Cedar Shopping Centers, Inc. — Q2 2011 Form 10-Q
Period: Quarter and six months ended June 30, 2011. The filing identifies the registrant as Cedar Shopping Centers, Inc. The company is a REIT focused on supermarket-anchored shopping centers, primarily in the Mid-Atlantic and Northeast. It owned and managed 131 operating properties; excluding development and held-for-sale properties, its 110-property portfolio was approximately 92% leased.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $38.3 million | $38.0 million | $79.2 million | $79.8 million |
| Operating income | $6.4 million | $12.4 million | $17.6 million | $24.6 million |
| Operating margin | 16.7% | 32.7% | 22.2% | 30.8% |
| Net loss attributable to common shareholders | $(27.7) million | $(4.3) million | $(40.0) million | $(7.7) million |
| Loss per common share, diluted | $(0.41) | $(0.07) | $(0.59) | $(0.13) |
| Operating cash flow | — | — | $13.6 million | $16.8 million |
| FFO per common share | $(0.26) | $0.10 | $(0.30) | $0.21 |
Operating margin is calculated as reported operating income divided by total revenue. FFO is a non-GAAP measure; the company cautions that it is not cash flow or cash available for distributions.
Balance sheet, debt and liquidity
- At June 30, total assets were $1.625 billion, total liabilities $970.1 million, and total equity $650.0 million. Cash and cash equivalents were $13.4 million; restricted cash of $14.3 million was generally limited to specified property-level needs.
- Debt recorded on the balance sheet totaled approximately $894.2 million, including $684.1 million of mortgages, $43.0 million of mortgages on properties held for sale/conveyance, and $167.1 million drawn on revolving credit facilities. Debt excluding held-for-sale mortgages was reported at a 5.2% weighted-average rate.
- The stabilized-property facility had $64.0 million outstanding and approximately $76.8 million available at June 30, subject to collateral and covenants. The development-property facility had $103.1 million outstanding. The company reported compliance with applicable facility covenants.
- Six-month investing cash outflow was $56.4 million, mainly reflecting $63.2 million of real estate and improvement expenditures. Financing cash inflow was $42.1 million, including $34.5 million of net revolving-facility advances and $29.3 million of mortgage financings. Cash declined $0.7 million to $13.4 million.
- Common dividends declared were $0.09 per share for Q2 and $0.18 per share for the first half. On July 28, the board declared another $0.09 common dividend, payable August 22, 2011.
Changes, unusual items and outlook
- Revenue was nearly flat year over year in Q2 and down 1% for the first half, while operating income declined. Results included $6.35 million of Q2 management-transition charges, primarily related to approximately $3.7 million of cash severance, accelerated vesting of restricted shares, and hiring-related costs.
- Net loss also reflected an $8.0 million write-off of an investment in a Philadelphia joint venture and discontinued-operation impairment charges of $12.3 million in Q2 and $22.5 million for the first half. The company cited the tenant’s departure, zoning and deed restrictions, required investment, and uncertain market conditions in deciding not to proceed with development of the adjacent properties.
- A tenant vacated a company-owned Philadelphia property; the company reported that it had made no mortgage payments since May and intended to convey the property to the lender through a deed-in-lieu process. The filing anticipated an approximately $8.3 million gain on conveyance, but completion and amount were not assured.
- The company could not obtain lender consents for a planned sale of 14 properties and was renegotiating the transaction; it might not sell all 14. This contributed to revised property valuations and uncertainty around the disposition plan.
- Management stated it expected sufficient liquidity, drawing on operating cash flow, credit availability, financing, property sales, joint ventures and potential equity issuance. It also warned that financing and refinancing availability was not assured. No specific earnings or FFO guidance was provided.
- Near-term financing risks included a $63.8 million construction facility due September 2011, a $21.0 million variable-rate mortgage payable in September 2011, and revolving facilities due January and June 2012, respectively, with extension options described in the filing. Subsequent to quarter-end, the company refinanced a $16.5 million property mortgage; the Cedar/RioCan joint venture also refinanced a mortgage in August.
- Interest-rate sensitivity: a 1% rate move was estimated to change annual interest cost by approximately $1.9 million on $187.9 million of variable-rate debt; the effect on the $64.0 million stabilized facility was estimated at $0.6 million only if LIBOR exceeded its 2% floor. The company reported $19.9 million of mortgage debt subject to swaps.
- CEO, Chairman and President retired and the CFO’s employment ended in June. The company issued a substantial restricted-share award to its new CEO, including time- and performance-based components. Management assessed disclosure controls as effective and reported no material change in internal controls during the period.
Key facts for investors to verify
- Whether the proposed deed-in-lieu for the Philadelphia property is completed, and the resulting gain, obligations and cash impact.
- Outcome and timing of the renegotiated 14-property sale, including lender approvals and any further impairment charges.
- Renewal, extension or repayment plans for the September 2011 and 2012 debt maturities, and continued covenant compliance and revolver availability.
- Whether operating cash generation can support property investment, debt service and declared dividends, particularly given negative reported FFO.
- Tenant credit quality, leasing progress and the basis for property valuations and impairment estimates.