.
The demand is really strong and when you combine that with the fact that the bankruptcies.
And liquidations of the retailer world simply haven't happened to the extent that that we would have thought a year ago, a you're right. We have to consider whether it's going to simply roll forward into 20 or whether the new normal has fewer bankruptcies my personal opinion is that.
Retail is still in transition there are disruptive forces going on in a lot of tenants throughout the sector and the best Defense you can have is really strong property.
What we would hope is that even as retailers are repositioning their store fleets. They are doubling down on their best locations and those are the ones that we think we own.
The only thing I would add is just from a budgeting standpoint, as we start to think about 2020.
When we kind of can have this debate about whether whether whether we're seeing a a wholesale improvement in fundamentals you should expect that we will remain conservative in terms of how we guide and how we do our budgets.
Some tenants are really question marks no. There they are trying really hard to turn their businesses around and we've seen businesses do that before I turn themselves around but but then there are some that we think really are a question on more of a question of when not if and so you can assume that will build a fair amount of that into our into our forecast. So conservatism will definitely be given given that.
These uncertainties, we'll consider them what will be the theme for our budgeting and guidance process.
Yes, sure that that's helpful and the reason I focus on it is.
From term investor standpoint that there has been a pretty significant differentiating differentiator between strips and and your cousin the mall sector.
Are you seeing a different demand from tenants from maybe.
More convenient to locate it strip centers didn't then then maybe you saw previously and is in is that maybe some of the change that that.
At least the markets or pricing and over the past 12 months.
I think rich the change has simply been an increase in aggregate demand across a lot of different product types. If you look at.
The last quarter as our earnings call, we lifted the number of tenants that at least those 48 boxes, it's pretty staggering and there's a there's a very wide range of of tenant demand, including services clubs and and traditional retail.
So I I don't really see a fundamental shift in the type of demand, but we certainly have had much more demand than we anticipated last year.
Got it Ah that's it for me thanks, guys.
Correct.
Our next question comes from floors on digital World from Compass point. Please go ahead.
Good morning, guys. Thanks for taking my question.
Just a follow up on the.
Cost of capital.
Discussion, obviously, you issued equity at a slight discount to any the but has paid down the preferred suicide is that right to assume that the your.
You are thinking about your cost of capital is as you know being.
At or below your cost of prefers that you're paying that down.
I think floors. What we said is that there is a very specific use of capital one at that price.
We were willing to.
Transfer.
The capital stack from preferred to common at that specific moment at that specific price.
And I was feeling I would add is.
No.
Any visa movable feast right at the moment I think the our band of for example, just looking at consensus numbers are banned goes from like $11. All the way up to 18, right and that's not because analysts aren't doing their job. That's because there's a lot of uncertainty about what asset values really are so there's a there is potentially a false precision involved in the energy exercise.
Even if we take the consensus and easy as a given whatever small amount of dilution. We think it was less than 1% versus versus a versus consensus that maybe there is a value add improving our capital structure that we think far outweighs whatever minimal amount of any be dilution there might have been based on a consensus number which were not necessarily blessing.
But there is there is at this point a cycle in particular, we think there's real value added by being smart and deleveraging in a way that has a very low cost associated with it.
Fair enough fair enough. The other question I have is maybe if you can give us some comments on.
Where do you view right now your mark to market in your portfolio you guys have done a very good job in terms of.
Leasing ER and I'm, just curious how much more can you squeeze out of the portfolio.
I floors that the great question I I think you know that we have not published a mark to market. We really haven't commented on it and and frankly it moved significantly when you're leasing.
A lot of anchor space.
But I will remind you that when we did the spin off of RV Ipi one of the primary reasons was to cure rate for mark to market.
And when you combine a high mark to market with great underlying land that means that over time, you should capture rent growth in addition to redevelopment opportunities.
And in some cases bankruptcies of tenants allow you to unlock the land value that you couldn't previously or otherwise do so.
Mark to market. It really important feature of this portfolio, but we really haven't been specific with with marking a specific dollar number.
Can you guys comment on the on the Mark to market opportunity for your for your Dressbarn and charming Charlie exposure.
We have not comment specifically on the exposure for those I would simply say that they're a positive mark.
Great. Thanks.
This concludes our question and answer session I'd like turn the conference back over to David Lukes for any closing remarks.
Thank you all very much for taking the time to join and we will speak with you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.