Pennsylvania Real Estate Investment Trust (PEI) 2015 Q1 法說會逐字稿

Good morning and welcome to the PREIT first-quarter 2015 earnings conference call.

(Operator Instructions)

Please also note this event is being recorded. I would now like to turn the conference over to Heather Crowell. Ms. Crowell, please go ahead, ma'am.

Thank you. Good morning. And thank you all for joining us for PREIT's first-quarter 2015 earnings 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 effect future events or results. Descriptions of these risks are set forth in the Company's SEC filings.

Statements that PREIT makes today might be accurate only as of today, April 29, 2015. 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. Today we see demonstrable evidence of PREIT's dramatic transformation. Portfolio sales were $414 per square foot. We sold or are in the process of selling lower quality malls. We've acquired Springfield town center and have announced our plans to redevelop The Gallery.

We are a new company. Our results for the quarter were strong, and the future is bright, as these two premiere assets stabilize and we continue to realize growth in our improved portfolio. As we approach PREIT's management team's third anniversary, we reflected on the goals we set at our November 2012 investor day.

Since they were 2015 goals, we thought it was appropriate to present a score card to place our accomplishments into context. In 2012, we laid out the following goals. Our leverage was probably the worst in the sector at 62%, we set a goal of below 55%. Our debt/EBITDA was 8.8, and we set a goal of 7.5%.

Same store NOI growth was inconsistent at best, and we set a goal of 3%. Our occupancy levels had historically trailed our peers, and we set a goal of 95%, compared to 92.6% at the time. We also set a target occupancy cost of 12.5%, which compared to 11.4% at the time.

Sales at the company were $379 per square foot, and we targeted over $400 a foot. We are pleased with the progress we have made and are even more excited about our future opportunities. By executing on the plan we laid out, we have not just met but have exceeded many of these expectations.

Leverage is below 50%, and a strong balance sheet continues to be a major priority for the Company. Occupancy costs have improved by 130 basis points to 12.7%, and total same-store mall occupancy is projected to be 95% by year end. But most indicative of the transformed company we are today is the sales productivity, now generating $414 per square foot, having blown past our $400 goal.

This is a function of our remarkable portfolio improvement efforts. We have led the way in the sale of lower productivity malls, and our intense focus on merchandising our assets has resulted in fundamental improvements in our portfolio. And our outlook on the future is bright.

Improvements in the quality of our portfolio and overall health of the retail industry is reflected in sales growth from a low point of $334 per square foot at the end of 2009 to $414 today, $80 a square foot, a 24% increase. We sit today with 11 assets generating sales over $400 a foot, nearly twice as many as a year ago.

Valley and Viewmont malls, two of the properties that recently surpassed this milestone, are great examples of assets that have been successfully re-merchandised. We executed on re-merchandising plans where we reconfigured existing spaces and added catalyst tenants for their respective markets, Forever 21, ULTA, and Buffalo Wild Wings at Viewmont and several restaurants at Valley mall.

We ended the quarter with total occupancy of 81.4%. Pardon me. We added Apple at Willow Grove a few years back, and the results of that addition are bearing fruit in the sales trajectory at that asset. Cherry hill mall is knocking on the door of $650 per square foot, and we have a merchandising plan in place to get the asset to the $700 per square foot mark.

Recently we have signed with leases Lulelemon, Tumi, and Adidas and have a number of transactions in the pipeline with other noteworthy concepts. Having blown past that $400 per square foot mark, today we are setting a new target at $450 per square foot. This is a milestone that's achievable based on efforts that we are currently undertaking.

Let me talk a little bit more about our tenant sales performance this quarter. Same-tenant sales increased 9% in January, 2.4% in February, and 4.5% in March, strong results by any standard. Every way we look at sales performance for the quarter, for the last 12 months, comp tenants for all tenants, indications are positive.

We think this speaks to the results of our re-merchandising efforts undertaken over the past few years, providing more compelling options to our shoppers. Now let me update you on these continuing initiatives.

We have three assets under agreement of sale, Palmer, Uniontown, and Springfield Park, and continue to pursue the sale of additional lower-productivity assets and are currently considering additional offers. At Springfield town center, we are very excited to have closed on that acquisition, which underscores our portfolio transformation.

Since the grand reopening in October, the property has performed extremely well, and we are confident that we will be able to drive tenancy and sales and integrate it into PREIT's premiere platform. The leasing of Springfield town center is going well. We ended the quarter with total occupancy of 81.4%.

We fully executed leases for 89.7% of the space, having signed over 55,000 square feet of new space since the year began. Notable recent openings were Nordstrom Rack, New York and company, Finish Line, and Hot Topic, to name a few. We are projecting year-end occupancy over 90%, including such tenants as Dave and Busters, Zales, Zinburger, and Wood Ranch BBQ.

During the quarter, we received a significant commitment from Macy's for a major upgrade and renovation of their store. After the close of the quarter, we announced our plans to redevelop The Gallery into The Fashion Outlets of Philadelphia. We are excited about the project and optimistic that we'll receive the necessary approvals from city council.

By way of update, we received unanimous approvals on the TIF and the transaction from two essential public agencies, the Philadelphia school reform commission and the Philadelphia redevelopment authority respectively. The necessary ordinance have been introduced at city council, and a public hearing on the matter will take place on May 28, going to final vote on June 18.

As we have outlined, the plan calls for a $325 million capital investment, and we are seeking $90.5 million in public financing in addition to other forms of consideration to be recognized over time. We are encouraged by the response from elected and appointed officials. Tenant interest has been strong, and we are looking forward to highlighting this project with our partner, Macerich, at ICSC in Las Vegas.

Having completed the Springfield acquisition, and making significant progress in our objectives at the gallery, we are also finalizing our redevelopment plans for Exton square mall where we will be gaining control of one of the most valuable pieces of underdeveloped land in the greater Philadelphia market. In a market with truly superior demographics, we are in negotiations with a number of cornerstone tenants to anchor this exciting redevelopment.

We expect this will be another property that becomes a premiere asset. And we look forward to detailing our plans in the near future. Now, before I turn the call over to Bob McCadden, I just want to add a couple of things, as if we didn't communicate enough progress today.

When we exclude the two malls under contract, our portfolio is even stronger with sales at $420 per square foot. And last night after we issued our earnings release, we signed an agreement to sell our 475-acre parcel on I-75 in Gainesville, Florida, further progress on the disposition front.

So a dramatic improvement in metrics, led by sales, completed acquisition at Springfield town center, on our way with Gallery, and Exton up next. We are a new PREIT. With that, I'll turn it over to Bob.

Thanks, Joe. After finishing strong in 2014, we carried that momentum forward into the first quarter of this year to deliver another quarter of strong operating results. Let me cover the key highlights for the quarter.

FFO, as adjusted for the quarter, was $28.2 million, or $0.40 per diluted share, comparable to last year's results when we reported FFO as adjusted of $28 million, or $0.40 per share. Same-store NOI for the quarter was $61.7 million, a $3.5 million, or 6%, increase over the 2014 period.

Excluding lease termination revenue, same-store NOI was $61.3 million, a 5.6% increase over the prior-year period. Portfolio total occupancy was up by 140 basis points from our reported occupancy a year ago, partially driven by culling lower performing properties. Same-store non-mall anchor occupancy was relatively flat despite the acceleration of bankruptcies we saw in the first quarter.

Over the long-term, we view this as an opportunity to replace underperforming tenants. We are making meaningful progress towards back filling the 230,000 square feet of space vacated by these tenants as of March 31. Our focus is on quality replacements that will generate results consistent with our portfolio's quality.

We believe that our improved sales performance environment will allow us to deliver strong results in the future in terms of renewal spreads and attracting new retailers to the portfolio. Key drivers for performance during the quarter were a 1% increase in revenues over the prior-year's quarter. Revenue growth during the quarter was adversely impacted by the tenant bankruptcies mentioned earlier.

Revenues from these tenants in the first quarter of 2015 were approximately $900,000 lower than the same period last year. This impacted our revenue growth rate by approximately 90 basis points. The vacancies from these tenants also impacted our same-store non-anchor occupancy by about 200 basis points for the quarter.

Average gross rents for small-shop tenants on our same-store mall properties were up 3.9% as compared to in-place rents as of a year ago, driven by a 3.6% increase in our premiere malls and a 4.7% increase in our core growth malls. On a combined basis, CAM and real estate tax expenses were lower by 2.9% compared to last year.

Taxes were up by 2.6%, while CAM expenses were down by 6.2%. The 2014 quarter was impacted adversely by higher weather-related expenses, such as snow removal and utilities. Our income contribution from redistributed utilities came back to normal levels.

Bad-debt expense was about $300,000 worse than last year's first quarter, reflecting a $400,000 impact from the first-quarter bankruptcies. Interest expense for the quarter was $22.8 million, compared to $22.9 million last year, reflecting lower average borrowings, lower capitalized interest, slightly higher average rates, and a $500,000 loss on hedge ineffectiveness for the quarter.

Average borrowings were $112 million lower than last year, as we applied the proceeds from asset sales to reduce stat. The effect of interest rate on our borrowings of 5.15% was 16 basis points higher than last year's quarter. At the end of the quarter, our average borrowing rate was 4.55%, and the weighted average time to maturity in our mortgage loans is now 4.6 years.

G&A expenses for the quarter were $8.9 million, a decrease from last year's first quarter, reflecting continued reductions in our home office costs. We have been reducing our G&A expenses as we have sold assets, and with the addition of Springfield town center and when the redeveloped Gallery comes back online, our G&A as a percentage of revenue will decline further, benefiting from increased scale.

Outstanding debt at the end of the first quarter, including our share of partnership debt, was $2.1 billion, an increase of $334 million from the end of 2014, reflecting borrowings used to finance the cash portion of the Springfield town center purchase price. Our bank leverage ratio stood at 49.6%, a 10-basis-point reduction from March 2014's ratio.

Our maturity schedule in 2015 will give us an opportunity to reduce our average cost of debt. Following the April 2015 repayment of the mortgage loan in Magnolia mall, we have approximately $250 million of mortgage loans maturing this year at an average rate of 5.77%. Since the loans mature in the latter part of the year, we'll realize some benefit of the interest savings in 2015, but the bulk of the benefit will be realized in 2016 and beyond.

Regarding our outlook for 2015, we are reaffirming our expectations of FFO per diluted share to be in the range of $1.82 to $1.87, and FFO as adjusted will range from $1.87 to $1.92. We now expect that GAAP earnings per diluted share will be a net loss between $0.27 and $0.32, reflecting the impact of the first quarter's impairment charge. With that, we'll open it up for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

D.J. Busch, Green Street Advisors.

Thank you. Joe, the sales [per activity] was pretty strong across-the-board. I was just wondering if you've dug a little bit deeper? And how much of that increase was from retailers that are still in the portfolio and they are growing their same-store sales, versus some of the tenant fallout that you may have had in the first quarter that are an under-productive retailers that have exited their space?

Well, if we had, essentially, took out the retailers that, say, went away, we would have had about a $10 sales increase. Still quite respectable.

$10 is actually the impact of the bankrupt tenants. So $10 -- would have been $10 less.

Okay so closer to 400, or just over 400, if those retailers were still in the portfolio?

About 4 or 5

Okay. You know, Joe, you mentioned you have made a lot of progress on the disposition front. You've got two pending sales now. I think if those close that gives you about 31 malls. When you look at the portfolio, what is the right number of centers for Penn REIT to own? In a couple of years from now, what do you think that count will be in your portfolio?

I don't sort of look at it as a count, D.J. I look at it as having a quality portfolio, with A and B-plus assets. And given the fact that we are continuing to redevelop, reposition, et cetera, the count is difficult to nail down. I think we'll continue to sell off the ones that we've announced.

There is probably some others in the portfolio that we will look to sell, some of which we are in discussions with now. And again, continue to strategically look at the portfolio from two perspectives. One is we talk to you all a lot about sales per square foot from a metrics perspective, but there is also probably as important is how compelling we are to retailers.

I think we've seen, as we've continued to sell off from the bottom that we are in a better position in terms of our renewals, new deals, et cetera to attract retailers. So I don't think it's a pure count number, I think it's more a decision made on the potential upside that one could achieve from an asset through repositioning.

Washington Crown is a great example of that, right? I think of Washington Crown, we would have sold that asset three or four years ago, and we may still, by the way. But we have now seen sales increase dramatically there as a result of bringing in upwards of a half a dozen new medium box tenants in there.

So we're not -- again, I don't think it's a number. I can't give you that number. We'll continue to cull. We definitely will get smaller, but where we end up at remains to be seen.

To that point, almost every mall that's deemed non-core -- I guess opportunistic is somewhat non-core in a different name -- is over $300 a square foot now. You have operated these malls for a long time. Is there any strategic reason or compelling reason to own a mall that's doing under $300 sales per square foot?

And I know that is only one metric, but it is a metric that represents a lot of other characteristics of the mall. Is there any reason to own those? Or is there any ability to create value by owning malls of that level?

Well, two answers to that question. Probably not, for a public company. Probably not a reason to own most lower-quality malls. Unless you, as I said earlier, can drive that number upwards, which we have done in a couple of instances.

Or in some cases in the hands, it has upside, it has a better upside in the hands of an entrepreneur who's going to operate it differently from both a cost basis and expense basis, as well as looking at adaptive uses, bringing in education, government, hospital kinds of uses that are quite different than our core retail business. So again, sometimes it's appropriate for us to continue to own them if we believe we have upside in them.

I mean, a good example of that, that we continue to keep in our portfolio is Beaver Valley Mall. It's the center that is doing average comp sales of around $290 a foot. But it happens to be about a mile away from a proposed cracking plant that Shell is building that will generate thousands of jobs. So we sit and say to ourselves, you know, it's not ripe yet.

We are seeing sales increase there. We are seeing tenant interest. We're seeing hotel interests are going into out parcels. And so, there's a compelling reason to continue to own that because we think there may be additional upside. And part of that is going to be driven by what happens to the natural gas market, et cetera. So in any event, did I answer your question?

Yes, that was very helpful. Thank you very much.

Lina Rudashevski, JPMorgan.

Hi, thank you. I was just wondering can you provide a timeline and some rough dollar amounts for the sales that you announced?

Are you talking about our new goal of $450? Or I'm sorry?

Just for the disposals. (multiple speakers)

Oh the asset sales?

Yes.

I mean, look, selling malls like we have announced is a quite adventurous process. We are moving as expeditiously as possible. Our intention is to try and close those transactions mid to late summer. But that could move. But again, our goal is to enter the fall not owning those assets.

Okay. And what rough dollar amounts do you think you could sell those for?

We are not prepared to -- we are still in negotiations. We are not prepared to discuss that on the call.

Okay. Thank you.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thank you. Seems like the Gallery at Market East project is coming along a lot further lately. Just curious, what other, besides TIFs and grant money from the city or the State, what other, maybe, intangibles are they providing to make sure this project could have the highest probability of success? Meaning, are they committing more public service around it, whether that be more street cleaners, or police, or whatever it is to make sure that this has the best chance for success?

Hi, Ki Bin. It's really two things that we referred to when we call it other consideration. One is the elimination of our lease payment that we currently have an obligation to pay. And number two, it's continued payment into a fund that is to maintain upkeep of the mall. Maybe a little bit of a different approach to the services you mentioned, by funding our ability to do that.

How much is that, roughly?

At this point, we're really not prepared to say that publicly. The bill was just read in council last Thursday, and we are going through a period of time right now where we are meeting with all of the individual members at council, et cetera. And we're trying to keep it as quiet as possible right now. So I'm sorry; I can't outline those numbers.

No worries. I think we probably completely understand that. The second question, referring back to the 238,000 square feet of tenant bankruptcies, $900,000 revenue hit. From a timeline perspective, and if I remember correctly, I think you said half of that space was released? Could you give us an update on when that actually hits the revenue stream?

No -- go ahead, Ki.

No, go ahead.

So I think on the first, I guess at the year-end earnings call, we generated last year about $8.5 million of revenue from the bankrupt tenants. And we were forecasting that we would replace about half of that revenue in 2014. Obviously, we kept -- 2015 -- some of that we kept in place in the first quarter as all the closures didn't take place immediately.

And we'll continue to keep a handful of those tenants in place as they -- even though they filed for bankruptcy, they continue to operate at a select number of stores in certain properties. And we'll have backfill replacements, as well as specialty leasing revenue coming from those tenants, those spaces, mostly in the fourth quarter.

So you'll see the negative impact of that impacting the second and third quarter. But we should start to see that in the fourth quarter of 2015, as well as into 2016, where there is a number of spaces where we were looking to aggregate space for the inclusion of large format retailers. So we have a number of those teed up for 2016 openings.

Okay. All right. Thank you.

Michael Bilerman, Citi.

Yes, good morning, how are you?

How are you doing, Michael?

Great. Either for Joe or for Bob, I think you spent well over about $1.5 million in your activist defense costs between the $1 million this quarter and over $0.5 million last year. Can you just help us understand what went into that $1.5 million?

I think publicly the only thing you did was you had two letters filed in response to Land and Buildings. There was no proxy fight; there was no lawsuits. So it just seems like a lot of money. Can you help us walk through what you spent it on?

Well first off, by the way, we are Beatles fans too. We like the theme of Here Comes the Sun, for today. (laughter) In any event, yes, I mean we would have liked to have not spent any of it, by the way, Michael, so there will be no confusion. I mean, we -- it is essentially, look, there is a lot more going on behind the scenes than just the public filings.

And it was essentially legal fees and investment banking fees and fees to a PR group. And put a lot more time into this, and it's a lot more time consuming than we certainly would have liked. And we do everything we can to keep our costs down on all fronts here. And already had the same concern that you did, that that's a lot of money. But based on the investigation, the research, and the [banking] we did, by the way, we didn't pay what was asked. (technical difficulty)

Right, but I guess what goes -- the lawyers are hourly. I assume the banking fee has maybe a success fee associated with it. I'm just curious was there a larger strategic alternatives process being done? Because arguably $1.6 million is a lot of hours, even at $1,000 an hour. It just seems like a big number. I didn't know if whether there was something more particular that was going on?

I think that was really the cost of managing our way through the engagement with Land and Buildings. We took it very seriously. We evaluated every proposal, and that was cost of doing business. I mean, I don't know what else to tell you, other than that.

And is there any -- I assume now that you put the mark on the board, there shouldn't be any other costs that come the rest of the year?

Pardon me, Michael? Could you ask that question again? I'm sorry.

Now that you have settled, and you put the marker on the board, is there any other ongoing costs to Goldman or [Wachtel or Joele Frank] that we should be aware of for the rest of the year?

No, there is no activist costs going on right now.

And then just a question on the balance sheet. Bob, you talked about the $250 million of debt that's rolling later this year and the ability to refinance that accretively And you are also sitting with about $210 million on the line.

I don't think the sales proceeds are going to be much more than $50 million, correct me if I'm wrong. But how do you -- what's your balance sheet plans to refinance, lower the line, and how should we be thinking about the debt side as we move through the year?

A couple of things. Obviously, we are not going to comment on the sales proceeds. As Joe mentioned, there are other assets being sold, including the land parcel that was mentioned first on the call today. But we expect to see additional financings put in place. One of the elements that is part of the Gallery transaction is a EB-5 loan that would help support or help fund a portion of the Gallery redevelopment costs, if you are familiar with that program?

Yes.

In addition we are currently talking about our banks about expanding our bank credit in the form of additional term loans or expanded line of credit.

So do you have a sense of -- because obviously, redo the line of credit. I guess if you are going to keep that floating, there won't be much move. But if you won't go more fixed, is there a certain amount of dilution that is baked into this year at all from an interest-expense perspective?

We have actually, subsequent to the end of the quarter, we have actually entered into swaps for all the term loans. So all of our term-loan debt is now swapped, at least for five years.

What is the book -- we have the carrying values for Palmer and Union, which I know one of them you wrote down. Each of those is about $20 million net book value, call it $30 million gross. What is your basis in Springfield Park and the Land in Gainesville? So at least we have a starting point to think about size.

I know you don't want to say what the sales price is. At least using un-depreciated book and depreciated book, we can get in a zip code of potentially what the proceeds are. So do you have Springfield Park your share and the Gainesville land?

Our share of Springfield Park gross is $8.5 million; net is $6.2 million net book value. And Spring Hills, which is our land in Gainesville, is carried at $19.2 million.

Okay. And then the only [one] you have debt on is Springfield park? Your share of the debt is $2.4 million?

Correct.

And everything else would be free and clear?

Right.

Okay, and now is that -- none of that dilution potentially, or accretion, if you pay down debt is in guidance right?

Well we make certain assumptions when we provide guidance in terms of our refinancing rates, so that would be included in our 2015 guidance. Our expectations for -- we don't have anything baked in for the asset sales. Traditionally, we haven't reflected that in our guidance until the sales are completed. But with respect to the refinancings that we have teed up, we do have that in our earnings numbers.

So basically $70 million of depreciated book value between the three assets and the land, $90 million gross book value between the three assets and the land? That's about right?

Yes.

In that zip code?

Yes.

Okay, great. Thank you so much.

Linda Tsai, Barclays.

Yes, hi. Sorry if I missed this. Relative to the development plans for Exton Mall, is this something you have been planning for awhile and just wanted to get the Springfield Town acquisition closed? I guess I'm asking why now? And how many other malls in the portfolio do you have these type of opportunities?

Well, with respect to Exton, yes, we have been planning it for awhile. Keep in mind that adjacent to Exton Mall is about a 12-acre parcel that has a K-Mart on it today, whose lease expires, by its terms, in 2017. And so we always anticipated that we would be getting that, because they have no options et cetera, so we always anticipated we're getting back to that.

It happens to be contiguous to Exton Mall, as I mentioned, at a great piece of property at Route 100 and Route 30 in a very strong demographic market. So yes, it was something we had been planning for awhile. When, as we continue to get closer to an expiration of that lease, we have received a significant amount of tenant interest in that. And then put in place a redevelopment plan that we think would really enhance the property. So yes, that's something that has been in the works.

We also think we have opportunities not dissimilar to that at properties like Mall at Prince Georges outside of Washington, D.C. and also Woodland Mall in Grand Rapids, Michigan. We are in the preliminary, call it the pre-development stages, around planning those as well. That was really the point I was making, that we think we have significant upside in the Company through some of the assets that we own that become even more pronounced as we sell off from the bottom and complete other redevelopments.

Great. Thank you.

Ki Bin Kim, SunTrust Robinson Humphrey.

Following up on that Exton Square Mall question, if I remember that mall correctly, it has a very unusual configuration with the Sears being basically right in the middle of the mall. And almost, not blocking off traffic, but it is a very unusual configuration. So should we take this news as maybe you are getting that lease back?

No. Actually, by the way, it's a Macy's in the middle of the mall. And there's also a -- it is a strange configuration -- it's a Macy's in the middle of the mall. And Sears, Boscov's are the other two anchors, and recently JCPenney closed there. So the plan is to repurpose the JCPenney box, and at least the thinking, right now, is to leave Sears, Boscov's in place, repurpose Penney's.

And if you think about the adjacent land that is actually in front of the mall, to create a retail promenade of shops that lead you right into the mall. That would be, if you think about that marketplace, it is a very affluent marketplace. And also it's growing very quickly. The first Catholic high school in the Philadelphia region was built there in over 25 years. So it's a good, strong market, and we have a dramatic amount of tenant interest, and I'm not exaggerating. (technical difficulty)

Okay, so yes, that's right. It was a Macy's. But so no change expected from Macy's at all on that --

Other than using that -- no change to Macy's. We looked at that. That would be a bit too drastic.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Coradino for any closing marks.

Thank you all very much for participating in the call today. We are a different Company than we were three years ago. We've got a quality portfolio with significant opportunities for upside through redevelopment, repositioning, and re-merchandising.

And we are particularly excited about the upcoming ICSC convention. We really view it as a huge opportunity to present the new PREIT to the retail community. Thank you all very much for being on the call. Have a great day.

Thank you, sir, for your time. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect, and have a wonderful day.