Cedar goes long

Cedar Realty Trust is building what it hopes will be a long-term value creation engine.

Last year, Cedar Realty Trust shook off the last vestiges of its recession. Upon taking the reins of Cedar, new president and CEO Bruce Schanzer set in motion a short-term strategic plan in third quarter 2011. The plan was to sell nearly half of the company’s 140 properties owned in 2011 and streamline its property-type and geographic focus, while reducing leverage over the following two years. While the results for 2013 are being tallied now, performance during the first three quarters suggest a very good year of solid results. Cedar’s successful completion of its short-term strategic plan in November 2013 seems to have been a catalyst for recent positive share price performance.

Near-term strategy
When Schanzer joined Cedar in June 2011, its portfolio contained about 140 disparate properties including unanchored strip centers, malls, single-tenant net leased assets and grocery-anchored shopping centers. “There was no unifying theme to the portfolio,” Schanzer said. “Our near-term strategy was to sell about half of our assets, 21 in a joint venture and 50 others in order to give the company a focus. Then we would use the proceeds to delever to the tune of $190 million and drive the debt to EBITDA ratio down from 9.2x to below 8.0x.

“We back-tested the new portfolio to see how it would have performed during the recession and discovered it would have turned in very strong results. In fact, better than all but one of the other shopping center REITs.”

Cedar kept only the strongest performers located along the Washington, D.C., to Boston corridor. These assets are the types of assets that tend to withstand tough economic environments such as the last recession.

“The D.C. to Boston corridor has four of the eight best retail markets in the country,” Schanzer said. “They are stable, mature markets, with attractive demographics.”

The short-term plan has worked. Cedar has pruned assets, reduced its debt to EBITDA ratio to 7.8x, improved its balance sheet with an unsecured corporate credit facility, lowered its cost of capital and managed to unencumber 40% of its NOI.

“We plan to continue to address maturities and continue to unencumber a greater percentage of our NOI,” said Schanzer. “This will increase the flexibility of our balance sheet.”

The short-term strategy has enabled the company to begin pivoting into an even more ambitious long-term strategy.

Long-term strategy
Cedar’s long-term strategy aims generally to improve the average asset quality of its centers. Accomplishing that will involve implementing five tactics:

•    Focus on grocery-anchored centers between Washington, D.C., and Boston
•    Intensify the geographic footprint and improve asset quality through capital recycling
•    Make targeted capital investments into existing centers
•    Drive results through leasing and operations
•    Continue to strengthen the balance sheet

D.C. to Boston focus
According to Schanzer, Cedar wants to acquire grocery-anchored centers in the D.C. to Boston corridor with attractive demographics, a stable income stream with growth potential and solid returns. “In short, we are looking for assets that improve our overall portfolio quality,” he said.

For example, the company recently acquired the 101,000 square foot Big Y Shopping Center in Fairfield County, Connecticut, that fits all of these criteria. It lies within the I-95 corridor. Anchored by a high-volume Big Y supermarket, the Class A center is 100% leased. High-credit quality tenants include Wells Fargo, Starbucks and Dollar Tree. The population within a five-mile radius is 102,747, and the average annual household income is $91,522.

Improve asset quality through capital recycling
The Big Y Shopping Center purchase price of $34.5 million was initially funded through its credit line and is ultimately being capitalized with funds from asset sales. “The Big Y investment achieves two things,” said Schanzer. “It’s a better asset than our average asset, so it inherently improves average asset quality. In addition, the way we paid for it by selling inferior centers, also raises average asset quality.”

Capital investments in existing centers
Cedar is also redeveloping centers that should be performing better, given their demographics and locations.

For example, the company has invested $3 million in the 466,213 square foot Colonial Commons in Harrisburg, Pa., to re-tenant a vacant movie theater parcel with a 15,500-sq.-ft. Old Navy and a 10,100-sq.-ft. Ulta, both slated to open this spring. The redevelopment also includes relocations of several small-shop tenants.

Schanzer said estimates project an unlevered internal rate of return (IRR) in the mid-teens.

Next, the redevelopment will continue into a phase II that includes the re-tenanting of another junior anchor box in the center, presumably increasing the IRR.

Leasing and operations
“Acquisitions provide good returns,” Schanzer said. “Investing in your own portfolio provides higher returns — recall the mid-teens return anticipated for the Colonial Commons redevelopment.

“The highest returns, however, come from leasing and operations. Ideally, we want to drive rent and occupancy growth to optimize portfolio performance.”

The next three years hold great opportunities for Cedar’s leasing program. About 34% of the company’s total square footage will roll over between 2014 and 2016, and Cedar anticipates that rental increases will average around 8%.

It’s already begun. Four Farm Fresh stores totaling 233,000 square feet recently exercised their contractual renewal options with 8.4% rental increases.

“Releasing 34% of our square footage at significant rental rate increases will offer meaningful upside,” Schanzer said. “This is an opportunity brought about by fortuitous timing in a period of economic growth and lack of new shopping center development.”

Operational changes are contributing to NOI growth as well. “Cedar used to be highly acquisitive, and we often didn't take the time to focus on operational opportunities,” Schanzer said. “But now that operations have become a main focus, we have pursued a strategy of more active asset management which is already generating attractive returns.”

Continuing to strengthen the balance sheet
Schanzer went on to say that plans call for a continuation of policies that reduce leverage, unencumber NOI and drive down the cost of capital.

Building a more flexible balance sheet plus a focus on the D.C. to Boston corridor, improving asset quality, improving existing centers and boosting NOI through leasing and operations comprise Cedar’s long-term plan.

“It’s a strategy designed to build a powerful value-creation machine that will compound value over an extended period of time,” Schanzer said.

That’s been hard for REITs to do in the past. “Yes,” Schanzer agreed. “But it can be done if you take a highly disciplined approach to capital allocation and balance sheet management. We want to generate positive shareholder returns on a consistent basis every year by methodically growing our net asset value. That’s a powerful long-term value-creation model.”

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