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Edited Transcript of CDR earnings conference call or presentation 6-Feb-20 10:00pm GMT

Q4 2019 Cedar Realty Trust Inc Earnings Call

Port Washington Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Cedar Realty Trust Inc earnings conference call or presentation Thursday, February 6, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce J. Schanzer

Cedar Realty Trust, Inc. - President, CEO & Director

* Nicholas Partenza

Cedar Realty Trust, Inc. - Director of Financial Reporting

* Philip R. Mays

Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO

* Robin McBride Zeigler

Cedar Realty Trust, Inc. - Executive VP & COO

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Conference Call Participants

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* Collin Philip Mings

Raymond James & Associates, Inc., Research Division - Analyst

* Floris Gerbrand Hendrik Van Dijkum

Compass Point Research & Trading, LLC, Research Division - Analyst

* Richard Jon Milligan

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Welcome to the Fourth Quarter 2019 Cedar Realty Trust Earnings Conference Call. (Operator Instructions)

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

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Nicholas Partenza, Cedar Realty Trust, Inc. - Director of Financial Reporting [2]

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Good evening, and thank you for joining us for the Fourth 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 updated 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 of -- as of the date of this call, February 6, 2020, 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.

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [3]

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Thanks, Nick. Good evening, and thank you all for participating in Cedar's Fourth Quarter 2019 Earnings Conference Call.

Joining me, as always, are my senior executive colleagues, and dialed in on the call as well, are most of the members of team Cedar. I want to thank our Board of Directors and all of team Cedar for their tireless efforts on behalf of the company, and for consistently doing their work with collegiality, collaboration and everyday excellence.

As a small retail REIT, we have been buffeted by stiff capital market headwinds as reflected in our share price performance of late. As I noted previously, we have a tough time reconciling this trading level with both the intrinsic value of our real estate and with the progress we are making in executing our value-add renovation projects as well as our more ambitious urban mixed-use redevelopment projects.

This cognitive dissonance has been exacerbated as we have seen a pickup in transaction activity in our footprint from our last earnings call, and pretty solid visibility into the warranted cap rates for our assets. That said, it continues to be a challenging operating environment with anchors at risk of vacating, such as A.C. Moore vacating at 2 of our centers. And with other anchors being open to vacating space relatively willingly, such as what we recently experienced with K-Mart at Valley Plaza and with shoppers at Metro Square. Greater detail on this is included in Phil's guidance comments.

On top of the pressure from anchors, the capital intensivity of our asset type continues to drift up as we endeavor to maintain and hopefully grow occupancy and earnings in the face of secular changes and challenges. This dynamic is not necessarily entirely unfavorable. For example, we agreed to an attractive lease [termination] payments at Metro Square and will hopefully monetize the asset further as we have placed it in our held for sale pool. Another example of how the secular dynamics in retail aren't entirely unfavorable is at Valley Plaza, where we were able to nudge our K-Mart for free after having been asked to pay them a few million dollars for the same outcome, not 2 years ago. We have identified Valley Plaza as an addition to our value-add renovation pipeline with some exciting merchandising options, and we'll hopefully provide further detail on this opportunity in the quarters to come. I will let Robin spend more time on the 3 large scale urban mixed-use assets we are pursuing. As a general characterization, I would state that we continue to make terrific progress on advancing all of these projects. With Robin at the helm, aided by Michael Summer, our new Head of Construction and Development, we are evolving this pool of assets into what will truly be first-class assets when completed, not to mention important amenities for the communities they serve.

At South Quarter Crossing, in particular, we commenced demolition this past quarter and are excited to commence construction in the coming months. I would be remiss if I didn't note our positive leasing results for the quarter and year. Our leased occupancy at 93.2% represents the highest leased occupancy level in over 4 years. This is significantly a result of moving our Dubois asset to comments to held for sale. However, it also represents the fruit of the labors of our leasing team headed by Tim Havener. The team has worked tirelessly to maintain and grow our occupancy in this challenging environment, and I thank them sincerely for their efforts. Some of the move-outs described in the 2020 guidance section of our press release, and in what Phil will discuss further in his remarks, are realistically going to bring occupancy down a little heading into 2020. However, we are keenly focused on backfilling those spaces, not to mention maintaining and growing occupancy more generally.

With that, I will conclude by reiterating my thanks to our Board of Directors and all of team Cedar for their efforts on behalf of our shareholders and assure you that we continue to be laser-focused on making astute capital allocation decisions across all of our endeavors.

With that, I will give you Robin.

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Robin McBride Zeigler, Cedar Realty Trust, Inc. - Executive VP & COO [4]

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Thanks, Bruce. Good evening. The Cedar leasing team finished the year strong with 41 deals totaling 297,100 square feet at an average base rent of $15.08 per square foot, bringing total leased occupancy up to 93.2%. This occupancy increase is 91 basis points above prior quarter and 220 basis points above the prior year. 28 renewals were executed this quarter at an average base rent of $15.84 per square foot with a spread of 5.9%.

During the quarter, we executed 12 comparable leases for which I would like to provide some detail. 6 comparable new leases were executed and historically difficult to lease spaces at an average base rent of $14.11 per square foot and a spread of 8.4%. Excluding grocery outlet, a new junior anchor grocer at Sweet Square, we executed an additional 5 new comparable leases at an average fixed rent of $11.37 per square foot and a spread of 20%. Despite the negative spread of the newly executed grocery outlet deal, we are excited about the introduction of this new merchandising to Fleet Square as the addition of a grocer positively impacts overall traffic at the center as well as its valuation.

Grocery outlet will replace a currently vacant space and a tenant that was in arrears with a strong daily traffic driver. We expect this new tenancy in conjunction with the existing LA fitness, will help catalyze renewed energy and tenant performance for this center. The 2 seater development platforms, the value-add renovation platform and our mixed-use redevelopment platform continue to advance and execute exciting projects. The value-add of innovation pipeline currently includes Fishtown Crossing, Carman's Plaza and Yorktowne Plaza. Groundbreaking occurred as Fishtown Crossing in Philadelphia in October 2019. The construction of a new small shop building is underway creating a home for Nifty Fifty and exciting regional diner concept and the vertical construction has commenced for a Starbucks pad building. There are several leases in negotiation, and we are very eager to unveil the reimagined shopping center this redevelopment will bring to the Fishtown in Northern Liberty's neighborhoods. Similarly, we have completed construction at Carman's Plaza located on Long Island, New York, and the anchor leasing lineup is firmly in place with key foods and 24-hour fitness.

Approximately 24,000 square feet of new small shop leasing has been executed to junior anchors, restaurants, service and retail users to round out the tenant mix at an average rent of approximately $22 per square foot, replacing previously vacant spaces and poor credit quality tenants. Once the remaining small shop spaces are re-leased, this project will be fully stabilized and is on pace to achieve very healthy double-digit returns. Yorktowne Plaza in Baltimore, which historically have been difficult to lease due to its lack of visibility and poor merchandising is now benefiting from physical repositioning and upcoming facade renovation and healthy leasing activity. Leases are executed with IHOP, Panda Express and Dunkin', with several others in mature negotiations.

This project is fully entitled, and construction is anticipated to commence in late 2020. We anticipate adding a fourth project to our value-add renovation platform due to the opportunity presented by taking back the below market rent K-Mart at Valley Plaza in Hagerstown, Maryland. Coupled with some adjacent space we will be freeing up at this center, the Cedar leasing and development team hopes to reposition this center to allow for a better junior anchor lineup and improved property performance. Additionally, we have 3 projects in our mixed-use redevelopment platform, South Quarter Crossing, the mixed-use redevelopment of South Philadelphia Shopping Center and Quartermaster Plaza will consist of 800,000 square feet of retail and 277 apartment units. Their project is anticipated to be built in 5 phases and preliminary demolition has begun. The rental apartment units are expected to be the first new apartment product of this scale delivered to South Philadelphia to provide a compelling value alternative to center city.

Our plan calls for residential to be complemented with ground floor retail, comprising a combination of existing anchor tenants, along with new anchor deals that will be announced soon, coupled with a diverse group of local, regional and national retailers to round out the small shop merchandising mix. The redevelopment is anticipated to drive an overall ABR increase of almost 40% over today's rent at the 2 properties that are being combined. Revere, formerly Riverview Plaza also in Philadelphia is programmed to be an entertainment and restaurant oriented mixed-use project. We anticipate constructing approximately 155,000 square feet of ground floor retail and 343 apartments in the first phase of the project. The project is slated to commence in early to mid-2021. Northeast Heights, the combination of East River Shopping Center and Senator Square in Washington, D.C. is our third urban mixed-use project. This project is expected to be completed in 3 phases, and the site plan for the project is rapidly crystallizing. The total project is expected to comprise 190,000 square feet of retail, over 1,000 units of residential as well as an office component.

We anticipate Northeast Heights upon completion to be transformative for the neighborhood and the surrounding communities. It takes a village to do what we do, ours is led by Tim's team, led by Rich Vilaboy and our asset management team led by Jennifer Bitterman truly work together every day, along with the rest of team Cedar, to advance this company on all fronts and create opportunities for future value creation.

With that, I will give you to Phil.

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [5]

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Thanks, Robin. On this call, I will briefly highlight operating results and provide detail on our initial 2020 guidance. Starting with operating results. For the quarter, operating FFO was $9.7 million or $0.11 per share. And for the full year, operating FFO was $40.8 million or $0.45 per share.

With regards to same-property NOI growth for the year, same-property NOI increased 0.3%, excluding redevelopment properties and decreased 0.3%, when including those properties. The decrease relating to redevelopment properties was driven by intentional vacancy and necessary to facilitate our urban mixed-use project at South Quarter Crossing, slightly offset by lease-up at Carman's Plaza, one of our value-add renovations. Operating FFO and same-property results are both consistent with our expectations and guidance discussed last quarter.

Moving to 2020 guidance. We are establishing an initial 2020 operating FFO guidance range of $0.49 to $0.51 per share. As detailed in our press release, this guidance is based in part on the following. Same-property NOI growth, excluding redevelopments, relatively flat. This reflects less than a full year of contractual rent from our 2 A.C. Moore locations given the uncertainty surrounding this tenant. While we are only excluding slightly more than $500,000 of contractual rent relating to this uncertainty due to the relatively small size of our same property pool, this represents almost 1% of same-property NOI.

Next, lending developments are included, we expect same-property NOI to decrease 1% to 2%, driven by vacating tenants to facilitate our urban mixed-use projects along with proactively recapturing the K-Mart space at Valley Plaza in early 2020 to facilitate a future value-add renovation. It also includes lease termination income from shoppers food warehouse for the early termination of its lease at Metro Square, net of foregone rental payments of approximately $0.07 per share. And a decrease in amortization income from intangible lease liabilities of approximately $0.02 per share. And finally, dispositions of approximately $15 million to $25 million, primarily in the second half of 2020.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from the line of R.J. Milligan with Baird.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Phil, a question on the A.C. Moore locations. You mentioned $500,000 of rent being excluded, so that is a partial year. Is that correct?

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [3]

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Yes. Just -- you've probably read some of the news related to A.C. Moore, but given all the uncertainty around that tenant. We have them in, generally for the first quarter, and not for the last 3 quarters, and it's a little more than $500,000. It's close to $600,000 for the year.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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So that if we look into 2021, assuming that those properties aren't retenanted. Would that be that 1% of NOI? Or that -- would it be slightly higher than that?

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [5]

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Yes. So the same-store pool excluding redevelopments for -- on an annual basis is about $70 million at this point because our redevelopment pool has grown. So 700,000 -- 100 bps or 1% of same-store NOI for partially there, it's about 600. For a full year, it'd be 800. So either way, it's approximately 1% of same-store NOI.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay, that's helpful. And then for the properties listed as held for sale that are expected in the back half of the year. Can you talk about the decision to list those for sale and any characteristics of those properties that are driving to make that decision?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [7]

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Yes. It's actually -- it's a pretty straightforward analytical process. Ultimately, until we need the capital more generally for redevelopments and things of that nature, largely the assets that you're seeing us divest or assets that from an asset management perspective, we feel have ripened and are optimally situated to be sold. And I'll tell you that, that's just a good way of thinking about, virtually everything that you see coming out in the held for sale bucket.

As we start executing on our redevelopments, as we've spoken about, our thoughts are that one way that they might be permanently capitalized as with the capital that's embedded in our lower quartile assets. But at this juncture, assets that we're selling are more attributable to that first rationale, which is just assets that have ripened and where they're in a good situation to be sold now as opposed to sitting on them where value could potentially diminish.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8]

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And so for the most part, they're stabilized?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [9]

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Not necessarily, but it's more that we think that they are right to be sold in as much as either they are stabilized, and therefore, they're right to be sold or there's a risk that their value could diminish, whether or not stabilized, in which case, both of those instances, we would look to divest them.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10]

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That's helpful. And my last question is, there was a $1.5 million item in the FFO, which was a reversal of management transition costs. I don't know if you could give any more color on that?

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [11]

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R.J., it's Phil. But let me try to give you some color on that. In 2016, we accrued a contingent liability of $1.5 million associated with the termination of our former COO. Recently, the arbitration related to this contingent liability concluded, and we reversed the accrual. So while our GAAP earnings this quarter reflect the benefit of this reversal, we've excluded it from operating FFO. And you can see that, as it's noted in our FFO reconciliation table that we've excluded it there. Hopefully, that gives you a little clarity in help of your analysis for the quarter.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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Yes. And it was excluded when it was accrued, is that right?

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [13]

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Yes. So yes, originally, when it was accrued in '16, we excluded it from operating FFO. So this quarter, when we had the favorable benefit of reversing it. We likewise excluded it from operating FFO to be consistent.

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Operator [14]

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Next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [15]

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First, I just wanted to ask a little bit more about your capital plan here over the next few years? And ask specifically about leverage. So funding for the larger mixed-use developments is expected to ramp. It's starting to ramp up a little bit here and leverage increased in the quarter. And when you -- I'm curious, when you look at the corporate model, where do you see leverage peaking on a debt-to-EBITDA basis? And when do you see it begin ratcheting down?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [16]

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Todd, I'm going to take a little bit of this, and then I'll hand it off to Phil to take a little bit of this. At a high level, our view is that we need to keep our eye on leverage. We recognize that as part of endeavoring to transform this company from one that has historically owned, secondary market, grocery-anchored shopping centers to one that owns first class, urban mixed-use assets that there is going to be a period where leverage is going to drift up.

We have a model that gives us a feel for that. But what I would tell you is that beyond the model, there are number of different ways that we're going to manage both the capital spend and the recapitalization of assets along the way to make sure that we're managing debt assiduously.

So certainly, it's something that we have our eye on. We do recognize that leverage is, of course, going to drift up along the way, but it's not something that we're being flipped about. Right now, at least, the focus is on capitalizing south quarter crossing, in particular, since, as Rob been noted, and as I alluded to as well. We commenced demolition in the last quarter, and we anticipate hopefully breaking ground in short order. We just need to button up the last few deals. But I'll let Phil talk through how we're going to be capitalizing that project.

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [17]

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Yes. So as Bruce discussed a little earlier, asset sales will play portion of the roles there and how we capitalize those. More so, long term, but also they'll help a little bit in the short term as we'll sell some of those. But just thinking about South Quarter Crossing since its first up. That's a combination of 2 properties, South Philadelphia on one side, Quartermaster on the other. By far, the bulk of the construction cost are on the South Philly side, and that's where the work gets initiated first. What I'll tell you is we're in conversations with several of the banks in our bank group. They are all very interested in doing a construction loan there. And what's nice about it is the 3 anchors that are currently there, ShopRite, LA Fitness and Ross are all staying and continue to pay.

So there's an in-place value there that stays there the whole time. So that while the loan-to-value may be kind of what it typically is for our construction loan. The loan-to-construction costs will be very high. So the loan-to-construction costs could be like 80% or more. So we can fund pretty much everything that's happening on the South Philly side, which will go first through a construction loan, if we go that route. And that will probably play a part of the role here.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [18]

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Okay, got it. But when you think about the trajectory of leverage here, I guess, near term? I mean can you sort of comment or describe how we should think about leverage maybe at year-end, it sounds like it's -- you're expecting it to continue increasing? I mean how much more of an increase are you comfortable with in terms of taking your leverage up from here?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [19]

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So when thinking about our debt-to-EBITDA, obviously, our EBITDA is, call it, circa $80-ish million. And so obviously, a full turn is $80 million. And I would think that this year and thinking about our capital spend, it's certainly not even going to approach that. And even going into next year, I think the aggregate spend probably won't even get there. And we expect to stabilize the first apartment building and, call it, I'm just kind of doing this little bit on the flame looking at Rob, I think about 2 years, call it. And so I would say that at that juncture, right? So we have to be stabilized the first apartment, and we've spent, again, less than an incremental turn of debt to pay for it.

At that point, we would obviously assess where we are in terms of how we think about the overall corporate capitalization, recognizing that all of the incremental debt as still is describing will be incurred through this construction financing that we anticipate taking on to pay for the construction costs. So that will be the juncture at which, I think, we decide the further trajectory of leverage, but certainly to get there in order to get to the point of completing what we think of as the first phase will require meaningfully less than a full turn of the incremental leverage on a debt-to-EBITDA basis.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [20]

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Okay. And then, Bruce, you mentioned -- you talked about the lease termination of shoppers food at Metro Square. I think you commented that you might look to further unlock value or monetize that asset further. And I don't see that asset held for sale. Just curious if you can discuss what's happening there?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [21]

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Well, I think it is held for sale or at least, certainly, we intend to bring it to market, if it's not formally on the held for sale list. And so the thought -- it's an interesting one, Todd. And as much as this is almost, we're being in a particular vertical or area of focus that we're in, and others, we focus on secondary market, predominantly grocery-anchored shopping centers coupled with our redevelopment efforts, and a lot of these assets require some fairly thoughtful asset management. And so in looking at this particular asset, which was made up of a dark grocer and an outparcel building that has a number of tenants. What we did is we thought through what was the way to optimize the value of that asset.

Interestingly, we had 2 choices, one was to divest the asset with a dark anchor as well as with this outparcel building. And we compared that with negotiating with the dark anchor tenant, a termination payment, and then selling the asset where it would have a vacant anchor building as well as in outparcel building. And remarkably, and of course, I don't want to spend money that we haven't yet made, but it appears that the process of negotiating that termination payment, which again, I commend the team for doing a very good and patient job. They meaningfully increase that termination fee during the course of the negotiation. And that termination payment, coupled with what we anticipate as the sales proceeds from the asset will represent an increase over the valuations that we have received from brokers for the asset as is of close to 40% or maybe even 50%, depending on how successful we are in the sale process. So again, it's a great example. We're talking about relatively small dollar amounts, but still a great example of where, through some thoughtful asset management, we were able to create real material value out of that asset.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [22]

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Okay. That's helpful. And then just 2 quick ones for Phil here. One is the $0.07 per share, the lease termination fee that's expected to recognize in the first quarter. Is that right?

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [23]

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Yes, that should be recorded in the first quarter.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [24]

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Okay. And then also, was the $1.5 million that you discussed the reversal for the former COO. Is that -- was that also -- was that a benefit in the quarter to G&A?

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [25]

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Yes. So when we recorded it, it went to G&A, so the reversal also came out to G&A. And Just to be clear, I want to go back to the termination fee. The $0.07 is net of what of rent that they would have paid for the year. So the fee that the first quarter will -- it impacts a little more favorable than that. But over the full year, Todd, once you kind of lose the rent that they pay over the full year, the net impact for the full year is $0.07.

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Operator [26]

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Your next question comes from the line of Floris Van Dijkum with Compass Point.

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Floris Gerbrand Hendrik Van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [27]

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Just following up on something Todd asked about. Can you quantify -- I mean I'm just trying to do the math here myself, but the total redevelopment plans and spend, it sounds like you're adding about 1.1 million square feet of retail and 1,600 apartment units, to build all of that out yourself on your balance sheet, potentially could see double leverage from your current levels. If it's in urban locations, which is where I think most of the space is. Could you just walk us through the plans and the funding because it appears like the leverage would shoot up quite a bit more, and maybe I'm overlooking something?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [28]

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Yes, Floris. I'm not sure those numbers don't reconcile with anything that we're doing. So maybe what might make sense, either we can -- it probably just makes sense, maybe what we should do is talk about this offline after the call. But those aren't the numbers that reflect either the 3 projects in the aggregate or any 1 of the 3 projects. And of course, these projects are going to be happening over, call it, 8 to maybe even 10 years. And so I think that would probably make sense to do is we're happy to have a call or you could have the whole C-suite on the call with you, and we can walk you through everything that we're doing there and walk you through our thoughts around it.

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Floris Gerbrand Hendrik Van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [29]

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Okay. And so -- and can you quantify perhaps what you expect to spend in both maybe just to make me feel a little bit more comfortable. But -- and also, the capital outlays in 2020 as well as 2021? Have you put together a plan or do you have like schematics up for each of those projects yet?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [30]

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So when you say each of those projects, right? We have a number of projects. I'm going to let Robin go to some of this in more detail. We have, as Rob described, 3 value-add renovations. And then we have 3, what we call our mixed-use redevelopments. The value-add renovations are all just in the ZIP code of 10 to maybe in the teens, the job is being less than $20 million each. And Robin described one of them Carman's Plaza, which is basically done. Again, very stout, double-digit returns, all these value-add renovations, relatively small numbers with very, very attractive returns.

And generally speaking, they get paid, either out of free cash flow, where they can get paid with relatively modest incremental capital outlays that don't meaningfully increase leverage because they're supported by significant pickups in earnings. Now on the mixed-use development, over the long term, these will also be supported by meaningfully -- meaningful pickups in the earnings, but of course, there's going to be, as we were describing earlier, I guess, with Todd, an increase in leverage. Over the next couple of years, the increase in leverage, as again, I was describing to Todd is not a very, very significant number. So when you talk about the next 2 years, you're talking about less than a full turn of incremental there on a debt-to-EBITDA basis. And furthermore, much of that is going to be coming from the construction facility that Phil was describing earlier.

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Floris Gerbrand Hendrik Van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [31]

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Okay. So I'll reach you guys offline, and I will go through it in some more detail. And the -- just to make sure that I understand the guidance that you put out there, that includes the $0.07 of term income. Is that correct?

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [32]

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Yes, the 2020 guidance includes that. And on my -- in my prepared remarks, there's -- I noted those and a few other items they're in the press release. Offsetting that is a large noncash item, this mark-to-market or amortization of lease intangibles is decreasing significantly. It will be a negative impact of about $0.02 per share, which is obviously a noncash item, but it does impact GAAP and FFO. But it is in the press release, all bulleted out there. And if you have any questions, you can give me a call.

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Operator [33]

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(Operator Instructions) Your next question comes from the line of Collin Mings with Raymond James.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [34]

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First question for me. I just want to go back to R.J's question real quick on A.C. Moore, just given the outlook there. Any update on where you stand as far as any sort of retenanting efforts?

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Robin McBride Zeigler, Cedar Realty Trust, Inc. - Executive VP & COO [35]

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Sure. Colin, it's Robin. We have 2 A.C. Moore's. One of them at our new London property. We do have a backfill tenant there. And so we expect that there will be a fairly short turnaround for that asset. And then for the other location, we are actively seeking a backfill for that one. So for the one location, we expect that we're in leased or at least with a tranche of that one. And the second one, we're seeking a tenant for the second location.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [36]

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Okay. And then switching gears. I did want to come back to the leverage discussion, which from a different angle. I just was curious, how do you balance a lot of focus on some of the prior questions around, kind of, net debt-to-EBITDA in that metric. But just trying to think about how you balance that versus your debt maturity profile, as you think about some of the capital spend on some of these projects? Maybe just talk about it from that angle for a second, if you can?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [37]

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Sure. So I'll hand this over to Phil again in a second. I think that we've been very focused, of course, on maintaining a cushion on our debt maturities, and we'll certainly endeavor to do that. I think that thematically, an important idea to understand with respect to these mixed-use redevelopment, is that this is the reflection of an ambition that we have to meaningfully improve our asset quality from where it has historically been. And that will require us to embark on a journey, which is what we're embarking on, that will represent a departure from an asset type of grocery-anchored shopping centers in suburban markets to urban mixed-use assets.

And what's interesting is when people think of Cedar, they think of Cedar owning those kinds of assets. And a lot of the questions that we get in that -- we get on calls like this are relate to that, almost a discomfort with the unfamiliar with the fact that people are used to thinking of Cedar in one way, and we're asking them to think about Cedar in a different way. And so again, we're happy to walk you through that, but I think that the thing to understand is that this is the beginning of a process that we're undertaking that will involve us taking on a little bit more leverage. Of course, we're going to be keenly focused on making sure that there's no existential risk associated with that. But certainly, this is the beginning of a process, where we hope to, again, transform the portfolio. And so that's very much part of this undertaking. With that, I'll let Phil speak to a little bit about the debt maturities.

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [38]

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Yes, Colin, I think, consistent with how we've behaved and what we've done over the last few years, we acknowledge our leverage is elevated. And one of the ways we mitigate it is not having too much come due in 1 year and also by trying to avoid any near-term debt maturities. So if you look at our schedule currently, there's no debt maturities in 2020. The revolver has extensions, if you move that out, then there's only $75 million in 2021.

So I think you should continue to expect us to adjust our maturities early and try to avoid having any near-term maturities. And trying to keep them also well laddered. And then additionally, I'll just add, most of these urban mixed-use projects have a residential component. So as those residential buildings are completed and stabilized, one thing we can consider doing is looking at agency debt to really turn those out for a long time. So that will give us another option there once those buildings start to come online. Is that helpful?

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [39]

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Helpful color. One last one for me. And just going back to the prepared remarks and recognizing this has been a topic on a number of calls recently. But again, in today's prepared remarks just highlighted that the pickup in transaction activity during the quarter. Bruce, I don't know if you can maybe expand upon that a little bit more? Just again, given the disposition plan here for the year. And again, the potential to continue to recycle some capital? Just your latest thoughts there would be helpful?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [40]

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Sure, Collin. And I'll be honest with you, I actually entered that comment really with you in mind. So I'm glad you picked up on that. As you correctly know, last quarter, I made mention of the fact that transaction volume had been light. I was concerned because, of course, that could have been a canary in the coal mine, so to speak, in as much as one way that you start seeing a market deteriorate is that you see transaction volume dry up.

It turns out that, again, we -- you talked about one quarter's transaction volume in a relatively small market. And ultimately, I think the issue was around the sample size because we have seen transaction activity pick up in the fourth quarter, a lot of deals that were struck in the fourth quarter, in fact, in closing in the first quarter. And so we've, in fact, seen very healthy level of volume in our markets relating to our asset type.

And so I just wanted to update you and obviously anybody else who keeps track of this stuff with respect to that dynamic, because I do think that one of the important things to understand about grocery-anchored shopping centers in particular, and this is in contrast to certainly malls, but even to big box retail or other types of open-air shopping centers is that these assets are on the smaller side.

And what we, again continue to see is this very high degree of liquidity when it comes to these types of assets. Since there's just a significant amount of transaction volume around them and therefore already a number of transactions that you could point to, to get comfortable with views on value from a cap rate perspective.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [41]

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So just overall, it sounds like this pickup in transaction activity gives you confidence to be able to execute on your disposition target to continue to use that as a mechanism to help fund some of the aforementioned projects?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [42]

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Not as much -- that's part of it, Colin, it's not so much of that as much as just that one of the things, and again, you and I have spoken about this a fair amount. We are continually focusing on a number of metrics as we think about various capital allocation decision. So one of them is, of course, our weighted average cost of capital, and we're constantly updating our rack to make sure that we understand what of course -- what our cost of funds is. And in a similar vein, we're continually updating our net asset value. And so it's really in that calculation that we really need to have a pretty good feel for what the prevailing cap rate environment so that we could comfortably point to all the transaction activity in the market, when we developed view on the valuation for our assets. As you probably know, and certainly as is publicly available, we put out in our corporate presentation, and we updated every quarter, a graph that walks through the distribution of cap rates for all the transactions in our markets. And again, we plan on updating that as we do every quarter. And so this information will be embodied in that slide in our corporate presentation.

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Operator [43]

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Your next question is a follow-up from Floris Van Dijkum with Compass Point.

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Floris Gerbrand Hendrik Van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [44]

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Sorry, guys. So one -- I have a follow-up here. If I add all the apartments potential developments together, I mean, you're looking at over 1,000 units, as you've indicated. Do you have internal people who can help you manage that process because it's a different asset class than what you're currently invested in? Or is the idea to bring along JV partners in each of those 3 mixed-use projects?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [45]

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Great question, Floris. I'm not going to have Robin answer this question because I don't need her to read off our own resume. And certainly, Michael Summer, our head of construction development would do the same. We have the people overseeing both -- overseeing these redevelopments, both Robin and Michael has incredibly specific relevant experience, whether it relates to overall mixed-use redevelopments in urban markets. Again, Robin has extensive track record of seeing these types of projects through -- from beginning to end. And of course, that includes many mixed-use projects with apartments in them. You just could look at several Realty's website, if you want to get comfortable with that, and Michael Summer has more extensive resume doing residential and doing multifamily. So certainly, we have real subject matter experts in the geography in which we're focused on to execute these projects. Now with that said, we're certainly leveraging third parties to execute it because that's part of what folks like Robin and Michael do, when executing these projects. And so we'll have third parties, overseeing leasing. We'll have third parties who will be doing property management. But the expertise that goes with developing these types of projects is certainly in-house. And again, we have tremendous confidence in our in-house experts. And very frankly, getting to see it every single day, gives me tremendous confidence that we have a great team here to execute these types of projects.

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Floris Gerbrand Hendrik Van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [46]

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So is it right, Bruce, to think that you're unlikely to partner with an apartment developer for these projects?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [47]

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Again, these are -- we're using -- I'm not sure these are upper case terms or lower case terms in terms of developer and JV partner and things like that. We're -- we -- this is not something that's being done entirely in-house at Cedar. And so we are, of course, working with third parties in the process of doing the construction, doing the development, doing the leasing, doing the design, all facets of this project are being done with third parties, because that's just the nature of the development process. And so while we may or may not joint venture from a capital perspective, we might, we might not, depends on the situation. And it also could vary depending on where we are in the course of executing the redevelopment. Certainly in terms of the just nuts and bolts of doing one of these projects, we have a very, very good team here, but certainly, we don't have a team that does this without leveraging professionals who we contract with to help us execute these projects. So that's just -- and that is just the way all these projects get done.

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Floris Gerbrand Hendrik Van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [48]

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Okay. And the assets held for sale, though, it's $12 million. So obviously, presumably, that will have to get increased to help -- and how much additional assets sales do you have to -- in your expectation of a turn increase in leverage by the end of next year? Maybe any other asset contemplated being put in that bucket?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [49]

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Right. So Floris, let me be clear. The -- obviously, we're selling, call it, $12 million or so of assets is not meaningfully going to change our EBITDA. So my comment about debt-to-EBITDA was not accounting for the fact that EBITDA will be reduced a little bit by these asset sales. These assets that we're selling now, we're not selling capital is fungible. So you could argue that it's helping finance the projects. But ultimately, the reason why we're selling these assets now is because these assets that I was describing earlier in response to an earlier question, are right for sale, and that's why we're selling them now. The thought process behind divesting assets going forward is over the medium term as we execute these projects. And of course, as we take on leverage, the thought is to permanently capitalize these projects by migrating the capital of Cedar from our lower quartile assets into these projects. However, in the near term, what we hope to do is to maintain cash flow by holding on to these assets, taking on some leverage and then delevering or permanently capitalizing these assets through the proceeds of asset sales. But the interim measure, as we've discussed a little bit tonight is going to be by taking on construction debt to finance the project.

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Floris Gerbrand Hendrik Van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [50]

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Okay, okay. One more question on the -- on your sort of your -- you've mentioned in your estimates, you're accounting for the A.C. Moore. You've taken them out of your -- so what -- any additional incremental bad debt or credit loss that you have in your estimates for 2020?

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Philip R. Mays, Cedar Realty Trust, Inc. - Executive VP, Treasurer & CFO [51]

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Related to A.C. Moore -- related specifically to A.C. Moore or just Moore in general?

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Floris Gerbrand Hendrik Van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [52]

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Moore in general, I'm talking about -- outside of the A.C. Moore that you talked about. Is there -- are there any other -- how do you see -- how do you look at the credit loss environment and your bad debt environment for 2020?

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [53]

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When we look at it for 2020, I think it will be fairly consistent with '19, it could actually be a little improved because our team has worked pretty diligently on addressing tenants that were having problems paying their full rent. And either helping them at the property through marketing or whatever or getting rid of them and come in an agreement to let them exit and replacing them with better, more improved tenants and anything new on the watch list that concerns me, so I would expect it to be similar to '19, but likely, slightly better than '19.

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Operator [54]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Bruce Schanzer for closing remarks.

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Bruce J. Schanzer, Cedar Realty Trust, Inc. - President, CEO & Director [55]

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Thank you all for joining us this evening. We look forward to keeping you posted on our progress in the months ahead.

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Operator [56]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.