Rithm Property Trust Inc. Common stock

Greetings and welcome to the RPT Realty 4th Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vin Chow, Managing Director of Finance and Investments. Please proceed.

Good morning and thank you for joining us for RPT's fourth quarter 2021 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 risk factors are described as risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2021, that will be filed later today, and in our earnings release for the fourth quarter of 2021. Certain of these statements made on today's call also involve non-GAAP financial measures, Listeners are directed to our fourth quarter 2021 and third quarter 2021 press releases, which include definitions of those non-GAAP measures and reconciliations of the nearest GAAP measures, and which are available 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.

Thanks, Ben. Good morning, and thank you for joining our call today. 2021 was a transformational year for RPT across all areas of our business, and we are in better position today than we ever have been in RPT's history to grow earnings and create value for our shareholders. Compared to 2020, we expect to grow 2022 operating FFO by a robust 32%, primarily driven by strong operating performance, accretive acquisitions, and fee income. We created another growth leveler in our fund business with the formation of our net lease platform to take advantage of dislocations between multi-tenant and single-tenant valuations, and to enhance our management fee income stream. Through our data-driven approach, we were the top buyer of open-air shopping centers in 2021, with Boston becoming our third largest market in less than a year, vastly improving our geographic footprint and portfolio quality. We leased more space than we have in any year since 2016, and we reported our fourth consecutive year of new lease spreads of 20% or more. We significantly upgraded our tenancy by replacing weaker credits with top investment grade rated tenants in many cases, while our sign not commence backlog continues to accelerate. We assessed all types of capital, including equity, debt, and joint venture capital, totaling $1.1 billion. while addressing a significant amount of our debt maturities through 2024. As was the case since our current senior management team joined RPT over three years ago, our actions in 21 were done through the lens of setting up RPT for bottom line earnings growth and NAV growth over the next few years that we believe will lead the sector. Starting with investments. Through our strategic investment platforms, we got an early start on the acquisition front and were able to successfully close on almost $550 million of gross multi-tenant acquisitions in 2021. The timing of our acquisitions could not have been better as we used the COVID-induced downturn to curate a portfolio of 10 high-quality assets in strong markets at attractive cap rates. Based on today's market comps and our performance against underwriting, we think these assets would trade about 70 basis points tighter than where we bought them, highlighting the opportunistic timing of buying in the short window before cap rates compress considerably. In addition, we believe we have a competitive advantage that our data science approach provides us when evaluating acquisitions. Over the past several months, we have invested in talent and technology to assess risks, analyze evolving trends, and to better project the future success of a property. In the long run, this data-driven approach will optimize our capital allocation decision-making. Clearly, it happened in 21. Let me put the benefits of our 21 acquisitions into perspective. In just one year, we increased our exposure to the vibrant and growing markets of Boston, Atlanta, Tampa, and Nashville by 12%. while reducing our exposure to Chicago, Detroit, and Cincinnati by 8%. Keep in mind, this was done on an earnings accretive basis with our net acquisition activities, including joint venture fees and preferred income, contributing about $0.08 of operating FFO growth in 21. Our 21 acquisitions were also high-quality, featuring strong grocer-anchored tenants such as Wegmans and Whole Foods, with sales performance of $775 per square foot. We expect these acquisitions to generate well above trend annual NOI growth of approximately 6% over the next three years, primarily driven by leases signed or an advanced negotiation that have yet to commence, totaling $1.6 million in ABR and estimated recovery income. During the fourth quarter, we closed on the acquisition of Highland Lakes in Tampa for $15 million. The current occupancy is just 51%, but during underwriting, we were able to secure a new lease with a premier AA-rated grocer to replace the former Steinmart box, which will increase occupancy to over 95% upon commencement of the new lease. This is a great example of the kind of value creation opportunities that we are looking for when we can buy vacancy and utilize our strong leasing platform to generate 150 basis point spread between the stabilized yield of the center and current market cap rates. We also closed in the Dedham Shopping Center in Boston through our grocery-focused joint venture platform. This is a great infill property that sits inside the Boston 128 loop is anchored by a high volume stop and shop that ranked amongst the top 2% of US shopping centers for traffic in 2020. TJX and Dix also do extremely well here. The center features strong demographics with three mile household income of $136,000 and population density of 109,000 and is a great addition to our Boston portfolio. We already have a signed lease with a 25,000 square foot marquee retailer that we look forward to announcing soon. Looking forward, we expect to remain active on the investment front. Our industry-leading acquisition volume in 21 has led to increased deal flow, and although cap rates have compressed, our three investment platforms provide us with a competitive advantage through enhanced yields. We have a deep acquisition pipeline with a variety of opportunities ranging from portfolio deals where we can allocate properties across our platforms to larger centers where we can enhance returns by selling parcels to our net lease joint venture. We're also looking at smaller grocery anchored centers and more granular opportunities in high income infill suburbs where existing metros where we already have scale. For instance, we are looking at some smaller opportunities outside Cambridge, Massachusetts where we could curate a portfolio over time with well above portfolio average incomes and densities. These properties are currently owned by mom and pops where we could realize significant NOI growth. We're also looking at a high barrier to entry center north of Boston that has two high performing grocers with tenant sales that would be in the top 5% of our portfolio and where we could enhance our yield by selling out parcels to the net lease joint venture. In our net lease platform, we closed on 191 million of single tenant net lease properties in 21. We now see opportunities to acquire multi-tenant centers outside of RPT's target markets like we did with our Mountain Valley acquisition. The inclusion of multi-tenant properties increases the platform's pipeline while preserving the ability to realize multi- to single-tenant arbitrage opportunities. We expect Tyler and his team to be very busy this year. As we discussed last quarter, the froth we are seeing is also allowing us to revisit potential asset recycling opportunities where we can redeploy proceeds from slower growth markets into higher and better uses, like we did with our Market Plaza and Webster Place sales in Chicago, which is a weaker market in our scoring model. Regarding Webster, after evaluating a multitude of densification and leasing scenarios, we concluded that we could realize the vast majority of the expected value without any development or leasing risk by selling it and deploying the proceeds into higher risk-adjusted return opportunities. On Market Plaza, We simply felt that we had harvested the NOI upside in the asset and selling at a 5.6 cap rate was the best interest of our shareholders. In both cases, the data and our expected IRRs governed our decisions, and we are pleased with the execution. Given the disconnect between public and private market values, dispositions are an attractive source of capital that also allows us to further reshape and improve our portfolio quality. As Mike will detail later, we have embedded about $100 million of dispositions in non-core markets in our 2022 outlook, which will be match-funded with about $125 million of projected acquisitions. Turning to leasing. While no one wishes COVID happened, the pandemic has reinforced the importance of brick and mortar to the overall retail distribution channel and has fueled a renaissance of tenant demand. We are currently in the midst of the strongest leasing environment that I have ever seen in my career. Demand is broad-based across all property types, geographies, and tenant categories. During the quarter, we signed 385,000 square feet at nearly $20 per square foot, representing a 25% increase over our portfolio average. For the year, we signed 1.7 million square feet of leases, which is the highest annual level since 2016, and validates our high-quality, in-demand portfolio. We continue to unlock the embedded growth potential in the portfolio as evidenced by the robust 33% new lease and 9% blended spread we achieved. Our strong leasing performance during the year and in the fourth quarter drove our sign-not-open backlog to 6.9 million. In addition to our growing S&O pool, we are also in advanced negotiations with grocers, Exciting fast casual concepts, boutique fitness, wholesale clubs, and more on leases totaling $3.3 million in incremental ABR and estimated recovery income. Equally important to locking in attractive economics are the quality improvements we were able to achieve by replacing weaker credit tenants for stronger ones. We were also able to increase our ABR from centers with a grocer to 71% from 65% in 2019. Overall, our tendency continues to get stronger. We are turning Airtime Trampoline and Game Park, Shoppers Food Warehouse, Lane Bryant, and Steinmart into a AA rated grocer, Giant Ahold, REI, Sephora, Burlington, and Ferguson. As you can see on page 17 of our investor deck on our website, the rent for these new tenants is about double what they are replacing and cap rate compression for these assets is about 50 to 75 basis points, both metrics representing significant value creation. As leases come online, you will see that our top tenancy will begin to change more materially as signed leases commence. Including signed leases and one in advance negotiation, the previously mentioned premier investment gate grocer is expected to become a top five tenant upon rent commencement. We also continue to think creatively about the highest and best use of our properties to maximize value. We recently executed an agreement with DiBarto Development. Upon completion of certain closing conditions, including obtaining entitlements, we will enter into a joint venture with them to build a roughly 300-unit multifamily property on undeveloped land next to our parkway shops in Jacksonville, Florida. We will contribute the land and $500,000 for a 50% equity stake in the venture. Sticking with development, we are working on an exciting redevelopment plan at Marketplace at Delray, which sits in the highly desirable Delray Beach sub-market of Miami. We are seeing robust tenant demand here, given the quality of the real estate and the strength of the market. We are also set to break ground in a few weeks at our Crossroads property in the Miami market. Here, we are demolishing the existing public store and building them a new, larger prototype to better serve their customers. Total cost is $4.4 million, with expected return on costs of 6% to 8%. Please see page 21 of our supplemental for further detail. Finally, we have also identified an opportunity at our Hunter Square asset in Oakland County, Michigan, where we expect to redevelop the north side of the center. We have strong interest from a major investment-rated grocer to anchor the project for us. We expect to share more details on the scope, costs, yields, and timing over the next quarter or two. As we look forward in 2022, we will be very active on all capital allocation fronts, acquisitions across all three of our investment platforms, opportunistic dispositions, and continued investment in leasing and development, all of which will drive future earnings and NAV growth. With that, I'll turn the call over to Mike to review our quarterly results and provide color on our 2022 outlook.