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Cedar Realty Trust Inc  (CDR)
Q2 2019 Earnings Call
Aug. 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Second Quarter 2019 Cedar Realty Trust Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Nicholas Partenza. Please proceed.

Nicholas Partenza -- Assistant Controller-Financial Reporter

Good evening, and thank you for joining us for the second quarter 2019 Cedar Realty Trust earnings conference call. Participating in today's call will be Bruce Schanzer, Chief Executive Officer; Robin Zeigler, Chief Operating Officer; and Philip Mays, Chief Financial Officer.

Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements and actual results may differ materially from those indicated by such forward-looking statements. These statements are subject to numerous risks and uncertainties, including those disclosed in the company's most recent Form 10-K for the year ended 2018, as it may be updated or supplemented by our subsequently filed quarterly reports on Form 10-Q and other periodic filings with the SEC. As a reminder, the forward-looking statements speak only as of the date of this call, August 1, 2019, and the company undertakes no duty to update them.

During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income, please see Cedar's earnings press release and supplemental financial information posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.

With that, I will now turn the call over to Bruce Schanzer.

Bruce Schanzer -- Chief Executive Officer

Thanks, Nick, and thank you all for joining Cedar's second quarter 2019 earnings call. I'm going to jump right in and acknowledge that today, Cedar is experiencing two opposing dynamics. On the one hand, our share price has fallen to a level that is impossible to reconcile with either the underlying value of our assets or with the prospects for our company. On the other hand, our team continues to work with everyday excellence, advancing our redevelopment projects and growing our leasing pipeline. We have never been closer to kicking off our large-scale urban mixed-use redevelopments. With our first project, South Quarter Crossing, poised to commence as soon as the fourth quarter of this year. We have finalized two of our critical anchor leases at South Quarter and are in late-stage negotiations on the last few anchor deals. We plan to more publicly elaborate on our anchor line-up at South Quarter once all of the anchor leases are fully executed. We have finalized our apartment development agreement with Alterra Property Group, who notably were the development partner for Kimco's recent Philadelphia project and have received critical zoning entitlements and other significant approvals. Much of this has been picked up by the press and is most definitely in the public domain.

More generally, the team continues to advance our corporate objectives. Our leasing activity has been remarkably strong over the last 12 months with a very solid leasing pipeline. Although we did not execute a number of them before the end of the second quarter, the prospect of occupancy growth is visible and at hand. This is true for both our core portfolio as well as our redevelopment assets. Furthermore, our value-add redevelopments continue to be getting completed, generating attractive returns with a growing pipeline of value-add opportunities. Robin will expand on this further.

While I don't want to take too much time speculating as to why we are trading where we are today, I would highlight a few ideas. First, we own relatively small shopping centers, for which there is a highly liquid private sale market with readily realizable liquidity. In our corporate presentation posted on our website, we share cap rate information on comparable assets within our markets as well as the building blocks of our NAV calculation. In addition, in our supplemental financial filing, we share information on assets we have sold recently. All these transactions, whether in our portfolio or in the market more generally, support the consensus NAV for Cedar.

Second, beyond our current NAV, our redevelopment pipeline is strong and we anticipate it will grow our NAV over time in a manner that far exceeds inflation. Thus, beyond our current NAV, we anticipate above inflation NAV growth. We believe none of this is being reflected in our current share price. Third, we have a management team and Board that is keenly focused on thoughtful capital allocation and strategic decision making. We have a demonstrated track record of astute capital allocation decisions, some offensive and others defensive. What they have in common is a nimble, analytical and flexible mindset. We sell stock at optimal moments, divest assets when appropriate, acquire assets when they make strategic as well as financial sense and repurchase shares in the same manner. In that vein, I can assure you that the Board and management are keenly focused on addressing this disconnect between the public and private valuation for Cedar. Fourth, and probably most significantly, we have a team of professionals at Cedar that are truly a blue-chip group of executives. They have executed effectively in the face of a challenging retail operating environment and distracting capital markets.

I will conclude by sincerely thanking them for their collective commitment to everyday excellence and for helping growing culture at Cedar that allows for personal and professional fulfillment in an environment that is collaborative and collegial.

With that, I will give you Robin to discuss our operating results and to provide greater detail on our redevelopments

Robin Zeigler -- Chief Operating Officer

Thanks, Bruce. Good evening. We have had a strong leasing quarter with the highest leasing volume in the last rolling 12 months, posting 452,400 square feet of lease spaces at the highest average rent per square foot of the last rolling 12 months of $14.75 per square foot. Five new leases were executed at an average rent of $17.73 per square foot and a positive spread of 9.6% over their prior rent. 30 renewals were executed at an average rent of $14.26 per square foot at a negative spread of 3%. Some of this negative spread was strategic and that it is attributable to a 64,000 square foot grocer renewal that was done at a reduced rent to secure term for an important traffic-driving anchor at the center. Exclusion of this strategic anchor deal converts the renewal spread to a positive 2.3%.

In addition, two non-comparable small shop leases were completed at our value-add renovations this quarter at an average rent of $53.75 per square foot. Leased occupancy this quarter rose 100 basis points over last quarter to 91.5%. The operating fundamentals are working well at Cedar with a strong leasing pipeline. There are currently 71 leases in our pipeline, 36 new deals and 35 renewals. 16 deals in this pipeline have already been executed post quarter end, and the remainder are under lease negotiation with an executed LOI. This additional pipeline represents over 300,000 square feet of renewal deals and almost 500,000 square feet of new deals, some of which are related to anchor and junior anchor deal for mixed-use redevelopments. This can be hard to call out when same-store NOI is flat. Given our portfolio size, one significant move in rents either to the positive or negative at a single asset has a large impact on our entire same-store pool. A $100,000 to $200,000 movement from the rent start of a new tenant to the closing of another can move the same-store NOI growth to the positive or the negative significantly.

We continue to be invigorated about our redevelopment work. As we talk about these efforts with our team Cedar internally, there is something inherently meaningful about revitalizing neighborhoods, bringing grocery to food deserts and delivering amenities that the community can enjoy. As we have shared on previous calls, our redevelopments fall into two categories, our mixed-use redevelopment platform and our value-add renovation platform. All three of our mixed-use redevelopments continue to progress with great promise.

The first project anticipated to commence construction will be South Quarter Crossing. This redevelopment is the combination of South Philadelphia Shopping Center and Quartermaster to create a live, work, play mixed-use environment. The anticipated project scope includes approximately 800,000 square feet of retail and 274 residential units. We have made tremendous leasing progress with several anchor leases near lease execution and multiple small shop leases with signed LOIs and in lease negotiation. The zoning was successfully approved in July 2019 to create an overlay district to allow CMX-3 commercial mixed-use, which allows the addition of residential on the South Philadelphia side of the project. The project is anticipated to commence construction in late 2019.

Riverview Plaza, another mixed-use project in Philadelphia, Pennsylvania is located on Christopher Columbus Boulevard and is programmed for approximately 155,000 square feet of retail and over 300 residential units. The project has been rebranded as revelry to reflect the entertainment and restaurant centric merchandising. Lease negotiations are under way for these uses. While there is no zoning variance required for residential, the normal design and entitlement process is ongoing.

Our third mixed use project, Northeast Heights is located in Washington, DC, and is the combination of East River Shopping Center and Senator Square situated across the street from each other at the corner of Benning and Minnesota Avenue Northeast. This project has garnered a lot of political support from DC politicians and it will be the largest private investment ever made in Ward 7 of Washington, DC. The program was contemplated to include 1.5 million square feet of Class A residential, retail and office density. This development does not require a rezoning and our team is poised to commence the entitlement phase in late 2019. We are in leases conversations with several grocers and national anchors to complete the anchor merchandising first and then move to the small shop line-up.

In our value-add renovation portfolio, the activity is just as exciting. We have successfully completed construction at Carman's Plaza and are finishing the final lease-up headed to stabilization. This project commenced defensively when we had a grocer in bankruptcy and we were experiencing small shop vacancy. Through the renovation, we have increased occupancy to 85% as of the end of second quarter, moving toward 90% with a junior anchor deal nearing execution. This $14.6 million renovation project is projected to have a return in the upper teens at stabilization.

Similarly, we completed Groton Shopping Center's value-add renovation in 2018 at a return in the mid-7s. This $7 million job increased occupancy from 82.5% to 100% upon completion. We are currently launching two additional value-add renovations that were discussed on previous calls. Fishtown Crossing, the former Port Richmond Shopping Center in Philadelphia, Pennsylvania; and Yorktowne Plaza in Cockeysville, Maryland. Fishtown Crossing is transforming obsolete small shop space on Aramingo Avenue and creating a leasable small shop building with adjacent pad buildings. Leases have been executed with Starbucks and Nifty Fifty diner at an average rent of $49.35 per square foot.

Additionally, we've relocated GameStop and T-Mobile to accommodate the renovation at a rent of $44 per square foot on average. The average small shop rents at Fishtown prior to the redevelopment was $20.89 per square foot. The site plan approval and zoning permits have been received and construction is anticipated to begin in fourth quarter 2019. Yorktowne also suffered visibility issues, tenant turnover and collection challenges. The development plan includes a facade and common area renovation that will create a more unique and inviting shopping atmosphere coupled with a merchandising strategy to reposition and release the vacancies to stronger local, regional and national tenants, which complement the best of the legacy small shop tenants.

Leases have been executed with IHOP and Panda Express at an average rent of $44 per square foot as compared to the average existing small shop rent of $16.49 per square foot. There are executed LOIs and leases under negotiation with several sit-down restaurant concepts, fast casual restaurants, junior anchors and small shops. The entitlement process is under way and construction is expected to commence in mid- to late 2020. As you can tell, team Cedar continues to work hard toward our goal of revitalized neighborhoods, growing the Cedar platform and creating more value for our shareholders.

With that, I will give you Phil.

Philip Mays -- Chief Financial Officer

Thanks, Robin. I'm going to add just a few brief highlights to Bruce and Robin's remarks before opening the call to questions. First, operating results. For the quarter, operating FFO was $10.2 million or $0.11 per share consistent with the previous quarter. Same-property NOI when compared to the comparable period in 2018 decreased 0.6%, excluding redevelopments and increased 0.2% including them. The decrease in same-property NOI as with the previous quarter was primarily driven by two Fallas locations vacating late in the fourth quarter of 2018.

I'd also like to add some context about our leasing stats. Over the last few years, we've intentionally vacated spaces at several of our centers to facilitate our mixed-use redevelopments and value-add renovations. This process caused a drag on our reported lease percentage over these past years.

During this quarter, we reached critical mass with this process at two of our planned mixed-use redevelopments, South Philadelphia and Riverview, and two of our planned value-add renovations, Port Richmond and Yorktowne. As we no longer intend to lease these spaces even on a temporary basis and expect to demise them in the near term, we have decommissioned them. Accordingly, this had a positive impact on our lease percentage and accounted for the majority of the related sequential quarterly increase.

Moving to the balance sheet. During the quarter, we sold Port Washington Center, a single-tenant center, located in Fort Washington, Pennsylvania, for approximately $9 million. Additionally, we acquired Girard Plaza in Philadelphia for approximately $9 million. Gerard is adjacent to our South Philadelphia Center. And finally, guidance. With half of the year behind us, we are trimming the high end of our operating FFO guidance by $0.01 to a new range of $0.44 to $0.45 per share. The key assumptions in this guidance remain unchanged except for same-property NOI growth, including redevelopments, which we now expect to be close to flat for the full year as opposed to approximately 1%. Both of these changes are the result of various factors, but were largely driven by the expected execution date of a new lease at significantly higher rent with a long time existing anchor now anticipated to close near year-end as opposed to in the third quarter, along with the decommissioning of spaces to facilitate our mixed-use redevelopments and value-add renovations.

And with that, I'll open the call to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Todd Thomas, KeyBanc Capital Markets. Please proceed with your question.

Todd Michael Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Good afternoon. First question. Phil, I just wanted to just circle up to your last comment there on the guidance revision and the same-store NOI growth forecast. You mentioned that the 100 basis point revision, I think, was a result of timing for a lease at a positive spread. Can you just go back through that a little bit. I realize it's a small base, the same-store, but just trying to understand that revision a little bit more. It sounded like a renewal lease, but it wasn't clear.

Philip Mays -- Chief Financial Officer

Yes. So it was -- really there's two things. I spoke about our lease stats and that we decommissioned a fair amount of property at our -- two of our mixed-use urban redevelopments and two of our value-add renovations. Those spaces came back a little quicker, some proactively, so and some just fortuitous where somebody didn't renew and we needed the space and we are happy to get it, so there's just a little bit of acceleration in vacating spaces that ultimately need to be vacated in order to facilitate our redevelopment pipeline. That's part of it. And part of it is we have an anchor, who's at one of these centers in our redevelopment pipeline, who is aware of our plans and is up for renewal, and we anticipate renewing at a significant increase. It's just going to take a little longer than planned to get the renewal done, where they'll actually start paying cash rent. Remember, we do the same-store on cash, not GAAP, so we were thinking we get a little bit of that cash increase this year, it's actually going to be next year.

Todd Michael Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Okay, got it. And then the -- so the acquisition of Girard Plaza that's adjacent to the South Philadelphia project. Can you just talk about that acquisition in the context of the mixed-use and densification project? And are you expecting to de-lease Girard Plaza as part of that larger project? Or is that going to continue to operate as is today?

Bruce Schanzer -- Chief Executive Officer

Todd, thanks for the question. Girard Plaza is a fully leased asset today. It does sit next to the South Quarter project. However, the plan is to continue to operate it as a shopping center. As I think we've made clear, we really like this part of Philadelphia and are very bullish on the improvements to this neighborhood that we expect will occur as we execute our redevelopment plans. So for right now, we're very happy to just own the asset and to grow the value of the asset, just by virtue of the improvements we're going to be making to the surrounding neighborhood.

Todd Michael Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Okay. And are you able to share the cap rate on Girard Plaza and also on the LA Fitness in Fort Washington, the disposition?

Bruce Schanzer -- Chief Executive Officer

Sure. So the Girard Plaza cap rate was right around the 6% cap. And the -- Fort Washington was a LA Fitness and net lease deal that was sold at around the 7.25% cap.

Todd Michael Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Okay, great. And just lastly, Robin, you mentioned -- you talked about some of the leasing that has taken place since the end of the quarter, some of the renewal and new leasing volume. Can you go through that a little bit more in detail and talk about what that represents in terms of occupancy gains? And how much of that leasing that you described is in the same-store pool?

Robin Zeigler -- Chief Operating Officer

Sure. So about half of that is renewals and about half of it is new deals. And of the new deals, as I mentioned, there is a handful of anchor deals that are included in there that are part of our mixed-use redevelopment pipeline. So as it relates to the same-store, I have not gone back and calculated it, but I would expect that by the end of the year, we would probably increase our same-store occupancy by about 100 basis points to 150 basis points, something like that.

Todd Michael Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Okay. All right, that's helpful. Thank you.

Operator

Our next question is from Collin Mings, Raymond James. Please proceed with your question.

Collin Philip Mings -- Raymond James & Associates, Inc. -- Analyst

Thanks. Good afternoon, everyone.

Bruce Schanzer -- Chief Executive Officer

Good afternoon.

Philip Mays -- Chief Financial Officer

Hi, Collin.

Collin Philip Mings -- Raymond James & Associates, Inc. -- Analyst

Just going back to the prepared remarks, Bruce, just recognizing the constraints on capital, you discussed last quarter. But now with the stock down over 20% from where the company was buying it back in 1Q. Just -- are you looking at any more potentially accelerating some asset sales to take advantage of that valuation gap or maybe just expand a little bit more on those prepared remarks regarding the stock price and the disconnect you see out there?

Bruce Schanzer -- Chief Executive Officer

Sure, Collin. Happy to do that. So why don't I address two different facets of your question. So first, in terms of share buyback it is of course, something that we continue to think about and there are really only two practical constraints to our continuing to pursue the share buyback, which again obviously makes sense as just a strictly financial undertaking. One of them is constrained in our corporate credit facility, that we want to make sure we're mindful of. And then the second is a little bit harder to measure, which is a recognition that given our enterprise value and the size of our enterprise and the fact that we have a platform that requires a significant amount of G&A spend that as we contract the size of the platform by buying back stock, we are potentially creating a strain on our ability to create value because of the fact that we now have a smaller platform and a substantial amount of G&A, so although on its face, selling assets at cap rates that are lower than the implied cap rate at which the entire company is trading is obviously on its face, a very compelling investment opportunity. And again, one that we continue to study. There are some practical constraints both within our credit facility and within just our mindfulness around how our G&A relates to our enterprise value that our governors are not just jumping right in and doing that, so that's sort of the answer to your -- the first facet of your question.

In terms of the second facet, look, we think about things like our share price and thinking about our capital allocation alternatives, so a great point is, for example, what we sold an asset and bought an asset, it happens to be the Girard Plaza has been under contract for well over a year and was an asset that we've been actively engaged in buying for well over two years. And that's pretty much the reason why we ultimately decided to close on it, but that's an example of a transaction where we thought long and hard about the fact that given our share price, this might not be an optimal capital allocation decision. And so again, with our share price where it is, it does force us to think much more clearly and much more analytically about our capital spend across all of our various capital allocation decisions.

Collin Philip Mings -- Raymond James & Associates, Inc. -- Analyst

Okay, that's helpful discussion there. And then maybe picking up on that point you made as far as the importance of the platform and the G&A associated with that. Again, we discussed a couple of quarters ago, some of the investments you are making on the personnel front, this year on the G&A front. But as again, continuing to move down the path with some of these redevelopments. Maybe just talk about the ability to kind of scale from here, if you will, do you need to -- do you see as we think -- start thinking about 2020 additional investments in G&A, given where the redevelopments are? Or should we think about again kind of the investments that you've made to this point being able to just kind of continue to grow off of this, if you will?

Bruce Schanzer -- Chief Executive Officer

So look, we have the major pieces in place to execute our redevelopment plans. I will tell you that, certainly, on the margin, as we dive deeper into these redevelopments, there will probably be incremental G&A. But what I will also tell you, and this is something to understand, is that between Robin and then Michael Sommer, who's just joined us as our Head of Construction and Development and the team that they have underneath them, the expertise that we have in this shop to develop projects that will be the types of crown jewel assets that a company 10 times our size would be proud to show off is really one of the things that's incredibly exciting as a CEO to have been able to put together a team like this. And as a shareholder and just contemplate the kind of value creation that's that hand that we look forward to. So certainly, there'll be a lot of leverage that we're able to achieve both operationally and financially, off of our G&A. So while there might be some incremental spend, certainly the big pieces are in place, and the team that we have is really second to none in terms of its ability to execute on our plans and really create a lot of value for a long time.

Collin Philip Mings -- Raymond James & Associates, Inc. -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] There are no further questions at this time, and I would like to turn the call back over to Bruce Schanzer for closing remarks.

Bruce Schanzer -- Chief Executive Officer

I would just conclude by thanking you all for joining us this evening, and wishing you all an enjoyable balance of the summer.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Nicholas Partenza -- Assistant Controller-Financial Reporter

Bruce Schanzer -- Chief Executive Officer

Robin Zeigler -- Chief Operating Officer

Philip Mays -- Chief Financial Officer

Todd Michael Thomas -- KeyBanc Capital Markets Inc. -- Analyst

Collin Philip Mings -- Raymond James & Associates, Inc. -- Analyst

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