Pennsylvania Real Estate Investment Trust (PEI) 2017 Q3 法說會逐字稿

Good morning. My name is [Jodi] and I will be your conference operator today. At this time, I would like to welcome everyone to the PREIT Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions]. Heather Crowell may begin your conference.

Good morning and thank you all for joining us for PREIT's third quarter 2017 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, November 2, 2017, and PREIT makes no undertaking to update any such statements. Also, 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 Chairman and CEO; and Bob McCadden, our CFO. I will now turn the call over to Joe Coradino.

Thanks, Heather, and good morning. Thank you all for joining us. We're pleased with our results this quarter, which are a testament to the success of our strategy. We're strengthening our portfolio and our results demonstrate they were narrowing the gap between ourselves and the other high-quality mall REITs, including sales performance, same-store NOI growth, sequential occupancy gains and anchor replacements at a sector leading pace. Just as we led the way with non-core asset dispositions, we're leading the way in transforming the anchor and landscape. This is a long-term business, malls in particular undergoing renaissance that we're excited about.

It's no doubt a challenging environment, but let's discuss what we've been able to accomplish and what we're doing to fortify our portfolio as we enter a new age of retail. Our accomplishments this quarter are impressive and we believe a direct result of the quality of the portfolio we have crafted over the past 5 years. Sales have reached a new high at $475 per square foot despite having anchors in transition at half of our malls. Same-store NOI excluding lease terminations from our wholly owned portfolio grew by 3.2%, while our entire portfolio increased 2.5% negatively impacted by our joint venture assets, which declined 2.3%. Year-to-date average renewal spreads were 5.8% for all non-anchor tenants in our wholly-owned portfolio, impacted by rent-relief packages with tenants who'd filed for bankruptcy protection. We raised $289 million, generating over $100 million of net proceeds to advance our capital plan. We're completing the final steps of our capital plan that will allow us to fully self-fund our redevelopment and anchor replacement pipeline. We opened 578,000 square feet of new space, contributing to a 200 basis point sequential increase in mall non-anchor occupancy.

And year-to-date, we have leased 3x the amount of space compared to last year. We're establishing unique environments for our shoppers. When we talk about diversifying our tenant base, we're referring to reducing our reliance on traditional mall retailer including department stores, apparel and accessories. We're transforming our anchor mix with 10 of 11 anchor replacements solidified in less than a year. Our anchor leasing team has been firing on all cylinders and deserves a shout-out for this amazing accomplishment in record time. In the past quarter, we opened replacements with 6 diverse tenants in 4 department store boxes with 3 more spaces under construction. We replaced 3 former Sears stores. At Viewmont mall, we opened the Dick's Sporting Goods, Field & Stream combo and a new-to-market home goods. At Magnolia mall, we opened a new-to-market Burlington and have the balance of the space under construction for Home Goods and Five Below. At Capital City mall, we opened Dick's Sporting Goods and have a Premium Fine Wine and Good Spirits store opening in a few weeks. At Valley View Mall, Herberger's replaced Mercy -- Macy's. The average downtime when these replacements was less than 9 months.

We are replacing these anchors within the same year-to-date close, underscoring the quality of the portfolio, the demand for space and our proficiency in executing. The anchor improvement story continues, having recently executed leases at Valley Mall with U.S. Fitness Holdings or a regional top-tier fitness facility to operate a 70,000 square foot inclusive of an indoor and outdoor pool. Completing the box Tilt Studios will open up 48,000 square foot entertainment facility that offers bowling, rides, laser tag and arcade games. These diverse users will join Belk, a high-end fashion department store who will replace a proactively recaptured Bon-Ton. At Moorestown Mall, 2 new-to-market retailers were opened in the Macy's space. While we are in a liberty to identify them by brand, they will offer off-price home furnishings from top designer brands and outdoor gear retailer in the off-price segment. All of these tenants are expected to open in Q4 '18 and we're underwritten in our multi-year capital spending projection previously outlined. At Willow Grove Park, within weeks of executing a lease to bring the high-end dine-in movie theater to replace JC Penney in 2019.

Regarding anchors, let's recap our staggering achievements over the past year. 11 anchors were proactively recaptured their close, 10 replacements are either open under construction executed or near execution. This leaves us with one, where we are finalizing on lease with some lead replacement tenant at Plymouth Meeting, situated at the best intersection in the Philly, Metro, where 92 million cars passed by annually. Recent additions include Legoland Discovery Center, Cyclebar, Build-A-Bear and the most recent addition is 5 Wits. A live-action hi-tech escape room recently voted one of the top 5 in the country by U.S.A. Today. These tenants joining already eclectic lineup and includes Dave and Busters, Whole Foods, J.Crew Mercantile and several top-tier dining establishment.

Outside of the anchor space, we're focused on adding sought-after brands. This past month, we've opened 2 new H&Ms, our first Zara, and 2 new prototype [watch] stores and we have executed leases for tenants not yet opened that will contribute over $11 million in annual gross revenue when they come online. In addition to the tenants previously mentioned, these exciting additions include Whole Foods at Exton, a new-to-region Dave and Busters at Capital City Mall, first-to-portfolio Intimissimi at Cherry Hill Mall, Charming Charlie at Springfield Town Center, and Tilt Studio at Patrick Henry Mall. While this was the tenants validate the demand for space and quality assets, it also highlights our approach in bringing new and different users to our properties to create experiences that are compelling to our customers.

Where we have replaced department stores, results have been impactful. At Viewmont Mall, where we have seen traffic and dramatic sales increases in the former Sears wing and the property has seen sequential sales growth, which we expect to continue. At Magnolia Mall, reports from the new anchor are strong. We are seeing increased activity in the formally underutilized wing. We're confident that the work we're doing is paying off through increased traffic, improved retailer sales as well as a strong NOI growth coming from these assets. The results validate the independent forecasts. We had completed where portfolio sales are estimated to exceed [$525] per square foot exclusive of our Philly redevelopment. The forecast completed over the summer includes assumptions regarding all the work we have just laid out and took into account historic population trends as well as comparative center sales trends.

Now, our comp sales aren't the [penneys here]. Organic growth is an indication that the moves we are making are strengthening our assets and increasing market share. And as we continue to execute on our redevelopment and remerchandising pipeline, we expect the value we have created in our portfolio to be recognized in our share price. In Philadelphia, we unveiled a new name for our project Fashion District Philadelphia, while we always anticipated a project that included tenancy beyond outlets. The name change was really driven by the continuing improvement in Philly's brand driving tenant demand from flagship, full-price stores by some originally targeted or outlet concepts.

The project has evolved and is changing the Philadelphia retails scene. The new Burlington store is opened, where our work transforming their former location into a new 8-screen premium AMC theater. So, it'll be the first new multiplex theater to open in Center City, Philadelphia in decades. It'll anchor the third level which is historically the most difficult to lease in retail. We also signed H&M for the largest Philadelphia location and are bringing several outlets to the market brands, which are new to Philadelphia. From a physical perspective, the (inaudible) Q-Benjamin's is completely identifiable at this point, and the exterior building facade is going up.

At MPG, we just announced a tenant line-up at the suburban DC gym. New retailers include H&M, ULTA, DSW, 5 Below and Flight 23, new expanded prototypes were completed for Victoria's Secret and Bath&Body Works, where Pink and White Barn candle were added. Old Navy opened in a new right sized prototype store and we have announced 3 new quick-service dining additions. All of these improvements serve to only strengthen this asset, which is headed to the $500 per square foot mark in sales.

We also had a strong quarter with respect to our capital plan, raising $100 million of net proceeds. The capital plan is a top priority. We are close to putting another non-core office building under agreement. I will walk you through the details of what remains to be spent. So, we're excited about the work we're doing and certainly it is creating a stronger platform.

With that, I'll turn it over to Bob to cover our quarterly results, expectations for the balance of the year and details surrounding our capital plan. Bob?

Thank you, Joe. Before I cover the operating results and discuss earnings guidance in detail, let me start with an update on the capital plan. As Joe mentioned, we've been extremely active with capital raising activity since our last call. We completed the sales of Logan Valley Mall, and the 801 Market Street office condo yielding over $60 million in proceeds.

Since the beginning of 2016, we have sold 9 non-core malls and other properties raising over $300 million, which is being used to fund our anchor replacement and redevelopment program. In September and into October, we issued $125 million of Series D preferred shares at [0.75% and 0.875%]. We use the net proceeds to redeem our 8.25% Series A preferred shares, which result in annual dividend savings of $1.6 million.

Earlier this month, our Lehigh Valley joint venture completed and early refinancing of its existing mortgage loan, which had a maturity date of 2020. We took advantage of an opportunity to extend the maturity, reduce the rate and generate excess proceeds. The new 10-year $200 million non-recourse loan carries a fixed interest rate of 4.06%. This transaction generated over $35 million of proceeds to us and will result in annual savings of $1.1 million.

We are in great shape, as it relates to our upcoming mortgage maturities. The loan on Francis Scott Key Mall matures in March of 2018 and we're in documentation with the existing lender to extend the loan for an additional 5 years. The loan on Gloucester Premium Outlets matures in June of 2018, but can be extended for an additional year. We are currently discussing financing options with our JV partner, Simon, who will have more to report next quarter.

After these 2018 maturities are addressed, our next significant mortgage maturity won't occur until 2021. We continue to advance discussions with the bank syndicate for a loan on Fashion District. We are targeting proceeds in excess of $100 million that are share from this financing, which is expected to close in the first quarter of 2018.

We continue to improve our balance sheet. Since beginning of 2017, we reduced our outstanding debt by $162 million. At the end of the quarter, we had $290 million of total liquidity, including $190 million of borrowing capacity available under our bank facilities. At the end of September, our bank leverage ratio was just under 48%, and our net debt to EBITDA was 7.2% -- 7.2x. Our cash interest rate was 3.80%, a 9 basis point reduction from a year ago. 95.6% of our debt is either fixed or swapped and debt maturities are well laddered. We are well positioned to manage through a period of rising interest rates.

We are in various stages of completion with other transactions that we anticipate will generate up to $70 million of incremental proceeds by mid-2018. These include the sale of the remaining non-core office property, various land parcels and other assets.

With respect to development, we invested $65 million on our capital program this quarter and $159 million to date this year. As of September 30, we had approximately $330 million remaining to spend on this program. We expect to spend around $40 million in the fourth quarter, approximately $175 million to $200 million next year, and the balance thereafter.

Turning to operations. We performed in line with our internal expectations and analyst's consensus for the quarter. We reported FFO as adjusted of $0.42 a share and net income of $0.05 per share. Continuing [with theme] first noted during the second quarter, we saw divergence in performance between our wholly owned and joint venture properties, which were disproportionately impacted by bankruptcies and store closings. This divergence was reflected and relative NOI contribution, occupancy and leasing spreads.

Same-store NOI excluding lease terminations at our wholly-owned properties was up 3.2%, while it was down 2.3% at our joint venture properties, blending to an overall 2.5% growth rate. Bankruptcies had an overall $1.3 million impact in the quarter. Excluding this impact, same-store NOI growth would have been approximately 4.7%. Non-anchor occupancy at our wholly owned same-store malls was down 30 basis points compared to last year, non-anchor occupancy at our joint venture properties fell 170 basis points to 92.1%.

Average rent spreads for our wholly-owned properties during the quarter were 5.5% compared to negative spreads of over 20% at our joint venture assets. As we look forward, we will have added or will add a total of 660,000 square feet of new tenants at our same-store properties in the second half of the year, which will contribute approximately $30 million in annualized rent at our share.

Turning to guidance, we are updating our FFO guidance to give effect the $0.05 per share dilution from the third quarter asset sales, an anticipated fourth quarter charges of $0.05 a share related to redemption of our Series A preferred shares and $0.02 a share related to the early repayment of the mortgage loan at Lehigh Valley Mall.

In addition to these factors, we're also updating our net income guidance for gains on sales of real estate and asset impairments. FFO as adjusted for the year is expected to be between $1.62 and $1.67. We expect to come into the lower end of our same-store NOI guidance range, which implies a fourth quarter growth rate of 4.2%.

Before we open up for questions, I want to turn it back to Joe for a comment.

We are going into Q4 in 2018 with momentum. A transformed Anchor base, a solid representation of sought-after merchants weighted towards restaurant, entertainment, fast fashion and off-price. We expect bankruptcies to moderate and renewal rates to normalize in the mid-to-high single digits.

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

(Operator Instructions) Your first question comes from the line of Karin Ford of MUFG Securities.

Just wanted to talk about, I appreciate the comments on where you stand on this year same-store NOI growth. I'm just looking into next year now that you have a lot more visibility on the leasing you've done here in the second half. How are you feeling about the 2.75% to 3% same-store NOI growth you had in your 3-year plan for next year?

Karen, I think that that was actually in average range over a period as opposed to a specific 2018 target. We expect as you would imagine with a lot of our redevelopments coming on-stream late in 2018, and will be completing in 19, you're going to have greater growth in the back end of that forecast period and maybe more moderate growth in the early part of that.

Second question is, can you just give us an update on the sale of a potential JV interest in some of your core malls and how is pricing going as you continue to market those assets?

Well, first off, I mean we've really -- while we've continued the discussions on the JV interests in some of our core malls, we really focused on disposition of non-core office properties and been quite successful at that, have one -- have another one about to go under agreement soon. We see the absence of trades that's occurring. I think the buyers that are out there for malls, I mean they read the news and know the sentiment in the market and they're spilling blood in the water right now. So, from our perspective, we're not in a situation where we have to sell. So, we're being very thoughtful and very careful and slow playing it, because pricing is important to us.

And just last question from me. It sounds like Simon is planning to do a big densification project at the King of Prussia mall. Do you think that that could hurt Cherry Hill or any of your other malls in the trade area, and what are your thoughts on densification opportunities?

Well, we're in the midst of densification, preliminary densification opportunities ourselves, so we think it's a good thing. I think that King of Prussia, the trade area associated with it is pretty disbursed from certainly Cherry Hill or any of the other assets that we have. So, we don't see it as being competitive from a sales perspective. We really see the opportunities that we have in our portfolio in places like Plymouth Meeting and Exton. In fact, at Exton, we do have an agreement to proceed with a couple hundred units there with a joint venture developer. So, in any event, we think densification is clearly the way to go. Residential is a good use right now, but I don't see King of Prussia as being something that causes concern for any of our assets.

Your next question comes from the line of Hong Yang of JPMorgan.

It was touched on a little -- you guys touched on it a little bit in the prior question, but can we expect any further mall sales from here, particularly in your lower productivity malls?

Well, we currently have Valley View Mall under -- listed for sale. So, we'll continue to work on that and I would say we'll always look for opportunistic situations to continue to drive quality in the portfolio. And so we are calling the portfolio -- pruning the portfolio to drive that quality or something that is in aid to us, if you will.

Your next question comes from the line of Christy McElroy of Citi.

This is Katy McConnell on for Christy Can you update us on the trajectory for narrowing the lease to commence spread and how much of that should contribute to the acceleration in 4Q of NOI growth? And then on the flip side, how are you thinking about the potential for further tenant fallout heading into 2018?

So, let me talk about kind of our renewal spreads, Katy. I think I mentioned that the spreads for the same-store properties were 5.5% negative 21% of the joint venture properties, which significantly diluted our operating results. The primary driver for the lower spreads this quarter was the concession -- concentration of extension deals that were done with tenants and bankruptcy and others on the watch list. We executed in the quarter 10 lease modifications with merchants, reorganizing under bankruptcy protection, made renewals with retailers on our watch list. So, on a relative basis, these 18 transactions represent about a third of what we concluded this quarter and significantly influenced the quarterly results. Bu, as Joe mentioned in his remarks, we expect the impact of bankruptcies to moderate going forward in return to more normal levels on our average returns, renewal spreads return back to the mid-to-high single-digit range.

And then any commentary on your expectations for fall-out in 2018?

We do not think that bankruptcies in 2018 are going to be at the level that we've seen in 2017. So, we think they're going to moderate, I think our watch list is shrinking a bit and we also think that we've gotten down in front of many of the problems already. So, we think '18 is going to certainly be a better year than '17 from a bankruptcy perspective.

Your last question comes from the line of Floris van Dijkum of Boenning.

I saw some encouraging increases obviously at MPG, also at Willow Grove, you're spending a lot of money on these anchor redevelopments. When should investors expect you're going to be -- the portfolio is going to show some more of these increases in sales and do you expect we're going to have the trough sometime in early '18 or how are you looking at that?

Were you talking about sales force?

Yes.

I think at this point, we are already beginning to see sequential increases in sales, where we have opened new anchors. We're seeing it at Viewmont, we're seeing it at Magnolia with Burlington, Viewmont with with Dick's Sporting Goods and Field & Stream and Home Goods, so already beginning to see that. We were up in every asset, every property from a sales perspective other than 8. Now, when you keep in mind that half of our portfolio had anchors in transition. I think we are beginning to see the results and we will continue to in the coming months.

Your next question comes from the line of DJ Busch of Green Street Advisors.

It's actually Spenser Allaway on for DJ. I just had another one in terms of dispositions, I know you guys have been really focused on sale of non-core assets. Obviously, you guys have had a lot of success, but can you guys provide an update on where you are in trying to joint venture some of your power center assets?

That continues to be a work in progress as reported a couple of calls ago. That is an agreement that was crafted prior to even the public company being formed, and has a very difficult buy/sell. So, while the assets are generally quality assets, it has been difficult to bring it to conclusion, although we continue to work on it.

Your next question comes from the line of Karin Ford of MUFG Security.

Just a couple of follow-ups. You mentioned the rise of the Philly brand. Can you just give us your thoughts on what could be the potential for a Philly winning bid for the Amazon proposal and how that could potentially boost the overall economic growth of the region?

I mean, look, the Philly sites that have been put forth are all in relative close proximity to our project. But I think it's a lot bigger than that in terms of what it could mean for Philadelphia. I mean let's not forget the fact that Philly is hot anyhow. I mean we are -- we're a city that in all aspects it's kind of moving to move and the Amazon bid would make a huge difference for us even in spite of the fact that we're on the move. So, I mean I know there is 2 sides adjacent to Penn's Campus and there's also some other sites that were not in Philadelphia are pretty close to Philly [Camp] is for instance. So, all of that is something. I don't have any insight into what the status of the bid is, but it's something that we participated in and we're helpful in crafting the response.

And just sticking on the Amazon theme, are you more or less interested in having Whole Foods as part of your properties now that they're linked with Amazon?

I think it's a good thing, we have 2 Whole Foods -- we have 1 Whole Foods opened at Plymouth Meeting. We have a second one that is turned over to the tenant and about to open in Q1 of '18. I think it makes it even a better use. They've announced that they're going to be deploying a number of store openings with their 365 concept that we are looking at a number of locations ourselves. I mean I would -- I can speculate that it would be the speculation that I mean I begin to see that the Whole Foods starts to service a pickup in distribution center for customers wanting to either pick up or bring back merchandise. I could see -- I could envision Amazon bookstores being incorporated in the Whole Foods stores. So I think it is a real net positive and we will continue to look to do business with them.

Can you give us an update on the status of the residential piece of the Fashion District project?

We a re in discussions as we speak, a lot of engineering work is being done, communication between the parties and obviously that's something that we think would be a real benefit to the project, because -- for couple reasons; one is built-in customers with residential above the project, plus nothing like that exists in Philadelphia, right? It would be a -- first a retail project with the residential overbuilt. So, we're working on it and continue to mature it.

And then just last one for me. Do you have any incremental visibility on any additional department store closures or any proactive take-backs of any more department stores?

Actually good, you asked that question. We've done a pretty thorough review of our portfolio and feel pretty good about it. I mean, number one, we have, what is, if not the lowest, I think, next to lowest exposure to Sears, lowest exposure to Bon-Ton. We've been quite proactive in our approach to department stores given the fact that either through closures or take-backs, 13 stores, 12 of them are spoken for ones on the way to being spoken for. So, we're pretty close to saying we're done. We think we're well positioned for department store exposure going forward, particularly again given the fact that we were extremely proactive in that arena.

There are no further questions in the queue at this time. I turn the call back over to Joe Coradino for final remarks.

Well, thank you all for participating. It was -- we enjoyed speaking with you. I know we'll see many of you in the next few weeks in Dallas. Thank you, all. Have a great day.

This concludes today's conference call. You may now disconnect.