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Weingarten Realty Investors (WRI) Q2 2019 Earnings Call Transcript

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Weingarten Realty Investors (NYSE: WRI)
Q2 2019 Earnings Call
Aug 1, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Weingarten Realty Inc. Second Quarter 2019 Earnings Call for August 1st, 2019. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer. [Operator Instructions] Please note, this conference is being recorded.

And I will now turn it over to Michelle Wiggs. Michelle, you may begin.

Michelle Wiggs -- Vice President of Investor Relations

Good morning, and welcome to our second quarter 2019 conference call. Joining me today is Drew Alexander and Johnny Hendrix, Steve Richter; Joe Shafer.

As a reminder, certain statements made during the course of this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the company's SEC filings.

Also, during this call, management may make reference to certain non-GAAP financial measures such as funds from operations, or FFO, both core and NAREIT, which we believe help analysts and investors to better understand Weingarten's operating results. Reconciliation to these non-GAAP financial measures is available in our supplemental information package located under the Investor Relations tab of our website.

I will now turn the call over to Drew Alexander.

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Thank you, Michelle, and thanks to all of you for joining us. I am pleased to announce a good quarter. The continued transformation of our portfolio through strategic acquisitions and dispositions, as well as profitable investments in our redevelopment program has clear exhibited by our same property NOI growth of 4.2% for the quarter. The diversification of our tenant base, the quality of our real estate and the much improved overall strength of our merchant lineup enabled us to post solid operating metrics across the Board, coupled with the best-in-class balance sheet, WRI is well-positioned for future growth. While the acquisition market remains highly competitive, we were able to purchase our second grocery anchored center in the Phoenix area and subsequent to quarter-end, we closed on a grocery-anchored property in the affluent part of Atlanta, Georgia. We're cautiously optimistic that we will be able to add other quality properties to our portfolio during the balance of the year.

As to dispositions, we sold $133 million of property in the second quarter, and an additional $114 million after quarter-end, that brings our year-to-date total to $314 million. We strongly believe that selling properties at the bottom of our portfolio at/or above our estimate of net asset value is the right thing to do when our stock is priced at a significant discount to NAV. Given our expected 2019 dispositions, it's likely that in addition to the special dividends paid in the last two years, we will also pay a special dividend in 2019 further enhancing shareholder returns.

We're very pleased with the sale of Jess Ranch, even though it led to an increase in the disposition guidance. We've discussed in prior calls, the challenges of selling large asset that's even more applicable for power centers and more tertiary markets. Consequently, when we received a very reasonable offer of $89 million, which was above our net asset value, we decided to sell. We believe that was the best long-term decision. Looking ahead to 2020, given the improvements we've made in the quality of the portfolio from the sales in 2018 and 2019, I'd expect dispositions to return to more normalized portfolio management, and I'd estimate around $150 million for 2020.

Moving to our new development activities. In DC, at Centro Arlington, we started residential pre-leasing and we expect to begin at West Alex near the end of the year. At Central, we expect Harris Teeter to open around the end of this year. Both of these projects benefit from a strong supermarket anchor, their close proximity to Amazon, HQ2 and the strong Northern Virginia market. The Driscoll at River Oaks is progressing nicely, construction is currently ahead of plan and we should have some residential units available in mid-2020. We have many other redevelopment projects in the pipeline that will provide excellent returns on the invested capital, and we continue to work on those with great focus, a great quarter.

Steve, the financials?

Stephen C. Richter -- Executive Vice President and Chief Financial Officer

Thanks, Drew. Our balance sheet remains among the strongest in our sector. At quarter-end, net debt to EBITDA was a strong 5.05 times and debt to total market capitalization was 33.4%, supported by a well-laddered maturity schedule that has no significant maturities until 2022. Our great liquidity and strong credit metrics provide significant long-term stability and flexibility to pursue future opportunities.

We had great second quarter results. Core FFO for the quarter was $0.53 per share, compared to $0.57 per share for the same quarter of the prior-year. The decrease is primarily due to disposition activity, which cost us $0.03 per share when compared to last year, and the $0.02 per share of indirect leasing cost we expensed under the new lease accounting standard in 2019, but not in 2018. These decreases were partially offset by increases in same property NOI, primarily driven by increased base minimum rents, bad debt recoveries, and incremental income from our new developments and redevelopments. A reconciliation of net income to core FFO is included in our press release.

As to guidance, we are increasing our disposition guidance to a range of $350 million to $450 million. This results in an increase in net income guidance due to higher gains on sale and decreases both NAREIT and Core FFO guidance to a range of $2.05 to $2.11 per share. Based on the strong results in the first two quarters of 2019, we are also increasing our guidance for same-property NOI growth to a range of 2.5% to 3.5%. All the details of our guidance are included on Page 10 of our supplemental. Johnny?

Johnny Hendrix -- Executive Vice President and Chief Operating Officer

Thanks, Steve. We have a great portfolio that keeps getting better. About 80% of the average base rent comes from shopping centers with the supermarket. Those supermarkets average a very strong $690 per square foot in sales. The strong results we are reporting today continue to demonstrate the quality of our properties.

Occupancy rose 94.8%, new lease rent growth was over 20%, same property NOI increased 4.2% and we acquired two great grocery-anchored shopping centers in the Scottsdale, Arizona and Atlanta, Georgia.

Leasing production remains steady, we have good demand for shop tenants, mostly medical services, fitness, beauty and restaurants. Folks like Orangetheory Fitness, Pacific Dental, Sports Clips and Silver Diner. As for the boxes, we continue to lease to supermarkets discount clothing and fitness. We signed our first lease with Lidl at High House in Raleigh, North Carolina. We expect they will open in the next six months. We've made great progress leasing the former Toys "R" Us space. We have commitments to lease all the space they rejected in bankruptcy. We increased the annual rent on those spaces by almost $1 million. Replacement tenants include two Ross stores, a Burlington, Five Below, Signature Furniture, and Baptist Health South Florida.

We're also in good shape with Kmart. During the quarter, we sold Prospector's Plaza in Placerville, California, where Kmart closed in May. This leaves us with only one Kmart located at Six Forks Shopping Center in Raleigh, North Carolina. We love to get it back, but it's a good store, so most likely it will be a part of the new Kmart company. Occupancy rose 50 basis points from last quarter to 94.8%. Most of the improvement is a combination of low fallout and strong leasing. Also contributing to the improvement is the disposition of Oak Grove Shopping Center in Portland, Oregon, where we had a large vacancy. We sold that property to an end user and we're very pleased with the outcome.

Importantly, we still have 200 basis point spread between signed and commenced leases, that's 450,000 square feet that should be opening in the next year or so. We expect to commence $6 million in annual rent before year-end. Good fuel for same-property NOI for the balance of the year and 2020. As Steve mentioned, we're raising guidance to same-property NOI growth to 2.5% to 3.5%. Year-to-date, we're at a strong 3.7%. We benefited from solid leasing and low fallout. We've also had unusually high bad debt recoveries that should trend downward for the balance of the year. We don't have a lot of the exposure to watch list tenants, and at this point, any significant 2019 impact from a bankruptcy is unlikely.

During the second quarter, we purchased Camelback Miller Plaza in Scottsdale, Arizona. This is a great property anchored by a very strong Sprouts Farmers Market and a high volume T.J. Maxx. Generally, rents are under market at the center, so we see good rent growth and rental rates and an opportunity for densification over time. The property is in the heart of Scottsdale, among multiple high-rise residential towers and close to Scottsdale Fashion Square.

In July, we purchased North Decatur Station in a partnership with Bouwinvest. The overall investment is $53 million with Weingarten share at $27 million. This 98,000 square foot property anchored by Whole Foods is the retail component of a mixed-use development. North Decatur is an affluent community in Atlanta. The three mile demographics are strong with 112,000 people, average household incomes at $97,000 a year and college graduates at 60%. This brings the company's share of acquisitions to date in 2019 to $81 million.

We're working on some other acquisition opportunities and are optimistic that we can acquire other strong properties this year. Drew?

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Thanks, Johnny. It's been a good first half of 2019. We've acquired three great grocery-anchored centers and our new development projects continue to move successfully forward. Same-property NOI at 4.2% is quite good, great rental growth and occupancy increased. The significant transformation of our portfolio with greatly improved demographics makes it possible to post operating metrics like these and provides our shareholders greater financial stability and enhance returns through special dividends, and better opportunities for future growth.

Great people, great properties, and a great platform equals great results. I thank all of you for joining the call today, and for your continued interest in Weingarten. Operator, we'd be happy to take questions.

Questions and Answers:

Operator

Thank you, sir. We'll now begin the question-and-answer session. [Operator Instructions]. And From Scotiabank, we have Greg McGinniss. Please go ahead.

Greg Michael McGinniss -- Scotiabank -- Analyst

Hey, good afternoon. Drew if I'm not mistaken. I think this was the third or fourth increased disposition guidance in the last two years, and you've now set this bogey at around $150 million of dispositions in 2020. Just curious what should give investors confidence that this expectation will stick and we won't have another more surprise transaction like Jess Ranch?

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Good day, Greg. You know, it's a fair question and I think it's something that we addressed in our prepared remarks, that we believe that the proper capital allocation when we are trading at -- such a good discount to NAV is to look -- to take advantage of the disparity between public and private markets. And in the case of Jess Ranch, as I mentioned, it's challenging to sell multiple box, more power oriented center in more of a tertiary market. And we thought it was a very compelling offer, it's our NAV. So there's certainly no guarantees, and I think that companies and people reserve the right to change their direction based upon how factors change.

If you look back three years ago, retail was in a totally different world than it is today, and I certainly don't know how things could change going forward. What I do know and what I was comfortable saying in the call, and I do feel at this time is, given what we've sold over the last couple of years, we are very comfortable with our portfolio and that's where we do feel that we are moving to a more normal call-in that we'd estimate at this time and it's early. But we'd estimate this time at around $150 million. We are also starting to see, as you mentioned some more acquisition opportunities. So looking at being more capital neutral, we know making good progress on the new developments and will have revenue coming online there. So, we appreciate that it's something that not everybody on the call likes. But we think it's the right long-term capital allocation decision. But we feel likewise good about '21 as we do more normal call-in and the development pipeline comes online.

Greg Michael McGinniss -- Scotiabank -- Analyst

All right. Thanks. Drew.

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Thank you.

Greg Michael McGinniss -- Scotiabank -- Analyst

And Johnny, same-store -- question for you, Johnny. So same-store NOI guidance seems to imply nearly 200 basis point reduction in same-store growth in the back half of the year. I know you mentioned bad debt as one of the reasons growth expected shift down. Could you quantify that impact? And then what's the rest of the move related? It this just expected occupancy fallout or some other items?

Johnny Hendrix -- Executive Vice President and Chief Operating Officer

Good morning, Greg. Yeah. I'm sorry. I think, I stepped on you. But overall, I think we're very proud of the results that we've produced. Bad debt recoveries was a little bit higher than normal in the first half of 2019, and we don't anticipate that continuing. So we're really adjusting for that at the back half of the year, recovering bad debt doesn't just happen and it's part of the results of disciplined work that sometimes takes years, and it's part of the overall business, and I think we're pretty good at that. For the first half of the year without bad debt recoveries would have been at about 3.3%.

Greg Michael McGinniss -- Scotiabank -- Analyst

And then, is the rest of the move expected occupancy move out? Or what's the other piece of that, that drags you down.

Johnny Hendrix -- Executive Vice President and Chief Operating Officer

There will be some occupancy move out. I think looking at around 3 for the year is pretty, pretty good.

Greg Michael McGinniss -- Scotiabank -- Analyst

Okay. Thank you.

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Thank you.

Operator

From Citi, we have Christy McElroy. Please go ahead.

Christine Mary McElroy Tulloch -- Citigroup Inc -- Analyst

Hey, good morning to you guys. Just a follow-up on that. Johnny, you talked about the $6 million of annual rents expected to commence before year-end. It sounds like there is a little bit of a move out component offsetting that. But just sort of what's the cadence of the move-in, so what's that amount of the $6 million that will actually hit in Q3 and Q4. And you said -- and sort of where does that lead the lease to commence spread at year-end factoring all that in?

Johnny Hendrix -- Executive Vice President and Chief Operating Officer

Hey, Christy. Good morning. It's pretty even throughout the balance of the year, about half in the third quarter, about half in the fourth quarter. Of course, the exact timing of that is depending on when we can finish construction and get the tenants open, but we feel pretty comfortable that we budgeted pretty accurately for that.

Christine Mary McElroy Tulloch -- Citigroup Inc -- Analyst

Okay. All right, that's helpful. And then just on the dispositions, maybe can you give us an update on your assumptions for use of proceeds inherent in that dilution associated with that. Will your cash balance should continue to tick up, what are you earning on cash today? And it seems like you're maybe alluding to a little bit more of a substantial special dividend than you originally thought?

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

So, Christy, it's Drew, I guess it's good afternoon to you. We are still adjusting since we moved our call back an hour our from our normal slot. So we do appreciate this afternoon and on the East Coast. So good afternoon to you. So let me take a little bit of that. And then if I miss a piece, Steve can chime in. And so I think we're earning 2.25 or thereabouts around cash. As mentioned, we up the guidance and we think that we're likely to have a special dividend in '19. Exactly what it is really, really hard to pick from many, many perspectives. As mentioned, we've done some acquisitions, we've got some others working. So when it's possible, we would certainly look to do 1031 and differ the tax gain.

But as I've also said before, we don't see tremendously overpaying for properties just to do a 1031. So while we've closed some things and do have some deals working -- the deals that we're working on, in some cases just started diligence and it's premature to think that there is certainly going to happen. So a lot of variables there.

Then -- when it comes to use of proceeds, I would say a variety of issues are on the table that we are seeing some acquisition opportunities do have some development pipeline to finish. Looking at a couple of new, new development opportunities, but really not seeing a whole lot there that is of interest to us and it's all early, so it wouldn't be much capital anytime soon. Always working on the redevelopment pipeline both small projects and large, so there could be some capital there. And if the stock were to get to a point we thought it appropriate, we would certainly consider buying back some stock. So I think we're very well positioned for a number of different opportunities and a number of different things are working. But it's really hard to put any specifics around a special dividend that's early in the year, given some potential acquisitions in 1031 as well as no real estate dealer sold until it's sold.

Christine Mary McElroy Tulloch -- Citigroup Inc -- Analyst

Okay, thank you. Yeah, it's really helpful in doing during the dilution math. But I guess there is still some variability there. Thanks, guys.

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

There is a lot and we're in a good situation. I think generally when we are selling properties, we are making money, we have gains. Some of our peers don't always seem to be making money when they're selling property. So I view it is better to make money.

Christine Mary McElroy Tulloch -- Citigroup Inc -- Analyst

Thanks.

Operator

From Bank of America we have Craig Schmidt. Please go ahead.

Craig Richard Schmidt -- Bank of America Merrill Lynch -- Analyst

Yeah. Johnny, on the $690 per square foot productivity to grocers. How many of your grocers are reporting sales?

Stephen C. Richter -- Executive Vice President and Chief Financial Officer

I don't have an exact number, but I would say most to 80% probably is somewhere in the range, and we also have pretty strong communications with all of them. So even if they're not officially reporting sales, we have a very good understanding of what their sales are.

Craig Richard Schmidt -- Bank of America Merrill Lynch -- Analyst

Great. And then in terms of the heavy investment in the e-commerce and the grocery area, are you looking at grocers any differently now than versus let's say two years ago? I know you mentioned in the call that you just acquired a center with Lidl?

Johnny Hendrix -- Executive Vice President and Chief Operating Officer

Yeah, I would tell you. Well, we actually leased a space that was vacant to Lidl in a shopping center that we've owned for a couple of years. We purchased -- the two shopping centers we purchased in -- since the last call was a Sprouts and a Whole Foods. I would tell you that, years ago, we moved toward a consistent a bias toward national and regional grocers, and that is really the direction that we continue to head. So it's going to take a supermarket operator with capital to be able to continue to deliver this omni-channel, which we believe is going to be the winning strategy. Today 75% of our national and regional grocers have some sort of curbside, pick-up or deliveries. So we think that is absolutely the direction to go from here.

Craig Richard Schmidt -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for the color.

Operator

[Operator Instructions] From Green Street Advisors, we have Vince Tibone. Please go ahead.

Vince Tibone -- Green Street Advisors Inc -- Analyst

Hey, good morning. Could you provide some additional color on the densification opportunities. You mentioned that Camelback Miller Plaza, and then, yeah, could that be a near-term development start potentially?

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Hey, Vince. I guess it is good morning to you. Yeah we -- this is -- could be a long-term, it could be a short-term. We actually purchased the shopping center with kind of in different pieces and could either sell off or build high rise development on part of the shopping center in the next couple of years. We wouldn't anticipate doing anything before that. We'll have recapture some of the space. On a long-term basis, though, clearly we have a great opportunity to be able to reconfigure the shopping center and do multi-family.

Vince Tibone -- Green Street Advisors Inc -- Analyst

Got it. Is it entitled for multifamily today or that's the process you need to go through?

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

It would be a process that we would need to go through, but the entire area is part of a redevelopment zone by the city and they are encouraging multifamily development there.

Vince Tibone -- Green Street Advisors Inc -- Analyst

Got it, that's really helpful. And then one more from me. It seems like based on the language in the press release, you weren't actively marketing Jess Ranch. I was just curious, if you could provide a little color on how the deal came about. And then, if you're seeing any kind of noteworthy trends in the transaction markets, particularly for kind of the non-core, higher yielding shopping centers.

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Good morning, Vince. It's Drew. So we did have it on the market, but as many on the call, including you and I have discussed, and as we said in our prepared remarks, that. assets sold over $50 million over sold approaching $100 are not always the most liquid. So while we had been marketing it for a while, the traction level on those kind of things, it's not as fast as smaller, more dense et cetera. So it wasn't something that we do lots of different scenarios in our business plan and lots of different -- what if this happens and what if that happens, but it was a nice fortuitous situation that put us at better than our business plan, when credible buyer came along and we worked through the issues and got it closed here in the last couple of days.

So we're pleased with it, but it's a combination of what's the expression that luck is preparation and opportunity, and our team responded, we were prepared, but there were some good fortunate associated with it as well. And likewise, we think it's a pretty good center. We think they got a good buy that it's more of a good, more stable in then the market might appreciate. But from a public market's perspective, it's a good situation for us.

Vince Tibone -- Green Street Advisors Inc -- Analyst

Makes sense. Are you able to disclose the cap rate on that individual deal?

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

No, we haven't gotten into that, but as folks have looked with the two deals that we sold post quarter, it was high sevens cap rate. So it is in the neighborhood that people would expect. So it was fortunate, we're pleased to have it done, but it is -- the market is the market. So as folks will note in the supplemental, our year-to-date sales are under 7% which is a little better than our business plan and conversations of mid-7s, which I think shows to some better quality, but also is something that will move around quarter-to-quarter and that's where these two deals in more of the high 7s we thought were very good deal. So the middle to low 7s for the year is still a good number, even though we are trending a little bit better than that right now. But it all comes down to the mix of what happens in -- especially in a quarter, it can move around.

Vince Tibone -- Green Street Advisors Inc -- Analyst

Great, thank you.

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Thank you.

Operator

And there are no further questions at this time. Drew, we'll turn it back to you for final remarks.

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Well, thank you, Brandon. I thank everybody for joining us. We really appreciate the interest in Weingarten. I know there aren't any conferences coming around anytime soon. But we are around if there are other questions. Have a great summer. And I appreciate your interest in the company. Thanks so much.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Michelle Wiggs -- Vice President of Investor Relations

Andrew M. Alexander -- Chairman, President and Chief Executive Officer

Stephen C. Richter -- Executive Vice President and Chief Financial Officer

Johnny Hendrix -- Executive Vice President and Chief Operating Officer

Greg Michael McGinniss -- Scotiabank -- Analyst

Christine Mary McElroy Tulloch -- Citigroup Inc -- Analyst

Craig Richard Schmidt -- Bank of America Merrill Lynch -- Analyst

Vince Tibone -- Green Street Advisors Inc -- Analyst

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