Pennsylvania Real Estate Investment Trust (PEI) 2013 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's first-quarter 2013 earnings. 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 Ms. Heather Crowell. Please go ahead, ma'am.

Thank you and good morning, everyone. During this call, PREIT will make certain forward-looking statements within the meaning of 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 be accurate only as of today, April 23, 2013, 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 Joe Coradino, CEO of PREIT.

Thank you, Heather. Welcome to PREIT's first-quarter 2013 conference call. I cannot remember a year beginning with this much activity for our Company.

We had a strong quarter. We delivered solid operating results; sold non-core assets; acquired an integral piece of real estate as a vehicle for future growth; refinanced property level debt; visited with 27 existing and potential investors on four non-deal road shows; and last week executed a new corporate credit agreement.

As you can see, we continue to make progress on the strategic objectives we have previously outlined -- balance sheet improvement, operational excellence, elevating portfolio quality, and positioning for growth. The new credit facility validates everything we have been doing. Our successes are building on one another.

Before we get into the details, let me provide you with our scorecard for our 2013 operating goals. Goal 1, reduce bank leverage to less than 60%. Today we sit at 55.3%.

Goal 2, increase comp store sales above $400 a square foot. Today we are at $381 per square foot.

Goal 3, drive non-anchor occupancy over 90%. Today we sit at 89.9%. Consistent with our expectations, the majority of our occupancy gains came from our core growth group of properties.

Goal 4, generate same-store NOI growth in excess of 2%. During the first quarter, we exceeded our goal at 2.6% and achieved 3.5% growth, excluding lease terminations.

Goal 5, achieve renewal spreads greater than 3%. Tier 1 renewal spreads were 4.9%.

We are making meaningful progress in all areas of our business. Our first-quarter performance was impacted to an extent by modest sales increases, driven by mixed economic indicators including improving employment, housing, and consumers' access to capital.

These positive factors were tempered by unseasonably cold weather in our markets, payroll tax increases, concerns over the international economy, and shifting consumer confidence. So while the consumer continues to shop, we expect moderate sales growth for the balance of the year.

In the aggregate, we sold three properties for $123 million, with another under contract for $75 million. These transactions helped to improve the quality of our portfolio while at the same time served to reduce our leverage. Not only did our metrics improve as a result of these dispositions, but they allow us to have more balanced discussions with retailers and to prioritize our capital needs going forward.

We also brought two additional assets to market -- South Mall in Allentown, Pennsylvania, and Beaver Valley in Monaca, Pennsylvania. We had previously removed Beaver Valley from the disposition target list, but have seen positive economic development from Marcellus Shale and believe now is the appropriate time to capture the value and sell this asset.

Last week we acquired 907 Market Street, the final piece in an assemblage of three blocks of real estate in downtown Philadelphia at the confluence of the transit center, the convention center, and the historic district in the fastest-growing residential CBD in the US and one of the largest employment markets in the country.

It is important to note that we are approaching the potential redevelopment of The Gallery at Market East in a careful and assured fashion. We have been studying both successful and unsuccessful urban developments throughout the country and analyzing the data in order to understand the potential for this project.

Obtaining tenants, securing public funding, and most importantly underwriting a project with appropriate risk-adjusted returns are all prerequisites to any redevelopment at this site. Notwithstanding the potential redevelopment, based on the purchase price of under $140 per square foot, we believe there is upside to this asset, particularly with the Kmart lease expiring in August of 2014.

On the capital markets front, the major news is last week's announcement related to the execution of our new credit facility. We are very happy with the terms we were able to secure in this transaction and believe that the 14 participating banks recognize the improvements we have made from a portfolio, operational, and balance sheet perspective.

Noteworthy terms of the transaction include a move from secured to unsecured; an increase in the facility amount to $400 million, including an accordion feature up to $600 million; an initial term of three years with a right to two one-year extension options; an interest rate of LIBOR plus a range of 150 to 205 basis points, depending upon the Company's leverage. As a result, we see immediate 95 basis points borrowing rate reduction. The cap rates used to calculate gross asset value are as follows -- 6.5% for properties with sales per square foot of more than $500; and 7.5% for all other properties.

The results of this transaction and other recent debt repayments have yielded a bank leverage ratio of 55.3% as of the end of the quarter, surpassing our near-term objective of 60%. We also refinanced $213 million in property level debt so far this year. On those transactions we reduced our average interest rate by 150 basis points to 3.93%.

We also repaid the mortgage on Moorestown Mall, which is unencumbered today.

In the first quarter, we drove leverage down, generated same-store NOI growth, delivered positive renewal spreads, and increased occupancy. We believe these accomplishments provide a platform for achieving our vision for PREIT, one with a strong balance sheet, a quality portfolio with a presence in major markets, and consistently strong operational performance.

We are looking forward to next month's ICSC convention in Las Vegas, with attendance expected to exceed 2012 levels. We anticipate a productive meeting. We have a long list of appointments with national and international retailers with a robust open-to-buys.

With that, I will turn the call over to Bob McCadden to give you more color on the financial performance of PREIT for the first quarter and our revised 2013 guidance. Bob?

Thank you, Joe. It's been a very productive quarter and I am pleased to report the details. Our team is focused on improving our Company's performance, as evidenced by our first-quarter numbers and our upward revision to 2013's FFO guidance, which I will touch on later.

With that as a backdrop, I will now provide you with the details of our first-quarter results. FFO, as adjusted, was $25.9 million or $0.44 per diluted share for the quarter ended March 2013, reflecting net adjustments of $1.7 million for employee separation expenses, the accelerated amortization of financing costs, and interest-rate hedging gains. This compares to $25 million or $0.43 per diluted share during last year's quarter.

Same-store NOI for the first quarter was $67.2 million, a $1.7 million or 2.6% increase over 2012's first quarter. Excluding lease termination revenue, same-store NOI was $67 million, which was a $2.2 million or 3.5% increase over the prior year's quarter.

A number of factors impacted our operating results for the quarter including the sale of the two malls and one power center. These property sales resulted in gains totaling $33.3 million in the 2013 quarter. The sold properties and Christiana Center, which is under agreement of sale, generated $3.6 million of NOI in the first quarter of 2012 and $1.3 million in the March 2013 quarter.

The improvement in same-store NOI resulted primarily from increased rental revenues driven by improvements in occupancy and higher average rental rates. As of March 31, 2013, non-anchor occupancy at our same-store retail properties increased by 220 basis points to 89.9%, while total retail occupancy increased by 170 basis points to 93.4%. Average gross rents per small shop tenants in our same-store mall properties were up 1.2% as compared to in-place rents as of a year ago.

Our operating margins were impacted by a $1.3 million or 10% increase in real estate taxes and a $500,000 increase in snow removal costs. In the quarter, we recorded employee separation costs of $1.3 million, accelerated the amortization of $900,000 of deferred financing costs, and had a gain on hedge ineffectiveness of $500,000. The net impact of these items was $0.03 per share.

Interest expense for the quarter excluding various charges and credits was $30.3 million, or $4.2 million lower than last year's quarter. This improvement reflects lower average borrowings and lower average rates. Average borrowings were $265 million lower than last year, and the effective interest rate on our borrowings during the quarter was 5.78%.

Outstanding debt at the end of the first quarter, including our proportionate share of partnership debt, was $2.04 billion, a decrease of $324 million from March of 2012. After taking into account the mortgage financings completed in the first quarter, and the lower rates under the new credit facility, our effective interest rate on current borrowings is approximately 5.3%. At the end of the first quarter, 92.4% of our debt had fixed rates or was swapped to a fixed rate.

This year's quarter included dividends on preferred shares of $4 million related to the 2012 preferred share issuances. G&A expenses for the quarter were $8.9 million, which represented a $1.0 million reduction from last year's first-quarter amount. The lower level of G&A expenses reflects reduced headcount and other corporate cost savings.

On the leasing front we executed 96,000 square feet of new, non-anchor transactions and 217,000 square feet of non-anchor renewal transactions. For these renewals, we generated an increase of 4.9% compared to expiring gross rents. We have completed fewer non-anchor renewal transactions as compared to the first quarter of last year, driven by the increased term on our renewals that has significantly reduced the number of tenants in holdover.

On the anchor and box front we executed two renewals for 96,000 square feet with a combined uplift of 5%. We have been notified by Sears that they will not renew their lease at New River Valley Mall in Christiansburg, Virginia. We have signed a letter of intent with a notable national anchor to replace them and anticipate a fourth-quarter 2014 opening.

Comp store sales continue to improve and were $381 per square foot at the end of the quarter. We have six properties reporting sales of over $400 per square foot and are particularly pleased with the continued growth of our Cherry Hill Mall, which now boasts sales of over $640 per square foot, and Willow Grove Park, where with the openings of Nordstrom Rack, JCPenney, and Apple have driven traffic and consequently sales, which were up 3.8% to $410 per square foot. If we exclude the non-core mall properties which are being marketed for sale, sales per square foot would have averaged $392.

We are increasing our earnings guidance for 2013 to give effect to improved NOI growth, the purchase of 907 Market Street, and interest savings resulting from the new credit facility. We expect that GAAP earnings per diluted share will be between $0.81 and $0.89, including expected gain on the sale of Christiana Center.

We expect FFO per diluted share to be in the range of $1.96 to $2.04 per share; and FFO as adjusted to be in the range of $2.00 to $2.08 per share. To arrive at FFO as adjusted, we anticipate additional employee executive separation costs of $1 million in the June quarter in addition to the FFO adjustments already reflected in the first quarter.

The assumptions underlying our revised earnings guidance are generally consistent with those set forth in February. Aside from the completed 2013 sales of Paxton Towne Centre, Phillipsburg Mall, and Orlando Fashion Square, the purchase of 907 Market Street, 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.

With that, we will open it up for questions.

(Operator Instructions) Daniel Busch, Green Street Advisors.

Thank you. Just looking at the leasing activity for the quarter, it looks like about 100,000 square feet were signed. I was looking at the tenant improvement; it looked like it was about 20% of the gross rent. That seems a little bit higher than in past quarters.

Can you give us a little color on what type of tenants or what type of leases were signed during the quarter, and why the TIs were a little bit higher?

The simple answer to the question is it is primarily restaurant driven. There were several restaurants signed during the quarter.

In addition, a couple of the restaurants were actually building new GLAs, expansion GLA. So the cost of that expansion is included in the tenant allowance number.

Okay. Then looking at the lease expiration schedule, I don't know if I am missing something. But the leases set to expire in 2012 and prior, they went from 3.7% I guess last quarter up to 6% this quarter. What would make that number increase?

And I guess following up on that is -- what is going to on with the leases that have already expired? And how are you guys addressing that?

The reason it went up from the last quarter is that effectively we had a lot of leases that expire in the January 31 time period. So if you look at our history of holdover leases, they typically have been -- if you were to go back to March of 2012, same period, comparable period, we had 941,000 square feet of leases in holdover, and generally typically relate to portfolio transactions. Many leases in there we are negotiating them as part of a package which may include leases that have yet to expire.

So if you look at that, we are down about a third from where we were a year ago on a comparable basis. So we have about a third less leases in holdover.

Okay, so we should look at it year-over-year as opposed to the sequential?

Right.

Okay. Then finally, I don't know if you mentioned it, Bob, but that Christiana Center still is being held -- is still held-for-sale. What is holding that transaction up from going through?

It is essentially -- it is financed with a CMBS mortgage, so it is up to the CMBS mortgager to approve the assumption of the mortgage. It should be, I would think, within the next two, three weeks when we have that approval, and we are anticipating closing sometime around mid-May.

Okay, great. Thanks, guys.

Ben Yang, Evercore Partners.

Hi, good morning. Thanks. You guys had made some positive comments on C Malls last quarter. Typically that financing is available for the right buyer. Is that still the case today, particularly in light of the more recent news at JCPenney?

Yes, from our perspective, it is still the case. Obviously, we sold two malls that had JCPenney as a tenant. And I think that while the story for JCPenney, you could put a negative spin on it, I think to an extent you are seeing the potential for the success of JCPenney.

I feel more comfortable now than I felt previously, and I think buyers are not shying away. We now have two additional assets on the market for sale, and we are optimistic.

So you say you feel more comfortable about JCPenney. Is that based on maybe some recent conversations you have had with the new management there? Or is that based on what you are seeing on (multiple speakers)?

We have had recent conversations with them, but that is not what is based on. It is based on really -- I got to know Mike Ullman when he was running JCPenney previously. When you think back, he is really the guy behind Sephora; he is the guy behind Mango. He really started the shop-in-shop concept.

My sense is that, one, that he can sift through some of Ron Johnson's ideas around shops-in-shops and pick the best from that group -- the Home Store, etc., Joe Fresh, etc. Number one.

I think number two, though, that he is a merchant and I think he is focused on, A, energizing the workforce; getting their capital structure a little more stable to be able to execute this plan. So I feel better about JCPenney given some of the particulars I just reviewed with you and I think the capabilities of Mike Ullman.

Okay. Fair enough. Sticking on JCPenney, are they a named co-tenant for some of the other department store anchors and maybe some of the retailers at malls? Or are they typically not a named co-tenant?

It depends on obviously on the particular center; but in some centers we have them as a named co-tenant.

Do you have any thoughts on just throughout the entire portfolio how much occupancy and rent might be at risk based on the co-tenancy (inaudible) JCPenney?

Yes, Ben, we don't have -- I don't know if I can give you that specifically. But we have talked about New River Valley Mall as a place where we're going to lose the Sears. And using that as a proxy for other properties in the portfolio, we would probably be looking, if we didn't replace that anchor, about a $300,000 impact to reduced rents on that property. That might again serve as an illustration for what impact it might have (multiple speakers)

Okay, fair enough. It is kind of hard to quantify now, but would you say that that risk might be concentrated at the low (technical difficulty) malls at this point? Or is it spread out through even maybe some of the premier properties that are in the portfolio?

Actually, Ben, we are having a hard time hearing you. I guess you are on speakerphone.

No, can you hear me now?

Yes, we can hear you.

Sorry about that. So it is hard to quantify specifically, but can you maybe generally say? Is that co-tenancy risk concentrated at the low end of the portfolio or just spread across the entire (technical difficulty)?

I don't think it is particular to the lower end. I think it is hard to say at this point, but that doesn't strike me as being specific to the lower end.

Okay, and then just final question. Is your same-store guidance, is that unchanged? Is it still 1.5% to 3% at this point, or have you revised that at all?

Yes; I think we are probably skewing toward the higher end of that range.

Okay, great. Thanks, guys.

(Operator Instructions) Michael Mueller, JPMorgan.

Yes. It's actually Molly on for Mike. Just one quick question. Can you guys walk through the next steps for The Gallery and if there is any timetable associated with that?

Well, as we mentioned on the call, we are pretty happy that we were able to acquire the sort of last piece of the puzzle, if you will, in 907 Market. At this point we believe we have got a great piece of real estate, given some of the particulars around it, with Philadelphia's growth trajectories from a residential perspective and the fact that it sits between the convention center and the historic district over the Market East train station, delivers about 18 million to 19 million commuters a year in and out of The Gallery.

So having said that, our real goal right now is, step one, we've got to identify tenants, right? Any transformation or any redevelopment of The Gallery is going to require that we execute transactions with key anchor tenants. So there is an effort afoot around that right now, and we will be highlighting The Gallery and focusing on it in Las Vegas.

The other pieces of the puzzle that are being worked on right now include a public financing, working through public financing. We have received at this point in excess of $13 million in public grants. We see that number -- a necessary number probably being upwards of triple that number, and that is being worked on right now.

So the point of it, the point all is that we are in the preliminary stages around -- it is driven by tenancy, financing, and really moving forward when we have a comfort level that we can deliver the kinds of returns that we need to deliver based on having executed deals with tenants to occupy the property.

Okay, great. That's all for me. Thanks, guys.

Quentin Velleley, Citigroup.

Hey, good morning. At the Investor Day you spoke about a possible opportunity equity raise to deliver. I know you have been reaching a lot of your goals in terms of asset sales and you've got the other assets on the market. That FFO guidance doesn't appear to have an equity raise in it.

But I guess with shares above $19, is an opportunistic equity raise still on the table? Or are you really not thinking about that at the moment?

Well, take a step back for a moment, Quentin. We have made significant progress in reducing leverage. At this point, depending upon how you look at leverage, but -- debt to market cap, debt to gross asset value.

But if you look at debt to -- the debt plus preferred to EBITDA, we are pretty much in line with our peers if you look at the recent Green Street. So we are at 8.1; GGP is at 9; Ralph's is at 8.2; Glimcher 7.8; Macerich at 8.1.

Having said that, we want to continue to delever. We think we've got a couple of tools at our disposal, right? Clearly improved operating performance, asset sales, and certainly the point you mentioned around equity. And we are going to continue to monitor the market and be opportunistic in considering when we go to the equity market.

Okay, perfect. Thank you.

Nathan Isbee, Stifel.

Yes, hi, good morning. Just going back to The Gallery at Market East, I know it is still early in the process. But can you talk about from a dollar perspective what you are looking at in terms of scope of this project? Incremental dollars.

Hi, Nate. It is a little too early to start to talk about that. Go back to the comment I made around tenancy. A lot depends on what kind of tenant we end up securing, which helps to define the project.

For instance, if we were to secure a high-fashion luxury department store as an anchor, that would end up having it be one kind of a project. Conversely, if we were to secure more of a discount or popular-priced department store, or some kind of a nontraditional retail anchor, large food market, etc., that would really define the project differently and would impact the capital spend fairly dramatically. So I think at this point it would be premature to start putting numbers out there.

Okay. As you look at the Kmart box, is there any scenario where you start cutting that up? Are you pretty sure that you're going to be keeping that as a traditional anchor for that whole project?

Yes, actually, that is one of the comments we made in the script. The Kmart comes available in August of '14, and under several of our scenarios it is a breakup. Right? It is a breakup where we could realize significant increase to rent as a result of taking a department store rent that is sitting in the low single digits and turning it into a rental stream more consistent with an in-line mall rental stream that is in the -- if you look at average rent in The Gallery right now we are north of $40 a foot. So their breakup, given the fact that it is the middle box, I think it lends itself more to a breakup.

Because as a department store you have to walk -- there is no control point. You have an entrance on the street and two mall entrances in the middle. So we think a breakup is more appropriate. That is where we are headed.

Now, if a huge anchor tenant stepped forward and said they would take the box, we might change our mind. But right now we think it is more valuable carved up.

Okay. I guess is it safe that you are not reupping with Kmart, hmm?

Well, certainly not in any kind of a long-term basis. Again, we are being careful and measured about this. August of '14 is not that far away.

Might we -- we don't think we are going to renew them, but we might renew them for a year. Right? We might give them a holdover over some period of time. But ultimately, we are going to want to get that box back. They have no options.

Do you have any sense of what type of sales Kmart does there?

I don't. I don't. I have been told it is a good store for them, but I am not aware of what their sales are. They don't have a duty to report.

Okay. Thank you so much.

There are no further questions in the queue at this time. Mr. Coradino, please continue.

Thank you for calling in today. We truly enjoyed being with you on the call.

We continue to execute on our strategy and are making very meaningful progress toward our 2013 goals. We are committed to continuing to improve our portfolio metrics, close the NAV gap, expand our multiple, and drive shareholder value. We look forward to seeing many of you at ICSC, NAREIT, and invite you all to our annual meeting in May. Thank you very much.