Pennsylvania Real Estate Investment Trust (PEI) 2014 Q2 法說會逐字稿

Good day and welcome to the PREIT Second Quarter 2014 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ms. Heather Crowell. Ms. Crowell, the floor is yours, ma'am.

Thank you and good morning, everyone. Welcome to PREIT's second quarter 2014 earnings 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, July 30th, 2014, 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 and 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's CEO, and Bob McCadden, our CFO. It is now my pleasure to turn the call over to Joe Coradino.

Thank you, Heather. Good morning, everyone. Our future is bright. Growth is on the horizon. We're laser focused on executing a sound strategy designed to enhance shareholder value. Quality has been our focal point without sacrificing balance sheet strength. Operating performance remains paramount and we are confident that shaping a higher quality portfolio will lead to consistently strong operating results and dependable earnings.

Quality will result in a continued narrowing of the NAV gap and in the long run, an elimination of it. We're creating a portfolio that derives nearly all of its NOI from A and high quality B assets with a strong presence in top MSAs. The market clearly rewards companies with high quality assets, with higher multiples and we are on our way to achieving that goal. Execution is all that matters.

We sit here today with a strong balance sheet, solid operating performance, improving portfolio quality, and a realizable vision for The Gallery that sharply minimizes execution risk and will provide capital that will fuel our ability to execute on our strategic objectives and maintain a strong balance sheet. The redevelopment of The Gallery coupled with the pending acquisition of Springfield Town Center and disposition of a few more lower-productivity assets demonstrates that the vision for the recast PREIT is crystallizing.

As it relates to our venture with Macerich on The Gallery, we're very excited about this collaboration. They're excited. Everyone should be excited. This is a case where the sum of the parts will clearly be greater than the whole. Our Philadelphia dominance and expertise coupled with their experience in urban vertical, mixed-use developments anchored by retail is a powerful combination. It is an equal partnership with shared responsibilities where each partner will bring our best to the redevelopment. We now look to conclude the public financing and lease modifications with various government entities in anticipation of presenting an exciting project to you in the near future.

To highlight specific results from the quarter, after recovering from the effects of extreme winter weather, operations have been solid with NOI for the quarter growing by 3.1%. Renewal spreads continue to be strong at 4.5%. Occupancy is temporarily flat as we ready spaces for new tenants, a function of our remerchandising efforts. Most notably, year-to-date new leases executed for non-anchor space represents an 83% increase, yes 83% increase or 200,000 square feet over last year's volume for the same period. We have over 575,000 square feet of new leases executed that haven't taken occupancy. And with move in scheduled for the balance of the year, we're projecting our ending occupancy to be in line with our expectations and reflect improvement over last year.

We've continued to methodically reduce our exposure to non-core properties. In the past 19 months, we sold seven properties and an interest in The Gallery, generating $360 million in proceeds. In addition to this, we have two non-core malls under agreement, another one being brought to market, an offer on our non-income producing land and we're making progress on selling our interest in our power center joint ventures.

We previously communicated a range of proceeds being sought of $150 million to $400 million. Since the announcement of the pending acquisition of Springfield Town Center, we've raised approximately $130 million with another $125 million in the queue. Our leverage at the end of June was 49.4%. When The Gallery transaction is included, our pro forma leverage is 47.8%. After we complete the acquisition of Springfield Town Center, assuming we close on the $125 million in pending transactions, our pro forma leverage will be 49.5%.

PREIT's unique among our peers. We've executed on the disposition of a sizable portion of our asset base. Our approach has been successful and we're pleased with our accomplishments to date in upgrading our portfolio.

We've also made tremendous progress in upgrading the quality of tenancy in the balance of our portfolio, another commitment we made to our shareholders. Exciting new leases with expanding domestic and international retailers such as UNIQLO, multiple RGA brands including F&F, Cortefiel and Suite Blanco that are new to the US, Vera Bradley, Forever 21, Ulta, the Buckle and key new restaurants that actually are in the Moorestown Mall.

Let me talk in some detail about the work we've done at some of our properties and recall that these are the properties where we told you that we were remerchandising. There's a lot of value to be created at these properties. At Moorestown Mall, we've made tremendous progress in upgrading the tenancy and creating a truly unique destination. We've added a new Regal Premium Experience, three restaurants, two from celebrity chefs, have executed a lease, add another one. We're anxiously awaiting the opening of the area's most fashionable salon and spa and have delivered on our promise of adding the boutique row, a collection of high end retailers with a local flair designed to cater to the affluent discerning resident. This is an asset that's been transformed and we believe, with all other things being equal, sales will ultimately eclipse the previous high of $433 per square foot in 2007. Note that this property is located just five miles from our flagship Cherry Hill and this effort points to the benefit of our deep knowledge of this marketplace and what resonates with these customers.

Viewmont Mall is another great example, a property in Scranton, Pennsylvania, that has long been the dominant mall in the trade area. We embarked on an effort to upgrade the tenancy. It's a single level mall where we had an expiring drugstore, paying low single digit rents, an oversized limited superstore and an underperforming food court. We were able to right size the Limited, Victoria's Secret and other brands housed within the former superstore and accommodate Forever 21, another large format retailer, along with a new Buffalo Wild Wings.

Washington Crown Center, another success story. It's one of our opportunistic assets, sitting right in the Marcellus Shale region that's clearly benefiting from increased economic activity in the area. In the past year, we've signed leases with Marshalls, Ross Dress for Less, Jo-Ann Fabrics and Ulta, which will really solidify this as a major retail hub. We're able to make use of deep spaces, introduce large format, category-dominate retailers into the mall. And with the stores accessing the mall common area, we will dramatically improve the credit profile of the property and drive asset value by 20% with this remerchandising.

From a balance sheet perspective, we continue to be focused on the strength of our balance sheet and financial flexibility and we're pleased to have reduced leverage by 30 basis points since last quarter. The transaction we announced with Macerich shores up our balance sheet even further.

And let me talk a little bit about it. Proceeds from the transaction are $106.8 million. We will split redevelopment costs going forward. We expect to deliver a project scope and cost after we conclude discussions on public financing. Most important is the expertise in developing and leasing vertical, mixed-use projects in dense urban environments that Macerich brings to the table, coupled with our relationships and knowledge of this market will allow us to reduce our execution risk in unlocking significant value at The Gallery. This is an exciting transaction. Again, one where we are confident that the sum of the parts is undoubtedly greater than the whole.

In terms of our growing portfolio, we continue to work with Vornado on leasing Springfield Town Center, expecting to close that in the first quarter of 2015. As of today, the project is approaching 80% committed with a grand opening scheduled on October 17th. As transactions come into focus, we are more and more excited about this property. The combination of location, demographics, retailers in mall finish will yield a premier property. We look forward to unveiling it and sharing a comprehensive tenant roster once we have finalized a few key deals that are progressing.

In June, we closed on land with Simon for Gloucester Premium Outlets. Construction is underway. Leasing is progressing with 65% committed and we expect that it will open in the third quarter of 2015.

Moving on to the retail sales environment, as many of our peers have discussed, we believe the retail sales environment is changing. On a comparable basis, sales were slightly down at 378. For the quarter, total sales for non-anchored tenants were up 1.6%. What's most important as relates to sales is our ability to drive rents and NOI in the future. Looking at our portfolio and explorations over the next two years, we come away with confidence that renewal and replacement rents will continue to increase over expiring rents.

Consider this, our average in place occupancy costs for leases expiring in the next two years is 12.6%, which compares to current portfolio occupancy costs of 13.1%, leaving much room for improvement, just marking rents to market in our existing portfolio before factoring in the opportunity to grow that occupancy cost figure. Furthermore, of the non-anchor leases expiring over the next two years, 75% of them are in the premier and core growth tiers of our portfolio based on GOA and our first substantive rollover of leases at Cherry Hill since its redevelopment in 2009. As you can tell, we are extremely optimistic about our future.

For now, I'll turn the call over to Bob McCadden to give you more color on the Company's operating performance.

Thanks, Joe. We had a great quarter, having made a nice recovery from a difficult start to the year, positioning us for continued strong performance in the second half of 2014. We're adjusting our previously-announced guidance expectations for FFO as adjusted to reflect a $0.03 per share dilution from the sale of a 50% interest in The Gallery.

Let me cover some of the financial and operating results in a bit more detail. Same-store NOI for the quarter was $67.2 million, a $2 million or 3.1% over the corresponding 2013 period. Excluding lease terminations, same-store NOI increased by 3%. This growth in same-store NOI was up 4.6% in our premier assets and up 3.6% in our core growth assets. NOI at our opportunistic properties was slightly negative during the quarter. We expect that trend to reverse as tenancy occupancy at Voorhees Town Center and Washington Crown Center during the second half of the year.

The improvement in operating results was all top line driven with base revenue up 3.2%. Operating margins improved by 30 basis points as revenue growth outpaced increases in operating expenses. Average rents per square foot were up 4.4% from the same period last year with increases noted across all property tiers. Total occupancy and non-anchor occupancy at the end of June were relatively flat compared to last year, as Joe mentioned, but we anticipate a significant uptick in occupancy in the second half of the year as many of the signed tenants that have executed leases take occupancy for the back-to-school and holiday shopping periods.

Renewal spreads for small shop tenants increased by 4.5% as expected. Spreads at our premier and core-growth properties were greater than that amount, increasing by 6% and 6.9% respectively. Renewal spreads for leases with terms greater than 5 years were 11.9% for the quarter, continuing the strong performance we saw in the first quarter.

Comp store sales per square foot were down modestly year on year but up sequentially from the first quarter. As Joe mentioned, overall non-anchor sales including large format stores were up for the quarter. We did experience positive growth in the all important small shop apparel category that was hit hard earlier in the year.

Interest expense decreased primarily from lower overall debt balances and lower average interest rates. In the second quarter, our average debt balance was $149 million lower than a year ago and the average interest rate was 58 basis points lower than in the second quarter of 2013.

After the quarter ended, we paid off the $51 million mortgage loan at Logan Valley Mall, incurring a $1.2 million non-cash charge relating to the write off of hedging costs. We will also repay the $25.8 million mortgage loan at 801 Market Street as part of the transaction with Macerich.

G&A costs were down $800,000 or approximately 8.7% for the quarter, reflecting expense savings in a number of categories. We incurred $4.9 million of employee separation expenses, associated with the previously-announced retirement of our vice chairman as well as other officers and employees during the quarter. To be clear, the separation charges are not included in G&A.

During the second quarter of 2014, we also recorded impairment charges of $13.9 million at Nittany Mall and $2.2 million at North Hanover Mall, as a result of signing the purchase contract for the sale of these two assets.

Our liquidity position remains strong with nearly $550 million of liquidity at the end of the quarter, including $393 million of unused borrowing capacity under our revolving credit facility.

Regarding our outlook for 2014, we expect the GAAP earnings per diluted share will be a net loss between $0.43 and $0.50. We expect FFO with adjusted to be in the range of $1.98 to $2.01 per share and FFO per diluted share to be in the range of $1.86 to $1.89. The revised guidance includes expected dilution of $0.03 resulting from The Gallery transaction. We are maintaining our expectations for same-store NOI growth of 2% to 2.4%, excluding lease termination fees. Finally, our guidance does not contemplate any other material property dispositions or acquisitions and does not assume any capital market transactions other than financing transactions in the ordinary course of business.

With that, we'll open it up for questions.

Thank you, sir. (Operator Instructions) D.J. Busch, Green Street Advisors.

Joe, was just curious of the level demand was from operating partners to join forces at The Gallery. I guess did you approach Macerich or was this more of an open bidding process to come on for a joint venture?

Well, we did talk to other developers, other potential joint venture partners for the transaction. But essentially, when we -- you know we sort of looked at the skill set of the folks in our sector, we liked the fact that Macerich had significant experience in urban projects, in high rise, in mixed use, etc. So as a result, we really thought they were the ideal candidate. I guess in terms of just history, I called Art I guess just about a year ago and really introduced the possibility of their looking at The Gallery.

Okay. In the press release, you used the term accessible luxury retailing. That sounds maybe like a higher end outlet. Last quarter, you mentioned that the outlet format was more unlikely. Has that changed at all with your partnership with Macerich?

Well, we're really not in a position today to sort of articulate the vision. I think that's something that from our perspective, D.J., what we really want to do is get through our discussions with the city and finalize our entitlements, etc. before we articulate precisely what we're going to be doing at The Gallery.

Okay and then can you disclose what the cap rate was on the transaction?

No, but suffice to say that when you look across the recent mall sales, it was a respectable cap rate. But I think as we look at this deal, we think one, we sold it a fair price. But we also think that this is really about value creation. It's about risk mitigation and it's about capital allocation. So, again not to repeat myself, but we like Macerich as a venture partner. They've done some great projects in California, in Virginia and in Chicago. So, we really see this more as we've created significant upside in the project as a result of having done this deal.

Ki Bin Kim, SunTrust.

Thanks. Just a couple more follow-ups on The Gallery. What are you looking for in a -- have your -- when you request funds from the city. Is it all grants or is it just very low-cost financing? What's in a -- in the best case scenario, what would you get from the city?

Well, first off, hi, Ki Bin. The answer to your question is a combination of grants, [TFs], low interest, etc. I think it would really compromise -- for me to answer your question with specificity would sort of compromise our discussions with the city. So, I think I'd rather punt on that one and get back to you all as we are in a better position to do so.

Okay, fair enough. Any update on when that could be, from a timing perspective?

Well, I would just say that we are, Macerich and ourselves, are -- we're running at full speed already. We think it's a great partnership and we're on it. It'll be as soon as possible. We're looking to move into the fall with fully ramped up in our discussions with the city and be back to you some time shortly after that.

Okay and quick one here, does -- is it a full, a pure 50/50 joint venture or does Macerich get some kind of promote? Is there any kind of promote just going to one party or another?

It's a 50/50 joint venture right down the middle.

Okay, all right.

Ben Yang, Evercore.

Joe, I'm curious. Curious how much more work you guys need to do to hit your same-store NOI guidance? I mean I know you guys did a lot of leasing this year. You mentioned Voorhees and Washington Crown, tenants taking space, the significant uptick in occupancy. But would you say that 100% of the leasing is done at this point to hit that target?

Yes, Ben, as Joe mentioned, we have about 575,000 square feet of executed leases that we're working to get those tenants open for the year. Maybe at 25,000 of that would relate to 2015 openings, but I would say substantial all the leasing that we need to do to hit our numbers is in place and we're now working on preparing the spaces, if we haven't already turned them over to tenants, to turn them over on schedule to meet those NOI goals for the year.

I mean how about like risk of tenant fallout or percentage rents kind of falling short on the lower sales? I mean is that also baked into the number that you're putting up there?

Yes, I think it's based on our expectations of any tenant fallout as well. I mean we usually bake that into our original guidance and update it as the year progresses.

What is that expectation? Can you share that with us?

No, I mean it's baked into our bad debt numbers and you know we have an equivalent of a reserve for vacancy, if you will.

Okay, then just final question, another question on the joint venture with Macerich. Are you potentially in discussions to do more JVs with them, maybe on future developments, redevelopments or even some pending acquisitions given, I think you stated publicly that you'd be willing to take on a partner at Springfield Town Center?

We are not in any other discussions with Macerich at this time. I think our venture at this point is myopically and laser focused on the redevelopment of The Gallery.

Got it and are you willing to potentially take on a partner at Springfield if the opportunity arises?

Well, you know as I allude -- as I mentioned in my script, if you look at the capital that we have gotten from The Gallery as well as a number of other of our sales and we sell an additional $125 million in properties that we or they're currently in process for sale, we end up after the acquisition of Springfield, we'll leverage below 50%. I think at about 49.5%.

So, the need to sell Springfield Town Center becomes a lot less critical to us going forward from a capital perspective. I wouldn't say that we're ruling it out. I would say it's something that we'll continue to look at as we look at our capital needs over the next -- over the coming months. But certainly it puts us in a position where we are firmly in the driver's seat as it relates to any discussion about Springfield Town Center.

I would add to that that the lease up is going exceedingly well. So as you think about the transaction with Vornado really absorbing the construction risk, the development risk and the lease up continuing to move at a brisk pace, essentially de-risks the project. So again, we'll continue to think about it. We'll continue to sort of consider it. But the urgency of it is certainly much less pronounced.

Got it.

Christine McElroy, Citi.

In regards to the Macerich JV, I understand that both companies will be doing the development, the leasing, the management. But as you sat down with them and thought about strengths in each of your organizations, you actually said Joe in your opening remarks, each partner will bring our best. How do you expect to divide up responsibilities along the way, given that you both have development, leasing, and management capabilities? I'm just trying to get a sense for how the partnership will work from a logistical standpoint.

Short answer, yes we have done that. Longer answer is we're the Philly guys. As a result, we really see our role in the development process as being focused on the lease modifications, public financing, entitlements, etc. Macerich will lead the development effort and obviously will be responsible for visioning and execution of the development strategy. As you take a step beyond that from a leasing perspective, they will be responsible for the majority of the leasing, although we will play a role in the leasing from both a restaurant and food perspective, again, given our relationships and our success in that arena.

So, yes there has been a very -- these discussions have been going on for about a year that there has been a very clear agreement between us as to the allocation of responsibilities that is really driven by the strengths of the -- of ourselves and Macerich.

Now the vision, we've seen the renderings. You had a vision for what the center will potentially look like, the retail and the street front, the potential for adding hotel and multifamily. Is Macerich on board with that vision or do you effectively go back to the drawing board architecturally and kind of redesign things at this point, before moving forward?

I wouldn't say it is going back to the drawing board, because there is obviously a lot of the work that we've done is of value from a systems perspective, etc. But I would think that there is -- Macerich and ourselves right now are doing a certain amount of rethinking of the project. So I think it's somewhere between throwing away what we have and utilizing it. We'll obviously take advantage of all the knowledge that we have about the property in some of the work. But again I think that as you -- as we look forward, there will probably be a certain amount of rethinking and re-visioning of the redevelopment of The Gallery.

Then on Springfield, given the leasing progress that both you and Vornado have made in recent months, has there been any change in the original expectation that the center would yield just north of 4% by Q1 2015. So at this point, where would you expect the yield to be when you ultimately take down the asset?

Christy, I think we'll probably provide some updated information to the market along the same timeframe that Joe mentioned, making some announcements about some of the major tenants. So I think it would be premature to release that information until we can actually announce the tenant line up. So look for that probably sometime in this quarter.

Okay and then just lastly, Joe, you talked about raising capital, doing JVs, like you did with The Gallery, selling non-core assets, extricating yourself from power center JVs, potentially other JVs. You sold about $125 million of equity in the Springfield deal when the stock was below the level it is today. Now that the stock has come off its May lows, do you start thinking about re-equitizing through a secondary offering? If not, is there a price that starts to get interesting to you?

No. Let me restate that, no. No, absolutely not. I think at this point, we are -- we're focused on our disposition program. We've had a lot of success thus far. Two more assets under agreement, placed an additional one on the market. Palmer Park, we actually have an offer on our land parcel, one of our land parcels and the -- we're making progress on the -- as you've said, extricating ourselves from the power centers. That's really our focus at this point. As I mentioned I believe on Ben's question, we'll continue to look at and consider other opportunities to raise capital, but one that we're not focused on right now and don't anticipate going to the equity markets.

(Operator Instructions) Nathan Isbee, Stifel.

Hey, as you explored The Gallery JV, did you get into any pricing discussions with other partners, perhaps more capital focused partners? I guess I'm just trying to understand how much the Macerich development experience and the operational side of things impacted the pricing on this JV?

Well, first off, we, as I mentioned, we did talk to others regarding The Gallery. I think it would be very difficult. We had some discussions with pure capital partners. But I think it would have ended up in a worse result than the one that we concluded with Macerich given the risk profile associated with a redevelopment of The Gallery. You know, Nate, you've been through The Gallery.

I think that what Macerich brought to the table is not to be repetitive but obviously their skill set associated with urban mixed-use, high rise, developments but also they shared a vision with us, right. A vision of what The Gallery can be. Right, a vision of what it can be, understanding the tremendous sort of demographics that exist between the Convention Center and the Constitution Center and the transit station and the population of downtown Philadelphia. Remember these folks are stepping into a transaction with no lease modification in place and with no public financing in place. So we think in addition to the skill set, they shared our vision and understand the potential of the project. I think if you look, if you think about a pure capital partner that would have been very difficult to communicate.

Sure and then I guess the decision to look for a partner like Macerich, was this specific to any challenges you encountered to date in the planning process or was this just prudence on your part as you see the size and the scope of what this could ultimately lead to?

I think the latter of your points. I don't think it was related to a particular obstacle or barrier that we confronted. I think personally my family lives in Southern California. My brother's been out there for 35 years. I've had lunch at Santa Monica Place any number of times. I've always admired the -- what that was and what it is and to a certain extent, Nate, you know Third Street Promenade is not -- wasn't all that different than Market East 15 years ago.

So, I saw a certain amount of sort of situations that they had confronted and had successful conclusions that I liked. I obviously took a look at the work they did at North Bridge. The fact that they were successful in the [Ederle] transaction. I took a look at the work they're doing at Tysons. I think as a result of all that, in terms of creating the highest and best value for The Gallery and for our shareholders, I like the Macerich transaction and I think I said earlier, it was a -- I mean I reached out to them.

Okay, thanks. Then just one last question on Springfield. Do you expect, are you in any late stage negotiations to add a junior anchor?

Really not in a position to comment on that right now, Nate. By the way, Nate, you live near Springfield. What do you think of it? I'm not supposed to do that. I'm sorry.

Had a chance to go down there a few weeks ago.

And?

We'll talk offline.

Ki Bin Kim, SunTrust.

I realize some of the details around the plans for The Gallery are pretty sensitive, but and then I know there was no real dollar amount that you came out with initially on how much the development would be, but there's Macerich decision, if I keep it in simple terms, is their vision compared to what you had in mind, is it more dense? Is it more dollars? Without giving anything away, is it just a bigger thing with them, what they have in mind?

I don't think at this point, Ki Bin, we're really in a position to articulate what the ultimate vision will be. I think it's something that we'll come to together. I think we want to be careful that we want to get our public financing and our lease modification in place before we really communicate what it's going to be. But I think, again I think Macerich is experienced and they're -- what they have done will make the end product exciting and you know more -- a better return and a better IRR going forward than had been with just us sort of spearheading the venture.

Okay and on your Gloucester, your development out there, I think Simon in their supplemental said they're a 50% partner, you figure at 25. Just curious who was the last 25% partner?

I think that's a question you'd have to ask Simon.

Okay.

Sorry.

No worries. Just one last question on some of the occupancy trends that you've mentioned that should be pending in the second half. If I remember correctly, the way you guys report occupancy is really purely based on a physical basis. I know you guys have done a lot of leasing that are at malls like Moorestown. If you look at things that are kind of concrete and should be coming the second half, what should we expect in this kind of non-anchor occupancy number, excluding non-core of 90.2%. I mean in more tangible terms, where should that go in the second half?

You should see it end the year north of 93%.

So 300 basis points more just on the non-anchor?

Yes.

At this time, we're showing no further questions. We'll go ahead and conclude the question and answer session. At this time, I'd like to hand the conference back over to management for any closing remarks.

Thank you all for participating today. The highlight of this call, obviously the announcement of our joint venture with Macerich on The Gallery. But let's not ignore the litany of our achievements over the past couple of years. We've sold seven assets. We have two under contract. Our operations have been strong with leasing spreads in occupancy. Levels on par with our peers. We're well on our way to creating a company with a high quality portfolio, consisting of trophy assets in top markets. We're delivering on our commitments to transform this company and we aren't resting. Our future is bright. We're filled with optimism. We remain committed to driving shareholder value and it's going to be a busy summer. Thanks.

We thank you, sir, and to the rest of the management team for your time. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day, everyone.