Pennsylvania Real Estate Investment Trust (PEI) 2016 Q1 法說會逐字稿

Good morning and welcome to the PREIT first-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Heather Crowell, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Good morning and thank you all for joining us for PREIT's first-quarter 2016 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, April 27, 2016, 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.

Good morning. We're excited to be here today to discuss our strong results, which reflect the redefined portfolio. Our performance is clear evidence that we have executed on our strategy and redefined PREIT as a top-tier mall company. The PREIT team is delivering results across the entire operating platform. This includes sales growth, revenue generation, expense control, extended debt maturities and reduced interest expenses.

Today, with stronger demographics, a powerful portfolio, with a compelling tenant lineup and four new anchors under construction, we present a new face to retailers, positioning us well for the future. We were confident that successfully executing on our disposition and re-merchandising efforts would create shareholder value. We knew that taking these steps would increase our portfolio of sales. This has obviously occurred and today we have grown our sales from approximately $330 per square foot to $460 per square foot with a clear path to $500.

This is a new beginning and sets the stage for our future performance. It better positions the PREIT team to deliver results for retailers and investors that are consistent with our top-tier mall peers. Last evening we shared the highlights of these results, confirming the successful implementation of our strategy.

With retailers, we now negotiate from a position of strength as existing leases come up for renewal, evidenced by the continued growth in the spreads on our new rents. This quarter we achieved 17.2% average renewal spreads, which on a cash basis is 10.9%, a Company record.

To add some color and illustrate the point, during the quarter we finalized the package of transactions that originally included seven locations, two of those locations were at properties we sold. The tenant was attempting to use their continued occupancy at the lower productivity malls to reduce their overall economics. Eliminating these two properties from the pool of transactions had a 350 basis point positive impact on the cash renewal spreads. This represents a very real opportunity to continue to drive rents.

We're now presenting better opportunities to retailers, allowing us to get more traction and lease more space. Putting it in perspective, at the end of the first quarter we had signed leases for 542,000 square feet that haven't yet taken occupancy. This is a 58% increase over the same time last year, with a smaller portfolio.

The level of interest from retailers has improved dramatically and with it, the opportunity to drive NOI and shareholder value. We've also opened doors to discussions with retailers we haven't previously done business with. During this quarter alone we signed leases with Round 1 Entertainment at Exton Square, Saks OFF 5th at Springfield Town Center and Dry Goods at Woodland Mall, a theme you will continue to see.

It is particularly noteworthy that common area revenues, an area that we have identified as a key growth component, increased by 15.1% in the quarter. We have improved our operating margins by 180 basis points, all of this resulted in a 4.1% increase in same-store NOI for the quarter. From an operational perspective we're off to a good start, and our expectations for the balance of the year remain positive.

We acknowledge there are challenges ahead, but know that we are better positioned to face bankruptcies, store closings, and anchor repositionings that we have ever been in our history. With our transition to a top-tier mall company we are now able to focus our capital resources on projects with higher value creation potential.

Along these lines we have several anchor replacements underway. We recently announced that we are recapturing the Sears box at Viewmont Mall, to allow for a Dick's Sporting Goods and Field & Stream combo store, along with the potential phase 2 to include additional boxes and restaurants. As we have discussed in the past, Viewmont Mall has recently undergone a comprehensive re-merchandising effort that has driven 20% increases in sales and NOI at the property.

This proactive recapture is another step in our methodic reduction of Sears locations in our portfolio, from 29 in 2012, to 16 following this recapture. This summer will also welcome the second Primark to the Philadelphia area in a portion of the Sears box at Willow Grove Park. We believe that not having any Sears on the most recent closing list is another reflection of the enhanced quality of our portfolio.

At Exton Square, the demolition of the former Kmart is underway to make way for a fall 2017 opening of Whole Foods, and work is underway in a former JCPenney store to add Round 1 Entertainment before the end of this year. These exciting additions will certainly bring additional customers to our door, as we contemplate a phase 2 reconfiguration.

At Cumberland Mall construction is underway for a Dick's Sporting Goods to replace JCPenney. This store is expected to open in the fourth quarter. We have a number of other redevelopments and re-merchandising efforts in process. At the fashion outlets of Philadelphia work is underway in the closed portion of the project. The opening is planned for 2018. Toward this end, we continue to move transactions through the leasing continuum and look forward to an exciting ICSC convention in Las Vegas for this project. The project cost is expected to range from $305 million to $365 million, with a net investment of $275 million to $335 million. We continue to work toward securing the remaining piece of public financing in the near future.

We are underway with the re-merchandising and cosmetic renovation at Mall of Prince Georges outside of DC, where we have 65% of this space committed with exciting retailers and restaurants. The plan will improve the merchandising mix and curb appeal, making better use of the surrounding densification, engaging with the 25,000 cars per day in front of the mall, and the pedestrian activity to and from the Metro station. We have a 20,000 square foot H&M set to open later this year. The project will span 2016 and 2017, reaching stabilization in 2018, strengthening this $459 per square foot asset, and the dominant position we have gained in this market through our Springfield Town Center acquisition.

At Plymouth Meeting, work continues on the new Legoland Discovery Center, scheduled to open in spring of 2017. This anticipated addition has already spurred great interest from tenants looking to co-tenant with this experience, and we look forward to advancing our re-merchandising plans for this property. Upon their opening, occupancy at the property should increase by approximately 200 basis points before any incremental leasing activity.

Another key element in our growth and portfolio improvement strategy was the acquisition of Springfield Town Center. March 31 marked the one-year anniversary of the acquisition and we are pleased with the results to date. Sales have come out of the gates at a strong $508 per square foot. Macy's is underway with their transformative renovation, it will bring an improved overall experience and higher end brands to satisfy the expanded customer base.

Department store sales have trended well, up 30% on average since the center reopened. Restaurant and entertainment sales continue to impress, set to eclipse $80 million. With over 70,000 square feet of stores under construction, occupancy is set to continue to move toward stabilization this year. Notably, Saks OFF 5th is under construction to open in the fall. This addition will build on its strong fashion mix and be a great complement to the existing Nordstrom Rack. So one year later we believe this center has room to grow its sales, occupancy and NOI.

All of these portfolio improvement efforts have allowed us to create a stronger balance sheet as well. With the recent financing of Woodland Mall and pay off of Valley Mall we have no debt maturities until June 2017. We have reduced our overall interest expense from 3.94%, with 91.6% fixed or swapped to fixed, and extended our average time to maturity to six years, providing security for the future.

We are exploring JV opportunities at some of our B and A minus quality assets, as a mean to accelerate leverage reduction. We've been in touch with several interested prospects who we will continue to evaluate as we move towards price discussions. We continue with advanced discussion on the sale of our JV interest in our remaining power centers. These are all steps we are taking to reduce our leverage and be more in line with our top-tier mall peers.

As it relates to additional dispositions, we continue marketing Washington Crown Center which is the remaining mall in our planned program. We expect to solidify interest in the next month, have meetings scheduled at ICSC to advance the interest, and move forward the finalizing bids following that. As it relates to the Philadelphia Street retail properties, we are progressing towards closing which we anticipate will occur in the third quarter.

Our move to quality has been decisive and we are generating results. We've taken our portfolio from sales of $334 per square foot to $460 per square foot today, a sea change in the position of this Company. We've demonstrated the impact this has had on our ability to attract talented employees and quality retailers.

We're also gaining recognition with investors and sell side analysts and expect our multiple to continue to expand in line with the portfolio we've created and the opportunities it presents in yielding results for shareholders. We believe we are well-positioned for the future and consider ourselves at the beginning of the next phase in our evolution, with continued opportunities to close the NAV gap. With that, I'll turn it over to Bob McCadden who will review our quarterly results and expectations for the balance of the year.

Thanks, Joe. We're building on the momentum generated during the second half of last year, we're starting off 2016 with solid financial results and improving operating metrics. Same-store NOI, excluding lease terminations, increased by 4.1% over the prior year's quarter. Factors contributing to the improved performance included a 2.5% increase in base rents from new store openings, higher average rents, and the increasing common area revenues that Joe mentioned, among other factors.

While expense reimbursement revenue was down reflecting lower operating expenses, improvements in our CAM and utility margins contributed to our bottom-line growth for the quarter. Our same-store expense recovery ratio increased by 40 basis points to 88.5% in the period, as we continued to realize margin benefits from our shift to fixed CAM leases.

Same-store NOI was favorably impacted by the inclusion of Springfield Town Center and the opening of Gloucester premium outlets in August 2015. Offsetting these favorable contributions was a loss of income for properties sold subsequent to March 31, 2015. The 2015 and 2016 property sales were approximately $0.04 per share dilutive for the quarter.

We continued to make progress on our objective of keeping our overhead costs in line with the size of our portfolio. G&A expenses were approximately 4% lower in the first quarter of 2016 compared to last year. Our weighted average debt balance of $2.035 billion was approximately $300 million higher than the first quarter of 2015, reflecting borrowings associated with the acquisition of Springfield Town Center. However, a 73 basis point reduction in the Company's average interest rate over that period largely mitigated the increase in borrowings.

Lower hedge and effectiveness in this year's quarter, combined with the capitalization of interest on redevelopment projects, resulted in a reduction of interest expense of approximately $858,000 compared to last year's first quarter. FFO as adjusted per diluted share for the quarter was $0.43 compared to $0.40 last year, and FFO per share was $0.42 compared to $0.34 in 2015. The FFO adjustments in 2016 include employee separation costs while last year's quarter included costs related to the Springfield Town Center acquisition. Both periods included hedging effectiveness resulting from the early repayment of debt.

There have been a number of questions raised regarding occupancy levels at several properties in our portfolio. As we touched on previously, we have been taking advantage of the bankruptcy-related closings that occurred last year as an opportunity to improve the tenant mix in our upgraded portfolio. Toward this end we have six new H&M stores under construction, which averaged 20,000 square feet in size, and require us to aggregate small shop space to accommodate them. With the opening of these new H&M stores and others, we expect to recognize a 250 to 300 basis point increase in non-anchor occupancy for the same-store properties by the end of this year.

We have modified the lease activity summary on page 8 of our supplemental to make our reported metrics more comparable to those reported by our mall peers. We are introducing an average rent spread metric to supplement our traditional cash basis renewal spreads. The average rent spread compares the average rent per square foot under the new lease term to the final rent per square foot amount in the expiring leases. We have also included the average lease term for executed leases for the presentation.

We added a vacant anchor summary on page 17 of the supplemental. To date we have executed leases covering approximately 250,000 square feet to backfill a majority of the space left vacant by four of the five anchor tenants in the portfolio. We continue to work on prospects for the remaining vacancies.

At the end of March we had over $250 million of immediate liquidity, including cash and amounts available under our credit facility. At the end of March our bank leverage ratio was 52.8%, a 350 basis point increase from the end of 2015. It's important to note that our net debt to EBITDA ratio was as approximately 8 times at the end of March is not impacted by this leverage change. As mentioned in our year-end earnings call, our bank leverage ratio increased primarily due to the formula used to calculate gross asset value in our bank facilities.

During the first year after acquisition we receive value equal to the purchase price for a property. Thereafter, bank gross asset value is determined by capitalizing growing 12 month NOI at a 6.5% or 7.5% capitalization rate. The increase in leverage will moderate as Springfield Town Center moves toward stabilization.

Our average interest rate, excluding non-cash financing fee amortization of the end of the quarter was 4.11%. Following the April refinancing of Woodland Mall, this rate was further reduced to 3.94%, a 42 basis point reduction from a year ago. Our debt maturities are well-laddered and we have addressed all loans maturing until June of 2017. At the end of the quarter, only 8% of our debt carried floating interest rates or is not hedged, leaving us well-positioned to mitigate the impact of any increases in short-term interest rates.

On our property redevelopment summary on page 25 we have added the Mall at Prince Georges. Spending for this project will take place over the next three years and was contemplated in the capital plan that was laid out at Investor Day in January. For the balance of this year we expect our redevelopment capital spending to be in the range of $90 million to $100 million.

With regard to guidance, we are reaffirming our most recent estimates of FFO per diluted share for 2016. The Company estimates FFO will be between $1.79 and $1.87 per diluted share, FFO as adjusted will be between $1.80 and $1.87, and net income attributable to PREIT common shareholders is estimated between $0.05 and $0.11 per share.

While our first-quarter results exceeded expectations, we're still maintaining our 3% same-store NOI growth target for the full year. The uncertainty surrounding the outcome of the announced or possible bankruptcy filings by tenants should become more clearer over the course of the next few months.

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

(Operator Instructions)

Ki Bin Kim with SunTrust.

Thank you, good morning guys. Could you first talk about the potential hurdles that you might face with Aeropostale, I'm sorry, yes, Aeropostale and PacSun, their store closures, and how would you describe the quality of that space in terms of rent per square foot and what would the total rent exposure be for those two combined?

Well good morning Ki Bin. This is Joe. First off we have about 34 stores combined with Aero and PacSun, and it's about 125,000 square feet of space in total. If you think about this, we've really experienced a relatively low volume of bankruptcy. And while PacSun has filed, Aero has not yet, it's pretty early on in the discussions to be able to give a great deal of specificity.

But I think it's important to point out that over the past few years we've right-sized their occupancy costs, and we think at least what we're learning from PacSun is it's a minimal amount of closures. And so all things considered, we think we're positioned to well absorb this, given the quality of the portfolio.

And each of these represent less than 1% of the Company's revenue. And we think there's an opportunity to enhance merchandising mix at these properties as a result of what we conclude, and again some of this is a bit premature, will be a number of closings that probably will be less than 25% of their store base.

I see. And what is the 125,000 square feet combined equal on a percent rent basis?

It's about $7 million.

Okay. And could you talk a little bit about the traffic trends you're seeing at Springfield Town Center, obviously this is not fully stabilized yet, could you just comment on?

We don't have a large basis for comparison, number one, since we just hit our first anniversary. But if you look at the indicators there, I mean again, the restaurant sales are approaching $80 million. The anchor sales in the property are up, and this is average across the board for Macy's, Target, Penneys, over 30%.

And there is a significant renovation being underway in the Macy's store right now to enhance both the store's appearance as well as to enhance -- to upgrade the merchandise mix. So in any event I think relative -- the trends at Springfield Town Center are extremely positive. We think there's an opportunity to continue to drive sales north of the $508 a foot that it currently is at.

Okay, thank you.

Christy McElroy with Citi.

Good morning guys. Just regarding your comments on the margin improvement and the shift of fixed CAM. Given the decline in same-store expenses in Q1, what's your expectation for operating expense trends into the rest of the year, and how should we think about that margin improvement contribution overall same-store NOI growth rate of 3% that you're expecting?

I think we continue to see expectation of, if you look at it a sequential basis -- or a comparable basis for the same period in the prior year, we'd expect to see continued margin improvement on the operating expenses. At this point I'm not sure if I can give you a good estimate for the full year, but we're definitely as we laid out at Investor Day, kind of seeing the trend as each year rolls over, with our fixed CAM program, we're seeing improvement in overall CAM margins.

Okay and then just following up on Ki Bin's question in terms of thinking about occupancy and bad debt, what level of potential closings was currently embedded in your 3% same-store NOI growth forecast? So what sort of buffer was in there before such that if we do see some closings from Aeropostale and PacSun that range could be affected?

I think we've said in the past we tended to look at stores on an individual basis as opposed to looking at specific retailers for potential closings. We had normally contemplated where we saw a tenant with high occupancy costs, whether it's PacSun or Aeropostale or anyone else, as a potential for either rent right-sizing or potential closing. So I don't know if I can comment specifically on individual tenants, but I would say that as it relates to store closings for a couple of these, we contemplated minimal store closings in our 3% same-store earnings guidance.

Okay and then lastly just in the context of department store discussion, sorry if you've addressed this before, but Wyoming Valley Mall you have three department store lease expirations in 2017, Bon-Ton, JCPenney and Sears, what are your expectations for that mall in terms of potentially getting any of those stores back?

We are in the process of extending one of those stores right now, and I believe we've reached agreement to extend the second store beyond those two dates, and we continue to work on an arrangement for the third department store. So that anchor situation, we believe will resolve itself.

Okay. Thank you.

Floris van Dijkum, Boenning.

Thank you. Guys, I wanted to find out about the price discussions on your three power centers that you put in the markets. You had previously mentioned a number of REITs are looking at that. Do you see any drop-off in terms of pricing expectations or do you think that progress should continue and it should be finished by the summer?

Well, we continue to make progress on the sale of our interest in those assets. From a pricing perspective we think it is coming in essentially where we anticipated that it would come in at this point. We are trying to use the opportunity of competing bidders to enhance that, and continue to work on moving that forward. So I think at this point we feel like we're moving in the direction that we anticipated, both from a pricing and timing perspective.

Great. And I know you mentioned, Bob, that you don't really want to put any guidance out there, but with the sale of the lower productivity malls do you foresee at some point over the next 12 to 18 months that you will be more like your other mall peers and recover more than 100% of your expenses going forward? Or do you -- where do you think is, what kind of timeline do you expect to get all of your expense recoveries back?

Well, Floris, roughly 12% to 15% of our leases roll over every year, so it's probably unrealistic to assume that we're going to achieve that -- close that gap in the next 12 to 18 months. It will take us more than that period, just given the nature of the lease roll.

Okay. Last question. I know -- is there an earn out on the, that you can get in terms of hitting certain operating metrics on your recent disposals, and if so what are those metrics?

Yes, the earn out is tied to anchor renewals at those properties.

Okay. Are there -- sorry go on.

Our view that is, that was a crap-shoot. Because you know as well as I, this dialogue that we're having on this call today is around anchor performance and their continued operation. So when you think about where the highest risk of anchor closings are, they are in lower quality malls from our perspective. We've seen that in the malls we've sold already. So it's tied to continued occupancy of the anchors and it's a crap-shoot.

Okay. Thanks guys.

Michael Mueller with JPMorgan.

Hi, this is Lina on for Mike. What do you see as the steady state or like 3 to 5 year average NOI growth of the go forward on stabilized mall portfolio?

I think we laid out at Investor Day that we would expect to be north of 3% as our target. So we think in the 3% to 4% range, when you go out three or four years is where we would expect to be performing.

All right. Thank you.

DJ Busch with Green Street Advisors.

Thank you. Joe, the reconciliation of the portfolio sales per square foot you guys provided in the press release is super helpful. I noticed that the bankrupt tenant closing impact is marginal at this point. But when I look kind of at the property level metrics it looks like there's a couple assets and I'll just name off a couple, I think it's Dartmouth Mall, Patrick Henry and Capital City are the ones that come to mind, where there was substantial declines in occupancy corresponding with substantial increases in sales productivity. I'm just wondering, you don't maybe have to address each one, but what's going on in those that's fueling the sales productivity but aren't from the bankruptcies?

It's a pretty short answer, H&M. Each of those centers is in the midst of various stages of a 18,000 to 20,000 square foot H&M which has caused tenant relocations, closings, et cetera. And so that's really what is driving that.

And by the way and as part of that I mean we took the opportunity to move out underperformers. We sort of saw this as, again if you think about this thing in steps, we got space back from tenants who all the filings that occurred in last quarter of 2014, first quarter of 2015, we got space back. We took that space back, it clearly wasn't large enough for an H&M. We did tenant relocations into some of those spaces. Step one, step two, exit the underperformers, right?

And step three was move the H&Ms into some of the 20 yard line, 30 yard line space if you will. And part of that -- part of that came about, part of that was the Gap closings as well. So H&M is in essence replacing that merchandise category.

So it's move-outs of underperformers and then in addition other kind of shifting of retailers within the space that causes those big occupancy declines?

Yes.

Okay.

And end up with space to lease that as well-located within your center.

Right.

I'll just add one other comment, DJ. A number of those properties we actually had tenants that became comp tenants that were performing at higher than the previous mall average, so they were also additive to the re-merchandising that Joe described. They're tenants that have already been in there but are now starting to report comp sales.

Right. Okay. And then I have one question on Beaver Valley I know it's a very minimal amount of the portfolio, but it's something that you guys addressed a couple times last year as far as opportunities, given the Marcellus shale job creation and whatnot. It's your lowest performing asset. It has a couple anchors, it has Sears I believe leaving this year, JCPenney's lease is up next year. Is that still an opportunity for you guys as a relevant retail center, or are there other opportunities for that asset just given where it's at and some of the activity that's going on in that region?

Well, again the tail wagging this dog is the Shell cracking plant. And not to get into a lot of detail but they bought the land, they're moving dirt, they just made another acquisition in the market. They just leased part of the Beaver Valley parking lot from us for a significant sum of money. And so all indications are that Shell is going to go forward. But also we know what's happening to the price of gas, et cetera.

So we continue to monitor that. As we think about Beaver Valley going forward, it continues to be a center where again, given Shell, that we think it's an opportunity to incorporate more of an open air center kinds of tenants to service that these 10,000 jobs that will be created. Hotels, we are under agreement with the adjacent landowner.

We have some additional land at that property, we're under an agreement with an adjacent landowner to sell property. Sell two pieces of property to one which will be an office building, for an office building he is developing, not us. And he's also developing an apartment complex which is in another portion of property and both of those are under agreement, hopefully they'll come to close. So again, closely monitoring Beaver, understand your comment it is -- we're very clear that it is our worst performing asset in our portfolio. But we just want to be, at this point we're so close, we want to be very thoughtful and careful that whatever decision we make, that we maximize the value of it.

Great. Thanks guys.

Ki Bin Kim of SunTrust.

Thanks a couple quick ones. You have about $200 million of high cost preferred equity coming due in 2017, are your plans today to pay that off? And what would the source of funding be?

Ki Bin, it's something that we've been discussing internally for some months. We will look at it as a possibility as to reissue another lower cost preferred stock in replacement. But that's still a long way out, May of, a year from now in October, but certainly on our radar screen.

Okay and I know you guys report occupancy on a physical basis and I believe that's correct, could you give some color around what that number, 94.4% would look on a lease basis and then 91.3% for non-anchor space would look on a lease basis?

Ki Bin I'm not sure if we have the ability to do that. Only because of the fact that some of those tenants that are part of that 500,000 plus square feet that we mentioned are replacing existing tenants. But we will endeavor to kind of work on that, so we're prepared at the next earnings call to report that, as part of our regular reporting, because it's an area that I think it shows upside for the portfolio, we just didn't have the ability to pull that information together for today's call.

I guess that's what I was alluding to, is that a pretty positive spread?

Yes and I think going forward we should provide that information as part of our normal press release.

Okay. And correct me if I'm wrong, but I believe you don't report tenant sales until a retailer has been there for two full years? Given that you've opened a lot of more, I guess, I'll say productive retailers in the recent past year and a half like H&Ms, what would your sales per square foot look like for your portfolio? And maybe those are over 10,000 square feet, but maybe we could just talk about this in a non-anchor basis, what would the generally pro forma sales per square foot look like for your portfolio, if you true-up for some of those more recent openings?

Yes, I don't know that we can again answer that question, but I think your point is well taken is that over time we're expecting that we would continue to see improvement as some of those re-merchandising tenants move into our comp store pool.

Okay, thank you guys.

Thank you. They were two good points Ki Bin, and we'll discuss them and again, on a going forward basis, look at incorporating them in our disclosure.

All right. Thank you.

(Operator Instructions)

At this time I'm showing no further questions. So I would like to turn the conference back to Joe Coradino for any closing remarks.

Well, thank you all for joining us today. We're looking forward to continuing to exploit the opportunities, to grow the platform, and a successful ICSC convention next month. We will highlight our new portfolio and sell the hell out of it. Thanks, guys.

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