RPT Realty (NYSE:RPT) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Greetings, and welcome to the RPT Realty First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Benigno, Senior Analyst, Investor Relations. Thank you, sir. You may begin.

Craig Benigno : Good morning, and thank you for joining us for RPT’s First Quarter 2023 Earnings Conference Call. At this time, management would like me to inform you that certain statements made during this conference call which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made. Although we believe that the expectations reflected in any forward-looking statements are based on reasonable assumptions, factors and risks could cause actual results to differ from expectations.

Certain of these factors are described as risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2022, and in our earnings release for the first quarter 2023. Certain of these statements made on today’s call also involve non-GAAP financial measures. Listeners are directed to our first quarter 2023 press release, which includes definitions of these non-GAAP financial measures and reconciliations to the nearest GAAP measures and which are available on our website in the Investors section. Lastly, this quarter, we are introducing our earnings presentation, which we will reference throughout the call to highlight key messages for the quarter. You can find the first quarter 2023 earnings presentation on our website in the Investors section.

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

Brian Harper : Thanks, Craig. Good morning, and thank you for joining our call today. We continue to experience strength in the leasing environment, highlighted by our third consecutive quarter of over 500,000 square feet of signed activity, compelling new re-leasing spreads of about 25%, and substantial progress on backfilling our Bed Bath concepts where we have strong demand and activity on all locations. As mentioned on the prior earnings call, we have been treating our Bed Bath boxes as vacant for some time as we worked on re-leasing plans well ahead of their bankruptcy filing. In some ways, our industry, like the hospitality sector, needs to have hands-on, active, day-to-day management to drive alpha and operational results.

Given our proactive approach, we believe we can create significant value with top-tier tenants that better credit, higher rent, stronger sales and more relevance with our consumer. We have engaged with several retailers across the country about these locations, giving us a substantial head start on backfills with single user tenants, which limits CapEx and downtime. Our in-place rents for Bed Bath are near the lowest in our industry at about $11.50 per square foot, which we expect to grow by 30% to 40%. At the end of 2022, we had 8 Bed Bath & Beyond leases and 4 buybuy BABY. Since then, we have released 3 of our Bed Bath & Beyond locations to strong national tenants, capturing a mark-to-market spread of nearly 50%, highlighted by our HomeGoods lease at River City Marketplace in Florida.

While the 50% spread is sizable and akin to industrial spreads, it is not surprising given the mark-to-market story we have been communicating and executing on for the last several years. Expected downtime on these deals is minimal with rent expected to commence on the HomeGoods deal in the fourth quarter 2023 and on the other 2 deals in the second quarter of 2024. Additionally, we are negotiating leases or LOIs on 5 other locations at a weighted average rent spread between 30% to 40% and are in active tenant discussions on our remaining 4 exposures, 2 of which are being considered as part of a larger redevelopment plan. The lack of quality new supply is driving broad-based demand that includes grocers, off-price, general merchandise, home improvement, health and beauty, medical and sporting goods tenants.

Given this demand, we expect to have signed leases in the next few months for all remaining Bed Bath and buybuy locations. In the event we get the spaces back. Please see Slide 10 in our earnings presentation for additional details about our Bed Bath exposure. In March, we were happy to announce the appointment of Amy Sands as Executive Vice President and Head of Investments based in our New York City office. Amy is well known and well respected within the real estate community and brings over 20 years of transactions experience, having last served as Senior Managing Director, Co-Head of the Chicago office at JLL Capital Markets. Amy brings a deep network and a proven track record and will be a great cultural fit at RBT. With $1.7 billion of committed capital to deploy between our 2 joint venture platforms, we are excited to see the efficiencies of our now consolidated investments team under her leadership.

I would like to take a moment to highlight Miami, which represents 8% of our ABR and is now our fourth largest market. We have been actively expanding our presence in Miami due to the incredible growth the area is experiencing. Our leased to occupied spread of 630 basis points in the market provides a clear path to further expansion. It’s one of the largest Miami shopping center owners in the public REIT space. And at just 83% leased, we have a unique opportunity to capitalize on one of the fastest-growing markets in the country, where rents are up 25% over the past 5 years, including an 8% increase in 2022. Over the last 2 years, we have been replacing older leases in our Miami portfolio that were paying little to no rent. At Mission Bay Plaza in Boca Raton, we replaced a former Office Depot with Baptist Health, a AA- rated credit health care facility, which we highlight on Slide 16 of our earnings presentation.

Additionally, we are finalizing a lease with a market dominant grocer to replace a Save A Lot that was paying $6 per square foot in rent. We are also in lease negotiations with a leading retailer to replace a Winn-Dixie that had been in the portfolio for over 25 years and was paying $6.50 per square foot. On the small shop side and to put it into context the mark-to-market opportunity in our Miami portfolio, we are replacing an older restaurant concept with a nationally recognized restaurant at close to a 70% spread, which equates to an ABR of $60 per square foot. Miami and the rest of Florida will be a meaningful driver to our internal growth for 2024 and beyond. See Slides 14 and 15 in our earnings presentation for more details on why we are so bullish about this market and the near-term opportunity there.

The crown jewel of our Miami portfolio is Mary Brickell Village. Our investment thesis was simple: buy great real estate at great value in a market we know well. Our plans to unlock this value are beginning to take shape in the form of a phased redevelopment of the Western parcel that we will realize the embedded mark-to-market opportunity in the near term. Today, the center is 94% occupied, up from 78% when we bought the asset last summer. Sales are over $1,500 per square foot, up nearly 63% since 2019, which equates to a low 4% cost of occupancy, reflective of the significant future mark-to-market upside at MBV. The challenge here is not filling vacancy. It’s curating the optimal mix of tenants that will generate the highest level of sales and allow us to maximize rents.

We are targeting best-in-class wellness, food and beverage, services and soft good retailers, including top international restaurant groups. We are in active negotiations with new and existing tenants at rents in the $120 to $150 per square foot range, which compares to our blended in-place rent of $47 per square foot and our initial underwriting rents in the $75 range. Fundamentals are clearly exceeding our expectations. And we now expect to drive unlevered IRRs that are several hundred basis points better than we initially underwrote. Longer term, our plans include a mixed-use vertical densification of the Eastern parcel. We continue to evaluate our densification options and have been working with a top-tier architect on our vision to unlock the air above the site.

While the timing of this specific opportunity is a few years away, we are spending time now to understand and evaluate our options to maximize value for our shareholders with an eye on creating an unlevered IRR well into the double digits. See Slides 17 and 18 of the earnings presentation for additional color on our plans at MBV. With that, I’ll turn the call over to Mike.

Michael Fitzmaurice : Thanks, Brian, and good morning, everyone. Recent tenant bankruptcy filings, the elevated rate environment, and concerns of a potential recession serve as reminders of the importance of disciplined balance sheet management. On this front, we continue to be proactive and control the controllables. Our investment-grade rated balance sheet is in a position of strength with no debt maturing until 2025, about $470 million of liquidity, only 5% of our debt tied to floating rates, and the leverage continue to tick down towards our target level of 6x net debt to adjusted EBITDA. Turning to first quarter results. Operating FFO per share of $0.25 was slightly ahead of our internal plan for the quarter and up $0.01 versus last quarter primarily due to lower G&A.

Same-property NOI growth for the quarter came in ahead of plan as well at 3.8%, fueled by 3% base rent growth after adjusting for some offsetting accounting movements between base rent and rental income not probable of collection highlighted on Slide 20 in our earnings presentation. In the first quarter, we signed leases covering approximately 506,000 square feet, resulting in a signed not commenced balance of $9.6 million, which equates to about 6% of first quarter NOI. Our SNO pipeline was down slightly versus last quarter as we opened almost $3 million of gross rent on schedule, partially offset by $1.2 million of new leasing activity. The pipeline is largely comprised of high-quality grocer and discount tenants that we expect will add an incremental benefit of $0.10 per share of annualized operating FFO by 2025.

Please see Slide 7 of our earnings presentation for additional details on the trajectory of our SNO upside. Our leasing pipeline continues to be robust with $10 million plus in lease or LOI negotiation. We ended the quarter with a strong 95.3% same-property leased rate, up 150 basis points year-over-year. I encourage you to focus on our same-property lease rate as you assess the quality of our portfolio. We are tactically recapturing substantial space at 3 properties that are in active redevelopment or being prepared for one, which is temporarily impacting our leased and occupancy rates for our aggregate portfolio. At Crossroads in the Miami market, we demolished a smaller, older Publix last year, representing 42,000 square feet or 30% of the property GLA and are set to open a brand-new Publix flagship store later this year that we expect to drive incremental sales and rent growth.

Additionally, at our Delray Beach asset, Florida, we proactively recaptured 53,000 square feet mid last year or 25% of the center GLA that was previously leased to a below-average grocer and are in active discussions with an investment-grade rated national tenant as they backfill. In Oakland County, Michigan, at our Hunter’s Square asset, we purposely recaptured about 100,000 square feet during the first quarter this year or 30% of the center GLA to be redeveloped. We are in active discussions with a top-tier grocer and 2 Class A national retailers. We look forward to sharing more details on our Hunter’s and Delray projects in the coming quarters. During the quarter, we also continue to realize the benefits of our below-market rents, achieving a 39% and 23% rent spread on new leases over the trailing 12 months and during the quarter, respectively.

Renewal spreads improved to 7% in the first quarter and were also up 7% on a trailing 12-month basis. Since mid-2018, our rent spread on new leases has averaged 31%, and we see no near-term slowdown, particularly in light of the Bed Bath opportunity. We also continue to drive contractual rent growth with escalators on new leases averaging 2% over the last 12 months as we realize the benefits of our high-quality portfolio. These escalators will contribute to a rising and sustainable NOI growth profile over time. Given our outperformance during the first quarter and with the bankruptcy environment playing out roughly as expected, we are maintaining our operating FFO per diluted share guidance range of $0.97 to $1.01 per diluted share and our expectation of same property NOI growth of 1.5% to 3.25%.

The midpoint of our operating FFO guidance continues to assume lost rent totaling 300 basis points of NOI, which is comprised of our typical bad debt reserve of 75 basis points as well as an additional 225 basis points tied to bankruptcies, primarily for Regal and Bed Bath & Beyond. Our operating FFO and same-property NOI range contemplates that we recapture all our remaining Bed Bath & Beyond and buybuy BABY locations by the end of July. We do expect our operating FFO and same-property NOI to decelerate in the second quarter as we recapture space from Bed Bath & Beyond but to reaccelerate in the back half as our signed not commenced tenants begin to open and pay rent. And with that, I will turn the call back to the operator to open the line for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Derek Johnston with Deutsche Bank.

Operator: Our next question comes from the line of Todd Thomas with KeyBanc.

Operator: Our next question comes from the line of Haendel St. Juste with Mizuho.

Operator: Our next question comes from the line of Floris Van Dijkum with Compass Point.

Operator: Our next question comes from the line of Lizzy Doykan with Bank of America.

Operator: Our next question comes from the line of Hong Zhang with JPMorgan.

Operator: Our next question comes from the line of Tayo Okusanya with Credit Suisse.

Operator: Our next question comes from the line of Alec Feygin with Baird.

Operator: We have no further questions at this time. Mr. Harper, I would now like to turn the floor back over to you for closing comments.

Brian Harper : Thank you, operator. So despite the uncertain macro environment, return of select national retailer bankruptcies, we believe RPT has the balance sheet and internal growth levers to strengthen our cash flows. Continued robust leasing demand and our track record of quickly backfilling spaces vacated by troubled tenants at superior economics gives us great confidence that 2023 will be another year of solid performance for the company. Looking forward to seeing many of you at, ICSC and NAREIT. Have a great day.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.