Cedar goes long
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.
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.
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.”
Redeveloping Waikiki retail
The few blocks surrounding the Honolulu intersection of Kalakaua and Ka’iulani Avenues boasts the highest pedestrian traffic in the world-renowned Waikiki retail district. The count exceeds 22,000 visitors per day. And it is rising as recovering international economies enable tourists from around the world — and especially from the Asia-Pacific countries of Japan, China and South Korea — to respond to the beckoning call of Hawaii’s Big Island of Oahu.
For the first nine months of 2013, visitors to Hawaii spend $11 billion, an increase of 4.1% from the same period in 2012. The total number of visitors rose 4.5% to 6,256,793 visitors.
To keep evermore tourists coming, the owners of the retail and hospitality real estate on and around Kalakaua and Ka’iulani Avenues have undertaken a billion dollar redevelopment effort.
Kyo-ya Hotels & Resorts, owner of five hotel and resort properties in Hawaii, is planning a $450 million redevelopment of its Sheraton Princess Ka’iulani Hotel, which is located at that intersection.
“Just across Ka’iulani Avenue, Blackstone just bought the Hyatt Regency Waikiki Beach and plans to embark on a major renovation,” said Kazuko Morgan, vice chairman of retail services with Cushman & Wakefield of California. “On the other side of the Sheraton Princess, The Taubman Company is renovating its International Market Place. Across the street the International Market Place, Kyo-ya is renovating another of its hotels.
“This is a game changer for the area. These renovations and redevelopments are raising the bar to a level that will attract luxury tenants — it has been a middle-market retail district.”
The $450 million redevelopment of the Princess Ka’iulani is the latest in Kyo-ya’s billion-dollar investment in Waikiki, an effort that began in 2007 with the renovation and rebranding of the historic Moana Surfrider as a Westin Resort & Spa. The repositioning of The Royal Hawaiian as a Luxury Collection Resort followed, along with the renovation of the Sheraton Waikiki.
“The Princess Ka’iulani consists of two towers,” said Morgan. “One will undergo a complete renovation. Plans call for the demolition of the second tower and the construction of a new 34-story, five-star hotel and residential tower.”
Both towers will sit atop a one-story structure with approximately 31,000-sq.-ft. of upscale street-level retail fronting on Kalakaua Avenue. Within walking distance of 22 hotels and 28,772 hotel rooms, the retail development will be called The Shops on Kalakaua.
Positioned to capture the 4.9 million tourists that visit Oahu annually, The Shops on Kalakaua will appeal to international travelers looking for international luxury brands in Waikiki.
Kyo-ya has appointed Cushman and Wakefield as the exclusive retail-leasing agent for The Shops on Kalakaua. Kazuko Morgan will lead that effort.
Target cuts outlook; discloses wider data breach
Minneapolis — Target Corp. on Friday cuts its profit forecast on the heels of disappointing fourth quarter same-store sales. The retailer also disclosed that its previously announced data breach involved many more people was much wider than it initially thought.
Target said that it expects same-store sales will fall 2.5%, from estimates of no change previously. And as part of its ongoing investigation into the data breach, Target said it learned that the names, mailing addresses, phone numbers or email addresses for up to 70 million individuals also had been stolen. The company said those 70 million people were separate from the approximately 40 million credit and debit card accounts previously reported as compromised, though there was some overlap. Target stressed that the newly disclosed information was not a new breach but was uncovered as part of its continuing investigation.
“I know that it is frustrating for our guests to learn that this information was taken and we are truly sorry they are having to endure this,” stated Gregg Steinhafel, Target chairman, president and CEO. “I also want our guests to know that understanding and sharing the facts related to this incident is important to me and the entire Target team.”
Target said it will offer one year of free credit monitoring and identity theft protection to all U.S. customers.
The company said its sales were stronger than expected prior to the December 19, 2013 disclosure of the data breach. Once the news broke, things headed south quickly and the company said is saw “meaningfully weaker” than expected sales, even though it instituted a 10% across the board discount for customers who shopped its stores the final weekend before Christmas.
Target said it is likely to incur a charge whose size it isn’t yet able to estimate because it doesn’t know how much it will have to spend on a range of data-breach related costs. According to the company, the costs may include liabilities to payment card networks for reimbursements of credit card fraud and card reissuance costs, liabilities related to REDcard fraud and card re-issuance, liabilities from civil litigation, governmental investigations and enforcement proceedings, expenses for legal, investigative and consulting fees, and incremental expenses and capital investments for remediation activities.
“In light of the recent data breach, our top priority is taking care of our guests and helping them feel confident in shopping at Target,” said Target CFO John Mulligan. “At the same time, we remain keenly focused on driving profitable top-line growth and investing our resources to deliver superior financial results over time. While we are disappointed in our 2013 performance, we continue to manage our business with great discipline and leverage our expense optimization efforts to reinvest in multichannel initiatives that generate long-term value for our shareholders.”