Pennsylvania Real Estate Investment Trust (PEI) 2012 Q2 法說會逐字稿

(Operator Instructions). Good day ladies and gentlemen, thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust second quarter, 2012 earnings conference call.

(Operator Instructions). This conference is being recorded today, July 31, 2012. I would now like to turn the conference over to Shawn Southard. Please go ahead.

Thank you. Good morning, everyone. 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 fact and are subject to risks, and uncertainties hat might affect future events or results. Descriptions of these risks are set forth in the Company's SEC filings.

Statements that PREIT make today, might be accurate only today, July 31, 2012 and PREIT makes no undertaking to update any such statements. Also, certain non-GAAP measures will be discussed. PREIT has included reconciliation of such measures to the comparable GAAP measures in it's Earning Release and other documents filed with the SEC. It is now my pleasure to turn the call over to Ron Rubin, Executive Chairman of PREIT.

Thanks very much, Shawn. Welcome to the Pennsylvania Real Estate Investment Trust second quarter 2012 conference call. Speaking on the call today are Joe Coradino, CEO, and Ed Glickman, President and Bob McCadden, CFO. Also in the room are Vice Chairman, George Rubin and General Counsel, Bruce Goldman.

Today we will discuss our performance this quarter, which I am pleased to report was a very solid one. We generated positive results in several key metrics, reflecting our continuing efforts to improve the fundamentals of our Business. I will now turn the call over to the Company's new CEO, Joe Coradino.

Thank you, Ron. Good morning, everyone. In my new role as CEO, PREIT has a clear vision, with a keen focus on the Business. Our priorities are clear, operational excellence, balance sheet improvement and improving the quality of our portfolio. We have set forth specific goals for our team in this regard.

Our near term goals are to generate same-store NOI growth in excess of 2%, and to achieve gross rent renewal spreads in excess of 3%. In the long run, we are working toward achieving comp store sales of above $400 per square foot, and non-anchor occupancy in excess of 90%. During the quarter, we have already made strides in improving our operations, as FFO, same-store NOI, comp sales and occupancy all improved. We have also made progress reducing leverage, and our plan is to reduce it below 60%.

To that end, in April we completed a $115 million preferred share offering and used the proceeds to pay down debt and reduce leverage. Specifically, in June we repaid our outstanding exchangeable notes and maturity, additionally during the quarter we paid the additional dividend on our new preferred shares, and a 6.7% increase to quarterly dividend on common shares. To further reduce leverage, we have listed our three wholly owned power centers for sale, in addition to the non core assets already listed.

We are taking a multi prong approach to improving portfolio quality. In this regard, we have already announced that we have non core assets for sale, and we are in active negotiation with potential buyers on four of the five properties, and have suspended marketing Beaver Valley Mall until we have clarification regarding the pending Marcellus Shale Tax Credit Legislation in the region that may affect the property. We are also developing targeted, assets specific merchandising plans at a number of our key assets, with sales in excess of $350 per square foot, and they include Capital City, Moorestown, Willow Grove and Viewmont as part of an overall strategy to drive sales above $400 per square foot. Our portfolio presents us with a unique opportunity to improve performance through remerchandising efforts, minimizing capital outlets.

With this overview in mind, we turn to some specific thoughts about the balance of the year. We acknowledge the forecast about the pace of sales growth for the remainder of the year are mixed. Retailer sentiment, however, has remained unchanged and they are progressively looking for new opportunities across their platforms. We are seeing this throughout our portfolio, not just at properties with sales above $400 per square foot, but also at properties with stable performance and demographic. Leasing spreads are of particular focus in the quarter, and I am pleased with where we are heading.

Though base rents are down year-over-year, this reflects transactions entered into in 2010 and 2011. The direction here has changed, on a year-to-date basis we have executed 44% more new deals, compared to the same period in 2011. Currently we also have 40% more transactions in our leasing pipeline than we did a year ago. Accompanying the improvement in our sales, is a pipeline more robust than before, with improved renewal spreads, and I anticipate overall increases in base rents as we move into 2013. With that, I will turn the call over to Ed Glickman.

Thank you, Joe. FFO is adjusted for the Executive Separation Provision was $0.37 per share, in line with our expectation and 12% above last year's second quarter. Same store NOI improved 2.1% over a year ago to $67.6 million. Comp sales grew for the tenth consecutive quarter, up 5.3% from last year, to another new high of $378 per square foot. With thirty of thirty-eight properties reporting positive results.

We are particularly pleased to report that sales at our Markey asset, Cherry Hill Mall continued to exceed $600 per square foot and now stand at $630 per square foot. Total occupancy ended the second quarter at 91.9%, an increase of 130 basis points, compared to 90.6% for the second quarter, 2011. In line occupancy came in at 87.7%, 60 basis points higher than a year ago.

Again this quarter we reported significant progress in leasing with over 810,000 square feet of non-anchor transaction, including over 500,000 square feet of renewal at a 4.6% positive spread in base rents and a 1.5% increase on a gross basis. Our new deal pipeline continues to be robust and we signed a number of exciting new leases during the quarter. We continue to improve the quality of the offerings at Cherry Hill Mall with the execution of leases with (inaudible).

These new retailers will compliment the recently opened Grand Lux Café and the soon to be open Pottery Barn. We also continue to improve the quality of the tenancy at some of our other key assets. At Woodland Mall we signed (inaudible) and a large format Forever 21, that will accompany the recently opened Pottery Barn. At Exton Mall we executed leases and open Chico's and White House Black Market.

At Patrick Henry Mall we signed another lease with Forever 21, to backfill a former Border's store. At Willow Grove Park, where Nordstrom Rack opened in April, and JC Penney will open this fall, we signed leases with Francesca's Collection, Laila Rowe and Soma Intimate. At Voorhees Town Center, we continue to add dining options including the recently signed (inaudible) and the Iron Hill Brewery.

In addition, we continue to move forward with our plans to transfer Moorestown Mall into a dining and entertainment destination. We are underway with construction of the new 56,000 square foot Regal Cinema, expected to open next Spring. And we are in active negotiations with three new restaurant's, Additionally, since our last call, Interstate General Media, the owner of the Philadelphia Enquirer, Daily News and Philly.com, took occupancy of 125,000 square feet at 801 Market and The Gallery at Market East, this brings 650 new employees to the property and ads 50 basis points to our total occupancy rate.

In sum, these new merchants speak to the evolution of our Shopping Centers, and our focus on creating dynamic and compelling environments at our properties. Now I will turn the call over to Bob McCadden to discuss the financial highlights of the quarter.

Thank you, Ed. We are reporting FFO as adjusted, to give effect the Provision for Executive Separation expenses that was previously announced on May 1st. FFO as adjusted was $21.6 million or $0.37 per diluted share, compared to $19.2 million or $0.33 per diluted share in last year's quarter. Same store NOI for the quarter was $67.6 million, an increase of $1.4 million or 2.1%, compared to the $66.3 million generated in last year's second quarter.

We had increased occupancy, higher base rents and continued improvement in our provision for bad debts. Lease termination revenue was $771,000 in this years quarter, compared to $693,000 in 2011 second quarter. Excluding lease termination, same-store NOI increased by 2% for the quarter. G&A expenses were $200,000 lower than last quarter, G&A expenses are typically higher in the second quarter of the year, due to cost associated with the ICFC Convention.

We expect our full year of normalized G&A run rate to be consistent with previously announced guidance. Interest expense for the quarter was $3.1 million, or 9% lower than last year's quarter. This significant improvement reflects lower average borrowings and lower average rates. Average borrowings were $80 million lower than last year and the average rate on the borrowings during the quarter fell by 30 basis points to 6.08%. Outstanding debt at the end of the second quarter, including our share of (inaudible) debt $2.25 billion, a decrease of $119 million as of June 30, 2011. During the quarter we reduced our leverage ratio by 294 basis points, to 63.2%, a significant step closer of our targeted range of below 60%.

Mortgage Debt Maturity for remaining 2012 include the mortgage loans secured by Cherry Hill Mall, with a total of $230 million due at maturity in October and First Mortgage loan secured by Cumberland Mall, that will have a $39 million due at maturity in November 2012. We have accepted proposals for these financing's, which we expect to complete prior to each loans maturities date. We are not prepared to disclose financing terms at this time, we anticipate receiving a meaningful amount of net proceeds at significantly lower average interest rate.

Through June 30th , we capitalized $21 million related to our redevelopment and development projects, and an additional $10 million was added to recurring CapEx and tenant allowances. We expect to spend and additional $20 million to $25 million during 2012, related to the redevelopment of Moorestown Mall, Willow Grove Park Mall, The Gallery, and Plymouth Meeting Mall along with other Properties.

We expect to spend an additional $20 million to $25 million on recurring CapEx and tenant allowances. PREITS loss for the quarter was $13.7 million or $0.25 per diluted share, compared to last year's loss of $18.2 million or $0.34 per diluted share. Turning to 2012 guidance, we are reaffirming our guidance of FFO per diluted share to be in the range of $1.72 to 1.79. FFO as adjusted for Executive Separated cost is expected to be from $1.83 to $1.90. GAAP earning per diluted share will be a net loss between $0.66 and $0.72 cents per share.

Our Guidance contemplates same-store NOI growth of 1% to 2%, excluding lease termination fees. The interest rate on our revolving credit and term loan bank borrowings will be reduced by 50 basis points starting in August, as result of our having reduced the leverage ratio below 65% at the end of the second quarter.

As reminder, the third quarter we will record approximately of $1.8 of other income related to the sale of historic tax credits in 2009, we recorded similar amounts in the third quarter 2010 and 2011, and expect to record similar amounts in 2013 and 2014. Our Guidance does not anticipate any acquisitions, property sales or capital market transactions other than mortgage refinancing in the ordinary course of business. With that, we are ready for questions.

Thank you. (Operator Instructions). Our first question is from the line of Craig Schmidt, Bank of America.

Thank you. Could you give me the three noncore Power Centers you are trying to fill again.

Sure. The three are (inaudible) Center, Magnolia Commons in Florence, South Carolina, and Paxton Town Center in Harrisburg. They are the three wholly owned Power Centers.

Okay. Will you sell the four malls before these, or do you think the Power Centers will sell faster than the malls?

Well, it is hard to handicap at this point, but I would say that the packages on the Power Center are just about to go out, and we have been in discussions on the mall's for some time, so it is a difficult question to answer.

Okay. Lastly , you have quite a few JC Penney's and their sales were significantly down, have you seen that impact the wings that lead up to the Penney's, have they seen less traffic, or has there been any fall out from the weaker performance?

We have not seen sales decrease in malls or wings of Penney's stores at this point. I would say that we feel good about the JC Penney transformation, they have a good Management Team in place and see this as a temporary set back if you will. We see them as a key retailer going forward as part of our portfolio.

Thank you.

Thank you. Our next question comes from the line of Cedrik Lachance with Green Street Advisors. Please go ahead.

First thing, on the properties for sale, the mall's. What can kind of buyers are currently interested in the four properties you have on the market.

I would classify them as entrepreneurs, probably the easiest way to answer, they are not institutional buyers, they are entrepreneurs.

And what type of financing is available for them to complete those transaction?

At this point we are not far enough long to determine what's available in the marketplace for these types of buyers. In some cases we have seen buyer in the past come with relationship with existing banks with doing bank refinancing. At this point it is too speculative to say with these transactions.

Would you be willing to retain an ownership stake in these properties, or are you only looking to sell 100% of the assets?

I think the objective would be to sell 100% of the assets, clearly, staying in the deal is not a preferred course of action.

Okay. Just looking at the tenants, you lost three more GAP this quarter, can you give us a little bit of color with regards to the change of tenancy in these three locations?

Right. One was Willow Grove, where we were relocating and consolidating for a much stronger tenant that we are not at liberty to disclose. The other ones were normal course and we have backfilled those location already, and I believe at increased rentals.

Okay. Thank you.

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

Good morning. First question in terms of the four assets you are in negotiations on. Three of those assets, in particular, have got anchor lease expirations risk in the next two years, I am just curious as to how some of these potential purchases are thinking about that anchor expiring risk and how they are underwriting that risk.

It is viewed a couple of different ways, some view it as an opportunity to, in effect, remerchandise or redevelop the assets, so having that vacant anchor could be viewed as an upside by a potential buyer.

Okay. Just in terms of guidance for this year, I know you don't want to disclose the terms of the Cherry Hill mortgage refinancing, but could you just remind us how it's affected into guidance in terms of the right, and excess amount of proceeds.

The excess proceeds, I'm not sure if that has any impact on guidance, our guidance reflects what we expect from these financing's. We don't give specifics on individual mortgage financing until they are completed.

Okay. So we are not clear exactly what's in guidance for the excess proceeds on the right on Cherry Hill.

Right, our guidance for the year does include what we expect the financing to be and the application of net proceeds.

Okay. Thank you.

This is Michael Bilerman, I have a quick follow-up question. I'm just curious, you've called what was paid to Ron the Separation cost, I'm just curious why the terminology of separation, Ron is still the Executive Chairman of the Company, I think Ron opened up the call. I'm just curious why you deemed it that way.

I think in some respect It is tied to the Employment Contract, it might be characterized as a retirement benefit. That when he makes a decision to leave the Company, that amount will be paid to him, that is the reason why it was separated. Even though It is not a near term separation, but it would be viewed ultimately when that payment is made in conjunction with his separation with the Company, respectively.

So it is a reserve made today and then cash out the door.

Right. The specific contract provisions give him the right to make that determination in June of 2013, and the accounting rules require us to accrue it over what we deem to be the service period.

From a G&A perspective, what is being paid through June 2013 for Ron?

He will get paid the compensation under his Employment Contract, as well as any bonus that he is entitled to under the terms of his contract.

And the go forward payment is similar to what was being paid previously or.

It is significantly lower. It is disclosed, it is $300,000 in base pay, plus a bonus.

So we should think about G&A comes down starting next year when it starts to annualize?

Yes.

Okay. Thank you.

Thank you. Our next question comes from the line of Michael Mueller with JPMorgan. Please go ahead.

Hi going back to assets sales for a second. I'm sure you don't want to get too specific at this point in time. But if you lump together the malls, lump together the power centers, give us a rough idea of the magnitude of how much deleveraging could occur dollar wise?

Probably round number would be around 300 basis points.

What does that translate in terms of potential asset sales dollars.

We don't want to disclose that at this point.

Okay. And then looking at a couple of malls, out of curiosity I'm trying to figure out if we look at Voorehees from Q1 to Q2 occupancy, I think it went from 66% to 67% to 63% and Cherry Hill went down a couple hundred basis points. How much of that is just seasonality from losing some tenants in Q1, is that all that is. Particularly the Voorehees number is bigger than I would have expected.

Cherry Hill is largely repositioning for later 2012 openings.

Okay.

Voorehees was actually a tenant that closed. Again, we are working to backfill that tenant later this year.

Okay.

You may recall we announced on Voorehees that we signed a number of restaurants at the property to attract Iron Hill and opening up on the street and prospects for Voorehees Town Center have picked up significantly in the past quarter.

Okay. Great. One last question going back to assets sales again, do you think there is a shot you could knock out one, two or three of the properties something along those lines this year.

Our goal is to sell two properties in 2012, and we are working towards that goal.

Okay. Okay. Appreciate it. Thank you.

Thank you. (Operator Instructions). And you have a call from Jeff Lau with Sidoti & Co. Go ahead.

Good morning. Can you talk a little bit about the leases on hold over, do you see those as continuing to decrease, or I guess what was the plan there.

Actually, if you look at our current hold over situation, there is actually a good story underneath it. We have about 340,000 square feet of hold over transaction in major accounts in process right now. Lease negotiation, et cetera, which would leave us about 200,000 remaining in hold over that continues to be a work in progress. That is about .5 immediately square feet better than we the last year. So again, from a hold over perspective, we are making significant progress.

For the rents, is it safe to assume those would come down a little bit just because of the.

Actually we are seeing positive renewal spreads continue and if you look forward in our pipeline our renewal spreads are actually higher than we are showing right now, they are in the higher single-digit numbers.

Okay. Thanks.

In fact, we have had seven consecutive quarters of positive renewal growth.

And we have no further questions at this time, I will turn it back over to Joe Coradino.

Thank you. This quarter we delivered solid operating results and made strides to our goal of the strengthening the Company balance sheet. Looking to the future, we believe our pending debt refinancings will provide us with ample financial resources, thereby creating a platform for us to drive further value in our assets.

We have identified several exciting growth opportunities within our existing portfolio, and hope to share these projects with you at a to be scheduled Fall Investor and Analyst Day here in Philadelphia. Thank you all for joining us. Have a good day.

Ladies and gentlemen this concludes the Pennsylvania Real Estate Investment Trust, 2012 second quarter earnings conference call. Thank you for your participation. You may now disconnect.