RPT’s Losses Worsen: Why This Earnings Call Matters Now

Introduction

RPT Realty (NYSE: RPT) – a retail-focused REIT – recently reported a deepening net loss, making its latest earnings call especially pivotal (^[1]). In Q3 2023, RPT swung to a $7.9 million net loss (−$0.09 per share), a sharp decline from the $11.3 million profit a year prior (^[1]). This deterioration in earnings heightens investor focus on RPT’s fundamentals – from its generous dividend and debt load to valuation and tenant risks – as management addresses how it plans to navigate mounting challenges. Below, we examine RPT’s dividend policy, leverage, valuation, and the key risks and red flags that underscore why this earnings call matters now.

Dividend Policy and Earnings Coverage

RPT has maintained an aggressive dividend in recent years, reflected in its quarterly payout of $0.14 per common share (annualized $0.56) as of late 2023 (^[2]). At pre-merger trading prices, this represented a high-single-digit dividend yield, significantly above the market average (^[3]). The flip side of such a yield is the question of sustainability. On that front, RPT’s dividend appeared well-covered by operating cash flows: Operating funds from operations (FFO) – a REIT’s core earnings metric – was $0.24 per share in Q3 2023 (^[1]). This put the payout ratio at a comfortable ~58% of operating FFO, up from ~48% a year earlier due to softer earnings (^[2]). In other words, RPT’s recurring earnings (FFO) still amply funded its dividend, suggesting no immediate strain on distribution coverage.

However, RPT’s dividend history reveals a cautious story. The company slashed its dividend during past downturns – notably the 2020 pandemic – and only gradually raised it back in subsequent years (^[3]). For instance, annual dividends were over $1.00/share pre-2020 but dropped to just ~$0.28 in the aftermath of COVID-19 (^[3]). The payout has since grown (to $0.52 in 2022 and $0.56 in 2023), yet remains far below pre-pandemic levels (^[2]). This history of cuts underscores RPT’s sensitivity to economic stress. Investors are now eyeing whether today’s high yield is a sign of undervaluation or a warning of potential future cuts. With FFO actually declining year-over-year (Q3 2023 operating FFO of $0.24 vs. $0.27 in Q3 2022) (^[1]), management faces pressure to stabilize earnings so that the dividend – a key attraction for RPT’s shareholder base – remains secure going forward.

Leverage and Debt Maturities

RPT’s capital structure carries substantial leverage, though the company has taken steps to manage near-term refinancing risk. As of Q3 2023, net debt stood around $900 million, equating to a net debt-to EBITDA ratio of roughly 6.9× (slightly improved from 7.0× a year prior) (^[1]). The REIT’s interest coverage ratio was about 3.5× EBITDA in the latest quarter (^[1]), indicating that earnings comfortably cover cash interest costs for now. RPT also benefits from mostly fixed-rate debt at relatively low rates: its total debt (including joint ventures) carries a weighted average interest rate of just 3.76%, with a weighted average maturity of 4.4 years (^[1]). Crucially, the company pushed out all significant debt maturities until 2025 by refinancing in prior years, and it fixed ~95% of its debt through maturity using swaps (^[4]). Fitch Ratings took notice of these improvements and even awarded RPT an investment-grade credit rating in 2020 (^[4]).

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In the near term, RPT’s balance sheet flexibility appears solid. The company had no major debt coming due until 2025, ample liquidity (including cash on hand and an undrawn credit line), and ongoing asset recycling to manage leverage (^[4]). Longer term, though, refinancing risk looms. When 2025+ maturities arrive, RPT will likely face much higher interest rates than its current sub-4% average. A large chunk of debt rolling over at, say, 6–7% could significantly inflate interest expense and squeeze FFO margins. Investors will be looking to this earnings call for management’s plans on de-leveraging or refinancing – for example, through asset sales or joint ventures – to prevent rising rates from eroding shareholder returns. The call is also a chance to gauge management’s comfort with the current leverage level. At ~7× EBITDA, RPT’s leverage is on the higher side for retail REITs, potentially constraining growth. Any insight on post-quarter debt reduction or proactive refinancing could reassure the market.

Valuation and Peer Comparison

Even before the recent earnings stumble, RPT’s stock had been trading at a discount valuation relative to larger peers. Based on its 2023 earnings guidance (Operating FFO of $0.97–$1.01 per share) (^[5]), RPT’s pre-merger share price in the $9–10 range represented a P/FFO multiple under 10×. This is markedly lower than the low-to-mid teens multiples typical for well-established retail REITs. For example, industry leaders like Kimco Realty (NYSE: KIM) and Regency Centers often trade around ~13× FFO (^[6]). RPT’s depressed multiple reflected investor concerns about its small size and slower growth, but it also made the company an attractive target. In August 2023, Kimco agreed to acquire RPT in an all-stock deal that valued RPT at $11.34 per share – a 19% premium to its prior trading price (^[6]). Notably, Kimco highlighted that the acquisition is “immediately accretive to FFO” and leverage-neutral for Kimco (^[6]). In other words, RPT’s cash flow yield was high enough that buying the company boosts Kimco’s per-share FFO. This underscores how undervalued RPT had become, and why a strategic buyer saw value in its portfolio.

From a real estate standpoint, RPT brought Kimco 56 open-air shopping centers (13.3 million square feet) concentrated in top U.S. markets (^[7]). RPT had been repositioning toward grocery-anchored and Sun Belt assets – the same favored segments of larger peers (^[6]). Yet RPT’s market capitalization was barely $1 billion, limiting its ability to scale further. The acquisition by Kimco (with a $13B equity market cap) effectively bridges that valuation gap for RPT shareholders, handing them stock in a larger, more liquid REIT. For RPT’s final standalone quarter, however, valuation remains relevant to judge performance: the stock’s high dividend yield and low P/FFO signaled skepticism about RPT’s growth prospects. Management’s commentary on the call about FFO drivers (leasing spreads, occupancy gains, etc.) will help analysts determine if RPT deserved a higher multiple on its own or truly needed a bigger partner to unlock value.

Key Risks and Red Flags

RPT’s worsening loss and heavy yield illuminate several risk factors and red flags that investors are keen to hear addressed:

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– Retail Tenant Bankruptcies: RPT has faced a wave of tenant bankruptcies and store closures that pressure its cash flows. The collapse of Bed Bath & Beyond (BBBY) is a prime example – RPT had eight BBBY or buybuy BABY stores in its portfolio, six of which it has recently backfilled with new tenants (^[2]). The remaining vacancies (2 BBBYs and 4 buybuy BABY locations) are still in lease negotiation (^[2]). Similarly, Regal Cinemas’ bankruptcy impacted three of RPT’s theater-anchored centers, requiring rent concessions and re-leasing efforts (^[8]). Other struggling retailers like Party City and Tuesday Morning have also vacated some spaces (^[8]). These transitions create near-term income gaps – in fact, RPT’s same-property occupancy dipped to 89.9% partly because recent closures cut occupancy by 220 basis points (^[1]). While management touts robust demand from new tenants (record leasing volumes and double-digit rent spreads) (^[1]) (^[1]), the risk is that further retail fallout or slow fill-up of big boxes could drag on RPT’s NOI. Investors will scrutinize updates on how quickly new leases (e.g. groceries and discount retailers) are commencing and offsetting lost rents.

– Declining FFO & Expense Pressures: A notable red flag in RPT’s results is the decline in operating FFO – down to $0.24/share in Q3 2023 from $0.27 a year earlier (^[1]). Management attributed this drop to lower NOI from asset sales and higher G&A costs (^[1]). The higher overhead is concerning for a smaller REIT and suggests limited operating leverage. RPT’s active asset recycling (over $790M in acquisitions in 2021, followed by some dispositions in 2022) (^[1]) may have improved portfolio quality, but selling properties also shrank rent revenue in the short term. If general and administrative expenses continue rising (e.g. due to inflation or merger-related costs), RPT’s FFO could be further squeezed. The Q3 net loss also included ~$4.8 million of merger transaction expenses (^[1]) – a one-time hit – but even excluding those, FFO was essentially flat sequentially. The inability to grow FFO in a high-leasing environment raises a flag about RPT’s efficiency and scale. Shareholders will want assurance that once merger costs and vacancies are behind them, the earnings trajectory can turn positive again.

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– Leverage and Interest Rate Exposure: As discussed, RPT’s debt load is relatively high, and while near-term interest costs are mostly fixed, the 2025+ refinancing is a risk. A fixed-charge coverage ratio of only ~2.9× (including preferred dividends) (^[1]) means there isn’t huge headroom if cash flows soften. Any shock – be it a jump in interest rates, a recession hitting rent collections, or unexpected capital needs – could tighten that coverage. The presence of a $130 million 7.25% Series D preferred stock (convertible into common) added another layer of obligatory payouts (^[2]), though Kimco’s acquisition plan includes converting this preferred equity at closing (^[9]). The preferred dividend was ~$6.7M annually (^[2]), which alongside interest eats into funds available for common dividends. Elevated leverage also limits RPT’s strategic flexibility; for example, funding new development or big redevelopments is difficult without either issuing equity (dilutive when the stock is cheap) or taking on more debt. Investors have been wary that RPT’s cost of capital disadvantage – a common red flag for small-cap REITs – would hinder its growth. This earnings call is an opportunity for management to detail how combining with Kimco (which has a stronger balance sheet) might alleviate this issue.

– Historical Dividend Cuts: While the current dividend is covered by FFO, RPT’s high yield telegraphs some market skepticism. The company’s history shows it is willing to cut the dividend in adversity, having done so during the last decade’s downturns (^[3]). For income-focused investors, that is a lingering concern. The fact that RPT’s payout ratio has risen (albeit still moderate) and that GAAP earnings have turned negative could be seen as warning signs if conditions worsen. Management’s stance on future dividend policy – whether it planned to maintain or even raise the payout versus retaining cash – is a key topic for the call. Any hint of stress (for instance, if FFO coverage were to deteriorate or if significant capital expenditures arise) would be a red flag that the current dividend may not be sacrosanct.

In sum, RPT enters this earnings call with multiple risk overhangs: a vulnerable retail tenant base (though improving), shrinking earnings, and a levered balance sheet. These factors help explain why the stock languished at a high yield and why a larger peer stepping in made strategic sense. Recognizing the red flags, investors will be listening for how RPT (and its acquirer) will mitigate these risks going forward.

Open Questions Going Forward

Given the backdrop above, several open questions remain for RPT stakeholders, making this earnings call particularly consequential:

– Can RPT’s fundamentals rebound? With a healthy pipeline of signed-but-not-opened leases (over $13 million in annual rent queued up, equivalent to an 8% boost to NOI) (^[1]) (^[1]), the pieces are in place for an earnings uptick. The key question is how soon those new tenants will contribute and whether they’ll fully offset recent vacancy losses. Investors want to know if RPT’s same-property NOI growth can accelerate as backfilled anchors (grocercy stores, value retailers, etc.) commence operations. Additionally, will the company’s aggressive leasing spreads (nearly +50% on new leases in Q3) (^[1]) translate into higher cash NOI in 2024, or are concessions and tenant improvement costs tempering the benefit? The timing and efficiency of turning record leasing volume into actual revenue is a critical open issue.

– How will rising interest costs be managed? Although RPT has no near-term debt due, 2025 is around the corner. On the call, management faces the question: what’s the plan to handle refinancing at much higher rates? Will the company look to term out debt early, hedge more, or reduce indebtedness (perhaps by selling lower-growth assets) before maturities hit? Investors will also seek updates on balance sheet strategy post-merger – e.g. will Kimco refinance RPT’s loans under its lower borrowing costs, thereby easing the interest burden? Ensuring that FFO growth from leasing isn’t instantly negated by rising interest expense is a major point of concern.

– Integration with Kimco – what’s in store? Since RPT’s board agreed to the Kimco deal, a crucial question is how the combined company will unlock value. On this call (likely RPT’s final independent earnings call), management may outline what synergies or strategic benefits RPT’s assets bring to Kimco. Kimco has cited bolstering its Sun Belt presence and expects the merger to strengthen its FFO outlook (^[10]). Investors might ask: Will any RPT properties be pruned post-merger? (For example, non-core markets or joint venture assets). Also, how will RPT’s shareholders – soon to be Kimco shareholders – benefit in terms of dividend policy and growth? Clarity on these integration questions matters now, as it frames the investment case for those holding through the transaction. The deal received shareholder approval in December 2023 and is slated to close in early 2024 (^[1]), so this call is management’s chance to answer any lingering doubts about the combination.

– Is the dividend safe and sustainable? Finally, even with the merger pending, income investors will ask if the current dividend level is here to stay. RPT’s AFFO payout was manageable at ~58% (^[2]), but if FFO doesn’t grow (or if unexpected costs arise), that ratio could creep up. On the call, any commentary around future dividend intentions – whether to keep it flat until earnings catch up, or confidence that FFO growth will support increases – will be closely parsed. Since Kimco’s dividend yield is lower (~5% range) and its payout policy more conservative, an open question is whether RPT’s high-yield payout will effectively be “right-sized” once under Kimco’s umbrella. RPT investors will want to know if they can count on similar income post-merger or if adjustments are likely.

In conclusion, RPT’s worsening losses have put management on the spot to address the company’s outlook at this critical juncture. The latest earnings call isn’t just about one weak quarter – it’s about charting a path forward amid uncertainty, be it as a standalone entity trying to turn around or as part of a larger REIT via the Kimco acquisition. With dividend stability, debt strategy, and operational recovery all in focus, what RPT’s leadership communicates now will greatly influence investor confidence. In many ways, this call serves as both an appraisal of RPT’s recent missteps and a final opportunity to instill faith in the future, making it a must-listen event for stakeholders. The answers given – or left unanswered – will matter not only for RPT’s immediate fate but also for how its value is ultimately realized under new ownership.

Sources: RPT Realty Q3 2023 earnings release (^[1]) (^[1]) (^[2]) (^[2]); RPT investor presentation (^[4]) (^[4]); Kimco acquisition announcement (^[6]) (^[6]); The Real Deal and Reuters coverage (^[7]) (^[10]); RPT Q1 2023 conference call (^[8]); Company financial supplements.

Sources

For informational purposes only; not investment advice.