Pennsylvania Real Estate Investment Trust (PEI) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust second 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, Tuesday, August 3, 2010. I would now like to turn the conference over to Garth Russell with KCSA Strategic Communications. Please go ahead,

Thank you, Douglas. Before turning the call over to management for their prepared remarks, I'd like to state that this conference call will contain certain forward-looking statements within the meaning of Federal Securities laws. Forward looking statements related 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 the 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 with 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 Ron Rubin, Chairman and CEO of PREIT. Ron, the floor is yours.

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

Today we will discuss our second 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. We are pleased with the progress that the Company has made on the liquidity and capital fronts.

Our successful equity offering during the quarter allowed us to repay borrowings under our credit facility, satisfying our required pay down well in advance of the target date. Doing so has improved our balance sheet. Though we have more work to do, we now have greater financial flexibility to take advantage of opportunities should they arise.

On the operating front, we continued to see signs of recovery as evidenced by an uptick in tenant sales. By an increase in the number of new transactions under negotiations and by the expected improvements in our occupancy between now and year-end. Our emphasis continues to be on renewals and new leasing opportunities throughout our portfolio.

With the mostly quiet and uncertain acquisition environment, our management team has focused on strengthening our financial position, improving our operational performance, and investing in our properties. In doing so, we are working to place and keep tenants in business, to improve occupancy and maximize NOI as part of our strategy to create long term value for our shareholders. And with that, I'll turn the call over to Ed Glickman.

Thank you, Ron. Good afternoon and thank you for joining us on the second quarter call. During this quarter we have achieved a level of stability in our finances and operations which we hope is indicative of the future direction of our business. This quarter, we are seeing some positive signs in our operations.

Demand for space is improving. We are now at 90% occupancy and we have successfully renewed all of our 2010 anchor expirations. The productivity of our space is improving as well with comp sales up 2.1% to $344 per foot. Releasing spreads have also improved from last quarter with new leases at positive spread of 7.6%. While renewal rents are still declining, the rate of decline has improved from last quarters minus 6.9% to a current level of minus 1.5%.

As a result of increased productivity and lower tenant costs, our total cost of mall occupancy has declined by 50 basis points to 13.1%. These metrics indicate to us that the portfolio is stabilizing. We are still, however, living in a buyers market for space. Retailers that have taken new space and those that have renewed existing store leases have been faced with a challenging consumer environment.

Our response has been to carefully assess each of our tenant's positions and we have worked closely with many strategic tenants to share with us by negotiating leases with shorter terms and lower fixed cost. As a result, while our activity level is up, our same-store NOI is down by 3.5%. We expect pressure on same-store NOI to continue through the balance of 2010 as we experienced the full year impact of 2009 lease concessions and as more of our long term leases expire and are renewed or replaced at current economic terms.

As the market stabilizes, we expect that occupancy and currency will recover and we will shift into positive growth. By keeping our renewals short, we hope to have an early opportunity to participate in the recovery.

In the long term, we are optimistic about the prospects for our portfolio as we believe that our assets are well positioned in their markets. We are continually looking at new uses for our space and, as you will hear from Joe Coradino, we have made progress in redefining a number of our assets.

On the right hand side of the balance sheet we continue to make significant progress. In May we completed a successful 10.3 million share offering that marked the return of many institutional REIT investors to our stock. Applying the proceeds from the offering to repay debt at the end of the second quarter, we have reduced our line of credit balance to zero. We also paid down our term loan by more than $100 million thus meeting the facilities three year target for balance reduction in the first three months of its term.

This year, we have also completed the refinancing of Lehigh Valley Mall, Valley View Mall and our Springfield strip center. Since we are in a leverage reduction mode and we have liquidity, our strategy and refinancings is a bias for terms and rates versus the last dollar of proceeds. In the fourth quarter, we expect to finish the refinancing of Springfield Mall completing our capital plan for 2010.

In summary, as we close the second quarter, we have more liquidity and we are facing less risk both operational and financial than any time in the past three years. Looking forward, we intend to continue to lower leverage by increasing and conserving operating cash flow and harvesting assets when appropriate. Bob McCadden will now give you more details on our financial

Thank you, Ed. Net loss attributable to PREIT for the second quarter was $22.7 million or $0.45 per diluted share. FFO was $19.7 million compared to $37.8 million in the prior period. After excluding the $2.3 million write-off of deferred financing costs of 2010 and the $8.5 million gains from the repurchase of our exchangeable notes in 2009, the FFO as adjusted for the second quarter was $21.9 million compared to last year's $29.3 million.

Key factors impacting our offered results include the following. In addition to the deferred financing costs that were written off, interest expense increased by $3.2 million as a result of higher spreads when short-term floating rate bank debt and lower amounts of capitalized interest.

Since Q2, 2009, we have placed $198 million of project costs into service and stopped capitalizing interest on certain development projects. We sold two centers, Northeast Tower and Crest Plaza, in the second half of 2009 that generated $1.1 million of NOI and last years quarter.

In the second quarter of last year, we also recorded a $700,000 gain on the sale of a restaurant outparcel at one of our malls that was included in FFO. We also experienced a $2.5 million decrease in same-store NOI.

The same-store NOI results were unfavorably impacted by several factors. First, lease termination revenues were lower by approximately $300,000. Second, last year's quarter included approximately $600,000 of below market lease intangibles that were recognized as revenues when several tenant leases were terminated prior to their scheduled expiration dates. Excluding these two items, same-store NOI was down by 2.3%.

Finally, same-store CAM expenses increased by $1.2 million for the quarter and real estate taxes increased by $800,000. [Adds to] the increase in CAM expenses relates to the opening of the 801 Market Street property in the third quarter of last year and higher utility expenses across the portfolio. The increase in real estate taxes is due to higher assessments and rate increases at a number of our properties. Where possible, we are aggressively pursuing property tax appeals.

Expense recoveries continue to be impacted by the shift of short-term percentage of sales or gross wages while our overall recovery rate for CAM, taxes and utilities fell to 81.2% in the second quarter of 2010 from 81.5% in the first quarter of this year and 88.1% in the second quarter of last year. Interest expense increased over last year's quarter despite lower average outstanding debt balances.

In the second quarter 2010, our weighted average debt balance was $2.6 billion or $223 million lower than the average for the second quarter 2009. Excluding amortization of credit financing costs, our average interest rate increased by 73 basis points over last year to 5.49% as of June 30, 2010.

The increase in rate is due to higher spreads in our revolving credit and term loans and the replacement of short-term floating rate loans with a 10 year fixed rate mortgage. The average interest rate on all of our fixed rate mortgage debt was 5.78% comparable to last year's rate. At the end of the quarter, 92.3% of our outstanding debt was fixed.

Our debt balance at the end of June was $306 million lower than the peak we reached at September of 2009. Turning to 2010 guidance we are reaffirming our estimate of FFO per diluted share of $1.77 to $1.87 and our estimate of net loss attributable to PREIT to a range from a loss of $1.34 to $1.44. As a reminder, our FFO guidance does not include the effect of any future acquisition, disposition, gain on the sale of non-operating assets or any significant changes in our capital structure. With that I'll turn the call over to Joe Coradino.

Thanks, Bob. The first days of 2010 saw gradual although slow recovery for our portfolio as evidenced by positive trends in occupancy, sales, store closings and retailer expansion. We've also enhanced our operating platform through our general manager leasing program, the addition of alternative uses, the expansion of Black Rose Antiques and the evaluation of ancillary revenue sources such as solar panels at our New Jersey property, cell phone towers and one mall advertising.

We have seen comp sales increase by 2.1% over the same period last year and 3% since the end of last year to $344 a square foot. We've seen 60% fewer store closings through June than we had by this time last year and significantly fewer bankruptcies as well as an increase in retailer open to buys.

Strip and power center occupancy now stands at 96.1%, a 450 basis point improvement driven by the opening of five HH Greg locations representing 153,000 square feet and a 40,000 square foot Ashley Furniture. Three of the five HH Greg stores filled vacancies created by the Circuit City bankruptcy, one back filled the former Linens-N-Things and the fifth store filled a longstanding vacancy.

Total portfolio occupancy driven by the increase in strip and power center occupancy and the opening of several anchor stores of Plymouth meeting to gallery and wired [grids] increased by 120 basis points to 90% and closed mall occupancy ended the quarter at 89% total, 83.6% in line. When temporary tenants are included, total mall occupancy increases to 90.3% and in line mall occupancy at 86%.

Our occupancy rates have been driven by our operational initiative. The general manager's leasing program delivered 20 leases for 61,000 square feet. We have signed 149,000 square feet of leases for alternative uses including healthcare, office, educational and municipal uses, and have introduced an additional Black Rose Antique Center.

This award winning concept is an antique and collectible marketplace operated by PREIT wherein multiple vendors sell their wears to the public. We currently operate two of these centers and plan to open two more by year-end. Both of the existing operations are 100% occupied.

The completed redevelopments continue to drive comp sales with five malls in our portfolio producing sales in excess of $400 per square foot. These same assets contribute 27.2% of the NOI of the Company. The recently redeveloped Cherry Hill Mall with comp sales of $523 per square foot had a strong showing with an increase of over 27% as compared to last year's second quarter of $411 per square foot.

We continue to improve the quality of merchandise at this asset and have recently executed leases with Francesca's Collection, who is now open; Disney for one of their few new prototype stores; 77kids by American Eagle for one of their only seven stores in the initial rollout; and Marciano, a Guess concept. All of these stores will open this year.

At Plymouth Meeting Mall, we are pleased to announce we executed a lease with ORBIS to open a 6500 square foot store in the new lifestyle wing of the property. As the new tenants added during the redevelopment become comp, sales have increased nearly 10% at this property.

At Voorhees Town Center, we're pleased to announce that we have recently signed leases with Coffee Works and two signature restaurants, FireCreek Grill, an upscale American fare concept and Dog House Burgers.

The most significant occurrence during the quarter was that we received approval for the relocation of Voorhees City Hall to 23,000 square feet on the second level of the enclosed mall. Voorhees Town Center, the new downtown for this vibrant south Jersey community will be one of only a handful of mixed use developments in the US that have incorporated a municipal building. We expect all of these additions to drive traffic in sales when they open in the Spring of next year.

We continue our momentum at Woodland Mall in Grand Rapids, Michigan where we opened the Barnes & Noble in October of last year and recently executed a lease with the North Face, was under construction for an opening expected in time for holiday shopping season. This is our first transaction with this premier retailer who will join Apple, Banana Republic, Williams Sonoma and J. Crew at this premier property.

We're encouraged by the up beat sentiment of our retail partners who are beginning to allocate capital to store expansion, an indicator of the continued recovery of the retail sector. As the economy strengthens and demand for space improves, we expect to enhance our focus on improving our gross margin. I'd now like to open for questions.

Thank you, sir, (Operator Instructions) Our first question comes from the line of Quentin Velleley with Citi. Please go ahead.

Good afternoon. Just wanted to focus on the drop in the recovery rate, which is down about 600 or 700 basis points again this quarter. Can I just clarify, was that drop in the recovery rate given that occupancy is roughly the same as last year -- was that drop in the recovery rate solely from giving rent concessions and percentage rent deals throughout last year?

Largely. If you look at the trend from the first quarter of last year through the second quarter of this year, you actually saw the fall off happening gradually. So, as I mentioned in my remarks, the fall off was much more modest when you compare it to the first quarter. So it was more or less baked into our plan for the year. We expected a much lower recovery rate.

Okay, so for guidance for the rest of this year you have got a similar rate of recovery that occurred this quarter, is that correct?

That's correct, right.

And so, just focusing on that, are you still doing short-term renewals in your leasing?

Yes, if we look at the transactions that were done in this quarter, about three quarters of them were less than five years.

So, three quarters, and what was that in previous periods?

I'm sorry?

Could you ask that question again, please?

Just wondering what the rate of doing short-term leases was in previous periods. If it was three quarters in this period, was that rate higher in previous periods?

It's about the same.

Okay. So, maybe if I turn, I know you did a lot of leasing in the strip and the power center portfolio as you look at that as part of the Company and you need to delever, are you -- given you've increased occupancy and you have a subsequent increase in NOI from those assets, are you thinking more seriously about potentially selling those assets?

Well, we've already considered asset sales, joint ventures and other kinds of property harvesting as part of our overall strategy.

Okay, all right, thank you.

Our next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Hello, good afternoon. Just going back to this shorter-term lease topic, is this your decision? As the sales have gradually increased, there's been some signs that retailers have been more willing to sign longer-term leases. So is this their decision or your decision at this point?

This is a decision on our part to really do short-term leases, keep our properties occupied in anticipation that we're going to drive rents on rollovers.

Okay, and how about on the percentage rents? Are you any seeing improvement there? Were you actually changing (inaudible) rents?

We started to see toward the end of the quarter preliminary successes. We were seeing increases in the number of tenants that we're paying a percentage of sales, and in the month of June that seemed to flatten out. But whether or not that's equivalent to [bottom], it's too early to tell, but the rate of increase is certainly slow.

Okay and Moorstown Mall, can you just remind me there's been a pretty significant occupancy pick up but sales continue to move down double digits.

The occupancy is the Vanscape Park transaction, I don't know if you've been to the property. Sales are trending down at Moorstown. Cherry Hill is a powerful asset that has had an impact on it. It's about four miles away and we do have a strategy in place to really differentiate that asset in the relative near term.

Okay, thanks, and just one last question. Looking at your expirations for 2011, you have 18 anchors that are expiring. Have you had some preliminary discussions with them, and what are your sense -- are any of those at risk for closure?

We have had preliminary discussions and we have a relative degree of comfort that we'll be okay with those.

Okay, thanks.

Thank you. Our next question will come from the line of Michael Mueller with JPMorgan. Please go ahead, sir.

Yes, hello. A few questions. First of all, is there any change to the same store outlook?

I think we're still holding to the 1% to 2% down for the year, full year.

Okay, down 1% to 2% for the year, great. Can you run over some of the terms? How similar, when we look at the municipal lease coming in, I think you termed it the antique marketplace, some of these non-traditional retail leases. Are they similar in duration, escalators, et cetera, to the traditional leases, or are they dramatically different?

Well, first off, the municipal deal is a condo sale. So that's a different type of transaction, the valuation model is in terms of valuing, it is similar to the approach we took on leases but it is a condo sale.

Okay. What about the marketplace? Is that essentially, you just take a bay in the mall and you have tables set up inside? Is that what it looks like?

Well, it's close, but essentially what we took is in the case of South Mall, a former vacant department store that had been occupied by Steve and Barry's most recently, it was about 48,000 square feet and we essentially built it out with stalls, if you will, that we rented to antique dealers, collectibles, et cetera, and we operate the cash register. So, in essence, their obligation is to provide merchandise. Those properties -- those transactions have been fairly close to breakeven but the important thing from our perspective is, again, driving occupancy in the short-term.

Got it. Okay, and just two other questions. One, in looking at the REIT development properties, it looks like there's a little bit of sequential occupancy declines in them. How much of that is just what can be a typical seasonality going from Q1 to Q2 with fall out versus maybe something else?

For the most recently open properties, Cherry Hill mall and Plymouth Meeting, is largely commissioning space that was vacant after a year of the opening of the initial space, so essentially all of the space we have in these properties is now, in effect, in service.

It's like bringing in the second level of the expansion at Cherry Hill and that, you know, those kinds of things are what's -- generally were increasing the number of tenants at our redevelopment properties, not decreasing the number of tenants. So what you're seeing is just additional square footage coming into service.

But -- we added a page in the supplemental last quarter which actually shows the occupancy in square footage for each of the properties just to address that concern. So, if you were to take the first and second quarters you would see these properties are actually seeing increases in the amount of square feet that's actually leased.

Okay, and last question going to Ed, comments on asset sales, joint ventures and, I think you said, harvesting assets when appropriate. Any sort of visibility or commentary you can give us as to potentially what might be in the works? Are you closest on a joint venture? Are you closest on asset sales? Is this stuff that could potentially happen this year, and I think the term you used was asset sales when appropriate. Under what circumstances wouldn't they be appropriate? Is it you're waiting for more lease ops so now is not the right time?

Well circumstances under which they wouldn't be appropriate are properties where we're still in the middle of a redevelopment, or we're working on lease up that's in progress and visible in the future, where they're strategic for some sort of leasing reason, et cetera, et cetera.

Okay.

They are assets that we have that are harvestable given the right combination of markets and pricing.

Okay, and any color on which path you're closer on? Is it your expectation that we could see some activity this year?

Unfortunately, we can't comment on that.

Okay, thank you.

Our next question comes from the line of Ben Yang with Keefe, Bruyette & Woods.

Hello, good afternoon. Going back to the Nate's question on the anchor expirations, it looks like you have four Bon-Ton's located at malls that do about mid-$200 per square foot in sales. Can Bon-Ton essentially walk away with no further obligation when these leases expire?

Typically, the operating covenants have expired, yes.

And I know you expressed confidence that -- on all of your anchor releasing, but are you having any discussions with potential replacement anchors? Specifically at those Bon-Ton anchored malls that -- due to low sales numbers? And who might those potential replacements be?

First off, again, well they aren't finalized. We do have a comfort level. We are not in discussions with replacement tenants for those locations at this time. But we're in the market every day and we're talking to tenants about lots of different opportunities.

Okay, and then switching gears, the two refinancings that you recently completed on Lehigh Valley and Valley View. You got a good below 6% interest rate on both mortgages yet you ended up having to inject some equity to effectively extend term. And I'm guessing the lender was underwriting a lower LTV or higher debt yield for those loans. Can you first confirm that those properties could have supported maybe larger mortgages than you essentially took out?

That's sort of an impossible question to answer because we were looking -- overall, the Company is interested in delivering. And so, trying to push the mortgage frontier on individual properties when we know those marginal dollars are going to be very expensive would be inconsistent with our overall strategy of delevering as well as trying to maintain the best set of terms we can to give us the best financial flexibility. and ultimately to keep the cost of the financing down.

So, we weren't out there looking for, as I said in my remarks, we weren't out there looking for the last dollar, because we knew in this environment that that would have a whole bunch of implications. And luckily, unlike last year, we're in a position where we have a significant amount of liquidity at the moment, and this seemed like a good place to use it.

So, that's where we are and I think that strategy and that vision of how we're going to handle future refinancings is going to stay in place. We're not looking for the last dollar. We're looking to get the best rate. We're looking to get the most advantageous terms and consider that part of our overall deleveraging.

Okay, great. Thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Cedric Lechance with Green Street Advisors. Please go ahead.

Thank you. Just looking at page 11 of your supplemental, you list a few different classifications for your assets. One of them is new properties. Could you give me a sense of where those new properties are?

The only new property that we have is City Road Plaza which is a power center in Lancaster, Pennsylvania, but at this point it consists of a Best Buy. We had previously sold the developed Lowe's a year ago or in 2009, second half of 2009.

Okay, so you basically added a Best Buy?

Right.

Just going back to the balance sheet discussion. You've essentially alluded to the fact that you may have fire power for external growth. Where does that rank to allocate capital incrementally to new projects or to acquisitions versus trying to delever? How do you think about it at this point?

Well, our real estate philosophy has always been very opportunistic. So, we are out there in the market, we are looking at opportunities. But at the moment, as we stated before, we would be much more comfortable closer to 60% than where we are today in leverage. So our main focus, which doesn't mean that we're closing up shop, but our main focus is delevering and continuing to delever.

Okay. So, you think about delevering, where does additional liquidity issuance fit into the mix?

I think that's price-dependent. It depends on where the stock ultimately goes over time. At the moment, it doesn't rank very high.

Okay. Just returning to some of the questions regarding the lease terms and lease lengths, so you talk about three quarters of your leases less than five years in length. Can you give us a sense of what the average lease maturity is there, or are we talking about two years on average or largely weighted to the one year type leases, or are we talking about longer lease terms?

Are you talking about within the group of leases that are less than five years?

Yes.

It's roughly half, less than three, a quarter, less than a quarter, three to five and then a little bit more in the quarter greater than five years.

Okay.

But it's spread over relative short-term. It's spread pretty rapidly.

And you said versus the recent past, it's about similar to what you achieved. If you were to compare it to three or four years ago, what percentage of your leases were less than five years in length?

These are, generally leases -- these are not necessarily new leases. Rather, they are short-term renewals. We, actually, if you were to go back and look at the average duration of the portfolio, it hasn't changed that dramatically even though we're doing a lot of short-term leases.

As we brought the portfolio -- the new space in our portfolio with the expansions at the malls as well as some of the ground developments, those tend to be five, 10, 15 year leases. But the portfolio exposure isn't that dramatically different than it was a couple years ago. It's maybe dropped down a tenth or two tenths of a percentage point in terms of average lease duration for the portfolio as a whole.

So, I think to a lesser degree we talk about these short-term leases, we're only talking about typically renewals as opposed to new leases, which have a much longer duration.

Okay, and what percentage of those leases are percentage rent at this point of those less than five years?

I don't know if I have that information available.

Okay, all right, that's it for me. Thank you.

Thank you. And there are no further questions in queue at this time. I'd like to turn the call back over to Mr. Rubin for closing remarks.

Thank you all for joining us this afternoon and for your continued interest in Pennsylvania Real Estate Investment Trust. We look forward to providing you with our update for third quarter results in November. Thank you again and have a good evening.

Ladies and gentlemen, this concludes our conference for today. We would like to thank you for your participation and you may now disconnect.