Pennsylvania Real Estate Investment Trust (PEI) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the PREIT 3Q '21 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Heather Crowell, EVP of Strategy and Communication. Please go ahead.

Thank you. Good morning, and thank you all for joining us for PREIT's Third Quarter 2021 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 4, 2021, 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. On October 26, we announced that we have partnered with Say Technologies to offer an opportunity for any shareholder to ask questions of management.

During this call, management will answer questions received over this Q&A platform, and we thank those who participated in this process. Members of management on the call today are Joe Coradino, PREIT's Chairman and CEO; and Mario Ventresca, CFO.

Joe?

Thank you, Heather. Good morning, everyone. We had another great quarter. Our business is back and stronger than ever with fundamentals and outlook the brightest we've seen in years.

As we head into what is forecast to be a powerful holiday season, the momentum is palpable across the portfolio. After selling off our weak properties, taking back department stores that should have closed and bringing in tenants people seek out, the success of this strategy is demonstrable. Our determined effort to curate a portfolio that generates success for our tenants and impact for our community is yielding tangible results in strong NOI growth, leasing activity, traffic and sales trajectories.

Same-store NOI, excluding lease terminations grew by 36% for the quarter. Yes, 36%. Year-to-date were up 17.2% and are on target to exceed our forecast and deliver mid- to high-teens same-store NOI growth this year.

On the transaction front, new activity volume now exceeds that of any of the past 5 years, during many of which we had a larger portfolio. October traffic remained robust at over 90% of 2019 levels, and total visits up 3% over 2018. We're seeing traffic growth that mirrors strong trends nationally as reported by RetailNext, with mall traffic results for the third week of October reflecting indoor mall traffic up 36.2% and outdoor malls up 30.2%.

And sales have grown beyond that of 2019, which is arguably the best barometer of the health of our business. We're seeing nothing short of an outstanding response to our offerings from customers, and we anticipate a highly productive holiday season.

For the quarter, sales for comp tenants were up 14% in the core portfolio with over 80% of our properties generating positive growth for each month. On a rolling 12-month basis, sales grew 6.1% compared to the rolling 12-month period ended September 2019. So sales on a comp basis are now $581 per square foot.

As we move toward our goal of $600 per square foot with a record-breaking leasing activity, it's unquestionable that consumers are demonstrating a clear desire to return to in-person experiences, and our thoughtful and successful tenancy in core markets is on point.

This quarter's results were outstanding and validate the tenacity and innovation of the PREIT team that's worked tirelessly for years to create this exceptional portfolio and evolve our business. The metrics speak for themselves, and success is apparent across the portfolio.

Back-to-school was, by all accounts, a success, as evidenced by August and September sales. Our customized events and reward program to complement our targeted tenant mix yielded strong results with sales growth by 9% in August and 17% in September. We expect this momentum to continue into the holiday season.

Forecast for holiday sales are strong this year, and we anticipate the logistic challenges will amplify the benefit of brick-and-mortar, supplemented by our spend-and-score program that rewards customers for shopping at our properties.

Our team's commitment to enhancing the lives of the communities we serve was exemplified in our recently issued, first-ever sustainability report. As an engaging community hub, we've always placed a high priority on social responsibility and cultivating stronger communities. From grocery stores to apartment building to medical facilities and more, our properties have established themselves as the one-stop shops our customers are seeking.

And we're committed to customizing our properties and creating unique destinations. We're focused on bringing the new and diverse uses into our core markets where we see significant opportunities in multifamily, hotel, health and fitness, essentials, grocery, experiential and, of course, a broad array of retail, including traditional mall retailers, off-price tenants and small and diverse local businesses.

In the past month, we welcomed our first Aldi grocery store and opened 104,000-square-foot Tilt Studio family entertainment center at Magnolia Mall. These attractions have proven to attract a broader customer base with weekend mall traffic up 33% at Dartmouth Mall, following the opening of Aldi.

In the coming months, we'll continue to open distinct tenants. Turn 7 will open at Moorestown Mall this month. Turn 7 is a specialty liquidator that offers a wide array of brand name merchandise, including housewares, ready-to-wear apparel and accessories.

In 2022, tilt Studio will open an action-packed, 2-story, 100,000-square-foot indoor and family entertainment center at Willow Grove Park. The premier facility will feature a restaurant, premier bowling lanes, multilevel laser tag, blacklight mini golf, bumper cars, virtual reality pinball and over 200 games and attractions. Later this year, we'll open a number of firsts to our portfolio, including Purple, OFFLINE by Aerie, Rose & Remington and Lovisa, emerging retailers we're excited to partner with in our premier properties as they roll out their expansion plans.

It's certainly worth a moment to acknowledge our small and emerging businesses that have been choosing our properties literally in droves by extraordinary efforts from our specialty leasing and general manager leasing programs. Our GM leasing program has set the yield double the volume it did in 2019. Likewise, our specialty leasing team has brought in some truly unique uses and pop-ups from yarn vending to fidget toys to delicious baked goods to youth entrepreneur pop-ups. These tenants are truly what differentiate our shopping experiences.

Our programs have been so successful that we expect to have fully occupied in-line space and fully occupied card programs at over 60% of our properties this holiday season. It's our belief that these merchants are selecting our locations for their businesses as our centers are market leaders.

Now shifting to our balance sheet for a moment. It's imperative that we harvest capital to reduce debt. Toward that end, we are pursuing a number of asset sales, including our multifamily and hotel land, anchor space and now parcel sales. We are making progress in obtaining unappealable entitlements and approvals to move to closing on several of our multifamily land sales. We anticipate closing on a number of potential asset sales. We expect to close on the sale of 12 parcels for over $120 million in proceeds by mid-'22. Our liquidity and collections continue on track ahead of plan, and we expect to end this year with over $100 million in liquidity.

Obtaining multifamily approvals have been an involved effort, while creating value in underutilized asphalt parking fields is a worthwhile endeavor benefiting all of our stakeholders by evolving our properties, ensuring stability, creating jobs and tax revenue. We anticipate obtaining full entitlements for 2 of our multifamily projects by the end of this year.

In addition, we're exploring both joint ventures and asset sales as we observe improving investor sentiment and valuations in our sector that provides an opportunity to fundamentally transform our balance sheet. Coupled with a marked improvement in cap rates, our strategy to optimize the value of our portfolio is amplified with strong results. We are clearly capitalizing on the improving environment in our operating results and taking critical steps to improve our balance sheet.

The strengths of our management team and our portfolio are indisputable, which is driving increasing value in our portfolio. Unlike others, we are nimble, adaptable and have completed the work to curate a portfolio of properties in strong markets.

With that, I'll turn it over to Mario.

Thanks, Joe. We continue to see meaningful improvement in the fundamentals of the sector, including traffic, sales, occupancy and leasing volume and more importantly, improvement in operating performance within our portfolio. Year-to-date, the company is cash flow positive from operating activities. Net cash from operating activities totaled $38.2 million for the 9 months ended September 30, 2021 as compared to net cash used in operating activities of $8.8 million for the 9 months ended September 30 of last year. This increase in cash provided by operating activities was due primarily to the diligent collection efforts of outstanding accounts receivable in the first 3 quarters.

Tenant performance and financial stability continues to improve with sales and contingent rents exceeding our expectations. Year-to-date tenant bankruptcies are inconsequential with no new bankruptcies during the quarter, a statement none of us recall being able to make in recent history. We currently have a pipeline of 637,000 square feet of transactions signed for future occupancy, which represent over $10 million in annualized future rents.

As it relates to expenses, during the third quarter, we secured reductions in key operating expenses, which will reduce costs by approximately $1.5 million annually.

Same-store NOI trends inflected in the second quarter, and we are seeing the positive trend continue. This inflection point has been more pronounced than our internal projections indicated. On a quarterly basis, we reported same-store NOI growth of 30.4% compared to the same period last year. Year-to-date same-store NOI increased by 18.3%. Year-to-date same-store NOI has exceeded our projection by over 8%. We expect this momentum to continue and now expect to end the year with a mid- to high-teens percentage increase in same-store NOI as compared to our previous guidance of 13% to 15%.

Cash collections have significantly outpaced our internal business plan. On a year-to-date basis, we outperformed our plan for cash collected by $20.4 million. As a result, liquidity is tracking well ahead of our plan. We ended the quarter with cash and unrestricted bank accounts of $21.1 million. When including capacity under the revolver, our total liquidity was $96.3 million as of the end of the third quarter.

Strong operational performance, macroeconomic factors, increasing tenant health and the outstanding effort put forth by the PREIT team are all contributing to the significant sequential improvement in collection rates since the onset of the pandemic. The third quarter collections averaged 92%, and the improvement continued in October at 93%, which is in line with pre-pandemic collection levels.

Robust new leasing activity, collections that are exceeding our liquidity forecast, a sharp return of consumer spending and overall improved perception of the space are leading to increased asset valuations.

To summarize the key points demonstrating our progress, the company continues to generate positive net cash flow from operations. Strong tenant performance is significantly impacting our results and driving better collection levels, and leasing activity is robust and expected to drive mid- to high-teens full year '21 same-store NOI growth.

Looking ahead to next year, we expect this growth to continue with increased leasing activity, tight control on expenses and renewed momentum in our common area revenue functions. We are pleased with where we are currently and see continued reasons for optimism.

With that, we will begin our Q&A session.

Thank you. Now I'll share the top questions received on our Q&A portal. The first question is, what are the most immediate plans to maximize expansion and growth in the company?

Thanks, Heather. We're focused on organic revenue growth, such that we finally benefit from the years of portfolio pruning and redevelopment we proactively undertook, as evidenced by our 36% same-store NOI growth this quarter. We believe we are seeing the benefits now of owning the dominant properties in our markets and are continuing to evolve our properties to customize the appropriate mix of uses for each market. A key element of that effort is the addition of multifamily and hotel offerings, replacing underutilized asphalt parking areas, creating true mixed-use destinations.

Okay. Thank you. The second question is, would PREIT consider focusing its business model on entertainment instead of retail, converting retail space into entertainment centers, pod hotels, restaurants, amusement park rides, bowling alleys, billiards, skate parks, makerspaces, co-op spaces and theaters?

Great question. We believe experiential offerings are a key element of the shopping center of the future and have been incorporating these uses for years. In fact, over the past 5 years, we've added 78 new dining and entertainment tenants throughout our portfolio and over 0.5 million square feet. Our strategy overall has morphed into creating a one-stop shop for our communities that include these elements as well as grocers, health and fitness and even self-storage in one instance.

Great. Thank you. What does the future of commercial property ownership look like in 2022? How can we better protect the public in malls across the nation when dealing with COVID-19 and bad actors?

Well, we believe the mall as a centerpiece of its community is a safe gathering place, and we take extraordinary care to provide a safe and healthy environment, including increasing our cleaning protocols as a result of the pandemic, being equipped with sophisticated HVAC and air handling systems, along with heightened security during peak seasons, working with law enforcement in special situations. While we maintain the malls, we're unfairly punished during the pandemic-induced closures. We were happy to pave a way to getting our tenants back to business and our communities back to work.

Great. Thank you. Moving on to the balance sheet. What is the status of the debt paydown?

As we touched on in our script, we have numerous transactions underway. We do expect to close on several within the next 8 months that will generate over $120 million in gross proceeds.

Great. Thank you. Will the company be anticipating a share reversal or share buyback?

Currently, the company and its Board are not planning a reverse stock split or a share buyback.

Great. Thank you. And the final question that we're going to take today, are you anticipating a return to paying dividends in the next quarter or year?

Our credit facility precludes us from paying dividends during the term of the facility, except in connection with maintaining REIT status.

Great. Thank you, both. At this point, I will turn it back over to Joe for closing remarks.

Thanks, Heather and Mario, and thank you all for being on the call. Unquestionably, it's been a challenging time for the world, for our country and, of course, our industry. But we're optimistic that COVID is slowly moving into the background, and we're moving to a new normal that favors in-person experiences, and we believe that our portfolio is well positioned to capture the customer.

We thank you for participating on the call, and wish everyone a healthy, happy and prosperous holiday season.