Q2 2020 RPT Realty Earnings Call
Greetings and welcome to the L.P.T. Realty second quarter Twentytwenty earnings Conference call.
This time, all participants are in listen only mode.
Next question answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded and is now my pleasure to introduce your host Mr. Vincent Chao. Thank you. Mr. Chow you may begin.
Good morning, and thank you for joining us Rpgs second quarter 2020, <unk> earnings Conference call.
At this time management would like need inform you that certain statements made during this conference call, which are not historical maybe deemed forward looking statements within the meaning of the private Securities Litigation Reform Act like you my thoughts.
Additionally statements made during the call are made as if the data but school, let's first any replace you understand the passage of time by itself will diminish the quality they've 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.
One of these factors are described these risk factors in our annual report on form 10-K.
When we report on form 10-Q, the first quarter up to 2020.
Our earnings release for the second quarter 2020.
Sure to be statements made on today's call also involved non-GAAP financial measures. It shows your directly to our second quarter press release, which includes definitions of those non-GAAP measures reconciliations to the nearest GAAP measures and this is available on our website and investors section.
Now, let's turn the call over to President and CEO, Bryce Harper and CFO, Mike It's more spread opening remarks, after which we'll open the call for questions.
Good morning, and thank you for joining our second quarter 2020 conference call.
I Hope you are all well and staying safe.
I'd also like to thank everyone on the front line up a pandemic for all of your extraordinary effort to get us through this difficult Todd.
The past quarter has been a challenging one, but I'd say say challenging times don't build character they reveal it.
I'm very proud of the character that RPT has demonstrated since the outbreak.
Take pretty tough.
Flexibility and ownership.
I'm also thankful to our board of trustees, who have been a rocket support.
Their collective extra expertise that spans multiple business cycles and multiple industries and includes former executives at retailers and restaurants has helped immensely during this time.
Our people our greatest asset and it is our people that will get us through the situation and position us for for success thereafter.
Last quarter I laid out for principles that will drive our performance during and after that pandemic.
Ample liquidity excellence in operations business continuity and maintaining a strategic outlook for the future.
These principles continue to guide our decision making process.
First on liquidity today would be sitting a comfortable position with almost $250 million on cash on the balance sheet no debt maturing. This year only 37 million maturing next year and our July collections are already at a cash flow positive level.
That said capital preservation remains a top priority as we continue demand managed through the current environment.
Accordingly, the board recently made the decision to continue the suspension of the quarterly common dividend for the third quarter 2020.
As discussed last quarter or future dividend decisions will be made based on liquidity needs and re taxable income distribution requirements the near term.
That's business visibility continues to improve management and the board remain committed to reinstating the common dividend to a sustainable level that we can grow overtime.
Turning to operational excellence.
This is the quarter like no other and the dedication that our organization demonstrated what's impressive to say the lease.
As noted in our press release, all properties are open and 92% of our tenants are operating again.
As of July 31st we collected 65% of second quarter rent and combined with signed or approved for all agreements you have addressed 89% of our second quarter Brett.
Brent collections for July have risen to 75%.
Including signed or approved deferral agreement, we have addressed 93% of our July reps.
The improvement in collections reflects retailer reopening.
Persistent collection efforts and the roll off of some deferral parents that are converting to cash collections.
We expect collection levels to continue to rise as to for all periods roll off in the coming but.
It's important to keep in mind, but we have views rent negotiations to improve lease structures that otherwise would have taken years to address.
It's also been able to unlock value by recapturing use rights at certain out certain of our centers that will significantly strengthen our navy over time.
What do we unlock.
Some of it was adding term or even removing options.
Some added a change of use clause some added radius restrictions or move to exclusive.
Went lease by lease.
Then extracted value when and where we could get it.
For example, using geospatial data, we identified multiple assets across the portfolio to understand consumer traffic patterns to help us optimize our ability to obtain additional use right. That's part of our negotiations with tenants.
Notably we are already in discussions for several new freestanding buildings across the portfolio.
And we also obtained rights to add non retail uses.
Select group of assets.
I'm often asked by the investment community about the future of retail and what product type I prefer grocery or power.
My answer in a post cobot world, It's a hybrid that captures the credit of strong national tenants and the essential everyday traffic of the grocers.
Good example, this is our kind of country asset outside of St. Louis just a whole foods target home goods supported by strong small shop offerings, including Athleta and Starbucks.
This resilient cash flow that should be stable and most environments. That's evidenced by second quarter collections that were almost 12% higher the portfolio overall.
The other significant opportunity to replicate the success of our town and country model through our project Renaissance grocery initiative.
Last quarter I spoke about the strong grocery demand that has resulted from a pandemic.
But anything interest has only increased since then.
You're now in various stages of discussions about over seven new crusher deals.
Portfolio currently has 18 non grocery anchored properties that could help accommodate that Amanda.
You see this as the significant opportunity to improve the growth and resiliency of our cash flow.
We also have opportunities to upgrade our existing grocer tenancy, who may be weaker and profile or balance sheet.
Overall, we are encouraged by discussions thus far we look forward to reporting on our progress in the coming quarters.
You're also seeing solid interest from off price fast food fast casual home improvement.
Medical tenants and yes, we are seeing an increase in demand from traditional mall tenants, which helps create tension in the market.
Well, we're being extremely selective and generally avoiding non discount apparel tenants.
Moving on to business continuity as we've discussed in the past, although we were not planning for a pandemic, we were well prepared to handle the unique challenges, resulting from widespread state and local shutdowns.
Well over a year before March we instituted a work life balance initiative that allowed our employees to work from home one day a week.
It's made the transition don't work.
From home environment and early March relatively seamless.
Please to report the team is not skipped a beat since then.
At the property level, we continue to offer uninterrupted service, while also focusing on creating a safe environment for our tenants.
And their customers.
Early on we implemented numerous safety measures and solutions at all of our centers, including the rollout of our exclusive Kirby priority pickup program.
This program consists of dedicated 15 minute pick up only parking spaces that are available for use by all of our shopping center customers.
And then has been exceptionally well received by tenants and shoppers alike.
Before I turn the call over to Mike I would like to spend a few moments discussing our strategic outlook I.
Some of you have heard me say, we're keeping to ice on the business and a third eye on the future.
Cobot 19 has accelerated changes that were already underway and its introducing new changes that we're still learning about today.
In this rapidly changing environment our size, it's an advantage as we can quickly adapt our business to meet tomorrow's challenges, while capitalizing on future opportunities.
Our sector, leading operating results in 2019 reflected our size advantage I sit the significant improvements made to our portfolio quality and our balance sheet quickly translated into outperformance.
The underlying fundamental improvements that drove our business last year serve us well, that's we come out another pandemic.
While our partnership with Jesse will provide fuel to fund our external growth platform.
I can assure you that despite all the positive change implemented at RPT over the past two years that our team is not sitting idle and we'll continue to turnover every aspect of the business took reserve and unlock value for our stakeholders.
With that I will turn the call over to Mike.
Thanks, Brian and good morning, everyone. Today I will review our current liquidity position provide details about our second quarter 2020, operating and financial performance.
And with some commentary about our business going forward.
Last quarter, we drew down 225 million on our evolving letter of credit to bolster our cash balance and as a precautionary measure.
As our tenants reopened and visibility on our business improved we made a decision three pay 50 million on the revolver during the quarter, leaving us with 175 million outstanding on our 350 million revolving line of credit.
Even after the pay down we ended the second quarter with almost 250 million of cash on the balance sheet with no debt maturing over the balance of the year only 37 million maturing next year and just $9 million committed capital expenditures remain in 2020, we also have only three mortgages outstanding and 91% of or otherwise and unencumbered.
Providing us with another potential source of capital.
As our business continues to normalize we expect to repay additional miles on a revolver as we balance liquidity macro environment risk interest expense and debt covenant compliance.
We ended the second quarter with trailing 12 month net debt from pro forma adjusted EBITDA of seven times, which reflected the negative impact from Coburn 19.
In light of the pundit pandemic, we would expect our leverage to remain above our recent historical range, but to normalize overtime. Our long term target range remains five and a half the six that items.
Turning to results second quarter same property NOI fell 13.2% versus a year ago, driven entirely by right not probable collection during the quarter, that's attractive 14.7% from same property NOI growth, partially offset by 1.5% base rent growth.
We ended the quarter at an occupancy rate of 92.9% down 40 basis points sequentially, but up 50 basis points versus last year.
Despite the challenges facing the industry, we're still able to signed 23 leases totaling 159000 square feet.
Blended rent spreads were up 2%, including 2.3% on renewals and a negative 4.4% a comparable new leases.
Although our comparable new lease spread was negative for the quarter. This reflected just two leases with the decline primarily driven by a relocation of an existing tenant to accommodate a new not comparable essential medical tenant that is expected to generate a strong mid teens return on cost.
In regard to our renewal spread it was lower due to a proactive set of renewals we did with one anchor tenant in exchange for editor and the ability to have the right to bring additional relevant uses to a couple of our shopping centers.
Operating FFO per share for the second quarter was 16 cents.
10 cents declined from last quarter, primarily due to our estimate for rent that we did not even collectible.
As of July 31st Pro rata uncollected tenant rent and expense reimbursements for the quarter was 17.7 million.
Of which 5.7 million or roughly one third was deemed uncollectable. In addition, we reserved about 200000 for uncollected balances prior to the second quarter, resulting in a total rent not probable collection of 5.9 million or seven cents per share.
We also reserve 1.4 million straight line rent, which detracted another two cents per share.
Higher interest expense accounted for the remaining penny of variance from last quarter, given our revolver draw at the end of the first quarter.
Oh, the 17.7 million of uncollected pennant rent expense reimbursement that I mentioned in my earlier remarks, we have signed or proved deferral agreements were roughly 12.1 million in.
In addition, we have reserved for and a half million related to uncollected amounts and the second quarter, where we do not have a deferral agreement, leaving just 1.1 million of unaddressed accrued unwritten recoveries in short we have addressed almost all of our second quarter uncollected right.
Via collection deferral or reserve.
Also notably 93% of our deferred amounts are for national or regional Pat.
Although we're not reinstating guide at this time I wanted to provide some additional color. They may help you model going forward. We ended the quarter with sign that open Avi our backlog of 1.6 million, which we expect will commence over the next 12 months rent exploration for the balance of the year total only 2.4 per.
So on a pro rata Avi are from a cash flow perspective, the suspension of the third quarter 2020, common dividend will save about 18 million of capital.
And as a reminder, our cash flow breakeven collection rate is about 60% versus our July question level of 75%.
Regarding our common dividend no decision hasn't made any future dividend beyond the third quarter. However, based on our estimates of taxable income no further dividends will be required to be paid in 2020 to satisfy requirements.
Turning to our disclosure. Please see page is 10, 12, and 35 of our quarterly supplemental detailing the amounts of uncollected, but a crude runs and our consolidated income statement same property NOI and joint venture tables.
Additionally, please see page 31 of our supplemental where a detailed breakdown on her recollections and opened status.
Also beginning the second quarter, we're excluding the non cash accelerated amortization of above and below market leases from our operating FFO definition.
This accelerated amortization occurs in the instances when a specific tenant vacated prior to the original estimated lease termination date.
Compare ability we had a recasted prior period included this presentation within our supplemental.
We made this change after discussions with analysts and investors and believe it will help in your analysis of the underlying earnings of the company by eliminating the volatility associated with this noncash items.
And lastly, please note that this quarter shares associated with our convertible preferred equity were anti dilutive, which may have created some unusual variances in your model. Please reach out to dinner me. If you need additional color with that I will turn the call back to the operator to open the lines for questions.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
Confirmation triangle indicate your line is in the question Q.
You May press statue if he would like to remove your question from the Q for participants you think speaker equipment. It may be necessary to pick up your handset duffel pressing the sakys one moment, please while we poll for questions.
Your first question comes from Derrick Johnson from Deutsche Bank. Please go ahead.
Hi, everybody good morning, Thank you.
An interesting observation. So your local small shop collections were higher than the overall portfolio collection rates I think it was 82% for Q2 and 87% for July even a bit ahead of peers can you comment on why that is and also on the flip side the anchor collections were a bit.
Lower than average it seems we figure it could be merchandising or tenant mix, but could you. Please provide color on both.
Sure Hi, Derek let's start with small shop, and about a year and a half ago, we de centralized leasing team. So we have leasing agents in our markets and I think thats.
Good that was a good catalyst for this rank collection. So we have boots on the ground. We have obviously very strong tenant relationships in those markets.
These these leasing reps were knocking on doors and there was no tenant left behind we talked to every single one of the tenants.
You know and that was a mixture to some of the small shop of national tenants.
Obviously, I imagine that that number is sector, leading now getting into the anchor.
A lot of those collections were are part of our deferral. So you'll see those turning back on very soon.
Okay. Okay, great. Thank you and you know what was your process in determining the level of reserves needed. The 5.9 million to date and the second part of that question will be no. What do you believe the likelihood of future reserves a further reserves in future calls.
Orders.
Thank you.
Sure. Good morning, Derek Thanks for the question. So I think you know the one thing that you know proven interference had again for RPT as are our small size. It's proven to be an advantage now we have 48 assets 10 million square feet. So we were able to take a very very granular approach tenant by tenant bottom up approach on.
What be deemed uncollectible weve involved all our business units from leasing and asset management finance collections and accounting and every assumption every element that we have is based on a number of factors that were unique for really each tenet. We looked at business models that long term viability the strike the balance sheet pain history.
You know whether or not a personal guarantee or security deposit was backstopping the lease.
And then we got two we got to our off or estimate and you really can't really look at category by category and make an assumption because every single.
Tenant discussion an estimate is based on a unique situation. So we feel pretty strongly about the reserving confidence around it and that we the reserve against.
The risks that we have out there.
Thanks, everybody.
Your next question comes from Todd Thomas from Keybanc. Please go ahead.
Hi, Thanks, good morning.
First question, Brian with with more than 90% of the tenants open in the portfolio and you know on on that you know after the 10% increase you saw in July collections versus the second quarter.
Able to comment at all on August and what you expect in in terms of the trajectory as we advance further into the quarter from the 75% level, Yes sure Todd August right now is about 15% higher ups at the same period asked July was so to say the lease we expect August to ramp up.
Up quite nicely.
And that's kind of going back to Gary's question I couldn't be prouder the team.
On this collections effort and even as part of the reserve.
This was a several hours several day.
Initiatives, where we turned over every rock so we do see a lot of these differ deferrals coming off.
From the anchor tenants and as you saw our mid eighties small shop tenants the pretty healthy number right now, but we than we see that up upsizing as well.
Okay and in terms of the deferrals you know with some of them you know starting to roll off already here can you can you talk you know maybe Mike you know about the or the timing of the deferrals. Overall, maybe can you can you quantify I guess the cadence of you know when the deferrals will burn off and how long some of those agree.
Payments were for.
Yeah sure Todd I I average, we defer to around two to three months.
In totality and then in terms of payback, 40% well get paid back in those in the second half of twice warning and the vast majority of the remaining well get payback in 21.
Okay.
And then in terms of a in terms of leasing can you can you just comment on you know I guess sort of the time that it seeking to get deals done today, and how that lease processes normalizing and you know you commented a little bit about that you know the negative new lease spreads in the quarter. It was a small sample size.
Pack did buy a relocation, but curious if you can comment on lease spreads and and what you're seeing in terms of rental rates you know more broadly with with what's in the pipeline today.
Yes, so it's really mixed across the board it comes down to space by space asset by asset.
You know very partnership driven I think the good is sunset shedding our bottom tier real estate in late 18 in early 19, we have real estate, where retailers want to be a grocery has been a big demand driver as I said with over seven grocery deals in negotiation.
And that's offering fair market deals on another accretive basis for the most part from a market rents.
They have not deteriorated and tenants are behaving so far and negotiate negotiations I think the demand of what we're seeing in addition to grocery is certainly off price and we've had deals that are going to be added to the pipeline even come in on a post covered world.
Fast food and and fast casual which drive through is the new arm and our initiative with the deferrals of allowing you know getting rid of some of these no builds to allow for some of those as they got great thing for any of the for the company.
Then home improvement and medical tenants. In addition, as well so Todd it's really mixed I think for that for the two deals that were negative this quarter and but we would do those all day long to get a mid teens IR and bringing in a medical tenant. That's that's taking up a lot of space and one of our centers in Columbus, Ohio. So.
It's mixed certainly we have our AR.
Tenants that are that are a little tougher but for the most part we haven't seen.
Much deterioration on rent negotiations.
Okay, and just a last question, Mike how much hbr exposure in total do you have across the portfolio to 10 instead of.
Bankruptcy or you know are in the process reorganizing.
About 3% or so Todd you know with majority of that is related to this unit brand.
And about two thirds of that we did reserved for in the quarter. The other one third.
Was representative of tenants that had a very very strong locations.
With that are in a high sales low occupancy costs low rent per square foot that we.
Heavy pretty good confidence level that those leases would be assumed.
Okay. Thank you.
You bet.
Your next question comes from Craig Schmidt from Bank of America. Please go ahead.
Hi, good morning.
He's done a good job holding on to occupancy, but you know given the accelerated store closings that are starting to occur.
Where do you think occupancy <unk> by year end wouldn't be lower than we are in the second quarter.
Yes, it's tough to say right now Craig I mean, what we've been doing too and as I think has helped the occupancy is early on.
We've been releasing the pier one so we only had two you know we've been really saying that dressbarns, even if they have had term and we've been releasing gap full price stores and I believe we had one left with the start of five or six so we're holding you know with that in mind.
This was even a pre co bid of replacing week tenants with stronger times.
So I I don't know, where this is going to shake out a lot of it is you know on this pandemic a lot of it is done by municipality of.
Open or close to a lot of it you know the mandate. So you know the.
I always say within the firm control the Controllables I think we're doing a darn good job of that you know, it's the macro that I can't predict and.
And I can't give you an answer on where it from an occupancy perspective.
Okay and then just.
There's a potential for leasing spreads to increase sequentially.
Given what happened in the second quarter.
Yeah, absolutely I think that was an anomaly and and again that was something we would do again and again and again to get a mid teens return.
You know the grocery deals that I've talked about are very accretive on our pricing tenants at a much lower rent.
You know it and the pipeline even of off price and medical you know those deals are on an accretive level as well. So generally I think thats, an anomaly and and at one time occurrence and we definitely see those improving over the next several quarters.
Okay. Thank you.
Your next question comes from Florida Stan.
From Compass point. Please go ahead.
Morning, guys.
A question for you on your.
Looks like your reserving about a third if you're on collecting rents maybe if you can gave us a little bit of that.
The bulk of those reserves are they for national tenants are they for for small shop tenants.
Hey, guys aren't for us I think I've I won't get a specific about.
What we reserved for in terms of category, it's pretty broad base, but I'll go back to the what our portfolio consists of almost 90% of our portfolio is national.
10% being being local and you saw that are our collections for the small shop was mid eighties.
Mid to high Eightys, which was a very very strong number that Brian described earlier.
Earlier in his.
Commentary, so it's predominantly I would say more national weighted than that.
And maybe if you could give so.
About the outlook.
Right now for.
As as you know that the investment committee is looking at trying to balance the reserves versus the expected.
Occupancy declines that should occur if your reserves are correct.
Uh huh.
Should people think about those going forward, where you could see.
So I'm thinking about it generally see reserves declining, even though occupancy levels or declining as well.
Yes, I mean look it's hard to the habit connective tissue between what your bad debt reserves are and occupancy I think we're in a very very fluid environment right now.
The theres lot of variables contained within the pandemic side, whether it be vaccine treatments or the deployment.
Of those two items. So the general population. So we're dealing with that in fact change with tenants quarter to quarter and we'll revisit those facts.
Like we went through this past quarter next quarter.
You know some some of the reserves that we set out some of those leases that are in bankruptcy could get assumed some could get rejected.
That point.
You'll start seeing some of the impact to occupancy, but you can't there's not a connective tissue right now between bad debt reserves and occupancy. So it's way too early to talk about what the economic impact to occupancy or NOI will be you know as we progress the up through to the year given liquidity of environment.
As I said before I mean, our proactive nature on on some of these tenants that have been on our watch list for several quarters pre Kobe and post kind of Ed.
Yeah, we've done as good if the job us any on replacing that in a quick matter with you know a credit tenant and stronger sales. So.
Yes, and then one think I would add there are two floors sale during the quarter you know I've our of our quarterly billings about 2 million or so was really related to tenants that went to cash basis accounting during the second quarter, we collected about 10% of that or so so far in July where are you up to 30%.
So if you extrapolate that.
Through the remaining part of the quarter for August and September were going to be up about 500000, or so relative to the second quarter. So again fact change flushed unchanged.
Things are very fluid.
Fair enough.
We're all trying to figure out exactly what's going on here, maybe one last question for me and bright I'd love to get your comments on Oh.
Where we think is happening to cap rates and.
Obviously, there's not much activity going on in the end markets right now, but where do you see cap rates trending or the calling up are they going down and love to get your your plus also as you.
Some of your seed capital or where you think that its best.
Yes, so I think cap rates, it's a little it's it's all depends on the NOI right now so in my view, it's very early outside of Triple net or are distressed retail where you're just looking at replacement cost.
So the NOI, obviously goes hand in hand, with a cap rate.
So just getting a handle on what's going to be what's going to stick for cash flow I think it's way too early.
You know and hence not a lot of activity in the investment world.
That being said on the G. I see we're obviously in conversation with them a lot. They see a lot of deal flow that that we would normally won't see and and vice versa.
Relationship has never been better and we're talking many things.
About many things just strategic in nature about private companies or one offs or you know grocery anchored centers across the.
Across the country, we're in dialogue with special servicer and receivers.
You know engines are fired up and we're waiting on dislocation and we see this obviously as a major a factor and the catalyst for the future of the company.
Thanks, Brian.
Thanks, Laura.
Once again, if you wish to ask a question. Please press star one on your telephone and wait for your name to be an out.
Your next question comes from Mike Mueller from JP Morgan. Please go ahead.
Yeah, Hi can you hear me.
Yep.
Okay. Yeah, my connections terrible I think I missed a good chunk of because we're saying good a quick question. So for the 5.5 million reserves.
How much of its tied to the deferrals you've made thus far and then is any of the 5.5 million tied to can you know aside from just.
Base rent reimbursement base rents.
Good question like it hopefully hopefully are staying up stance safe up in a dairy and I know that produce method storms of their last night.
But it's a of what we reserve for against that of the of the deferrals about 1.2 million of that that five and a half a million or so.
Is reserved against those deferrals.
Hopefully that answered your question got it.
Okay, and and so a hand and the second part your question the AR.
Reserves contemplate both rent.
And some triple truck my charges I would say the vast vast vast majority has been on the rent side because most of the tenants are paying their triple nets.
Got it okay.
That was it I think they've got that thank you.
Thanks, Mike.
There are no set of questions at this time I would now like to tend to flow back of its mr. hopper for closing comments.
Thank you [laughter] when I first arrived about two years ago I saw tremendous potential it RPT.
And quickly built a team and a plan to unlock that potential.
This translated into sector, leading performance and our first full year. It gave me comfort that we were on the right path.
Well the cobot 19 pandemic has disrupted our business plans in the near term. It has also revealed the true character of this organization.
Which has given me, even greater confidence and rpcs future success.
Thank you all for joining our call. This morning, and please reach out to micro even if you have any further questions have a great day.
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