Pennsylvania Real Estate Investment Trust (PEI) 2013 Q3 法說會逐字稿

Good morning and welcome to the PREIT Q3 2013 earnings conference call and webcast. (Operator Instructions). Please note that this event is being recorded. Now I would like to turn the conference over to Heather Crowell. Ms. Crowell, please go ahead.

Thank you and good morning, everyone. Welcome to PREIT's third quarter 2013 conference call.

During this call we 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, October 29, 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.

Members of management on the call today are Joe Coradino, PREIT CEO and Bob McCadden, our CFO. It is now my pleasure to turn the call over to Joe Coradino.

Thank you, Heather. With our operating metrics now in line with our peers, including renewal spreads of 6.5%, portfolio occupancy of 93.5% and average rent growth of 2.5%, we are pleased to report a 4.7% quarterly increase in adjusted FFO per share and a 7.3% increase year-to-date. All of these were critical objectives that we outlined at our Investor Day almost a year ago.

Same-store NOI grew by 2.1% for the quarter and we expect full year same-store NOI growth to be between 2% and 3%. Make no mistake about it. We aren't satisfied with our quarterly results. It was a solid, not a stellar quarter.

I am pleased that we are delivering on our priorities of strengthening our balance sheet, improving our operating metrics and elevating the quality of our portfolio. Now it's time to raise the bar, reset our goals and focus on expanding our platform through organic and external growth opportunities.

With competitive metrics, we are intently focused on quality, quality people, quality tenants and quality properties. We are pleased that within the past year we have eight new members of our management team that bring a fresh perspective to our already strong team. With that I will discuss some specific highlights from the quarter.

On the balance sheet front this quarter we closed on the sale of two power centers, Christiana Center in Newark, Delaware and Commons at Magnolia in Florence, South Carolina. The decision to sell these was designed to capitalize on their maturity and allow us to reduce overall indebtedness.

We extended the mortgage loan on Logan Valley and paid off two additional loans on Wyoming Valley and Exton Square Malls, one of which was subsequent to quarter end. As a result of our extensive efforts this year, our bank leverage ratio or total liabilities to gross asset value was 48.7% at the end of the quarter. We are pleased with the progress we have made on our balance sheet and will look to strengthen our financial position and create flexibility with respect to our capital position.

Regarding our operational performance, we continue to show improvement in our metrics. Same-store NOI was up 2.1% for the quarter and stands at 2.8% year-to-date. Excluding lease termination revenue, same-store NOI improved 2% for the quarter and is up 3.4% on a year-to-date basis. Same-store mall occupancy increased to 93.4%, an increase of 90 basis points over last year.

Non-anchor occupancy has exceeded our 90% goal for the year and is at 90.6%, an increase of 150 basis points, driven largely by growth at our premiere malls and more modest gains in our core growth malls. Gross rents were up 2.5% at our mall properties, driven by increases in all of our mall property categories, excluding those classified as non-core. Renewal spreads for small shop tenants continue to be strong and were 6.5% for the quarter and 5.5% year-to-date.

Portfolio sales at $381 per square foot have held up in this challenging environment, impacted by slow job growth, the political landscape, warmer than expected weather during the back-to-school season, all resulting in need-based shopping. We have not seen any impact on transaction activity or quality since sales have trended up over a longer period of time and retailers are generally healthy.

To combat these results we are continuing on our efforts to upgrade our tenant mix, introduce exciting new retail concepts and experiences, such as restaurants and entertainment uses, and adding new amenities to our common areas. By way of example, we will be adding Wi-Fi to three properties next month and we're also adding play areas at three properties.

We've also added product search functionality to our PREIT mall app, and these are simply ways that we continue to enhance the shopper experience. We're also making progress on improving our portfolio quality through our dispositions and re-merchandising efforts.

We currently have two mall properties under contract subject to normal due diligence and closing conditions could close by the end of the year. We have a non-refundable deposit on Chambersburg Mall with certain closing conditions in the process of being satisfied for a potential closing in November. The previously discussed contract for South Mall was terminated during the quarter.

This is a hybrid center, a lineup of power center tenants and anchor tenants with a small in-line component. It was marketed as a re-development opportunity and the buyer couldn't secure their tenancy during due diligence and terminated the contract. We are currently negotiating a contract with another party.

We do continue to generate nearly 80% of our same-store NOI from our premiere and core growth properties, which generate sales of $447 per square foot. Year-to-date same-store NOI growth at these properties was 3.3%.

We continue to drive quality of tenancy at our properties with custom solutions based on property and market knowledge. At Plymouth Meeting Mall we signed over 15,000 square feet of new leases this quarter with notable regional and national retailers, including J.Crew Factory, Schuylkill Valley Sports, Things Remembered and Smashburger. These new tenants will join the recently opened Kay Jewelers and soon to open Uncle Julio's Mexican Restaurant.

At Moorestown Mall this quarter we announced that Rizzieri Salon, a local award-winning salon, will relocate its flagship location to the Moorestown Mall next year to add to our unique lineup of sought after tenants not typically found in a mall setting.

At Washington Crown Center, located in the Marcellus Shale region, we are in the process of transforming the mall with category dominant retailers, including the recently opened Marshalls, which we expect will be followed by other large format merchants, solidifying the mall as the retail hub in its market.

In terms of growing our business we are proceeding to execute on organic opportunities, developing our shadow re-development pipeline and making progress identifying external product. Organically we are focused on properties where value creation prospects are highest. The fourth quarter will bring about the opening of the new Regal Premium Experience Theater, Marc Vetri's Osteria and Firebirds at Moorestown Mall, bringing occupancy to 83%, up from 68%.

We are enthusiastic about the progress we have made in pre-leasing The Gallery. We are making significant strides in finalizing several catalyst transactions that will define the direction of the project. We anticipate delivering a project that is a focal point for the city of Philadelphia, drives the transformation of the retail landscape in the city and the evolution of The Corridor into a vibrant shopping, entertainment and dining district that capitalizes on its urban environment through offerings that are coveted, trend setting, unique and evoke the passion of our diverse market and consumer base.

Externally, we are reviewing several acquisition opportunities and are in discussions to add these properties to our portfolio. While we are not in a position to discuss any specifics, we are looking for properties that are, or can easily become, accretive to our metrics and which are complementary to our proven skill sets. With that I will turn the call over to Bob McCadden to give you more color on quarterly and year-to-date financial performance and our revised earnings guidance.

Thanks, Joe. We reported solid results for the third quarter and increased our FFO guidance for 2013, which I will touch on a little bit later. First let me cover the quarter's highlights.

FFO as adjusted was $32 million or $0.45 per diluted share for the quarter, reflecting adjustments of approximately $800,000 for interest rate hedging losses and other noncash charges. This compares to $25.1 million or $0.43 per diluted share last year. Last year's quarter included approximately $5 million of adjustments for employee separation charges.

Same-store NOI was $65.3 million, a $1.3 million or 2.1% increase compared to 2012's third quarter. Excluding lease termination revenue, same-store NOI was $65 million which was also a $1.3 million or 2% increase over the prior year. The improvement in same-store results primarily were attributable to increased rental revenues driven by improvements in occupancy and higher average rental rates.

While we were able to hold the line on CAM expenses during the quarter, we experienced a $3.5 million or 28% increase in real estate taxes in the third quarter of 2013 compared to last year's quarter. Approximately three quarters of the increase was incurred at our four New Jersey properties due to a combination of higher assessments and higher tax rates.

While we anticipated some increase in taxes this year, we didn't anticipate the size of the increase when tax bills were received in the third quarter. In addition, the prior year's quarter included the benefit of a successful real estate tax appeal at one of our other properties.

A number of other factors impacted our overall operating results, including the sale of three properties in the first quarter and the completed sale of two power centers, Christiana Center and Commons at Magnolia, this quarter. The sold properties generated $4.1 million of NOI in the third quarter of last year and $1 million in this year's quarter.

We also sold a condominium interest in connection with the ground lease located at Voorhees Town Center for $10.5 million. We recorded gains totaling $45.1 million on the sale of the properties this quarter. In addition, the newly acquired 907 Market Street property at The Gallery contributed $1.2 million of NOI in the third quarter of 2013.

Interest expense for the quarter was $26 million or $7.9 million lower than last year's quarter. The improvement reflects lower average borrowings and lower average rates. Average borrowings were $310 million lower than last year and the effect of interest rate on our borrowings during the quarter was 5.25%, a decrease of 67 basis points from last year's quarterly average.

Outstanding debt at the end of the third quarter, including our proportionate share of partnership debt, was $1.8 billion, a decrease of $353 million or approximately 19% from September of 2012. This year's quarter included dividends and preferred shares of $4 million (inaudible) to the 2012 preferred share issuances as compared to $2.4 million in last year's third quarter.

As Joe mentioned, in the third quarter we repaid a $65 million mortgage loan on Wyoming Valley Mall and are currently in the market to refinance the property. We also exercised the first of two extension options related to the mortgage loan on Logan Valley Mall and paid down the principal balance concurrently by $12 million.

In connection with the principal reduction, we recorded noncash interest charges relating to swap costs that had been deferred and other comprehensive income. In October we repaid the $66.7 million (sic -- $66.9 million -- see press release) mortgage loan on Exton Square Mall. Excluding Wyoming Valley Mall, we currently have about 20 unencumbered assets in our portfolio which generate approximately $72 million of adjusted NOI.

Our liquidity position is strong. At the end of the quarter we borrowed $70 million to fund the Exton mortgage loan repayment and for working capital purposes. We currently have $240 million of liquidity available to us under our credit facility. We also don't have any material mortgage loans with hard maturity dates until July of 2015.

In the third quarter we recorded approximately $2.5 million of other income related to the sale of historical tax credits on 801 Market Street compared to $1.8 million which was recognized in last year's quarter. As disclosed in last year's 10-K, the increase is the result of additional tax credits that were sold in 2012.

G&A expenses for the quarter were $8.1 million which represented a $600,000 reduction from last year's third quarter. The lower level of G&A expenses reflects reduced executive headcount and other corporate cost savings.

Since the end of the second quarter we have signed the purchase and sale agreements with potential buyers for Chambersburg and North Hanover Malls, resulting in a triggering event under the accounting rules for impairment. We recorded impairment charges of $23.7 million at Chambersburg Mall and $6.3 million at North Hanover Mall to write down the carrying value of each property's long-lived assets to the respective estimated fair value. Since the transactions with the potential buyers have not yet closed, these estimates are subject to change.

On the leasing front we executed 235,000 square feet of new non-anchor transactions and 185,000 square feet of non-anchor renewal transactions. For these renewals we generated an increase of 6.5% compared to expiring gross rents. On the anchor and large format front, we executed 11 renewals for 714,000 square feet at rents that were comparable with rents in expiration. We have no remaining anchor expirations for this calendar year.

As Joe mentioned, comp store sales were $381 per square foot at the end of the quarter. If you exclude the non-core mall properties which were under agreement or being marketed for sale, sales per square foot would have averaged $390. We're adjusting our earnings guidance for 2013 by raising both ends of our FFO guidance range by $0.01 per share and our FFO as adjusted guidance range by $0.02 per share. We expect that GAAP earns per diluted share will be between $0.29 and $0.34. We expect FFO per diluted share to be in the range of $1.79 to $1.83 and FFO as adjusted to be in the range of $1.89 to $1.93 per share.

The assumptions underlying our revised earnings guidance are generally consistent with those set forth earlier in the year. Aside from the completed 2013 sale transactions and the acquisition of 907 Market Street, our guidance does not currently contemplate any other material dispositions or acquisitions. In addition, our guidance does not assume any additional capital market transactions other than that already disclosed. With that we'll open it up for questions.

Thank you. (Operator Instructions). And the first question comes from Brandon Cheatham with SunTrust.

Hi. Good morning. Thanks for taking my questions. Just real quick, I was wondering if you could provide an update on the Sears vacated anchor space at New River Valley Mall.

Sure. That space was vacated in August of this year and we are currently in negotiation at the letter of intent stage for a replacement anchor.

And is that something that you think should commence in the fourth quarter or is that next year?

No, occupancy would not commence in the fourth quarter. We're working towards a 2014 occupancy.

Okay. Just on tenant sales, they were kind of weak during the quarter. What exactly is driving that? Is that the same across the portfolios? Is there certain tenants that are weaker than others? Can you delve into that a little bit for me?

Sure. I mean clearly sales have been impacted by a whole host of those factors I referenced; the political morass in DC, weather conditions in the Northeast, which weren't very conducive during back-to-school season, selective retailer underperformance, primarily in the junior's category, but certainly not limited to that, and, of course, slow job growth.

While we believe the rate of sales going forward will moderate, we also believe that with the constrained supply, mall sales will continue to grow at a slower rate. It's worth noting that over a longer period if we look at 2009 to 2013, sales in our portfolio have increased approximately 14%. And so, we're not really seeing any impact on quality or quantity of leasing at this point.

Okay. The real estate tax expense that you mentioned, about how much is that expected to be reoccurring in nature, how much of it had to do with the -- better or worse comps versus 2012 -- same-store NOI?

From a big picture perspective a couple things happened. If we look at our entire portfolio, we saw about a 16% increase in real estate taxes in 2013 over 2012. And if you further slice it, in our New Jersey properties, we actually saw a 46% increase from year to year. So that was a fairly dramatic impact.

We hope that this is a one-time effort. Essentially if we look at what's happening in New Jersey, New Jersey is a state not unlike many others who are affected by cutbacks in state support from municipalities, resulting from federal cutbacks as well. And in New Jersey, we saw a shifting of the tax base from residential folks in the communities to commercial property owners. So we don't expect the same level of increase in the subsequent years.

If you look at properties outside of New Jersey, average rate was more in line with inflationary increases.

On an annualized basis the impact of the taxes this year, taking into account any leakage that we have for vacancy or tenants who pay us gross rents, it's roughly -- on an annualized basis, it's about a $1.9 million impact. New Jersey is contributing about $1.6 million of that total.

All right. Thank you.

Thank you. And the next question comes from Ki Bin Kim with SunTrust.

Thanks. It sounded like you had some positive [upbeats] on The Gallery at Market East. Maybe you could provide a little more color on what type of tenants that you think are the most likely to move in and maybe some rough numbers around cash outlay and yields, and if there's anything unique about the lease they are going to do. Would there be a bigger percent rent component, would it be a traditional lease? Maybe some more color all around.

Well, first off, good morning. As excited as we are and as much as I would like to, I have to remain somewhat restrained about The Gallery. What I would tell you about the tenants is they are clearly first to market and I would say that's first to the region and that they are quite exciting and will define the project.

In terms of giving you something directionally, that would be probably saying more than I would like to say at this point, other than this is going to be a tenant driven re-development. This is not going to be a project that we're going to start -- if you build it, they will come. This is going to be first you get them, and then you do the re-development.

In terms of the investment, I think it's premature to really give you anything at this point. But we are -- as I said in my script, we are making a great deal of progress moving forward in negotiations with two impact retailers that will really define the project and be what I would consider to be transformative, not just for the property, but probably for retail in Philadelphia.

Okay. I definitely appreciate that you have to be a little sensitive about it. Maybe I can ask it in a different way that's more general. You guys own four contiguous blocks. Would the retailers be taking potentially -- I guess your -- the scope of it would include all four or would it include half of it? And the second part of that question is is the city of Philadelphia -- are they going to have a substantial hand in this, just given where it is located? I know it's a great location in terms of (inaudible) density, but it does seem like a rough neighborhood in a certain aspect.

Well, you asked a bunch of questions there. I'm going to kind of try and respond to all of them.

First off, with respect to the city of Philadelphia, I will start at the back end and work forward. The city of Philadelphia is very committed to the project as is the state of Pennsylvania. They both already made financial commitments to the project. We're anticipating and we are in discussions with them to expand that commitment.

With respect to -- you mentioned that we've owned it. It's actually been a ten year acquisition. It's important to note that the last piece was just acquired in April of this year.

So it's not something that we really have controlled. We have been working towards controlling it, but only really took full ownership of the three blocks in April of (technical difficulty).

And with respect to the space that tenants would take, I would look at it as an anchor transaction, if you will. And so they would take combined in the neighborhood of north of a hundred (technical difficulty)

And your other comment that I have to take a little bit of exception to is you called it a bad area. Well, there are 20 million suburban commuters that come in and out of The Gallery annually. There is a convention center drawing several million people that's weather-connected to the property, there's the 5 million tourists to the historic district to the east of the project. And lastly, Philadelphia has now become the third largest residential CBD population in the US behind only New York and Chicago, and much of that population is due south the property and much of the residential value is in the $1 million-plus range.

So I think it's important to look at Philadelphia as a transformed city. I will give you an example. We have gone in a little more than decade from a half a dozen sidewalk cafes to 296 sidewalk cafes. So I, again, take a little bit of exception to the bad neighborhood (technical difficulty).

Just to clarify, I didn't say it was bad. Well, I said it was great demographics density-wise. Just seemed like when I walk around that area, it could be a little bit questionable. That's what I meant.

Okay.

Thank you for all the clarity.

No problem.

Thank you. And the next question comes from Ben Yang with Evercore.

Good morning. Joe, maybe for you. Sears said this morning that they intend to begin closing stores as leases expire, and it looks like you have 13 Sears leases expiring between now and 2016. So it may be a bit early but I was wondering if you could talk about your plans for this real estate if Sears closes?

Well, obviously, we have not received any announcement with Sears. We're in regular communication with them, but we also have sat down and looked through our portfolio regarding the expiring Sears. We've actually looked at all the Sears locations throughout the portfolio, and in many we have contingency plans. We think there is opportunities. Some will be more difficult than others. But at this point, Ben, it would be difficult to answer your question with specificity.

So even with broad strokes you can't talk about the contingency plans that are more likely to be successful versus those that are more challenging?

Well, first off, I mean Sears is performing well in our portfolio. We did a review of their sales volumes as recently as this week, so we don't have a lot of concern. And again, I think with specificity it's hard to say at a particular center.

We think that in many cases the Sears boxes are smaller boxes than their typical prototype, which would allow you depending on the position in the mall to utilize it for what I would consider to be some of the larger mall-based retailers, H&M, Uniglo, Forever 21, Et Cetera, as possible replacements, where in many of our malls we are unable to fit them in; it becomes a very difficult and high capital expense. And this is a situation where you can go from a low single digit to a rent that is significantly higher.

And I guess the final point is, I don't want to negotiate with Sears publicly on this telephone call. So again, we are on it, we understand the opportunities and down sides and we will deal with it as appropriate.

Got it. Appreciate those comments. Maybe switching gears to the balance sheet. It looks like you used the line to take out the loans that extend [the Square] in Wyoming. Were you in any way forced to do that to build up the unencumbered asset pool or is the longer term game plan to put some fixed-rate debt on those particular properties?

Well, as mentioned Wyoming Valley, we're currently in the market, so that was really kind of a temporary situation. But we do have an interest in freeing up our balance sheet to provide us with greater flexibility going forward. So you will probably see over time a shift from encumbering properties with mortgages to having more financing supported with an unencumbered asset pool.

So the line balance, $90 million today, so that's probably somewhat permanent financing for you guys at this point?

No. I expect we'll be looking at different financing opportunities over the next six months.

Okay. Can you elaborate further?

Not at this point.

Okay. Great. Thank you.

Thank you. And the next question comes from Daniel Busch with Green Street Advisors.

Thank you. Occupancy looks like it's continuing to climb at a pretty healthy clip, over 90% for the mall portfolio. Just looking at the four breakdowns, how much opportunity or runway is left in the opportunistic malls? And as the top two tiers fill up, are you seeing demand increase at that third tier?

Yes. We've actually seen on a year-to-year basis somewhat of a decline in the opportunistic portfolio. I think some of it has to do with repositioning. As Joe mentioned, we have some exciting things going on at Washington Crown Center, so to some extent we are creating vacancy in order to accommodate some additional tenants in the future. But we do believe that there is opportunity to drive the occupancy rate which is now in the mid-80%s to something higher than that.

Yes. I guess I'm curious as -- when in your discussions if a retailer isn't comfortable with the rents maybe at the premiere growth malls, have you seen their appetite to move further down your quality stretch? I'm just trying to get a sense of where that occupancy at the opportunistic portfolio can grow to.

I mean there are clearly tenants who find that their business model works better in that second tier mall. They would be tenants like Body Central and Charlotte Russe and Route 21. So you are seeing those tenants move into that second tier property.

We're also seeing, as you saw Bob mentioned, the Washington Crown example. We're also seeing what are typically strip center based tenants like Marshall, Ross, Et Cetera move into a second tier mall environment. Ulta is another category that's moving into the second tier, so we're taking full advantage of that.

And by the way, as we occupy that bottom tier of malls, we'll continue to look for opportunities where we're either going to improve them to the point where we're going to move them into our core growth or we're going to think about bringing them to market.

I think, though, as you think about our runway to improve leasing spreads, we've got 7.7% year-to-date increases in leasing spreads in our premiere and core properties. We think that there is runway beyond that in those core growth properties, in spite of what is a couple of quarters of flattening sales.

You kind of hit on my second question, which is [I thought] I'd take it a step further. You've had success disposing of the non-core properties or the ones that you label non-core properties thus far. As you do that, you're creating a new bottom. How should we think about your disposition cadence over the next couple of years and how many of those opportunistic malls -- what do you think the split is or the opportunity is of how many of those can move up versus out of the portfolio?

Well, first off, the thing we want to do is sell what we have on the shelf, if you will, which is we want to dispose of the properties that we have on the market right now or under agreement. We are optimistic about the properties that we have on market right now. So that's one step.

As you think about which properties in that next tier could be brought to market or be brought into the core growth category, it's a difficult call to make. Because if you had asked this question a year ago, I would have said Washington Crown Center. But one of the things that we're dealing with is the fact that we have six malls in the Marcellus Shale region and we're all of a sudden finding that Beaver Valley, a property that we had on the market -- which we think by the way was not priced appropriately by the market -- is a property that we're receiving not only increasing sales, but demand from retailers, hotel operators, et cetera.

So it's a little bit of a different question because, again, as you look at that category, those six malls for the most part sit in that category. So we're going to need to be somewhat thoughtful and selective about what we bring to market and what we don't bring to market. I think there's probably one or two malls that sit in there right now that we may in fact bring to market at some point.

Great. Thanks, guys.

Thank you. And the next question comes from Nathan Isbee with Stifel.

Please go ahead, Mr. Isbee. You call line is live.

Sorry about that. Just going back to the disposition -- South Mall termination, can you give a little bit of color around what happened there? And as you look at the two that are teed-up, any relation to the South Mall buyer and why you're comfortable those will go through?

No. There is no relation to the South Mall buyer at this point, but South Mall is a little bit of a unique situation. It's not a pure sale. It's a re-development play.

I mean it was a food market that everybody knew who the food market was. This was not a surprise, who is -- who took a little long, was a little bit indecisive, et cetera, so we lost the first buyer.

We're currently in negotiations with another buyer, also, by the way, a re-development play. So that's a little bit atypical of the other properties. And again, at Chambersburg Mall we do have a hard deposit up. As I said in the script, we're anticipating closing that. The ball is in our court and we will get the conditions resolved.

Hanover, we've got a little bit of time on, but there are a number of buyers that have expressed interest in Hanover that sit behind the one who has it under agreement at this point. So, again, level of comfort there.

So we're okay. We understand the South deal -- again, quite atypical.

And then could you just talk a little more broadly about the sale market? There's clearly more buyers out there for these types of assets than there were a year ago.

You talk about cap rate compression. Can you talk about from your perspective, for instance, the two you have under contract, what the cap rates are and broadly what you think you can get for some of those lower tier assets today versus six months, a year ago?

Well, I would agree that there are buyers out there. I think in terms of pricing and cap rate, if you look at what we've done already, the power centers were sold in that 6% to 7% range, with Commons in the 8% range. From a non-core mall perspective, typically in that 10% to 11% range. Although depending upon the quality of the asset, the sales performance, et cetera, you may end up seeing a higher cap rate.

I think if you look at us, while certainly be willing to engage in that cap rate discussion, we're approaching it from a more strategic perspective, and it's about driving the quality of our portfolio. Because we believe that with the improved portfolio, when you combine that with improved operating performance, stronger balance sheet, that we'll begin to see improvement in our trading multiple.

Alright. All right. Thank you. And then you mentioned in your prepared remarks about some leasing at Plymouth Meeting. Can you talk a little bit more about that in terms of how much is outside on both sides in the restaurant and then the lifestyle wing versus the interior space?

I think with respect to deployment, that one of the tenants, which is the J. Crew Factory Outlet, is a -- fronts on the outside. Uncle Julio's, which is a pretty cool Mexican concept, if you will, that will be opening soon has both mall frontage and exterior frontage. The balance of the tenants that we spoke about will all be inside the mall.

You've got Smashburger, who has outside access on the other side of the mall, the Hickory Road side, if you will. Schuylkill Valley Sporting Goods inside the mall. Again, I talked about Kay Jewelers opening inside the mall. I think Plymouth Meeting Mall is coming of age, if you will.

The original re-development strategy that we put in place that was taken off track by the downturn in the economy is beginning to come to fruition. Significant tenant interest will take occupancy there up into the 88% approximate range, so we're moving in the right direction. We do have a fairly sizable list of prospects that we're working on for the balance of the interior space.

And these are full long-term leases, regular rent?

Yes. That's correct. These are long-term leases.

All right. Great. Thanks. And then just one last question on Gallery. Clearly a little too early to start naming names, but can you talk a little bit about -- you said it's a tenant driven project. Can you talk a little bit about how you view the capital allocated here and what type of returns you would require to get this done in such a tenant driven project?

Well, let me respond to your question regarding the tenants first, and that is that we obviously want to be in a position when we decide to go forward with this deal that we're comfortable and we have significant pre-leasing. So that's a condition precedent, and that's what The Gallery team is working on as we speak.

So it's not going to be a project where we're going to sign one lease, and then move forward. We're going to want some significant pre-leasing.

With respect to the returns, it's a bit early to start having a discussion about that, other than we typically look at a 200, 300 basis point over our trading cap rate as a return hurdle, and we will put The Gallery to that same test.

All right. Thank you very much.

Thank you. The next question Michael Mueller with JPMorgan.

Hi. Couple questions. One, speaking about The Gallery for a second. I apologize if missed this, but is there an updated time frame that you're thinking about to get the project going once the leases are announced?

If you will recall, Michael, we originally talked about we were taking two directions with The Gallery at the same time. One is a high fashion; the other one we characterized as Food and Fast Fashion. The first thing we want to do is by year-end, our goal is to determine the direction on The Gallery with respect to those two choices and we're on track to do that.

With respect to a timing, again, going back to my comment that I made to Nate, I think it's going to be pre-leasing driven. We're going to want to identify the tenants, execute leases with them and have a comfort level that there is a queue of tenants that we can do deals with as we think about transforming this property. So to a great extent, that's going to determine the timing of it.

The other thing I think you should keep in mind as you think about timing is one of the keys to being able to execute any kind of a plan is Kmart vacating their space. Their lease doesn't expire until August of next year, so that's driving it partly as well.

So again, we're at the point right now where we're starting to put the pieces together. I think it's a little too early to talk about when we're going to start and what the returns are, because first and foremost we want to finalize deals with the tenants.

Okay. And then sticking with the theme of investments and capital deployment, you talked about looking at different opportunities and wanting to grow the portfolio. A couple questions tied to that.

One, when you're looking at acquisitions and stuff like that, is it primarily in the mid-Atlantic, is it in Pennsylvania as well, or do you see yourselves expanding a little bit? And is it -- aside from the Simon JV for the development, is it pretty much all acquisitions you're looking at and not any sort of development?

First off, we tend to concentrate up and down the East Coast, if you will. I don't see that changing with any immediacy, but one never knows at this point. Because primarily what we're looking for, right, is assets that are accretive to our metrics.

Remember, 90% in-line occupancy, $400 a square foot in sales. Obviously, we like stronger markets better. We don't want to find ourselves in a position where we're buying what we're selling, if you will.

So again, I think the geography we've tried to stay as a commutable distance, if you will, and we're looking for higher quality assets that are additive to the portfolio. In terms of the only real development we're thinking about right now is The Gallery, but we're certainly not in the market to look at ground-up development at this point.

Got it. Okay. That was it. Thanks.

Thank you. The next question comes from Michael Bilerman with Citi.

Yes. Good day. Just a question on the leasing numbers. Page nine of the supplemental. The third quarter new leases 235,000 square feet at $27 with high TI relative to that cost.

I'm just curious -- what is happening? Where was that leasing done? Because you were to look at the average gross rents in the existing portfolio, premiere malls at 66, the core malls at 42, making up almost 85% of your NOI. And then the opportunistic and non-core at 26, yet occupancy is down year-over-year. So I'm just trying to put it all together.

This is Bob. I don't know if it's specific to any property sector. One of the things that may be impacting the way we've disclosed our costs is often times if we're doing -- I will use the Marshalls as an example that Joe cited earlier at Washington Crown -- where we're putting in reconfigured spaces into the properties; we're including -- it may be a misnomer to describe it as just tenant allowances, because this also includes landlord work. Some other companies may not necessarily include that in their cost of the deal. But we essentially include any incremental costs that we have as part of our determination of what your net effect of rent is.

Right, but this -- the gross dollar at $27 seems quite low for a large square footage. Is there a deal that's impacting that square footage?

Yes. If you look at the average size of the deal, think about we're doing more large format transactions there. I don't have the specifics at my fingertips, but I could get those for you in terms of some general direction.

So that doesn't (multiple speakers) --

We have a couple of gym deals and large format shoe operators in that number, so those tenants are typically taking space that's less desirable. And we're reconfiguring space generally at the end of the malls or inside corridors to accommodate those tenants.

And that was just filling pure vacancy at that point, the 235,000 square feet?

Not necessarily all pure vacancy. Again, if we take out a couple of those larger tenants, you're seeing numbers that are a little bit more in line with what you saw in the first couple of quarters.

So that number doesn't concern you in any way?

No.

Okay.

I don't think it's indicative of any trend.

Okay. And then you provided some pretty good disclosure in terms of the anchor rollover as well as the anchor stores in each of the malls. Is there anybody that doesn't have options to renew in the next couple of years?

No. I think we're now in a cycle with most of our anchor tenants where they are working off their original lease options -- contracted options.

Right. So no one has final term -- final --?

The only place we have it is in Exton Mall. There is a Kmart on an outparcel that has a final lease option in 2016.

And then is there any dark rent paying anchors at this point?

No.

South Mall, $36 million book value. Where was the contracted purchase price?

We're not going to discuss that at this point because we're still in negotiation with other buyers.

I guess from a net book value, you would have taken an impairment if it was below the net?

Yes, if we got to that point, that a determination was made that the offer was legitimate and it was below that. But that's true for any property.

Right. But just if you had a contract at purchase price, that we should take -- that your net book value on the asset of $27.6 million, I have to assume that your contract to purchase price was above that number. Potentially lower than maybe book value gross, but it was above the $27.6 million?

Yes. There's a lot of assumptions that you're throwing around, Mike. I don't know if we can comment on that.

Well, if the contract to purchase price is below $27.6 million, you would have previously had to take an impairment, correct?

Yes. If it was like that as it was to be sold, the answer would be, yes.

Okay. In terms of the Gloucester site with Simon, can you provide an update in terms of capital, timing and what you expect as a return?

I think we are likely to break ground in the spring. We're still finalizing the deals with the tenants as well as with our joint venture partner.

But total potential size, I assume it's about an $80 million, $100 million project (multiple speakers)?

Yes, it is in that neighborhood. And so our commitment is 25% of that number.

Right. And then any other future development or re-development capital that's being targeted outside of The Gallery, which we have spent a lot of time talking about?

As Joe mentioned, that we're looking at a shadow re-development pipeline. Obviously in response to an earlier question, that would include potentially if we had the opportunity to buy back some department stores or to get department store space back. But at this point there's really nothing that we have committed to or in far enough stages of development where we would want to talk about them.

Okay. Thank you.

Thank you. And we have a follow-up question from Ki Bin Kim with SunTrust.

Thanks. Just a couple follow-ups. On your comments about making additive acquisitions from the portfolio quality standpoint, how should we think about how you fund those deals?

When you talked about re-development earlier you said you wanted to have a return that's at least 200 basis points above your current implied cap rate. Would that be the same for the [acquisitions]? It just seems it might be a little bit dilutive, just given the quality of that [with your prior pursuant] work versus where you're trading. I was wondering if you would provide a little color on that and if equity is part of that equation -- issuing equity.

With respect to future acquisitions, at this point, I think everything is on the table in terms of how we would finance it. We would consider joint venture with a capital partner. We would consider -- every form of financing that's available, we would take that into consideration. Certainly if the time was right and the stock price was right, we would have to think about raising equity to finance a significant transaction. But at this point, we're talking hypotheticals.

Okay and just one last question. In terms of your disclosures, you talked about working on some re-development, one-off deals, but what is the total expected investment value of your re-development pipeline?

Other than finishing up Moorestown Mall, which will be completed largely by the end of this year, and The Gallery, we really haven't expressed a view that we have a hard re-development pipeline. So at this point we don't have any material capital commitments devoted to re-development. When we further define The Gallery project, at that point we'll be able to size the investment, and we'll disclose that.

So there's nothing internally assigned to some of the Sears or JCPenney boxes that might come back to you guys?

Well, we don't know that any are coming be back, or what the opportunities are.

I think at this point, all of what you just asked are works in progress. I mean early discussions with Sears, JCPenney, nothing much going on and we're looking strategically at a couple of assets. But again to Bob's point, really have not identified or earmarked any properties that we're going to get to work on other than The Gallery at this point, which as we've talked about earlier on the call is a work in progress.

Okay. Thank you.

(Operator Instructions).

Thank you, everyone. We're looking forward to what we are hoping is an energetic and productive holiday season for our shopping centers and retail partners, and we look forward to seeing many of you in November at the NAREIT convention. Have a great day.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.