Pennsylvania Real Estate Investment Trust (PEI) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust first-quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode, and following the presentation the conference will be opened for questions. (Operator Instructions).

I would now like to turn the conference over to Shawn Southard, Director of Corporate Communications.

Thank you, Douglas. Good morning, everyone, and welcome to PREIT's first-quarter 2012 conference call. During this call, PREIT will make certain forward-looking statements within the meaning of the federal securities laws. These statements relate to expectations, beliefs, projections, trends, and other matters that are not historical facts and are subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the Company's SEC filings. Statements that PREIT makes today might only be accurate only as of today, April 24, 2012, and PREIT makes no undertaking to update any such statements.

Also, certain non-GAAP measures will be discussed. PREIT has included reconciliations of such measures to the comparable GAAP measures in its earnings release and other documents filed with the SEC.

It is now my pleasure to turn the call over to Ron Rubin, PREIT chairman and CEO.

Thank you very much, Shawn. Welcome to the Pennsylvania Real Estate Investment Trust first-quarter 2012 conference call. Joining me on the call today are Joe Coradino, our incoming CEO; Ed Glickman, President; Bob McCadden, CFO. Also in the room today are Vice Chairman, George Rubin; and General Counsel, Bruce Goldman.

Today we will discuss our first-quarter performance, which I'm pleased to report reflects the continued success of our efforts to improve the fundamentals of our business. For 2012 we are off to a good start, including reaching an all-time high for sales of $376 per square foot.

Before we discuss the details of our first-quarter performance, we recently announced that Joe Coradino will become CEO of PREIT at our annual meeting on June 7. Joe knows the business, understands the challenges and opportunities facing the Company, and has unique skills and relationships suited to leading a retail-focused real estate company. This business is all about relationships, and Joe has excellent skills in that area.

We are all looking forward to working with Joe on the next chapter for PREIT. As far as I am personally concerned, I'll be here to continue to be helpful to the Company and to Joe. And with that, I'll turn the call over to him.

Thank you, Ron, and good morning, everyone. It's an honor to follow in Ron's footsteps as CEO of this Company. Ron has defined real estate in this region for more than 50 years, and his career is one of the most impressive in the commercial real estate business. I look forward to ensuring that his legacy of innovation and leadership for our business continues, and I know that as our Executive Chairman, he will be available to all of us for guidance and continued leadership.

The team and I are dedicated to continuing to implement the strategy that has been serving us very well in terms of solidifying our foundation. It has 4 clear pillars -- continuing to drive improvement in our operating metrics, with a focus on our core business; reducing leverage; selling assets that do not fit into our long-term vision; and bringing new and creative uses to our properties.

Our progress in achieving our objectives is evident in our first-quarter performance; most notably, sales per square foot have increased across our portfolio for 9 consecutive quarters. This validates our decision both to reinvest in our properties and to enter into short-term leases with tenants. The result has been ongoing increases in comparable store sales and renewal spreads that have turned clearly positive, which is a very meaningful metric and speaks to the attractiveness of our properties.

With that, I'll turn the call over to Ed Glickman to discuss the highlights of the quarter in some more detail.

Thanks, Joe. As you have heard, we had a solid first quarter. Our portfolio performance continues to improve, with comp sales now at $376 per square foot, up 5.3% year to year, another high for our portfolio, with 33 of 38 properties showing positive results. We are especially pleased to announce that the Company's Cherry Hill Mall, at $623 per foot, has become the Company's first property to break the $600 per foot mark, with 10.9% year-to-year growth.

Of note, three of our smaller market assets, Crossroads, Dartmouth, and Valley Malls continued to record solid comp sales increases ranging from 9% to 12%. These centers are benefiting from increased consumer traffic, driven by our recent tenant upgrades.

Total occupancy at the end of the first quarter was 91.9%, an increase of 110 basis points as compared to the 90.8% reported for the first quarter of 2011. In-line occupancy ended the first quarter at 87.9%, 80 basis points higher than the first quarter of 2011.

This quarter we had significant progress in leasing, with approximately 725,000 square feet of non-anchor transactions. Renewal transactions were secured at a positive 2.9% spread on base rents. Significant transactions for new leases included three leases with PS from Aeropostale, two stores for each of Pottery Barn, Shoe Dept. Encore, Maurice's, Justice, and Wet Seal. We also signed leases for large format stores with Tilly's, Ulta, and Victoria's Secret.

This quarter we executed three new anchor leases -- JCPenney at North Hanover; Regal at Moorestown, and Philadelphia Media Network at The Gallery. We also renewed Sears at Uniontown. At this time, all of our 2012 anchor renewals have been completed.

Last Friday, the Company closed a very successful offering of preferred shares. We sold $115 million at a dividend rate of 8.25%. While this offering is slightly dilutive, we still have great coverage of the common dividend and a low payout ratio. Bob will review these metrics for you shortly.

This capital raise positions us to repay our outstanding exchangeable notes while maintaining borrowing capacity under the line of credit. By the end of the second quarter, we expect our bank leverage ratio will fall by 300 basis points to just over 63%. This is a great step towards our long-term leverage target of 50% to 60%.

Earlier in the quarter we successfully refinanced Cap City Mall for $65.8 million at 5.3%. This was used to repay amounts outstanding against our line of credit. This property previously had a mortgage of approximately $48 million at 7.61%. This transaction generated net proceeds of $18 million.

Beaver Valley Mall had an anticipated maturity date of April 2012. Since we are marketing this asset, we decided to take advantage of the mortgage terms, which allow us to defer repayment until 2032. In the summer we will be seeking to refinance Cherry Hill Mall, which will have $230 million outstanding at maturity in October.

Finally, the $38.8 million financing on Cumberland Mall matures in November. We believe that we will have net proceeds from both of these refinancings.

As we have previously mentioned, the Company is focused on leverage reduction, and one way of accomplishing this is to sell non-strategic assets. To that end, we are in the market with 5 assets for disposition. In addition to Beaver Valley Mall, we have also offered our Orlando, Phillipsburg, North Hanover, and Chambersburg properties for sale.

At this time we have not yet entered into any transactions on these assets. When these properties are sold, the proceeds will allow us to further deleverage. We also continue our ongoing discussions regarding joint ventures with institutional assets and hope to give you additional color on future calls.

During the first quarter, we spent $2.2 million on recurring CapEx and tenant allowances. We funded these amounts and our mortgage amortization payment of $5.5 million from ongoing cash flow.

While our goal is to operate the Company at a lower level of leverage, we still intend to pursue plans to continue our development and redevelopment activities. As for our previously-announced major tenant additions, at Willow Grove Park we are on track to open Nordstrom Rack in the coming weeks, and the new JCPenney this fall. We are also continuing work on a JCPenney relocation at North Hanover for a fall opening, and Moorestown Mall relocations for the expansion of Regal Cinema are underway.

Work continues at 801 Market Street to accommodate Philadelphia Media Network, and construction has begun for Grand Lux Cafe at Cherry Hill Mall and Mercy Health at Plymouth Meeting Mall. We expect all of these tenants to take occupancy during the summer.

In the first quarter we spent $6.9 million on development and redevelopment activity. During the balance of the year, we anticipate an additional spend of approximately $50 million to $60 million. All of these amounts, and our estimated spend for the balance of the year, are within our business plan and will ultimately be funded against the line of credit.

In summary, we had a positive quarter, making progress on both sides of the balance sheet. And with that, I will turn the call over to Bob McCadden.

Thanks, Ed. Funds from operations was $25 million, or $0.43 per diluted share, compared to $21.3 million or $0.37 per diluted share in last year's quarter. Same-store NOI for the quarter was $69.1 million, an increase of $2.3 million or 3.5% compared to $66.8 million generated in last year's first quarter. We benefited from higher occupancy, lower operating expenses, and continued improvement in our provisions for bad debts.

Lease termination revenue was approximately $700,000 in this year's quarter compared to $25,000 in 2011's first quarter. Excluding lease terminations, same-store NOI increased by 2.5% for the quarter.

Our G&A expenses were $300,000 higher than last year's quarter, primarily due to the timing of certain expenditures. We expect our full-year normalized G&A run rate to be consistent with our previously-announced guidance of approximately $38 million. The effective interest rate on borrowings, including amortization of deferred financing costs, premiums, and discounts for the March 2012 quarter fell to 5.92% from 6.14% in last year's quarter, a decrease of 22 basis points.

Interest expense for the quarter was $1.9 million, or 5.2% lower than last year's quarter, reflecting the impact of the lower interest rates and reductions in our average outstanding debt balances. The debt balances at the end of the first quarter, including our share of partnership debt, was $2.362 billion, a decrease of $34 million from last year's first quarter.

At the end of the quarter 95.9% of our debt was either fixed or swapped at fixed. Our bank leverage ratio was 66.18%, 73 basis points lower than the ratio at the end of December.

PREIT's net loss for the quarter was $10 million or $0.18 per share. Last year we recorded a $14.3 million, or $0.27 per diluted share, loss. For the 12 months ended March 31, 2012, our FFO payout ratio was a conservative 31.6%, and our FID payout ratio was 47.3%.

Turning to 2012 guidance, after giving effect to the $0.06 per share dilution from the issuance of preferred shares, stronger than anticipated NOI growth, and other items, we expect FFO per diluted share to be in the range of $1.83 to $1.90. GAAP earnings per diluted share will be a net loss between $0.55 and $0.61 per share.

We are also increasing our expectation of same-store NOI growth by 50 basis points to 1% to 2%, excluding lease termination fees. We expect that interest on our bank borrowings will be reduced by 25 basis points starting in August 2012, as a result of the leverage ratio dropping below 65% at the end of the second quarter.

In addition to the redevelopment spending mentioned by Ed, we expect $35 million to $40 million in recurring capital expenditures and tenant allowances. As a reminder, our 2012 guidance includes approximately $1.7 million of income from the sale of historical tax credits that we will recognize in the third quarter.

Our guidance does not contemplate any acquisitions, property sales, or capital market transactions, other than the completed preferred share offering, the redemption of our exchangeable notes in June, and mortgage refinancings in the ordinary course of business.

I'll now turn the call back over to Joe.

Thank you, Bob. To revisit what I said earlier, our plan has been working, and we continue to focus on the four initiatives -- the operating metrics in our core business, divesting non-core assets, reducing leverage, and continuing to find creative uses for our properties. We been successful adding value to our properties to attract tenants to our customers and benefit our shareholders. As we do that, our focus will be on operational excellence at all levels of our organization.

We're looking forward to the ICSE convention next month. We invite you to stop by our exhibit to visit with us and the mayor of Philadelphia, Michael Nutter. Additionally, we will be at the NAREIT conference in New York City in June and look forward to seeing you there.

With that, we're ready for questions.

(Operator Instructions). Quentin Velleley, Citigroup.

Just in terms of the 5 assets that you have begun marketing on, could you maybe just give us a little bit more detail on how you're thinking about the possible timing, and what stage of the marketing we are at, and whether or not you can give us any feel for pricing?

We are out marketing the properties actively. We are at the beginning of the process, and we cannot give you any sense for timing at the moment.

And in terms of pricing, we've seen B asset sales. We can get a feel to where assets with productivity above $300 a foot is. Can you give us any sense where these assets, where you're hoping they might trade?

Not yet.

Okay. And then just in terms of the average base rents -- I think down about 2% over the year -- it looks like most of that is coming from those lower productivity assets. Can you just give us a sense for what is driving the lower base rents in those assets? Is it new leases? Is it conversion of percentage rent deals to permanent rent-paying deals? Just to give us a sense for those base rent declines.

There's a couple of things impacting that. Typically, when we report our renewal spreads, we're typically reporting them when the leases are signed. So if you go back and look at our 2011 new leases and executed leases, you saw the downtick in renewal rates across the board, generally. And I think as we mentioned in previous calls, what we're experiencing in 2011, 2012, and the to the early part of 2013, is a disproportionate amount of our renewals coming in properties with sales beneath $350 square foot.

So effectively, that's one of the key drivers and what you're seeing in the average base rents. So it's not unexpected. And you'll see, typically, as you see in this quarter, our renewal spreads are flattish to slightly positive, but those leases won't come onstream until later in 2012. So you are going to see a time lag in terms of when you see the renewals as reported in our supplemental, and then how they convert into the average base rents, anywhere from three to eight months later.

Okay. And then just lastly, you did have a high proportion of lease renewals, practically in those lower productivity assets which were on shorter terms. Have you seen an improvement in that this year so far?

The term of the renewals is similar to last year.

So it is like -- I think it was 40% of renewals were on terms for less than 5 years? Is that number correct?

Well I can tell you that we were about flat, with about 25% -- I guess 23% to 25% of the renewals for one year or less. And for those that were 3 years or more, we're down about 4% from 49% to 45%.

Okay, thank you.

Samit Parikh, ISI Group.

Thanks for taking my call. My question was in regards to what your -- generally your pushback or how your conversations with retailers are regarding fixed rent -- fixed CAM bumps? What we've been hearing are that retailers are giving pushback because they understand the expense savings that the landlords are getting.

I have noticed that your recovery ratio has been dropping steadily, and I know part of that has to do with the short-term leasing. But any color you can give me on that would be great. Thank you.

Well, I think if you look at our portfolio compared to what at least other of our peers have publicly announced, we probably have a smaller proportion of our leases in fixed CAM. And that was done, I think, strategically, as we were undertaking a lot of our redevelopment projects.

In many of our leases we were able to pass through a portion of the redevelopment expenses as part of the CAM pool. So we actually deliberately deferred -- kind of following the herd, moving to fixed CAM. So I think we're probably not the best source to answer that question.

Okay, but on whatever portion of your leases which are fixed CAM, are you seeing any changes in lease terms in regards to that, or is that pretty consistent?

No. At this plant, we are seeing 3% to 5% annual increases, but nothing dramatically different than what we've seen in prior years.

Okay, thanks for the color.

Nathan Isbee, Stifel Nicolaus.

Just looking at the occupancy movements close to the portfolio, there was a fair amount of move-outs even at the higher end of the portfolio -- Woodlands, Jacksonville, Dartmouth, Viewmont. Can you just talk a little bit about what was driving those occupancy drops?

We started, I guess, in 2011, started reporting temporary tenants in our occupancy numbers. So what you see is a normal, cyclical move-out. Our temporary tenants across the board, obviously, peak at the fourth quarter, and they have reached their lowest point in the first and second quarters. So that was a large driver of the sequential change in occupancy for even the better assets.

But this is year over year.

We'll have to look at that. I don't know if there's any broad observations that we can make with respect to -- .

Okay. And then just specifically on the Springfield Mall, there's about a 10% occupancy dropoff. Is there anything going on there with the redevelopment that might be driving that, or is that straight move-outs?

Yes, essentially, it's Springfield that is positioning for additional new tenants that will be coming in, including Victoria's Secret and Ulta.

Okay, thanks. And then finally, could you just talk about your thoughts on the current dividend level, given the low payout and somewhat better environment out there?

Sure. We've been reviewing our dividend, and we typically have a dividend discussion at the annual meeting. So yes, we have been thinking about it.

Do you foresee recommending to the Board to increase it here?

Well, I think what I would say at this time is that our coverage ratios are strong, even following the issuance of the preferred stock -- which will be utilized, by the way, to pay down existing debt and bring our leverage down one rung in our credit agreement, which will save us additional interest. So even though it was an 8.25% coupon, we think it was a very positive transaction, and we're still maintaining very high coverage ratios.

Okay. And then just -- sorry, one other question. I know it's still about 5 months out, but have you started discussions with lenders in Cherry Hill, and do you have any sense in terms of rate and perhaps how much you might be able to take out of that?

Yes, we have had discussions, and broadly, more money, lower rate.

(Laughter) Thanks.

Nate, just a couple of specifics on Woodlands. There's a couple of expansions for Apple and Forever 21, so we've taken some tenants off-line to accommodate their planned expansion. Another one of the properties, Viewmont Mall -- again, these are moving some tenants around for later leasing in 2012. But we can talk specifically offline if you want to continue this discussion.

Okay, thank you very much.

Cedrik Lachance, Green Street Advisors.

Thanks. I just want to go back to Quentin's question in regards to the 2% decrease in average base rents. You talked about a delay between signed leases and when they come into operations, but it appears to me that there's something else at play, and I just want to try to understand that.

If you look at page 8, the lease is signed, every lease you've signed this quarter is below your average base rent. So it would suggest that some of the -- either you're leasing space that is of a lower quality in a particular property, or that market rents might be declining. And I'm curious if you could comment on that.

Cedrik, I think some of what you said is true, that at the margin -- I think we talked about it even with respect to sales per square foot. As you're increasing occupancy, you're typically not leasing space at center court. That space has already been occupied for years. You are leasing space at the margins, closer to the anchor locations or inside corridors. And typically, that rent is going to have a lower average sales per square foot and reduce your overall yield on the property.

But you can also see, if you look back over time, properties where we have lost occupancy, you're seeing rents per square foot increase, which is just the opposite effect. The lower quality spaces in the malls are typically filled with tenants who probably are, maybe, the least successful. So as they go out, the average goes up.

So it's really not as -- I'm not sure we can draw a simple conclusion based on the metrics. I think there's a little bit more that you need to dig into on each of the assets.

Okay. And maybe just focusing, again, on the bottom quartile of the portfolio, where there has been, in some cases, double-digits decreases in some of the average base rents. What's driving that? Is it a change in market rent on those properties? Or is there anything else that is tenant-related?

Yes, I think it's -- in a lot of cases in that section of the portfolio, it is market-driven. And we are -- in that case, we may also be looking to backfill national tenants who had left the property several years ago with local and regional tenants who may be operating at a lower sales level, and therefore, paying rents at a lower level.

Okay. Finally, just last question. On page 14, holdover leases, which represented 8% of your portfolio -- what are those, exactly?

What was that -- ? (multiple speakers)

What question are you asking?

Quarter holdovers.

On page 14, if you look at the non-anchor lease expirations, the holdover-type tenants, which represented 8% of your total, what is this? Is it short-term leases?

Essentially they are national account transactions that we have been in protracted negotiations over -- it represents, as you said, about 8.1% of our portfolio, about 980,000 square feet. We are about -- we have about 80% of those transactions either signed or in various stages of negotiations at this point. We have begun to make progress in that area.

Okay. So it's national tenants whose lease term has expired, but they are still in their space paying rents, and you're trying to hammer out a new deal?

That is correct. They are portfolio-wide transactions.

Okay, all right, thank you very much.

Ben Yang, KBW.

I just have a follow-up question on non-core mall sales. I recall you mentioned last quarter having some opportunistic buyers approach you about buying some of your malls. And I was just wondering if the 5 malls that you are trying to sell -- are these the type of assets these investors want to buy? I'm just wondering if there is even a buyer for what I think most people would describe as a C mall. Or are you just trying to put stuff out there to see what sticks?

Well, both things. We did have some reverse inquiry on some of these properties. I think there was an expectation that the financing market would move to provide liquidity at this level of asset. I'm not clear at this time that the liquidity has gotten all the way there yet. And by liquidity, I mean finance in the CMBS market, etc.

I believe that once that happens, there will be significant interest in these properties. At the moment, the interest is mostly from very opportunistic buyers who have the resources to go forward with these properties.

And one of the things that we've said about these assets is that they were built on a great real estate, and they are entitled. And those are two things that are harder and harder to achieve these days, so we think there is a lot of utility in some of these properties.

What do you mean when you say opportunistic buyer? Is it the local guy that thinks they can do a better job managing the assets than you guys? Is it the private equity guys, because -- ?

It is generally cash-flow driven buyers who are looking for a high cap rates assets, because they're interested in yield and they think that they can intensively manage the properties in a way that we might not be able to.

Whether that's true or not, that is what makes the market. But in certain regards, I think it is highly driven by the availability of leverage. As the leverage comes back, it raises the current return on these properties substantially, assuming they buy them at high cap rates. So that's really the play that they are interested in.

Okay, fair enough. And then, obviously, we've seen some private equity guys buying the malls recently, and I was wondering, have you had any discussions with those type of buyers, and if they were interested, would you consider selling some of your B malls to those guys?

We've covered the waterfront. The information in the industry is pretty available to all of us. We know who the potential buyers are. And we've had and are continuing to have discussions with all of those types of buyers.

So I guess everything is on the table at this point? Or are you only looking to sell your C or some of your lowest-quality properties?

Well, that is where our major focus is, yes.

Okay, thank you.

Michael Mueller, JPMorgan.

Thanks. A quick question, Bob, on the offering, the proceeds. I know the press release said something like $30 million was used to pay the credit line. Is the balance of the offering sitting there in cash at this point?

As of today it is.

So when we're going forward, so we take it out -- so it's roughly $80 million there. And when you take out the preferred -- excuse me, the convert, it's basically going to be that cash and then credit --?

Yes, we expect that cash plus residual from the credit facility.

Got it, okay. And Ed, on top of asset sales, you mentioned something about talking with folks about joint ventures, and I was just curious, what sort of assets are you thinking about exposing to joint ventures? Is it the top quartile, if we look at page 10 of the supplemental? Is it more the middle of the line assets in terms of productivity?

We've had a wide range of discussions regarding possible joint ventures. Again, our primary focus is to reduce leverage, so we've had a wide range of discussions.

Okay, could that include assets like a Cherry Hill or a Lehigh Valley?

Michael, all I would say at this time is we've had a wide range of discussions with people that are interested in different tiers of the portfolio.

Okay. Okay, great, thank you.

Jeff Lau, Sidoti and Company.

Just a quick, simple question. The G&A -- I think you mentioned it, what caused that slight increase in G&A, and what are you expecting, again, for 2012?

I think we're still holding a kind of reduction, like 2% to 3% from last year's number, which gets you somewhere around the $38 million mark. A lot of the G&A is just a function of when we spend -- when we make expenditures for professional fees, when we make charitable contributions.

There is a whole host of things that have some timing element to them, and they don't always fall in the same quarter every year. So we think these are expenditures that would be considered still within the budget, but have more of a timing -- having a timing characteristic to it.

Okay, I guess, were some of it maybe due to the Moorestown issue going around, or --?

The Moorestown costs would have been incurred in 2011.

Okay, thanks.

(Operator Instructions). Quentin Velleley, Citigroup.

It is Michael Bilerman speaking. Ed, can you just -- my notes are not that great. The 5 malls that you're selling, you said Beaver Valley, Chambersburg Mall, Orlando Fashion Square -- what were the other two?

North Hanover and Phillipsburg.

And what is the current -- North Hanover, you said, right?

Yes.

And Phillipsburg. And what is the current NOI growth that is being produced, either trailing 12 or 2011? Just so we get a sense, we can -- I know you don't want to provide pricing, you don't want to put something out there, but we can do our own math.

Right. I'm sorry, we don't give that number out. They don't give out NOI for individual properties.

As a group. I don't need it as individual.

We don't give that out, either. But you can look in the supplemental, because we do break down by sales tier.

Right, so you do -- so in gross, these assets are about $200 million in gross book value.

Mike, I'm sure that you can make your own judgments from that list.

Okay, thank you.

Thanks.

At this time, there are no further questions in queue. I'd like to turn the call over to Mr. Rubin for closing remarks.

Okay, thank you all for joining us today and for your continued support and interest. Our next earnings conference call will be in July for our second-quarter results. So thank you again, and have a good day.

And ladies and gentlemen, that does conclude our conference for today. We'd like to thank you for your participation, and you may now disconnect.