Pennsylvania Real Estate Investment Trust (PEI) 2011 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 2011 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, Wednesday, April 27, 2011. I would now like to turn the conference over to Mr. Garth Russell of KCSA Strategic Communications. Please go ahead.

Thank you. 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 the 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 the future events and are subject to risks and 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 & Exchange Commission, and in particular PREIT's annual report on Form 10-K. 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's first quarter 2011 conference call. Joining me on the call today are Ed Glickman, President, Bob McCadden, CFO, 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 2011. After we conclude our remarks and our presentation, the call will be opened for your questions.

Before we begin, I would like to publicly take this opportunity to thank Rosemarie Greco for her many years of leadership and valuable service. Rosemarie is not seeking re-election to the PREIT Board when her term expires in June and the Company has benefited in many ways from her outstanding judgment and guidance.

In her numerous roles through the years as a Board member, and recently as compensation committee Chair, Rosemarie helped make sure that the Company prepared for and met market challenges while also remaining responsive to the interest of our shareholders, our employees, and the communities in which we operate. We will miss her and thank her for all of her meaningful contributions to the Company.

As noted in our press release, the Company has experienced five consecutive quarters of comp store sales growth. We are pleased with the trends in sales and in occupancy, yet we understand that the recovery is still underway. With performance consistent with our guidance, we are making steady progress in our efforts to strengthen our financial position, improve our operational performance, and maximize the value of our properties. To do this we are working to improve our balance sheet, place tenants in service, increase NOI, improve occupancy, and generate positive leasing spreads, all as part of our strategy to create long-term value for our shareholders.

With that, I'll turn the call over to Ed Glickman.

Thanks, Ron. Good afternoon, and thank you for joining us on the call.

The Company had a good first quarter and continues to benefit from an improving economy. Comp sales have continued to recover. And 30 of our 38 malls posted performance that was equal to or better than a year ago. Occupancy improved at 25 of 38 malls and was up 0.4% across the portfolio. Our average rent level is down $0.10 year-over-year, and same store NOI net of termination income was essentially flat at minus 0.7%.

All in all, while some of our performance metrics are still slightly negative, we believe that the Company has achieved an overall level of stability and a foundation for future growth. Translating this stable environment into NOI growth is an ongoing challenge and the full focus of our efforts. While retailers are forecasting moderate growth in sales, there are still concerns about the economy.

To echo comments by a local retailer quoted in the most recent Philadelphia Fed Beige Book, We are cautiously optimistic, although we do not think the consumer will step up buying strongly until employment picks up. Our portfolio metrics mirror this sentiment.

To achieve consistent NOI growth, we need to see continued recovery and retailer expansion. However, each quarter that sales continue to grow is another positive step for our portfolio and we now have five consecutive positive steps. We go into the May ICSC Convention in a much stronger position than we were last year. Our retailers are doing better, the economy is improving, and we can show better performance at our properties. This convention will allow us to showcase the positive momentum in our assets.

On the asset side of the balance sheet, the Company continues to be conservative in capital allocation with limited spending during the first quarter. While we are an opportunistic Company and we are aware of the numerous contemplated asset transactions in the mall sector, our primary focus at this time is to grow returns on our existing asset base. We followed a great retail adage, never fall in love with the inventory.

Should it turn out that there is a strong market for certain of our non-strategic assets, we will be a seller. We will consider sales and should it turn out that we have an opportunity to acquire assets at truly opportunistic prices, we may be a buyer though more likely a partner. We believe that PREIT has the skill and the capacity to add value to underperforming assets.

On the liability side, we will continue to look to lower leverage through improved operating performance, opportunistic asset sales, and capital markets transactions. At the current time, as Bob will discuss, we believe that we have sufficient liquidity and access to capital to operate our business and to meet all of our financial obligations as they come due. All in all, the first quarter was quite positive for PREIT. We are optimistic regarding the balance of the year with additional color to follow the ICSC Convention.

With that, I will turn the call over to Bob McCadden.

Thanks, Ed.

PREIT's net loss for the quarter was $14.3 million, or $0.27 per share. FFO was $21.3 million, or $0.37 per share, compared to $25.5 million, or $0.55 per share, in the comparable period. Last year's results included $2.4 million of NOI, generated by the power centers that we sold in September 2010, and $1.8 million of lease termination revenues. FFO on a per-share basis also reflected the dilutive effects of the equity offering completed in May of 2010. Same store NOI, excluding lease termination revenues, was $66.7 million, down about $0.5 million, or 0.7% from a year ago.

Outstanding debt for the first quarter, including our share of partnership debt, averaged $2.4 billion, a decrease of over $350 million from last year's comparable quarter. Our effective interest rate for the quarter was 6.13%, 76 basis points higher than last year's quarter. We have reduced debt by over $300 million since March of 2010, and at the same time improved our liquidity position by $76 million.

At the end of March 2011 we had $43 million of cash on hand and $149 million available under the revolving credit facility. Our liquidity position is sufficient to meet all of our near-term capital needs. At the end of the quarter 97.2% of our debt was either fixed or swapped to fixed. Our bank leverage ratio was 67.62%, a 333 basis point improvement over last year's ratio.

Before turning to 2011 guidance, I wanted to highlight two distinct changes that we made to our supplemental reporting this quarter. First, we have begun to report occupancy on an economic basis to include all tenants that contribute to our revenues. Previously, our primarily leasing metric did not include the contributions of our specialty leasing and seasonal tenants occupying in-line spaces. In addition, with the growth of pop-up store and similar concepts, we believe this total occupancy metric better represents a level of retailer interest and sales activity at our properties.

While we are including occupancy from specialty leasing tenants, we are excluding from occupancy tenants who are legally obligated under their leases, but no longer meet the revenue recognition criteria under the accounting rules in order to better align our operating and financial performance metrics. The net impact of these changes added approximately 160 basis points to our non-anchor mall occupancy and 70 basis points to our total mall occupancy as of March 2001 as compared to the previous method of reporting. For the March 2010 period, non-anchor occupancy increased by 230 basis points and total occupancy increased by 120 basis points.

Second, in our leasing activity summary, we are providing leasing spread information on both a minimum or base rent basis and on a gross rent basis. As calculated, gross rents include minimum rents along with estimated common area maintenance costs, real estate taxes, and other charges. The new presentation should provide investors and analysts with additional information to model our operating performance.

Regarding our outlook for the balance of 2011, we are reaffirming our expectations that GAAP earnings per diluted share will be a loss between $0.78 and $0.88. We expect FFO per diluted share to be in a range of $1.56 to $1.66 per share. Our guidance does not contemplate any acquisitions, property sales, or capital market transactions, other than property financings.

Joe Coradino will now cover the first quarter's activity and our retail portfolio.

Thanks, Bob.

The retail environment is exhibiting signs of a rational and sustainable recovery. At PREIT, we realize the year-over-year and closed mall comp sales increase of 4.7% from $341 to $357 per square foot. We now have 23 properties with sales over $300 a square foot, 14 of those were over $350 per square foot. The sales increase through our premier properties, which include Cherry Hill, Lehigh Valley, Woodland, and Jacksonville Malls, where comp sales were $533 per square foot, increased 9% over last year and 2% over last quarter.

From a retailer perspective, 7 of our top 10 in-line tenants realized sales increases over last year. Total portfolio occupancy increased by 40 basis points to 90.4% from a year ago. In-line occupancy over the same period is up 100 basis points to 86.5%.

During the quarter we opened 80,000 square feet of space and it is noteworthy that this consists of entirely small shop tenants. As of March 31, we have over 175,000 square feet of executed new leases for 2011 occupancy and another 300,000 square feet of leases in negotiations. Leasing activities for the quarter totaled 841,000 square feet. We renewed 81 non-anchor leases, totaling 310,000 square feet, at an average base rent of $22.23 per square foot, a $0.01 per square foot increase over expiring rents.

Also noteworthy, renewals with terms of five years or greater saw a 5% increase in renewal spreads across the portfolio. We also had a successful quarter on the anchor renewal front, signing five anchor renewals representing approximately 370,000 square feet. We had three anchors totaling 340,000 square feet that are set to expire over the balance of 2011. We are in discussions with the three remaining anchors and expect all to renew.

We are continuing to realize the impact of our investment in redevelopment. Our efforts to upgrade the merchandising at our properties have resulted in improved metrics.

At Plymouth Meeting Mall, the comp sales productivity ended the quarter at $343 per square foot, an increase of 43% over the $240 per square foot reported in the first quarter of 2010. The increase is driven by the additions to the property of California Pizza Kitchen, PF Chang's, and Redstone Grill, which are significantly outperforming the mall averages. The increase in sales is generating significant additional tenant interest in the property.

At Cherry Hill Mall, the comp sales productivity is $562 per square foot, an increase of 9.3% over March of 2010. The increase can be attributed to a strong year-over-year sales growth with 25 tenants showing double-digit increases over the previous year. We continue to drive sales by adding luxury merchants to complement the new Nordstrom and recently opened Lush and Hugo Boss.

We are committed to our efforts to back fill vacancy in our secondary market assets with alternative uses. We are proud that our accomplishments in this regard were reported in Monday's Wall Street Journal, announcing the opening next week of the Disney Entrepreneurial Center in 22,000 square feet in Orlando Fashion Square.

Additionally, Voorhees City Hall will open on the second level of the newly configured mall at Voorhees Town Center on May 17, solidifying the property's position in the market. With 80% of the residential apartments that were opened at year-end leased or reserved, Voorhees Town Center has a significant pipeline of retail and alternative use deals, generated by these mix of uses.

Aside from alternative uses, we're pleased to report that national retailers are showing renewed interest in our secondary market properties. Notably during the quarter, we executed leases for a new Dick's store at Crossroads Mall, Ross at South Mall, Joseph A. Bank and Children's Place at Gadsden Mall, and Route 21 at Exton and Valley View Malls.

We are keenly focused on enhancing our operational proficiency on a number of levels. We have advanced our social media initiatives and we are introducing an interactive mobile app in May for our properties. We are active on numerous social media platforms and were recently honored by ICSC with a Silver Maxi, for our work in digital media.

We have instituted a CAM initiative to mitigate the dilution of breach NOI, through controlling expenses and establishing rigorous standards that sharply reduce CAM concessions to tenants.

The environment for leasing space continues to improve, driven in large part by the recent solid sales performance of our properties. We are pleased with the tenant interest generated by our completed redevelopments and remain committed to enhancing the shopping experience throughout our portfolio. With consumer and retail sentiment on the upswing, we are optimistic as we prepare for the upcoming ICSC convention.

With that, we're now ready for questions.

Thank you, ladies and gentlemen. (Operator Instructions) Our first question is from the line of Michael Bilerman with Citi. Please go ahead.

This is Quentin Velleley.

Just in terms of the renewal spreads, I think you said you were getting 5% positive spreads on leases with terms greater than five years. I am just wondering what proportion of the renewals in the quarter were done on a short-term lease basis? And what kind of rental spreads that would be done on?

48% were short-term leases.

And I assume that was about a 5% average decline, then? Does that sound about right?

Well, for leases less than one year, it was about 5.5% decline, one to three years, about 8% decline, three to five years 2.1% increase.

And that ratio of shorter term leases is about the same as what you've been doing over the last few quarters. When do you sort of expect, given the increasing sales that you've had, when do you expect this short-term leasing proportion to improve?

We are hopeful that is going to turn around as part of our -- some of the initiatives I talked about in my remarks. The tenant sales are increasing at our properties, and we've now had the opportunity and have a number of portfolio transactions that we're negotiating with national tenants, where we are optimistic that we're going to see the renewals turn positive.

Okay. And then maybe one for Ed.

I know you commented that you're more focused on internal growth rather than external growth. Given the amount of B-grade mall assets that are in the market at the moment, have you spoken to private equity or joint venture partners in terms of looking at doing an acquisition, where your ownership stake is lower, and you can leverage your platform into managing those assets?

We have been approached by folks that are interested in the portfolios that are out there, and we have had some discussions around those possibilities.

Okay. Thank you.

Thank you.

The next question is from the line of Craig Schmidt with Bank of America/Merrill Lynch. Please go ahead.

I guess, taking the opposite tact, we continue to hear about a number of malls coming to sale. At what cap rate, if they were low enough, would you be an active seller in that environment?

Well, I think you can rest assured that if Westfield achieves its stated goals that we would be interested in being a seller at those levels. So it really depends on the cap rates for the properties that we would be interested in selling, but I wouldn't put an exact number on it unless we were talking about a particular property.

Understood. So you are going to take a look at Simon's and Westfield's and eventually GGP's malls for sale?

Look, this is our business. We're in this business. We're in this property type, and so these are the assets that we trade in.

As I said in my remarks, we're a buyer or seller depending upon where the pricing turns out. If it turns out that these assets are priced very aggressively, then I think at this stage we would be a seller. If it turns out that the properties are priced very opportunistically, I think that we would be interested in being a partner.

Given our balance sheet where it is, it's unlikely that we're going to be out there for one of these portfolios on our own. But we clearly would consider it being a partner if the properties trade opportunistically.

Great. Thank you.

Thank you.

The next question is from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Good afternoon.

Joe, can you talk about -- how many of your properties are you considering some of these alternative non-retail uses for?

Well, I mean, certainly it's not something that we're looking at for our premier properties, those top four or five assets. We have interestingly had interest in properties that are performing over $350 a square foot and they're being selective in that regard and are very concerned on the synergy associated with the use and whether it works for the asset. But I would say the primary focus for alternative uses is looking at it for what I would call the secondary market malls. That is the primary focus and where we're seeing the most traction in that regard.

Okay. Are you close to any other deals?

We are making a good deal of progress in our healthcare initiative, with respect to transactions at three of our properties right now and continue to look at other uses including educational, governmental, et cetera, so more to come.

Would you expect announcements over the next quarter or two?

I'm not in a position to really respond to that question.

Okay. And then can you just talk a little bit about the deal terms for the Disney space? Was it just in terms of term?

I'll have to get back to you on that one. I don't have the specifics at hand.

I can remember the rent, but I don't remember the deal, so I would rather not do it on one leg. I would rather get back to you off line.

Can you just talk a little bit about the interior at Plymouth Meeting? You talked about the restaurants outside but I know you put in an Express in about a year ago and how that experiment has been going.

Clearly that is our focus right now, the interior of Plymouth Meeting Mall. We took a little bit of a step backwards with the closing of Krazy City there, but we did put Express in. It actually just this past November that they opened. And we do have a number of other tenants that we're working with for the interior of the mall. Some are fairly well along, in terms of the process.

The interior is our focus right now.

All right. And then just one final question. I don't know if this is for Ed or Bob.

In terms of your credit facility, as the credit markets have continued to improve, have you reopened discussions with your lenders possibly to redo that deal?

Yes.

Okay. Any progress there?

Yes.

Okay. Thanks.

Thank you.

The next question is from the line of Cedrik Lachance with Green Street Advisors. Please go ahead.

Thank you.

In your prepared remarks, you alluded to the fact that some of the national retailers are becoming more interested in secondary locations or secondary productivity malls. Would you be able to expand on that a little bit, in terms of what is creating the appetite for those locations? And if there are particular retailer categories that are more representative than others?

Well, I think it is just generally that there are a number of retailers that are in the expansion mode. Joseph A. Banks is probably a good example of that, moving to Gadsden Mall in Alabama. I think part of it is that we have been very aggressive in terms of seeking out new retailers for these properties and telling a story regarding the market dominance of these properties within the regions, and how Joseph A. Banks could serve the male customer in a 50- or 70-mile radius. That gives them a significant customer base to draw on.

Okay. And then regards to perhaps the TA packages that have to be associated with those leases, how did they differ from other tenants? Or how did they differ from your more productive locations?

I mean, clearly the deals aren't -- it's a sales per square foot gain, and the transactions aren't as strong as one might do in a major mall. And the rents have been lowered. TA tends tore fairly consistent.

Okay. So on a percent of NOI the TA's are probably higher than you would normally provide for in a different mall?

Yes, on a rent NOI basis. Yes.

And in regards to your interest and whether you would be interested in being a buyer or seller, you talked about having some, I suspect, institutional investors approaching you.

Does the possibility of having a partnership change the price at which you're a buyer?

No. I don't think that we would be a buyer without a partner, so that's the capacity in which we could consider it.

Okay. All right. Thank you.

Thank you, ladies and gentlemen. [ Operator Instructions ]

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

Hi. A couple questions.

First of all, going back to the non-retail uses and some of the secondary market centers, can you talk a little about -- I know you can't talk about the specific deals -- but just generally how rent levels for those types of deals compare to what the average rent is for a mall? I know often these are going to be not at 50-yard line spaces, so what a comparable rent for retailer would be at the corner location where one of these uses would go to?

So, you would like me to discuss comparing an alternative use deal in a secondary market to a retail deal?

Yes, exactly.

Essentially the big issue you have in the transaction relates to CAM charges and to some of the other additional charges. Because an office use or healthcare user is not interested in paying that kind of a CAM that might be $15 a foot, as an example. They're more focused on what would be the market place for office space within that particular area, which might be in some cases 50% of what mall CAM is. And so that's what really drives the transaction.

I would say the rents tend to be somewhat again for what I would consider to be 10- and 20-yard line space in a mall, really difficult to lease space particularly in secondary markets. The rent is not inconsistent what you would get for a retailer, in terms of the minimum rent. Where you really are struggling is in that operating expense, including the CAM in there.

With respect to TA, it tends to be a case-by-case basis depending on the buildout. In some cases, a lot of what's exist just needs to be added to, again, depending on the user. The TA again is somewhat of a select case-by-case decision.

Got it. Okay.

And switching gears for a second, just looking at 2012, the maturities, and any general comments about mortgage maturities? How you feel about the loan to values, et cetera, and I guess looking at the converts as well, which also mature then?

I think we talked on previous quarterly calls about our view that over the near term '11 and '12, we would expect to see net proceeds coming out of our mortgage financing, refinancings. So we still feel optimistic the market gets better every day for financing, so our view gets a little rosier with each passing day.

With respect to the converts, we clearly have that in mind and one of the things that we've talked about as well with some investors is the fact that we've allowed the credit facility, a revolving credit facility balance, to remain untapped to give us an ability to warehouse the converts, as they come due in May 2012. Obviously, part of the day we'll be considering other capital market alternatives to provide the liquidity for the converts but as a backup, we still have the availability of the credit facility, if necessary to refinance those on a short-term basis.

Okay. Ideally, is that something you'd like to pay down with some form of equity, whether it's asset sales or equity or something, that you're contemplating replacing with a similar instrument?

It could be equity or equity-like instrument, like the existing convertible debt.

Okay. Thank you.

Thank you. The next question is a follow-up from the line of Michael Bilerman with Citi. Please go ahead.

Thanks. (Inaudible) you think 8.5% to 9% cap rates are opportunistic pricing to be buying?

I don't think that it's appropriate for us to get into that level of specificity.

I am going to ask it a different way. Your stock trades today at an 8.7% implied cap, which is higher than all the peers and would appear to be much higher than where [we're at with the trades] in the private market.

Why aren't you, management, partnering with private equity, or selling your assets and buying back stock? Or even putting the Company up for sale at this valuation?

Can you repeat the question, please?

Your stock trades at an 8.7% implied cap.

Yes.

Which would appear to be meaningfully higher than the peer group. And it would appear to us to be higher than where transactions in the marketplace are likely to come out.

So why wouldn't you be trying to sell assets aggressively or even partnering with the private equity and institutional capital that's looking at assets, to either sell assets and buy back your stock or put the Company up for sale completely to narrow that gap in value?

If we were selling assets, first of all, we think it's in our best interest strategically to see how the transactions that are in the marketplace trade. This will inform us as to what real valuations are.

Right now, the talk about valuations is mostly hypothetical. There's not enough trading activity in the property type to really determine what true value is. There's a number of portfolios on the marketplace, when they trade it will be informative as to what our next move should be.

Shouldn't you be -- if there's a lot of capital that is looking to invest in the mall space, shouldn't you be engaging with these capital partners in some way, to narrow the valuation gap that exists in your stock by selling assets? Or looking at a corporate-type public transaction?

We're here and we talk to people all the time, but again, there's a lot of talk about all the capital in the marketplace. There is a lot of talk about all the deals that are getting done.

We haven't seen a lot of deals get done yet, and we haven't seen where the pricing is established. So until there is facts rather than talk, this is all a big hypothetical. It is not like we're not available for conversations. We meet with investors and capital sources all the time.

Okay. Thank you.

The next question is from the line of Ben Yang with Keefe, Bruyette & Woods. Please go ahead.

Good afternoon.

Just going back to Nate's question on the credit facility extension, [one strip center] just announced plans to extend their facility about a year-and-a-half before that maturity, and obviously it included extended term, lower rate, higher borrowing capacity, and also steps to unsecure the line. Can you just offer maybe your expectation about what your line extension might look like? And whether there's a path for you guys to also maybe unsecure your line when you redo it?

At the moment we're not in a position to talk about the discussions that we're having with our banks, but at an appropriate time we will be glad to discuss it in detail. At the moment, though, we're in discussions with our lead bank.

Great. Thank you.

Thank you. There are no further questions at this time.

I'll turn it back over to Mr. Ron Rubin for closing remarks.

I want to thank everybody for joining with us this afternoon and thank you also for your continued support.

We're looking forward to the ICSC Convention next month and we invite you to stop by our exhibit. Our next earnings conference call will be in July for our second quarter results.

Thank you again and have a good evening.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.