Pennsylvania Real Estate Investment Trust (PEI) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust fourth-quarter 2012 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)

I would now like to turn the conference over to Garth Russell of KCSA. Please go ahead sir.

Thank you. Before starting today's call, I'd just like to remind you that during this call, we will be making 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 that might affect future results or events. Descriptions of these risks are set forth in the Company's SEC filings. Statements that PREIT makes during today's, might be accurate as of today, February 26, 2013, and PREIT makes no undertaking to update any such statements. Also certain non-GAAP measures will be discussed. PREIT has included [low] reconciliation 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 Joe Coradino, CEO of PREIT. Joe, the floor is yours.

Thank you, Garth, good morning everyone. Welcome to the Pennsylvania Real Estate Investment Trust fourth-quarter 2012 conference call. In 2012, we focused on transforming PREIT, resulting in a stronger balance sheet, improved operating metrics, a higher quality portfolio, and powerful returns to our shareholders. We have made significant progress, but acknowledge that we continue to have room for meaningful improvement. Here are the headlines for our report today. Afterwards, I will go into more detail about each item, and make some of the comments.

We raised the dividend 12.5% based on our confidence in our business going forward. Our bank leverage is down by approximately 450 basis points from a year ago, to 62.4%. We have sold three non-core properties, and a fourth is under contract, for a total of almost $200 million. Phillipsburg and Orlando Fashion Square are gone, Paxton Towne Center is gone, and Christiana Center is pending. We have refinanced, or improved, the terms on $642 million of mortgage loan since the start of 2012, generating excess proceeds, lowering interest rates, and extending maturities. Our same-store sales are up to $378 per square foot, and same store NOI was up 1.8%, excluding the four sold or pending properties.

At our Investor Day in November, we met with a number of you, and laid out our strategy. In the first hundred days since then, we have taken significant steps to execute the strategy, and build momentum, as we move into the 2013. I will give you a little more detail about how we are performing against the strategy, and Bob McCadden will give you the specifics of our financial performance for the fourth quarter of 2012 and the full year. 2012 was a year of tremendous transformation and accomplishment for PREIT. It was a year in which we established goals to reduce bank leverage less than 60%, increased comp store sales above $400 a foot, drive non-anchor occupancy over 90%, generate same-store NOI growth in excess of 2%, and achieved renewal spreads greater than 3%.

Let me give you some more color on a few of our successes delivered in 2012, and the early part of 2013, and our thoughts about the upcoming year. In November, we indicated that our top priority was to address legacy balance sheet issues, and reduce our leverage. As we sit here today, our bank leverage ratio is 62.4%, a decrease of 450 basis points since year-end 2011, more than 800 basis points since early to 2010. If the sale of Christiana Center were closed, our pro forma leverage would be 60.2%. In 2012, we successfully completed two public offerings of preferred shares, generating net proceeds of $194.1 million, and helping us to meaningful lower our bank leverage ratio during the year.

Since the start of last year, we've entered into, or extended, $642 million in mortgage loans, generating over $112 million excess proceeds, reducing the average interest rate by more than 138 basis points to 4.18%, and extending the average duration of our mortgage loans by more than two years. As I said, we have also sold, or are under contract to sell four properties raising capital to repay debt. In looking at our portfolio, market fundamentals have led to increased demand for high-quality power centers, making this an ideal time to harness a value created through our development management and leasing of such properties. Last month we sold Paxton Towne Center, a power center in Harrisburg Pennsylvania, for $76.8 million. The property had a $50 million mortgage loan that we repaid, yielding net proceeds of $24.9 million.

But we are also under agreement to sell Christiana Center in Delaware for approximately $75 million. After repaying the mortgage loan, we expect to generate proceeds of approximately $22 million, which we plan to use debt reduction. As a result of the capital markets activity, we have also obtained the release of three additional properties that were previously part of the collateral pool, to our credit facility that are now unencumbered. We have begun to monetize some of our non-revenue-generating assets on our balance sheet, with the recent sale of 27 acres of undeveloped land in Gainesville, Florida for approximately $2.7 million.

Consistent with improvements to our operations, leverage, and portfolio quality, we have begun to discuss new terms for our credit facility. Our liquidity position is strong. We have $240 million available of our $250 million revolving facility. Our term loan balance is down to $97.5 million. Along with our continued efforts to improve legacy balance sheet concerns, our focus on operating remains central.

In 2012, our [comp] store sales increased to $378 per square foot, and our same-store NOI grew by 1.8%, or $4.7 million for the year. We attribute these improvements to growth in retail sales, increased occupancy, positive leasing spreads, and expense efficiencies. We are taking advantage of our comp store sales increases to generate positive renewal spreads, of 2.2%. Now that we have sold two non-core mall assets, we are in a better position to discuss portfolio-wide transactions with national retailers of a higher quality portfolio. Our total occupancy, and non-anchor occupancy, improved to 94.3%, and 91.7%, excluding the held-for-sale properties. We are continuing to engage new retailers, and current retailers have reaffirmed their commitment to our portfolio. During the year we opened 890,000 square feet of new non-anchor space, and 285,000 square feet the anchor space, at Willow Grove, the Gallery, and North Hanover.

While alternative and office uses continued to be introduced where appropriate. Philadelphia Media Network opened in 129,000 square feet at the Gallery, Mercy Healthcare opened at Plymouth Meeting, and we also signed a lease with Main Line Health for 32,000 square feet on the lower level at Exton Square Mall. We are constantly looking for ways to control or reduce costs. We have just entered into a new, six-year contract for security services, which will result in meaningful expense savings. We are also examining other vendor relationships to achieve further cost savings. As a result of the successful execution of our strategy, and our expectations in the future, we increased our dividend by 12.5%.

At our Investor Day, we also articulated our objective of raising the overall level of quality in our portfolio. As previously discussed, we have sold two non-core malls so far in 2013, for prices representing a 9.8% cap rate. Both of these properties had operating metrics that were well above, well below our portfolio averages. Excluding these two malls, our average mall non-anchor occupancy was 91.7%, 90 basis points higher, in the average, including those properties, and sales were $378 per square foot, an increase of $6 per square foot.

In November, we outlined the segmentation of our portfolio into four classifications; premier, core growth, opportunistic, and non-core. Our premier malls, including Cherry Hill and Willow Grove, had sales that grew by 4.5% year over year, to $530 per square foot. They had non-anchor occupancy of 96.3%, and also increased their share of our NOI. These properties are benefiting from the redevelopments that we completed a couple of years ago. Our core growth malls including such malls as Capital City, near Harrisburg, PA, and Valley Mall in Hagerstown, Maryland, had sales of $356 per square foot, and non-anchor occupancy of 91.5%. The results for this year were impacted by a redevelopment that is underway at Moorestown Mall, where we have taken a theater off-line as well as several non-anchor spaces to accommodate noted restaurants.

The malls that we have placed in the opportunistic category including Lycoming Mall near Williamsport Pennsylvania, and New River Valley Mall in Christiansburg, had sales of $265 per square foot, and non-anchor occupancy of 89%, and represents a smaller portion of our total NOI. We have a few remaining assets that we consider non core, after selling Orlando and Phillipsburg. We were particularly pleased with our execution of those two sales, they were a real accomplishment. We achieved good pricing for those assets, with a buyer we sourced ourselves, in one case. We have high confidence in our skills of disposing of such properties, and will bring these skills to bear with some additional disposition candidates in the portfolio.

We also continue to raise the quality of our properties by re-merchandising and redeveloping them. The transformation of Moorestown mall is under way. We are executing our repositioning strategy by introducing dining, entertainment, and best of regional retailers to improve the shopping experience, and drive traffic to our retail partners. We have signed exciting new restaurants, including Marc Vetri’s Osteria Firebirds Wood Fired Grill and Corner Bakery. And the theater under construction is currently scheduled to open in the fall of 2013.

The fourth and final element of our strategy is taking steps to generate future growth. We are proceeding with plans to bring a mix of uses to our properties, subject to a strong internal discipline in our use of capital. Right now we anticipate doing this through joint ventures with partners who specialize in other property types. While the consumer may be fragile, we believe there are bright spots. January sales in our portfolio were strong, up over 8%. Over the past several years, we have incorporated growing international retailers into our malls. We believe there is an opportunity to take advantage of the US expansion plans, and drive occupancy within our portfolio.

What you are seeing is the new PREIT, 2012 was just a beginning. We have a strong team in place, which is committed to continuing the momentum that we started when I was appointed CEO in June of 2012, and we have set our course for 2013, which is anticipated to lead to a 9% increase in adjusted FFO. We have taken a number of concrete, deliberate steps, including issuing preferred shares, and selling assets to reduce our debt and to deleverage, and selling non-core properties to raise the quality of our portfolio. We know what needs to be done, and we are poised to take advantage of our improving performance to drive operational results. We are optimistic that 2013 will be a year of growth for PREIT. And with that, I will turn the call over to Bob McCadden to give you more color on the financial performance of PREIT for the fourth quarter and full year of 2012, and provide guidance for 2013. Bob?

Thank you, Joe. Before I review the operating results for the quarter, let me define some terms for you. Same-store results exclude the four properties classified as held for sale on our December 31, 2012 balance sheet. As we have done in the past, we are also reporting FFO as adjusted, FFO as adjusted excludes the provision for employee separation expense, and non-cash interest charges associated with the early payment of debt. In the fourth quarter, we recorded $3.7 million of employee separation costs, including additional amounts related to further reductions in staff, and incurred $1.9 million of non-cash interest charges related to the early repayment, or anticipated early repayment, of debt.

We also made a few changes to our quarterly supplemental reporting package, specifically we added a new page to present key performance indicators for each of the mall categories that we've set out on our investor day, classify malls as the premier, core growth, opportunistic, and non-core categories. We have also introduced gross rent metrics on a number of pages in the supplemental. On some pages, we have presented both base rents and gross rents, as a first step in transitioning to disclosing only gross rent metrics treat beginning with the first quarter of 2013. We believe that presenting gross rent metrics will provide investors with better information about the operating performance of our properties.

Let's now turn to the operating results. FFO, as adjusted, was $35.2 million, or $0.60 per diluted share, for the quarter ended December 2012, reflecting the adjustments described in my introductory comments. This compares to $36 million, or $0.63 per diluted share, for last year's quarter. The issuance of the series A and series B preferred shares, for approximately $0.07 per share diluted for 2012, and approximately $0.12 per share diluted on an annualized basis. Same-store NOI for the fourth quarter was $76.6 million, with was $600,000, or 0.8% over the prior year's quarter. Excluding lease termination revenues, same-store NOI was $76.5 million, which was $1.5 million, or 1.9% increase over the prior year period.

Lease termination revenue for the quarters ended December 2012 and 2011, was $0.1 million, and $0.9 million respectively. Results for the quarter were impacted by increased rental revenues, driven by improvements in occupancy, and higher rents. As of December 31, 2012, non-anchor occupancy in our same-store retail properties increased by 110 basis points to 91.7%, while total retail occupancy increased by 130 basis points, to 94.3%. Average gross transfer small shop tenants in our same-store properties were up 1.1%, as compared to in-place rents as of a year ago. Revenues from tenants paying percentage sales and percentage rent were somewhat lower than our expectations, in the quarter, due to the soft December sales. However we were able to recapture a portion of that lost revenue in January 2013, due to the strong sales performance last month.

We also experienced lower margins on redistributed utilities, which were approximately $600,000 below last year's levels. At our Pennsylvania properties, we were impacted by lower electric usage of about 12.5% by our tenants, as measured by kilowatt hours. While our cost of purchasing electricity was lower this year, the redistribution rates we are permitted to charge our customers were also lower during 2012 as compared to last year. In the quarter, we recorded employee separation costs of about $0.06 per share, which was $0.04 per share above amounts previously anticipated, due to further reductions in staff in the quarter.

We incurred $1.9 million of non-cash interest charges related to the early repayment, or anticipated repayment, of debt. Excluding these additional charges, interest expense for the quarter was $32.7 million, or $2 million lower than last year's quarter. This improvement reflects lower average borrowings and comparable average rates. Average borrowings were $158 million lower than last year, and the effective interest rate on our borrowings during the quarter was 5.93%. G&A expenses for the quarter were a $8.7 million, a $1.7 million reduction from last year's fourth quarter. The lower level of G&A expenses reflects reduced headcount, and lower incentive compensation accruals for the period.

In December, we exercised an optional amendment under the terms of our 2010 credit facility that decreases the maximum leverage ratio, as defined, from 70% to 65%. It increases the interest coverage and fixed charge covenant levels, and lowers the interest rate spreads across the pricing grid. At our current leverage level, we are now paying 300 basis points over LIBOR, as compared to the 350 basis points spread, previously paid. We are also in the early stages of discussion with our bank group about amending the terms of the 2010 credit facility. We will have more details to report to you during our first-quarter earnings call.

Outstanding debt at the end of 2012, including our share of partnership debt, was to $2.1 billion, a decrease of $266 million from the end of 2011. Since the end of 2012, we have continued to make improvements to our balance sheet. Last week, we announced amendments to mortgage loans on three properties, Francis Scott Key, Viewmont, and Lycoming Malls. The amendments to the loans, which now total $146 million, reduce the average interest rates to 3.9%, and added additional term. Following these refinancings, the Company's weighted average maturity for its mortgage loans, increased to 5.3 years, from 3.4 years as of December 31, 2011. We are currently negotiating the terms of a new mortgage loan for Dartmouth Mall, and expect to bank the maturing mortgage for Moorestown Mall, on our credit facility, pending completion of the redevelopment.

Regarding our outlook for 2013, we expect GAAP earnings, per diluted share, will be a net loss between $0.44 and $0.51. We expect FFO, per diluted share, to be in the range of $1.91 to $2.01 per share, and FFO, as adjusted, to be in the range of $1.95 to $2.05 per share. To arrive at FFO as adjusted, we anticipate recording $2 million of executive separation costs that will be incurred by June of 2013, and $800,000 to accelerate amortization deferred financing costs, related to the permanent reduction in term loans, using proceeds from the non-core assets. The assets sold, or under contract to sell, generated approximately $14.7 million of NOI in 2012. We incurred, or will save, about $9.5 million of interest expense related to these properties. The sale of these assets is about $0.09 per diluted on an annualized basis.

Same-store NOI was $270.5 million in 2012. We expect same-store NOI growth at 1.5% to 3%, excluding lease termination fees. In 2012, we recorded lease termination fees of $1.8 million, our guidance range assumes termination fees of $1.5 million in the lower end, to $2 million on the higher end. We expect a decrease in general administrative expenses of approximately 3%, resulting in an annual run rate of approximately $36.5 million at the midpoint of our range. We typically have higher G&A expenses in the second quarter, due to the ICSC convention.

Interest expense will be favorably impacted by a full year of lower interest rates on our credit facility borrowings, and on properties that were refinanced in 2012, and 2013. We also will see lower interest rate as a result of the issuance of preferred shares in 2012, that was, the proceeds of which were used to repay debt. And we also have a March 2013 expiration of a swap, a $200 million of (inaudible) debt, that tags the base rate on this (inaudible) amount at 2.955%. We will also have, obviously, a full year of dividends on the series A and series B preferred shares, we anticipate recurring capital expenditures and tenant allowances to be the range of $35 million to $45 million, reflecting an expected increase in leasing activity.

We also anticipate redevelopment capital expenditures of a similar amount, $35 million to $45 million. Aside from the completed 2012 sales of Paxton Towne Center, Phillipsburg Mall, and Orlando Fashion Square, and the pending sale of Christiana Center, our guidance does not contemplate any other material property dispositions or acquisitions. In addition, our guidance does not assume any capital market transactions, other than mortgage refinancings, in the ordinary course of business. With that, we will open it up for questions.

(Operator instructions)

Daniel Busch with Green Street Advisors.

Thank you. I was just noticing one of the assets that were released from the collateralized pool is Nittany Mall. Is that something that we should, is that a mall that we should consider a candidate for disposition going forward?

Well, it certainly sits in the category of up or out, if you will, as we have characterized it. We are having a strategy session -- it's funny you should ask -- at Nittany, prior to ICSC, to focus on what we can do to drive sales there and tenancy, et cetera. So that determination has not been made at this point.

Okay. And then on the refinancing at the three malls that you just completed, you could characterize them as B type properties, Lycoming being a little different because it is an only game in town, but do you have a sense if there is financing at the next rung down, call it the C quality level, basically some of the malls that you are trying to maybe dispose of? Or are candidates for up or out. What is the financing environment for those quality of malls?

Well, we know from the sale of the two assets that we sold back in Orlando, the buyers obtained financing to make those acquisitions, so we assume, from the results of those transactions, that financing is available. We do not have specifics in terms of the duration and the interest rates that they are paying on their loans, but suffice it to say, for the right buyer, financing is available for C type assets.

Okay. I guess lastly, just a quick question on JCPenney. As JCPenney continues to roll out the new concept, I understand that not all the stores are going to be getting the full layout makeover, they'll just be getting the merchandise. Do you have a sense at this point what percent of your 29 JCPenney anchors will be getting the full layout versus just the merchandise?

At this point, we have not been advised of that any of them will not get it.

Okay.

What is occurring out there, mostly, is landlords are being told what stores are not going to get it. But on that note, on that note we are going down to Plano to meet with their executive management to look at their prototype, I think it's in about 10 days, to get a better understanding of what the finished product will look like. So we are staying close to the JCPenney transformation, if you will.

Great, thank you.

(Operator instructions)

Showing there are no further questions, I will turn the call back to Joe Coradino for closing remarks.

Well, thank you all for calling in today. I want to leave you with our plan is to make meaningful progress towards our goals in 2013, and really write the next great chapter in the story of one of the first REITs ever established in the US. With that, again, I thank you all, and wish you a good day.

Ladies and gentlemen this does conclude our conference for today. We thank you for your participation. You may now disconnect.