Pennsylvania Real Estate Investment Trust (PEI) 2014 Q3 法說會逐字稿

Welcome to the PREIT Third Quarter 2014 Earnings Call. 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 Heather Crowell. Ms. Crowell, please go ahead.

Thank you, and good morning, everyone. Welcome to PREIT's third 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, October 29, 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 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'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. We had a great quarter. We continue to deliver strong results, capturing the benefit from our improved portfolio, to the progress we've made in PREIT's transformation to a quality mall company. Our focus is on quality, while improving our balance sheet and operational results a sharper than ever.

Our strategy is designed to drive long-term shareholder value as the market has continually reward the companies with high quality properties with higher multiples. The continued execution of our strategy is transforming our portfolio and it's narrowing the NAV gap.

Same-store NOI growth turned positive for the year, in spite of the effects of a harsh winter that impacted our first quarter results. And in the outstanding quarter, where we recorded 6% growth in same-store NOI as a result of the year-to-date growth at 2%. Renewal spreads continue to be strong at 4.8% year-to-date.

During the quarter, renewals executed for leases with parts greater than five years were 18.1%. Occupancy gains continued in the portfolio with same-store malls increasing by 80 basis points for non-anchor space. This is in spite of declines at several premier properties with tenancy in the process are moving in for holiday.

Leasing volume has been remarkably strong this year. Till the end of the quarter, we've executed over 395,000 square feet more of new leases than we had this time last year.

As of the end of the quarter, we have over 400,000 square feet of leases executed in our wholly-owned portfolio and where we have taken occupancy. With JVs are added to this total, we had a robust 557,000 square feet of rent paying tenants not factored into our 930 occupancy figures.

On the disposition front, we have continued to methodically reduce our exposure to non-core properties. And in past 22 months, we have sold (inaudible) 12 properties and an interest in The Gallery for a total of over 400 million in proceeds.

In addition, we had an Uniontown Mall at Uniontown, Pennsylvania. They are non-core (inaudible) leaving us with two malls currently being marketed. We also have an offer on our non-income producing land and we are making progress in selling interest in two of our power center joint ventures. The benefits of our improved portfolio were taking effect. We've reduced our department store exposure having sold properties that are experiencing department store closings.

We have also been able to secure better rents on small shop renewals for the longer term. As leases mature, we expect to see a gradual impact from the effects of our portfolio improvement.

As many of our peers, we believe the retailer sales environment is changing. Comp store go up sequentially by 1.6%, which repays with (inaudible) that were relatively flat. The consumers stay somewhat cautious in our view and we expect sales to improve certainly in the fourth quarter. In spite of the current sales environment, we believe there continues to be opportunities to drive rents in our portfolio.

Over the past two weeks, Springfield Town Center in Virginia and Century 21 at The Gallery opened to tremendous success.

Springfield Town Center is exceeding even our most optimistic expectations with improvements of our initial underwriting. Upon opening it was 81% occupied. We have commitments for over 80% of the non-anchor space and expect to achieve over 90% non-anchor occupancy by the end of 2015. The tenant lineup is incredible. The crowds and people are unrelenting and the initial sales performance is exceeding retailer expectations. We got storage of executives washing dishes, merchandise being shipped from other area stores and staff being added.

The retailers, the customers in PREIT couldn't be happier. It's noteworthy that in-place tenants are already talking about expanding or introducing other concepts they operate.

The property is equipped with amenities that are designed to attract and retain customers like charging stations, free WiFi, children's play area and a dedicated court equipped with the children's library. We're particularly excited to have entered into agreement with Deliv to offer same-day delivery service from this property. So first for us, in a relationship we are looking to expand as we continue to find ways to embrace the omni-channel platform. With this tenant mix in an affluent trade area in an unbelievable location, we're confident Springfield Town Center will exceed our expectations.

Century 21 opened to the public just yesterday and we're tremendously pleased with the warm welcome they've received from Philadelphians. This marks the first step in the renaissance of The Gallery with Macerich as our partner. We're poised to deliver a world class project.

Our discussion with the public sector continue to progress with the expectation that City Council will consider a public financing package in December and ratify it in early 2015. As this process unfolds, we intend to update you on our vision, scope, schedule and returns.

We are methodically executing on asset sales in a manner that sets us apart from our peers and seizing the real opportunity that an A-quality asset. The pending acquisition in lease up of Springfield Town Center and the redevelopment plan for The Gallery are transformative for our portfolio.

We're improving the quality of our leasing team, expanding relationships with growing retailers, such as Uniglow, Field & Stream, ULTA Cosmetics, Vera Bradley and Michael Kors; all of them, we've signed leases with in this quarter.

From the balance sheet perspective, we sit today with a leverage of under 49% representing continued sequential improvement. We had previously communicated a range or sale or venture proceeds being short of $150 million to $400 million. Since the announcement of the pending acquisition of Springfield Town Center, we've raised approximately $162 million with another $93 million in the queue.

Our leverage at the end of September was 48.9%. As we complete the acquisition of Springfield Town Center and the (inaudible) 93 million in pending transactions, our pro forma leverage will remain less than 50%.

As it relates to growth in addition to our goal of exceeding our projections with our two great opportunities; The Gallery and Springfield, we're also focused on harvesting the natural growth that we expect from pruning of the lower quality properties. Our dominant position in the Philadelphia region has generated several redevelopment opportunities that we believe will drive asset values, sales and NOI.

We have an opportunity to add density to the extremely well located Plymouth Meeting Mall site and are pursuing entitlements for the joint venture with a high quality extended stay hotel with PREIT's contribution being a vacant land parcel.

Similarly, we have a great opportunity to reconfigure Exton Square Mall situated in the best demographic market our current portfolio has to offer, resulting from the closing of the JCPenney store and a near-term opportunity to recapture existing Kmart store along the well-traveled road.

We look forward to sharing details about these projects and others with you in the near future.

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

Thank you, Joe. We had another strong quarter with solid growth in same-store NOI and an 8.9% increase in FFO as adjusted per share. We are adjusting our previously announced guidance expectations for FFO to reflect the dilution from the sale of North Hanover and Nittany Malls in September of approximately $0.03 per share and other factors which individually are not material.

Let me cover some of the financial and operating results in a bit more detail. Same-store NOI for the quarter was $63.7 million, a 3.6 million or 5.9% increase over the corresponding 2013 period. Excluding lease terminations, same-store NOI increased by 6%. The improvement in same-store NOI was led by an increase of over 9% at our corporate assets and NOI was up in all property tiers, except in our non-core group.

Non-anchor occupancy in our same-store properties was up 80 basis points to 91.4% and total occupancy increased by 50 basis points to 95.4%. As Joe mentioned, we have a sizable backlog of executed leases pending occupancy. Approximately 290,000 square feet of retailers are slated to open in the fourth quarter of our wholly-owned properties. And an additional 150,000 square feet of retailers will open at our joint venture properties. So we anticipate further occupancy gains by year-end.

Following the sale of a 50% interest in Gallery for Macerich in July, we have reclassified the property into redevelopment. You will see this presentation at our supplemental.

There is a lot of confusion around our reported results, so let me try to clarify it for you. We experienced a 250 basis point improvement in our operating margins for the quarter. The improvement in operating results came from a combination of top line revenue growth, which accounted for about half of the improvement and operating expense savings, which contributed the balance.

Rental revenues were up 2.8% for the quarter, reflecting increased occupancy and higher average rents. I've put the expense reductions in the three categories, which each accounted for about a third of the improvement. The first would be planned CAM and other expense reductions. Secondly, lower utility costs resulting from a mild summer. And three, the impact of higher real estate tax assessments that were recorded in the third quarter of 2013.

While some of the CAM and other expense savings are expected to be of a permanent nature, we anticipate operating expenses will increase in the fourth quarter, reflecting a seasonality of CAM costs, utilities and other expenses, such as property marketing.

As a reminder, in 2013 third quarter we've received notice of additional real estate tax assessments at a number of our New Jersey properties. These additional tax assessments are for calendar year 2013. So we had recorded catch-up adjustment against 2013's first and second quarters and last year's third quarter. However, this was largely offset by additional real estate tax reimbursements, that were also recorded in last year's third quarter.

At the end of September, we've opened about 170,000 square feet of new tenants, including Century 21 at The Gallery, Washington Crown Center, Uniglow, Willow Grove Park and also at Valley View Mall. Next month, we anticipate opening new Dick's Sporting Goods stores at Francis Scott Key and Valley View Malls.

The remerchandising on mall, let's say, fourth quarter openings of Forever 21 and new Victoria's Secret prototype and Buffalo Wild Wings, including the tenants that mentioned above the healthcare office expansion at The Gallery and other retail tenants throughout the portfolio we anticipate adding over 500,000 square feet of new leases to our [vendor] by the end of the year.

Interest expense decreased primarily from lower overall debt balances and lower average interest rates. In the third quarter, our average debt balance was $131 million lower than a year ago and the average interest rate of 5.18% with 36 basis points lower than in the third quarter of 2013.

Our liquidity position remains strong with over $480 million of cash and unused borrowing capacity under our bank credit facilities. Regarding our outlook for 2014, we expect the GAAP earnings per diluted share will be a net loss between $0.54 and $0.58. We expect FFO as adjusted to be in the range of $1.94 to $1.97 per share and FFO per diluted share to be in a range of $1.81 to $1.84.

The revised guidance includes expected dilution of $0.03 per share from the third quarter sales of North Hanover and Nittany Malls. We are maintaining our expectations for full year same-store NOI growth of 2% to 2.4% excluding lease termination fees. Finally, while we continue to market a number of assets for sale, our guidance does not contemplate any other material, operating property dispositions for acquisitions. In addition, our guidance does not assume any capital market transactions other than financing transactions and it's occurring in the ordinary course of business.

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

We will now begin the question-and-answer session. (Operator Instructions) Ki Bin Kim, SunTrust Robinson Humphrey.

Thank you. So it does seem like there are lot of moving parts this quarter. But I want to focus on -- but I think you've 500,000 square feet of leases that were signed but not paying, which I think was the same number last quarter. Could you just give us a little guidance on how much of this -- I think it cost around -- we should expect in the next four quarters? And what are the lease pressures achieving on those leases?

These are actually -- we're talking about new leases. So we typically don't report spreads on new leases. But 290,000 is going to -- and the wholly-owned properties will take occupancy before the end of the year. We already have 65,000 in occupancy as we sit today towards the end of October. And we have another call it 150,000 on our joint venture properties and that number includes Century 21 which opened this week.

Okay. How does that play into your same-store revenue number that you should report or that should be -- how should that impact your same-store revenue number in the fourth quarter? And I'll leave it there.

Well, obviously we expect that to have a positive impact on the revenue number for the fourth quarter, but we would anticipate a much more significant impact in 2015, because we aren't going to have many stores opened for a month or two before the end of 2014.

Okay. I guess how that feel when you have normalized quarterly basis, like how many basis points that should approximately add to your top line on a full quarter run rate basis?

Yeah.

If I get a sense of what the trend was versus your rental revenues on year-over-year this quarter, that's why I asked.

I'm not going to give you specific response to that question, Ki. So we'll have to think about and get back to you.

All right. Thank you.

Craig Schmidt, BOA.

Thank you. The base rents fell sequentially pretty significantly from second to third quarter, but the expense reimbursements actually increased. I wonder what was causing that differential?

So it's a couple of things. I think that the same-store pool has changed. We've reclassified The Gallery out of the same-store and as well the sale of two assets that closed during this quarter, North Hanover Malls and Nittany Malls were also excluded from the same-store pool for the third quarter. So those changes would account for part of what you're seeing, Craig.

But wouldn't that reduce the expense reimbursement as well.

No, typically the expense reimbursement ratio is lower in the properties that are no longer in the pool than they were previously.

Okay. And then the stabilized return on Springfield Town Center that you raised on [5.5 to 6.7], is that primarily due to the 80 million of property development rates? And in that calculation, what did you assume was the one-time earn-out payment to Vornado?

Yeah. We didn't -- we haven't provided that one-time earn-out payment.

Craig, this is Joe. All of those things are factored into it. The value of the peripheral ground upside on lease up and the one-time payment to Vornado are factored into that. We didn't provide specific color on each item.

Okay. Thank you.

Michael Mueller, JPMorgan.

Yeah. Hi. I guess sticking with Springfield for a second, not a stabilized deal down the road, but just given the leasing progress you are talking about, is there any change to the initial yield that you expect once you buy it.

Mike, we don't have specific color on that yet, but as we -- I would expect by the end of the year, we will provide some additional color on that, because part of what we're doing now is we are finding the way. It's a matter of getting the tenants cheered up to two or three times a year, when tenants typically open. So that piece is still in flux, but we'll provide some color in the near-term on that.

Okay. And then just you gave some color on the asset sales, what the plan was, what you've done so far. I mean, what can you reasonably expect to execute from this point until Springfield closes or your year-end '14, whichever metric you want to talk about and how much more do you think will hit by that?

What we think, roughly maybe $40 million we close before the end of this year of the 93 and we're optimistic we can make progress on the balance. If it doesn't close by March 31st, we're hopeful that they would close in the second quarter of next year.

Okay. That was it. Thank you.

Christy McElroy, Citi. Please go ahead.

Hi, good morning. I just wanted to follow-up, Bob, on the $0.04 guidance decrease. The $0.03 of dilution that you spoke about from Nittany and North Hanover seems a little high given that the $32 million deal closed in early September. What was the average cap rate on that sale? It seems like you'd have to be well into the double-digits to get to that kind of dilution. And can you also detail sort of the other factors that you mentioned that impacted that change in the FFO range?

Sure. With respect to -- the reason why we have maybe a greater dilution that what you're saying is essentially, right now most of the sales proceeds are sitting in cash on our balance sheet. Since we don't really have any short-term debt that we could repay with the proceeds. So you typically would see less of dilutive effect, so we can actually redeploy those proceeds into paying of higher coupon debt. So we are at a point now where all of our bank credit is reduced to zero and we aren't basically holding a cash pending the acquisition of Springfield Town Center in the first quarter.

So what was the cap rate?

We haven't disclosed the cap rates.

Okay. And in terms of the same-store NOI growth in Q3, just trying to get a sense of how much of that 6% was driven by one-time expense savings versus more permanent changes? You talked about a number of different factors that impacted expenses. So stripping out sort of the one-time impacts in Q3 what would same-store NOI growth have been?

It's hard to look at one-time savings because some other stuff, it was a dynamic business. So we have a number of contracts for service providers, some of that was impacted as we've renegotiated contracts or contracts came up for renewal in the second and third quarters, so that has an impact. Yeah I think if you look at the tax fees, real estate tax fees, that clearly was a one-time benefit. Actually, harm for us, last year that we got the benefit of them this year. But we also, as we mentioned I think early in the year, we've made some reductions and reducing customer service centers at some of our low sales productivity properties that would generate annualized sales in excess of a $1 million a year. But there's a lot of -- you know it's nickels and dimes that add up to dollars.

On fourth quarter, should we expect to see another expense decline on same-store?

No, I would expect sales -- expenses to revert to more normalized levels. As a matter of that point to remind you, last year we actually had a real estate tax assessment appeal that broken our favor last year. So we feel we may or may not see something similar to that this year. So other -- all other things being equally, we'd expect same-store operating expenses to be -- I don't expect to see the same type of decrease that you saw on the third quarter.

Okay. Thank you.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thanks. I have just got a couple of quick on follow-up questions. If I remember your accounting, your methodology correctly, your occupancy is always based on a physical bases. And even though occupancy might increase, your tenant sales may not, because I think you wait a full year further for any comp sales to be reported. I guess my is that, is that correct?

And I think there is an Apple store and I think Willow Grove that might not be in your tenant sales numbers. When is that going to be in your numbers? And the second part of that question is, I know it's a lot sorry, what is your total tenant sales across from all without the 10,000 square foot definition?

So first off, tenants become comp after 24 months -- 12 months. That is one answer. The other regarding the Apple store and Willow, that will come in Q4 of this year and it should represent a significant uplift. I mean, I guess the other thing is, if you think about our sales generally, you've got a couple of things I think you need to look at. One is, basically in our premier properties there is a lot of moving around of tenants from high performance in Victoria's Secrets and Cherry Hill. Uniglow is just moving in and not being in comp yet, a lot of moving around.

Clearly the juniors category is struggling I think across our industry, which is another factor. And Apple would be -- the iPhone 6 came into being last week of September. So I think when you factor-in some of the movement in the premier properties with that income that becomes comp. And when you think about the juniors' category, some of them beginning to turn themselves around, that your own comp prognosis for sales I think is a positive point.

Okay. And did you have the total mall sales data? I mean, that's a metric, there are some other reason I have started to report. Just curious if you guys will have that information year-over-year.

Ki, I think Joe mentioned in his remarks that the total sales were relatively flat this year compared to last year.

Okay. Fine.

And you had a question on occupancy. Yes, we don't include signed leases unless the tenant has physically taken occupancy.

Okay. And on -- just to follow-up on Joe's last comment about Apple moving into the fourth quarter, the comp data, do you have any sense of what that does to your reported sales numbers on a kind of same-store basis?

It will be very helpful, Ki.

All right. All right. Thank you.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Joseph Coradino for any closing remarks.

I'd like to close by just saying we had a great quarter. We are delivering on our transformation to a high-quality mall company. We remain committed to driving shareholder value. We're confident that continuing the implementation of our strategy and realization of our goals, we will yield great results and look forward to seeing many of you, maybe, next week. Have a good day.

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