Pennsylvania Real Estate Investment Trust (PEI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust first quarter 2010 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, April 29, 2010. I would now like to turn the conference over to our host, Mr. Garth Russell, with KCSA Strategic Communications. Please go ahead, Sir.

Thank you, Jeremy. Before I turning the call over to management for their prepared remarks, I would like to state that this conference call will contain certain forward-looking statements within the meaning of federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends, and other matters that are not historical facts. These forward-looking statements reflect PREIT's current views about future events and are subject to risks, uncertainties, and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by these forward-looking statements.

PREIT's business might be affected by uncertainties affecting real estate businesses generally as well as specific factors discussed in PREIT's press releases, documents PREIT has filed with the Securities and Exchange Commission, and in particular PREIT's annual report on form 10-K for the year ended December 31, 2009. PREIT does not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise. It is now my pleasure to turn the call over to Mr. Ron Rubin, the Chairman and Chief Executive Officer of PREIT. Ron, the floor is yours.

Thank you, very much, Garth. Welcome to the Pennsylvania Real Estate Investment Trust first quarter 2010 conference call. Joining me on the call today are Ed Glickman, President, Bob McCadden, Chief Financial Officer , and Joe Coradino, President of our Management Company and Head of our Retail Operations. Also in the room today are Vice Chairman George Rubin, and General Counsel, Bruce Goldman.

Today we will discuss our first-quarter results, the status of our current projects, and our expectations for the balance of 2010. After we conclude our remarks, the call will be open for your questions. Before we begin, I'd like to take this opportunity to thank our longest serving trustee, Lee Javich, who is going to retire from the PREIT Board when his term expires on June 3rd. For 25 years, PREIT has been served well by Lee's wisdom, thoughtfulness and guidance. And we thank him deeply for his years of service and his meaningful contributions.

As we have discussed on previous calls, the effects of the economy continue to impact our results. Recently, however, there have been signs of recovery as evidenced by an uptick in tenant sales and by an increase in the number of new potential transactions in our pipeline. In addition, we are pleased that our redevelopments continued to generate momentum as it evidenced by sales exceeding $500 per square foot at both Jacksonville and Cherry Hill Malls.

As we have noted in previous calls, regardless of the economic environment, the fundamentals of our business remain unchanged. Our management team is focused on strengthening our financial position and improving our operational performance and maximizing the value of our properties. To do this, we are working to place tenants in service at mixed use elements where possible, increase NOI, improve occupancy, and generate positive leasing spreads as part of our strategy to create long-term value for our shareholders. And with that I'll turn the call over to Ed

Thanks, Ron. Good afternoon, and thank you for joining us on this call. It was a pleasure to have had the opportunity to visit with many of you during the past few weeks. Especially since the position and outlook for the Company have improved dramatically during the last 12 months. In the first quarter of 2009, we were finishing construction on a number of our projects, expectantly awaiting the opening of key tenants and searching for capital in a very difficult market. Our stock was well below $5 per share, and we had a wall of debt maturing.

This afternoon's call finds us in quite a different environment. We have completed the construction phase at cherry Hill Mall, 801 Market, and Plymouth Meeting Mall. Our strategic tenants are not only open but exceeding their own expectations. With the help of our bank group, we recently closed a three-year, $670 million credit facility to refinance the previous line of credit and term loan. We have also been able to reduce our outstanding convertible note balance by more than half, and in the process save our shareholders over $50 million through discounted repurchases.

As we hold this call, our stock is at over $15 per share. We have the liquidity to run our business, and we are beginning to see stability return to the economy. These are good things and give us reason to be optimistic. Our optimism is mirrored by our metrics.

We had a good first quarter. For the first quarter PREIT is reporting FFO of $55 per share. Overall NOI was $71.6 million with same-store NOI at $71.2 million. On the same store basis we were up 1% against the comparable quarter. Portfolio occupancy ended the quarter at 89.3%, up 50 basis points.

Our sales have stabilized. We were up $1 year to year and significantly against the last quarter. We are seeing signs of increased leasing activity. As the space market begins to firm, we expect that leasing spreads will begin to stabilize. We are optimistic that we are at an inflection point in our operating performance.

We have employed capital to renovate and expand our asset base. We have acquired that capital through financial leverage. What we have not attained is the operating leverage that we expected. In our next phase of growth, we hope to accelerate return on assets through lease-up of our newly renovated portfolio without the necessity of the massive capital outlays of the last five years. We are, however, cognizant that the recovery that we are experiencing may be the eye rather than the end of the storm, and we remain cautious in our outlook of our actions. Overall economic metrics remain mixed and the world is not without its challenges. In the relief that we are feeling will be prudent to forget the lessons of the last few years. Therefore as we have discussed, it is our intention to delever the Company.

Many of you have asked for clarity as to our capital strategy. It has always been our intent to operate the Company with more constructive leverage. We expect that NOI from redevelopments would naturally deleverage the borrowings to refinance the expenditure. As the retail market slowed, our stabilization period extended and our expenses rose. Faced with this situation and with the concurrence of our banks, we first sought liquidity to complete our work in progress. Then we sought stability by extending maturities. And now that we have accomplished those goals we embark on the process process of restructuring our capital stack. We would like to operate at a lower level of leverage closer to our target of 60% LTV, and with a longer maturity schedule.

To accomplish this we will pursue many tactics. First, we have amortizing mortgages, which naturally delever our assets. Second, we intend to opportunistically sell assets. Third, we expect NOI growth from leasing activity to create additional growth asset value. Fourth, we intend to restructure our capital stack by replacing debt with equity.

Given our current leverage, we cannot achieve our goal overnight. We do, however, intend to take prudent steps that will demonstrate our conviction to achieving the goals that I have just stated.

For those shareholders who have stayed with us through this challenging period, we appreciate your continued support, and we believe that your faith will be rewarded. For those that have left, we hope that you will view this call as an excellent opportunity to reconsider your decision. Bob McCadden will now give you more details on our financial performance.

Thank you, Ed. FF( for the quarter was $25.5 million or $0.55 per share. Net loss attributable to PREIT for the first quarter was $17.6 million, or $0.41 per diluted share. Increased interest expense and higher depreciation charges relating to assets placed in the service impacted both our GAAP net loss and FFO for the quarter when compared to the prior year. As Ed mentioned, same-store NOI was up 1% when compared to last year's first quarter. The quarterly results were positively impacted by $1.8 million of lease termination revenues, and an improving retail climate that favorably impacted revenues from tenants paying either a percentage of their sales in lieu of fixed rent or a percentage rents.

In addition, we had only two local tenants file for bankruptcy this quarter, with minimal financial impact. Same store CAM real estate taxes increased by $2.9 million from last year's quarter. $1.6 million of the increase was from higher snow removal costs, as record snow fall levels were recorded in the mid-atlantic region this winter. $0.4 million of the increase relates to the 801 Market Street office property which was occupied in the third quarter of 2009 by the Commonwealth of Pennsylvania. Real estate taxes increased $0.5 million dollars due to higher assessments and rate increases at a number of our properties. Where possible, we are aggressively pursuing property tax appeals in these jurisdictions.

Our expense recovery rates continued to be negatively impacted by short-term lease renewals which often times take the form of gross leases or percentage of sales in lieu of minimum rent leases. Our expense recovery ratio decreased to 81.9% from 86.3% at last year's quarter. In the near term we expect to see downward pressure on the recovery ratios until such time as we are able to convert tenants back from gross to net leases. As tenant sales improve and our short-term renewals expire over the next few years, we will work to convert these tenants back.

Interest expense increased over last year's quarter as a result of placing $220 million of completed redevelopment assets in the service since the end of the first quarter of 2009 and to a lesser extent, slightly higher average interest rates. At the end of the quarter, we had outstanding debt of $2.7 billion, a decrease of $40 million from the end of last year. Our effective interest rate for the quarter was 5.41% compared to 5.23% a year ago. We expect our effective interest rate will move higher throughout 2010 due to the impact of higher spread in the 2010 credit facility and term loans and anticipate a refinancing of two (inaudible) mortgage loans later this year. At the end of the quarter, 84.6% of the Company's indebtedness rate was fixed.

Turning to 2010 guidance, we are reaffirming our FFO guidance of $1.94 to $2.06. We modified our guidance for GAAP earnings by approximately $0.10 per share to reflect higher expected levels of depreciation and increased common stock equivalents as a result of our higher share price. As a reminder, our FFO guidance does not include the effect of any acquisitions, dispositions, gain on the sale of nonoperating assets or any significant changes in our capital structure. With that I'll turn the call over to Joe Cadino.

Thanks, Bob. We continue to improve our operational proficiency and are pleased to share with you metrics in the first quarter of 2010. (inaudible) sales increased to $341 per square foot, sluggy favorable to last year's first quarter of $340 per square foot. And a 2.1 increase of $7 per square foot over December 31 2009. Quarterly comparable store sales increased 5.7% over the first quarter of 2009.

We eclipsed $500 per square foot, a major sales milestone, at two malls in our portfolio. At Jacksonville Mall, comp store sales were $502 per square foot and at Cherry Hill, $514 per square foot. Total portfolio occupancy increased by 50 basis points to 89.3% When temporary tenants are included, total mall occupancy increased to 90.1%, an in-line mall occupancy to 85.7%.

During the quarter, we opened 188,000 square feet of space, consisting of 65,000 square feet of anchor space, 77,000 square feet of stores over 10,000 square feet, and 46,000 square feet of in-line stores. Notable tenants that opened during the quarter include Whole Food of Plymouth Meeting Mall, Bye-bye Baby at Whitehall Mall, Petsmart at the Commons in Magnolia,, Intox Fitness at Voorheis Town Center, Encore Shoes, A New Concept from shoe department at Nedny Mall, A Men's Warehouse at Dartmouth, and the Buckle and Guest at Cherry Hill Mall.

We also proactively replaced four former Walden Books locations after they announced they announced significant store closings. Two with BooksAMillion and two with a local operator out of western Pennsylvania, Bradley's Book Outlet.

We do have over 200,000 additional square feet of executed leases for 2010 occupancy, and another 400,000 square feet of leases being negotiated. Over the past two weeks, HH Gregg opened three locations, representing 90,000 square feet in our portfolio, at Paxton Town Center, Wyoming Valley Mall, and Red Rose Commons. Their stores at Christiana Power Center and Lehigh Valley Mall are scheduled to open in mid May. Including these transactions, we are expected the in-line occupancy of our Strip and Power Center portfolio to improve approximately 700 basis points to 95% before year end.

Non anchor lease activity for the quarter totaled 610,000 square feel. We renewed 132 leases totaling 489,000 square feet at an average rate of $20.56 per square foot, a decrease of 6.9%. These figures do include transactions which challenged retail concepts as well as portfolio-wide renewals that encompassed underperforming properties where we focused on maintaining occupancy. 55% of our renewals this quarter carried terms less than three years. For renewals with terms in excess of five years which made up approximately 30% of the executed renewals. Rents increased 6% upon renewal. To date, we have gone to documentation with 73% of our planned 2010 non anchor renewals.

On the anchor leasing front we signed six anchor renewals representing approximately 400,000 square of space. We have five anchors totaling 613,000 square feet that are set to expire over the balance at 2010, three of which renewed this month. The environment for leasing space continues to improve. Driven in large part by recent solid sales volumes.

While available retail open to-buys are at a premium we are seeking select merchants to expand their existing brands, and in some cases introduce new ones. Another very positive sign, we experienced no additional tenant bankruptcies during the quarter. A significant event considering the first quarter generally sees a spike of post holiday season filings. We are pleased with the excitement generated by our completed redevelopments and remain committed to striving toward operational excellence. With the retailer sentiment on the upswing, we are optimistic as we prepare for the upcoming ICSC convention in Las Vegas. Now we are open for questions.

(Operator Instructions) Our first question comes from the line of Craig Schmidt with Bank of America Merrill Lynch. Please go ahead.

Thank you, good afternoon. I think your reported same-store NOI includes centers that have been recently renovated. Do you know what the same store number would be if you excluded those recently renovated assets?

Yes, Craig, as we've done since the start of the redevelopment process, we included all of the properties in our same store portfolio. We've never carved those out. So we don't have that in available.

Okay. And now that you have Whole Foods in Plymouth Meeting, where do you think non anchor occupancy could be by year end?

First off, Whole Food is performing very well there. It's one of their best openings in the region. We're expecting occupancy at year end to be around 80%. We are seeing a demonstrated increase in interest from prospective tenants and obviously intend to take advantage of that.

And what will you be doing at Voorheis this year to try to improve the occupancy there?

Well, I mean, first off we recently opened up Intox Fitness, and we have a number of leases in negotiations rights now. So we're optimistic that we're going to drive occupancy there this year.

Okay. Thank you.

Into the mid 70%'s.

Thank you. Our next question comes from the line of Nathan Isby from Stifel Nicolaus. Please go ahead.

Good afternoon. Joe, you spoke about the 73% of the 2010 renewals that were signed or up for signature. It should give you a pretty good idea of where your 2010 lease spreads are going. Given your view there, of the 73%, where do you expect those to trend over the next few quarters?

Well, first off, I mean, we're certainly seeing a decrease in rent relief, but we don't have a specific number that we can give to you regarding those leases that are completed right now. Renewals that are completed right now.

Okay. You said five acres were expiring this year. Three were renewed. Do you have any sense of the last two?

We're optimistic that the remaining two will renew.

Okay. Thank you.

Thank you. Our next question comes from the line of Quentin Velleley with Citi. Please go ahead.

Good afternoon. Do you think in terms of the restructuring of the capital (inaudible) and I think you spoke about four method of doing that, the third one was potentially increasing NOI. Could you give us some kind of idea of the million dollar amount that you think that you can potentially increase NOI in order to help delever the Company.

Quentin, I don't know if you noticed, but in our supplemental this month or this quarter, we included a more detailed breakout of our portfolio which shows the amount of vacant space by individual assets.

Yes

And we also provide obviously our our rental rates for each of the assets. And I think we would look at it the same as where are we with occupancy today versus what is a normalized level of occupancy be at a more stable time. So that's probably somewhere in the high 80% to low 90% levels. And you can certainly do the math against the numbers that we've provided.

So that high is on in-line occupancy.

In line, right.

And as far as timing, is it a two to three-year plan?

Probably two to three-year plan in terms of where we are today.

Okay. And then just the fourth element of the restructuring of the capital stack was replacing debt with equity.

Given you've obviously done the line and you've had strong share price performance pushing toward $16, I'm just wondering what's holding back the Board and management from potentially raising equity now rather than sometime in the future. Well, we've been actively considering our next steps, but we've had a long process to go through in terms of positioning the Company, including finishing up our line of credit. And obviously we missed your conference. So, we've had to go and have a lot of conversations with investors that we haven't spoken with in a long period of time. And we're currently considering what our options are.

Okay. But it was there anything on the leasing front that you wanted to get done or there any assets that you're close to selling that you want to do before you raise the equity?

There are no pending transactions, but there are a lot of logistical steps that we needed to get through before we were in a position to even consider an offer.

Okay. Thank you.

Thank you. Our next question comes from the line of Michael Mueller from JPMorgan. Go ahead.

Good morning. Hi. Just looking at Cherry Hill for a second. The non anchor occupancy looks like it went from in the 93%s at year end to in the 87%s at March 31. I guess how much of that is just kind of a seasonal down draft versus something where you kind of lost some occupancy that will be out for a little bit?

Actually, the reason for that decrease in occupancy was driven by rolling the second floor in and including that in the vacancy number, taking that on line. The second floor I refer to in the Nordstrom edition.

Okay.

Okay? It's about 19,000 feet that was added. Effectively (inaudible) follow a one year from completion of construction if it's not leased, we move it from construction progress to inventory if you will.

Okay.

That's it.

Okay. And one other question. I think the, if I hear the prior question correctly or one of the prior questions, it was where does the occupancy trend over the next year so that high 80%s number. Where do you think the mall shop occupancy ends, 2010, relative to where it ended 2009?

We're up in the mid 80%s.

Okay. That's it. Thank you.

Thank you. (Operator Instructions) And our next question comes from the line of Ben Yang with Keif, Bruyette & Woods. Please go ahead.

Hi. Good afternoon. In the supplemental it looks like several of your potential development projects fell out of the pipeline, specific the Gallery and Pavilion at Market 8, Spring Hills and White Clay. Curious what happened to these projects and whether you're planning to sell the land at White Clay and maybe Spring Hills?

Ben, some of these projects have been in a state of inactivity in terms of specific milestones. Rather than continue to report them, if you looked at another schedule, we should have them in the construction progress balance. We consider those to be active and viable projects. But it's going to be a little bit longer before we get a lot of traction on them.

Ben, you should know that most of our development projects are driven by tenant interest. And so we don't do these projects on a speculative basis. And that so while we're talking to prospective tenants, we have to get a determine as to whether those expansions by those tenants are real before we bring those redevelopment projects into let's call it beyond a conceptual stage.

Sure. And can you just remind us what your pre-leasing hurdles are before you would actually begin construction on some of those projects?

It's not a question of pre-leasing. It's a question of anchor tenant driven because all of these projects are driven by major tenants. And so that's really the focal point of deciding to go ahead with the project or not.

Okay. And final question. I believe, Ed, that you mentioned that two local retailers had filed for bankruptcy during the quarter. But then it also looks like your lease termination fees are considerably higher than they were a year ago. I was wondering if you could provide some color on maybe who's closing stores voluntarily, and is it any particular type of retailer or maybe concentrated in a particular location?

No. There was actually one large termination that was a little under $1 million that was from a large format retailer. Not practicing related. And the rest were kind of a handful. I mean, essentially what you have is in some cases you have tenants who are looking to shrink their concepts and if they recently signed a lease. They have a lot of remaining obligation. It's not necessarily indicative of any particular asset category or merchandise category that we saw in the lease termination number for the quarter.

Okay. Great. Thanks, guys.

Thank you. And Mr. Rubin, there are no further questions at this time. Please continue with any closing remarks you may have.

Okay. Thank you all for joining with us this afternoon And for your continued support. Looking forward to the ICSC Spring convention next month, and we invite you all who are out there to stop by our exhibit. Our next earnings conference call will be in August for our second-quarter results. Thank you again, and have a good evening.

Ladies and gentlemen, this concludes the Pennsylvania Real Estate Investment Trust first quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.