Pennsylvania Real Estate Investment Trust (PEI) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust third quarter 2010 earnings conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions.

(Operator Instructions)

The conference is being recorded today, Thursday, November 4, 2010. At this time I would like to turn the conference over to Garth Russell with KCFA Strategic Communications. Please go ahead.

Thank you Vince. Before 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 change and circumstances that might cause future events, achievement or results to differ materially from expressed or implied by the forward-looking statements. PREIT's business might be affected by uncertainties effecting 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 forward-looking statements to reflect new information, future results 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 third quarter 2010 conference call. Joining me on the call today are Ed Glickman, President, Bob McCadden, CFO, Joe Coradino, President of our Management Company and Head of Retail Operations. And also in the room today are Vice Chairman, George Rubin and General Counsel, Bruce Goldman. Today we will discussion third quarters results and our expectation for the balance of 2010. After we conclude our remarks, the call will be open for your questions.

We continue to make progress towards achieving our 2010 goals. At the end of the third quarter, we completed the sale of five power centers at a cap rate in the mid 7's. We used the proceeds of $135 million to make further reductions in our outstanding debt balances, to reduce the company's leverage, and improve our liquidity position. Operating results for the quarter were in line with our expectations and we are cautiously optimistic about the upcoming holiday season. Tenants have generally been reporting increases in sales, and we are hopeful that consumer confidence will continue to improve through the fourth quarter and 2011.

We've been able to drive an increase in our overall portfolio occupancy level over the past year. However, maintaining occupancy at certain of our properties continues to remain challenging. Our emphasis continues to be on executing renewals and sourcing new leasing opportunities where possible for our properties. We are also focused on exploring mixed use opportunities for a number of our assets. This includes medical facilities and offices.

Joe Coradino will tell you specifically about our progress at Voorhees Town Center. Our management team is keenly focused on realizing returns on the investments we made in many of our properties over the past five years. As the economy continues to recover, PREIT is well positioned to attract new tenants, to improve occupancy, and hopefully maximize NOI. As always, we remain focused on creating long-term value for our shareholders. And with that I will turn the call over to Ed Glickman.

Thanks, Ron. Good afternoon and thank you for joining us on this call. In the third quarter the company continued to show positive top-line trend. Portfolio occupancy was up 1.3% to 90.2%. Small shop base rents were up $0.19 to $32.70. Comp sales grew 3.9% from $335 to $348. We believe that these results are a function of our corporate emphasis on improving occupancy as well as indicative of the greater level of retailer stability than we have seen in recent quarters.

Compared to last year same-store revenues grew 1.2% from $117.2 million to $118.6 million. At the same tame as the top line is improving, we continue to experience declining same-store NOI due to higher expense levels primarily in CAM and real estate taxes. When possible, we have focused on cutting costs. In a stronger market we would have been able to pass through more of these expenses. In this market, however, we have had to absorb the higher percentage of these costs to maintain occupancy and to keep our malls vibrant and attractive to shoppers.

During the last quarter, leasing activity improved and we signed 631,000 square feet of non anchor leases. This compares to 602,000 in the third quarter of last year. For the first nine months, and including all types of tenants, our focus on lease has resulted in 3.8 million square feet of executed deals this year compared to 2.6 million square feet in the same period last year. While we have made progress at improving occupancy, maintaining rent levels has remained challenging.

Renewals spreads in the quarter were negative 3.6% and new leases scored a negative 11% spread to prior level. Anchor leasing spreads were flat. As demand for space continues to improve we are shifting our focus from maintaining occupancy to improving lease economics. When comp sales declined we worked with our merchants to lower occupancy costs. Now that sales levels are coming back, retailers are beginning to focus on growth and we are looking to improve our margin.

As we work to rebuild NOI, we are also focused on continuing to improve our balance sheet. We recently applied $116 million on the proceeds of our power center sale to repay debt. During the past year we have reduced debt by approximately $422 million, or 15% of the outstanding. And at the end of the quarter, our revolving facility had no outstanding balance. While we have satisfied the amortization requirements of our bank facilities, we intend to continue to focus on reducing leverage on an opportunistic basis.

Although our debt level has continued to decline, our interest costs have risen. This increase has occurred because the cost of our bank facility has increased and the amount of construction interest we capitalized has fallen. The reduction in construction and progress is a reflection of our focus on organic growth and our efforts to conserve our liquidity. We are being very cautious in our capital allocation process and focused on building up the value of our in-place investments. Bob McCadden will now give you more details on our financial performance.

Thank you, Ed. PREIT's net loss in the third quarter was $3.6 million, or $0.07 per diluted share. The quarterly results included a $19.2 million gain from the sale of the five power centers which by definition is not included in FFO. FFO is adjusted to exclude gains or charges associated with repayment of debt with $23.2 million or $0.41 per diluted share for the quarter, compared to $25.6 million or $0.48 -- I'm sorry, or $0.58 per diluted share in the prior period.

In connection with the sale of the five power centers in September, we repaid three mortgage loans totaling $40 million and permanently reduced the term loan by $56 million. As a result, interest expense includes accelerated amortization of $1.4 million of deferred financing costs related to the debt repaid with the proceeds from this transaction. And last year's quarter we recorded a $4.2 million gain on the repurchase of $12 million of our exchangeable notes at a 40% discount to par. FFO on a per share basis also reflects our issuance of 10.35 million shares in May of this year.

Key factors impacting our operating results include the following. A $2.7 million increase in interest expense compared to the prior year's quarter despite lower average debt balances. Debt balances for the third quarter averaged $2.5 billion, a decrease of $288 million from September 30, 2009. The increase in interest expense is due to higher spreads on short-term borrowings, increased amortization of deferred financing expenses, and placing $108 million of completed development and redevelopment assets into service since the end of third quarter 2009.

Our effective interest rate for the quarter was 6.15%, up 85 basis points when compared to last year's quarter. We also experienced a $1 million decrease in same-store NOI reflecting the impact of negative renewal spreads as well as the erosion and our expense recovery rates and lower average rents on new lease transactions. We sold two centers in the second half of 2009, Northeast Tower and Crest Plaza that had contributed $1 million of NOI in last year's quarter. The impact of these factors was mitigated by lower G&A expenses of $600,000 and $1.7 million of earned income related to the sale of historic tax credits. We anticipate recording a similar amount of income related to the sale of tax credits in the third quarter of each of the next four years.

Our balance sheet position has improved markedly since September 2009, following the fourth quarter 2009 repurchases of $65 million of exchangeable notes, the extension of our bank revolving credit and term loan facilities in March, the equity offering in May, and the sale of the five power centers in September. At the same time we've been able to improve our liquidity position. As of September 30 we had almost $48 million of cash on hand and $148 million of unused borrowing capacity. Our liquidity is sufficient to meet all of our near-term capital needs.

At the end of the quarter 95.7% of our debt was fixed or swapped to fixed. Our bank leverage ratio was 57.3% compared to almost 70% a year ago. We're adjusting our 2010 guidance to give effect to the sale of the five power centers as previously mentioned, we recorded a $19.2 million non FFO gain and took a $1.4 million FFO charge from the accelerated amortization of financing costs in the third quarter. And we will see approximately $0.015 per share dilution from the sale of the power centers in the fourth quarter. We expect FFO per diluted share $1.80 to $1.85 and our estimate of PREIT's net income -- net loss, rather, to rang from a loss of $0.99 to $1.04.

As a reminder our FFO dividance does not include the effects of any future acquisition, disposition or sale of non-operating assets or any material changes in our capital structure. With that, I will turn the call over to Joe Coradino.

Thanks, Bob. We're encouraged by the continuing signs of stability in our portfolio as evidenced by positive trends in occupancy, sales, store closings and retailer expansion. We've begun to see consistent increases in sales over the past four quarters. In the third quarter, comp sales were $3.48 per square foot, up 3.9% over last year. We've seen comp sales increase at 21 of our 38 malls, with three malls having sales in excess of $500 per square foot.

In particular, we've begun to see growth from previously stagnant categories and retailers with jewelry leading the pack followed by notable increases in popular back-to-school merchants. American Eagle Outfitters, in both their namesake and Aerie divisions, Justice, Claire's, The Limited, Express, The Buckle and athletic shoes across the board. As the retail industry continues its slow recovery we've realized the impact of increased store openings and decreased store closings in our occupancy figures. For the year we're forecasting approximately 20% more store openings and a 50% reduction in store closings as compared to 2009.

Portfolio in-line occupancy is up 170 basis points, fueled by an 890 basis point increase in our power and strip center portfolio to 93.8%. This result was driven by the replacement of Circuit City and Linens 'n Things throughout our portfolio. Mall in-line occupancy increased 70 basis points to 84.5%. This result was driven by increases at the majority of our malls, most notably Crossroads, Wyoming Valley, Dartmouth, and Francis Scott Key malls.

When temporary tenants are included, enclosed mall non-anchor occupancy increases 300 basis points to 87.5% and total mall occupancy stands at 91.1%. This is the result of a targeted effort to drive occupancy at our centers, strengthened by our general manager program, the introduction of alternative uses, and a successful incubation of merchants in our temp-to-perm conversion program. The completed redevelopments, though, continue to drive comp sales. The recently redeveloped cherry hill mall with comp sales of $536 per square foot had a strong showing with an increase of over 27% as compared to last year's third quarter of $419 per square foot and a $13 per square foot increase over the second quarter.

We have continued to benefit from sales growth as a result of the redevelopment and the strength of the luxury sector. Sales have continued to grow and improve by $135 a square foot, or 34% since the opening of Nordstrom. Our sales figures do not yet include 10 tenants who are significantly outperforming the current mall average. We are continuing to improve the quality of merchandise offerings at this asset and have recently executed leases with Bare Essentials that is now open and White House Black Market and Marchiano, both of which will open for the holidays.

At Plymouth Meeting Mall, the redevelopment plan for this property is demonstrating positive results. With the improvements to the property complete, driving the sales productivity to new heights, we are underway with our efforts to improve retail offerings within the enclosed mall. As the tenants added during the redevelopment become comp, we are seeing positive trends in sales which increased over 30% to $320 per square foot. This includes the impact of three new restaurants and substantial sales increases for several existing tenants that had a much better back-to-school season than last year.

A major step in the transformation of this property will be taken tomorrow as Express opens a 10,000 square foot dual gender store inside the mall. Both Express and the previously announced Orbit Store, which will be the largest of its kind in the region, will generate excitement at the property when they open their doors to the public this week.

At Voorhees Town Center we are excited to have announced that last month we executed an agreement to relocate the township municipal building including the township court, zoning, tax collection, construction permit and records offices to a new facility at our property, creating a true downtown environment at Voorhees Town Center. The new municipal building unique accomplishment for this type of property will bring over 100,000 additional visitors to the property each year. The facility is under construction and is expected to open in the Spring of 2011, which will coincide with the new restaurants we previously mentioned.

The finalization of this component of the project allows us to bring the balance of our vision to fruition. We are underway with consolidating the mall retailers on the first level of the mall. This year we've relocated Victoria's Secret, Children's Place, and Payless Shoes to the first level in an effort to create further centergy and free up the second level for our office and alternative use program. The announcement of the town hall relocation has already begun to generate additional prospective tenants, and we have interest from medical and education users for a majority of the space on the second level of the mall. The residences at Abitare continue to come online and increase traffic at the site with four buildings available and one more scheduled for completion later this month. The four available buildings are 84% leased that this time.

The sales momentum at Woodland Mall in Grand Rapids, Michigan continued with sales up 8.5% over last year, since the introduction of new merchants. Barnes & Noble, Bare Essentials, Crazy 8, and most recently, The North Face, who opened last week and reported record opening day sales for the chain. We are beginning to capitalize on our recent successes at this property.

At Orlando Fashion Square we are excited to have announced the execution of a 21,000 square foot lease with Disney Entrepreneurial Center and a 19,000 square foot lease with Planet Fitness. Planet Fitness will open in December of this year and Disney will open their facility in April of 2011. We expect both of these editions, representing 9% of non-anchor GLA, to drive significant traffic to the property.

We also continue to refine our operating platform while addressing the sustainability of our portfolio. We recently received Gold Lead and historic certifications for our improvements to 801 market. And we have selected a vendor and are in good faith negotiations to install solar arrays in our New Jersey properties in three forms -- roof mounted panels, parking canopies, and a high efficiency ground mounted solar field.

We continue to investigate an energy strategy that includes implementing a demand response program, installing high efficiency energy consumption products, and exploring wholesale purchasing opportunities in select markets. We continue to be cautiously optimistic that stability and growth are on the horizon, and we look forward to a productive holiday season for our retailers and a dynamic New York ICSC. With that we will open it for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session.

(Operator Instructions)

Our first question is from the line of Craig Schmidt with Bank of America Merrill Lynch. Please go ahead.

Thank you. Regarding Plymouth Meeting, where do think occupancy will be at the end of the year, including the new Express store?

Bear with us a second. Approximately 76% in line.

Are you seeing other in-line specialty shops show interest now that Express has opened the -- or is opening their new store?

Actually, yes, we are experiencing interest in Plymouth Meeting from a number of traditional in-line merchants as well as some merchants that also locate in the strip shopping centers.

Okay. And then the roughly 10% vacant at Cherry Hill. Is that space you're holding off on, or is that concentrated in some region of the mall?

It's the second level, adjacent to Nordstrom. And there's also a number of transactions where the occupancy, the move-in date, is later. So, again, at Cherry Hill, we're confident that we'll drive occupancy at that property.

It would seem with your productivity that that would be an area of uplift.

Yes, we think it's important that the next steps in the leasing at Cherry Hill are to drive more in the direction of luxury. And we are either very far along in negotiations, or at lease with a number of luxury retailers which occupancy is driven by lease expirations elsewhere in the market. But again, it's a strategic decision to try and continue to drive that sales number at Cherry Hill in a positive direction and to begin to respond to what we've seen with Nordstrom and our other quality merchants. A need of the Cherry Hill shopper.

Okay, thank you.

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

Good afternoon. Just in terms of a couple of questions on the portfolio. Can you talk a little bit about the trends in short-term leasing? Just wondering whether the amount of short term leasing is starting to tail off? Then secondly, I'm just wondering how many of your rental deals you're doing on a percentage rent basis?

Well, I guess in terms of just answering the question generally, we obviously made a conscious effort to drive occupancy this year, and in doing so, did short-term deals as well as percentage deals. And going forward, we're focused this year -- and I think Ed, in the script, spoke about how we're focused on the quality of the transaction, the economics going forward in 2010, and hope to begin to minimize the transactions that are percentage rent and short term.

And then, maybe with your occupancy number, I think it's about 85% for the shop space. How much temporary leasing do you have in the portfolio that would be on top of that occupancy number?

It would be about 300 basis points addition to that.

Okay. Go it. Thank you.

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

Hello. Good afternoon. A few questions. For one, can you just give an update on where you stand in terms of vacant anchors and if you are close to finding any replacement deals in any of them?

Yes, essentially our two vacant anchors are in Willow Grove with the Strawbridges that was vacated as part of the Macy's acquisition of May Company and Hanover, that was vacated as a result of the -- actually, was built and never occupied, as a result of Boscov's bankruptcy. Oh, I'm sorry, to add a third one to that, 801, but that's a mixed use property that will be both retail and office. But with respect to the first two, we are in active negotiations to replace the anchors in both Willow Grove and Hanover. And in the case of Willow Gove are well along and beginning lease negotiations.

Okay.

With respect to 801, we've identified an anchor and we are at proposal.

Alright. So, would you say any of those take occupancy in 2011 or is it too early to tell?

It's unlikely that they will be 2011 occupancies -- probably move into 2012.

Okay. And could you just remind me, at Voorhees, do you have any additional land there for outlet sales?

Yes, we have -- we have additional land there for-- what? You trailed off at the end.

Outlet sales?

Yes, we have, I believe, about five out parcels. Right now one is occupied by the learning center, and we have an additional health and beauty aid store-- you can probably figure it out-- that we are in active negotiations with. We have consciously not focused on the out parcels. They're located at a very -- a real hard corner. We focused our energy on leasing inline in the mall at this time. And we also have land available, by the way, as part of the street scape, the boulevard, where we could do out parcels as well.

Okay. And then just one final question. In the bottom tier of the portfolio, you have a number of assets that are in western Pennsylvania. I'm just curious if in terms of your explorations of possibly converting those to alternative uses, especially considering some of the speculation that's going on out there right now in terms of energy uses.

To answer your question, in terms of -- regarding alternative uses. We've actually introduced alternative uses to a number of our properties in western Pennsylvania in the form of both government tenancies as well as educational and medical and continue to explore and exploit that arena. With respect to -- if you're referring to Marcellus Shale possibilities, that is something that we continue to look into that. And there's currently a moratorium on permits in Pennsylvania. But again, something that we are -- have our energies focused on trying to exploit for our properties.

Alright, thanks.

Thank you. Our next question is from the line of Michael Mueller with JP Morgan. Please go ahead.

Yes, hello. Couple questions. First of all, on the NOI comps, can you talk about whether that's-- and I understand that you guys put in the redevelopments into the pool with the non redevelopment properties-- but for the comments relating to the higher CAM costs and the higher taxes, those tougher expense comps. Are they predominantly at the redevelopment property, so that they're weighing on the comps, or is it really broad based across the whole portfolio?

Well, let's just talk about the two pieces separately. If we look at the quarter only, our CAM costs dropped about 2.1%, and a big chunk of that is related to increased operating expense at the 801 Market Street property. So, if you take that out, CAM has actually increased by about 80 basis points over the prior year. Real estate taxes are probably, and taxes in general, are probably more broad based. Obviously to the extent we've made improvements to many of the properties, tax assessors in today's environment are coming back and looking for increased property taxes from those assets.

We've been very active in the trying to negotiate rate decreases from the proposals, but even if we're successful, and we've been successful in a number of cases, the net change still results in an increase in taxes. But it's not limited solely to the redevelopment assets. It's really a function of municipalities looking to generate additional revenues from existing tax ratables in their respected jurisdictions.

We also were in the state of Michigan. They implemented a new business tax a few years ago, and we're able to use the prior year's tax credits from our acquisition Woodland Mall to offset those taxes. Those tax credits have burned off and now we're paying additional Michigan tax as a result of our ownership of Woodland Mall.

Okay. And just focusing on the redevelopments that have been completed thus far, are they positively impacting the same-store NOI guidance?

Yes.

Okay. Last question. In terms of the incremental asset sales that you've talked about contemplating, should we be thinking of more specifically malls or open air shopping centers, or just a mixed bag?

Mixed bag.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Ben Yang with KBW. Please go ahead.

Hi. Great, thanks. In the prepared remarks I believe Ron talked about exploring some mixed use opportunities at existing properties, medical and traditional office. Can you talk a little bit about how big that opportunity is for you guys, maybe in terms of size of investment, timing, and maybe the number of properties that you think you can add mixed use to?

Yes. Ben, you should know that several months back we set up a whole department to deal with the medical opportunities at a number of our properties, and we see that whole department bearing fruit. There is a cultural change in the medical world, and those opportunities lend themselves to properties like ours that have retail and have parking and have great ingress and egress. And so consequently, many of the medical institutions that we're dealing with, see that opportunity and we see it as a potential trend with a lot of synergy for our business.

How many people did you hire for that new department?

Actually, we didn't bring in any new people for that. We staffed it internally, and it is actually -- we can't report anything concrete today. But just generally, we've probably got upwards of 300,000 square feet in active proposals right now for medical institutions and couple that with the fact that our primary-- our first step was to focus that in the Philadelphia region. So, most of that activity, although not all of it, some of the business has come from a little further afield. But most of that activity is occurring within the eight or so properties we have in the Philadelphia market.

And I would add to that, the Allentown market as well. So, you'd be talking about 10 assets. But we think there is significant opportunity in that for our portfolio, both to utilize existing space within the malls as well as to potentially build new within these properties. The synergies are significant.

So, it sounds like it's letting them build on out parcels and letting them be tenants in your mall. Is that the assumption?

Yes, that's the -- I would say that the bulk of the interest at this point is in existing space in malls, although there are a couple of opportunities where we're looking at building as well.

Great, that's helpful. Final question. Do you have any thoughts on the convert market? You've got your exchangeable notes that mature in 2012. I believe you had previously talked about issuing new converts to effectively roll the maturities down the road. We've seen some pretty attractive pricing. Are you guys taking a look at that or do you have any updated thoughts on how you address those maturities?

Well, we're constantly looking at that capital markets for opportunity. But as this moment, we don't have anything in particular planned. And we still have awhile to go before the convert comes due and we have a fair amount of liquidity on the balance sheet. So, we're not concerned about being able to replace that capital.

Okay. Got it. Thank you.

Thank you, ladies and gentlemen. (Operator Instructions) Our next question is from the line of Cedric Lachance with Green Street Advisers. Please go ahead.

Thank you. Just staying on the theme of alternative uses. When we look at your occupancy rate right now what percentage of that is actually medical or any other alternative users you may have introduced over the past couple of years?

I don't know that we can put a number on it today, but it's probably north of 100,000 feet in the portfolio today.

Okay. So as of yet, it's not really impacting--

It's not a major portion of our current portfolio.

Okay. And when you think about the TI's and the costs essentially associated with retrofitting the space within a mall for -- whether it is medical or education purposes, where do you peg those costs at this point? And how do think about the return on that capital allocated to TI's?

You should understand that a great deal of the space that we're discussing for this alternative use in many cases is space that's not mall frontage, that's areas in the malls where in some cases, it was space that was never occupied. Some of these malls were built at a time when people were a little bit more optimistic and we found that this is space that is not generating revenue. So, the returns that we'll be getting on this space will be returns that is really new revenue for the Company.

Okay. And in terms of progress being made on the leasing on many of the recent redevelopment projects, once everything is stabilized, what do you think your debt to EBITDA ratio will be compared to what it is right now?

We think it will be better.

That much I'd be willing to calculate. Can you quantify?

Well, no. The reason for that is because we've put out a large majority of the capital at this point. So, now we're, in many cases, leasing up space that we have already paid for, it's already sitting on the balance sheet, as opposed to over the last couple of years where we were putting out a lot of money into construction.

So, our construction account is down dramatically, and we've put a lot of this into service. In fact, that's the reason -- that's one of the reasons why the interest expense is up. It's because construction account is down and the property is put into service, and now the lease-up comes with just the marginal tenant improvements rather than the full redevelopment costs.

So in terms of the EBITDA pickup, once stabilized from today, are you able to quantify that for us?

Well, that will depend on what we rent the space out for, and at the moment, that's hard to say.

Okay. All right, thank you.

Thank you. And at this time I'm showing no further questions. I would like to turn the conference back to Mr. Rubin for any closing remarks.

Thank you very much for joining us this afternoon and for your continued support. We look forward to seeing some of you at that time NAREIT conference in New York later this month and we'll provide our update for our full-year 2010 results in February. So, thank you again, and have a good evening.

Thank you, sir. Ladies and gentlemen, this does conclude the Pennsylvania Real Estate Investment Trust third quarter 2010 earnings conference call. Thank you very much for your participation. You may now disconnect.