Pennsylvania Real Estate Investment Trust (PEI) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the PREIT second quarter earnings call. (Operator Instructions)

I would now like to hand the conference over to one of your speakers today, Heather Crowell. Thank you. Please go ahead, madam.

Thank you. Good morning, and thank you, everyone, for joining us for PREIT's Second Quarter 2020 Earnings Call. We hope everyone is staying well.

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, August 11, 2020, 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 Chairman and CEO; and Mario Ventresca, CFO. We will limit today's call to 30 minutes. Our prepared remarks will last approximately 15 minutes, and then we will take questions. To allow a chance for everyone, we will allow one question and one follow-up per caller. Thank you in advance for respecting our time constraints. Joe?

Thank you, Heather, and thank you all for joining us. We actually miss you guys, and hopefully, we'll see you soon and we also hope that you continue to stay safe. The past few months have been intense and challenging. As a world, as a country and certainly, as a sector, our resolve continues to be tested. It's important to note that our results reflect the closure of our malls for an average of 86 days, nearly the entire quarter. As we entered the third month of the quarter, we had only 5 properties open. Nonpayment of rent, of course, impacted our results and our liquidity position. As Thomas Paine said, "These are times that try men's souls." So we're going to focus this call on the recovery of our sector and the steps we're taking to get stronger.

As of today, all of our properties are open. This is a modified open. It includes capacity restrictions, use prohibitions and a more challenging shopping experience. We're getting close to a goal line, probably in the red zone. And while we shared details on our quarter and you may be tempted to compare them across the sector, but broadly speaking, we really didn't have a quarter. We were not open for business.

That said, upon reopening, we've been pleased with traffic and shopping patterns occurring across the portfolio. We've seen a purposeful shopper carrying multiple bags. We've seen our market-dominant properties recover quickly, comparatively improving their market positioning upon reopening. Some examples, Capital City Mall, which is essentially the only mall in the Harrisburg-York market, where there were once 3 malls is generating traffic in the 70% to 85% range of prior traffic and is 98.6% occupied, which is great under stabilized circumstances. We've got a loyal team customer there and many tenants report beating their July sales goals.

At Patrick Henry Mall, it's pretty amazing. We continue to see traffic at an impressive 105% of average. Patrick Henry is the only mall on the Hampton Roads peninsula, boasting 7 military bases. And we're reaping the benefits of addition by subtracting -- by subtraction, boasting the only remaining Macy's on the peninsula. Throughout the portfolio areas of strength include athletic shoes, self-care, jewelry and athleisure.

Back-to-school spending is expected to break records this year as parents prepare for combinations of in-class and at-home learning. We believe the diverse tenancy we had in place positions us well to capitalize on these shifting trends. We do note that properties that rely more heavily on dining and entertainment that remain restricted by partial opening of restaurants and nonoperating movie theaters have been slower to recover traffic, which indicates that these are popular venues that we expect will regain traction as they become fully operational.

We're also excited to see new tenants in our portfolio. Yes, there are tenants opening in our portfolio, Kate Spade, Industrious, Francesca's open at Fashion District, Sephora, Tempur-Pedic and Jamba opened at Woodland, Talbots outlet, Restore Cryotherapy and Plymouth Performing Arts Center opened at Plymouth Meeting. And we also have a number of key tenants under construction, still to open. Planet Fitness at Moorestown, Sola and Shake Shack at Plymouth Meeting, White House | Black Market at Woodland, Pizza in Ardene at Willow Grove, Blaze Pizza at Capital City and Miller's Ale House at Mall at Prince Georges. So we are beginning to regain some level of normalcy and continue to open stores in our properties.

Fashion District, which opened on July 3, is 69% reopened. Now that number is affected by Round One, AMC and City Winery continuing to be closed. When they open, the number increases to nearly 80%. When you include executed leases for stores that will open this year, we expect to exceed 90% occupancy at Fashion District by year-end. We're pretty excited about that, by the way, it's been a long row to hoe and one where we think we'll continue to generate positive trends. We believe we've installed among the best safety precautions in the industry and are mindful of the changing nature of restrictions and requirements. As of August 7, 83.1% of our core portfolio has reopened, which is impacted, of course, by theaters remaining closed. Across the portfolio, traffic is registering 68% of pre-COVID averages and grew at nearly every property for the past 2 weeks.

It's noteworthy that 12% of our tenants report outperforming pre-COVID sales. Openings and their strength are an important precursor to improving collections. We were among the last to be able to open a majority of our portfolio. Cash collections are improving but not yet meeting occupancy levels. From April through July, our cash collections were 53%. As more of our properties open and we execute deferrals with key national tenants, these figures are improving. We expect to ultimately collect 85% of COVID-period rents, that would be April, May, June and July.

Since the beginning of 2020, we've seen bankruptcy filings that impacted 101 stores in our portfolio, operating at a 2.4 million square feet. If we exclude JCPenney, these stores occupy about 388,000 square feet and pay gross rents of $12.5 million. Regarding JCPenney, we believe we fared well with only 2 of 14 stores on the closing list. We expect to minimize our capital outlay on these locations by taking advantage of their placement within their respective properties and not replacing them with an anchor, but with in-line retail and decommissioning the rear portion of the store or simply moving to nonretail uses, in one case, residential. The impact of the pandemic and resulting closure of our properties for an extended period of time has had an impact on our liquidity.

As you saw in our release, we did get temporary covenant relief, and we're pleased today to report that we've also signed documents for a $30 million bridge loan that is expected to close before the end of today and run for period of time during which we hope to finalize a long-term transaction. As we had previously reported, we continue to work with our bank group to structure a long-term modification to our credit facility.

When you look at the future of our business, it's natural, at a time like this, to focus on the worst case. However, taking the more constructive approach, we're seeing occupancy and traffic exceed our expectations, as evidenced by both construction in progress and recent openings. So there is cause for optimism regarding our core business.

Having said that, we're also experiencing bankruptcies and store closings, which are giving rise to interest from a variety of alternative uses. As of this call, we are negotiating agreements with a health care provider, a food market, are in discussions with several fulfillment and logistics operators, and are exploring opportunities to incorporate research and lab facilities at our properties. This, of course, is in addition to multifamily and hotel uses that are already underway.

This interest, and this is an important point, is rooted in the quality of the locations and the underlying demographics associated with a portfolio with a concentration in high-barrier-to-entry markets like Philadelphia and D.C.

In the final analysis, we own quality real estate that is suitable for a vast array of alternative uses. And one thing that isn't changing is that our holdings are vital contributors to the communities they call home. Thousands of jobs and hundreds of community events depend on our properties. In fact, since the pandemic began, we've hosted 3 dozen community and charitable events at our properties. This summer, we're hosting another 2 dozen community events branded [Park and Play,] an outdoor event series that spans a variety of activities, ranging from drive-in movies to virtual concepts to unique crab and seafood festival and more. As people grapple with uncertainty, they crave normalcy, people and places they are familiar with and bring them comfort. That's what our properties offer.

Now I'll turn it over to Mario.

Thank you, Joe. As Joe noted, the results that are being communicated today are reflective of a portfolio that was essentially closed for the entire second quarter. During the quarter, we came together as a team working from our homes to mobilize and combat the impacts of COVID on our company. In that regard, we have made tremendous strides, although we recognize there is much more that we need to accomplish.

For the second quarter, we reported an FFO loss of $0.06 per share and an FFO loss as adjusted of $0.06 per share. For the 6 months of the year, we reported FFO of $0.08 per share and FFO as adjusted of $0.09 per share. Same-store NOI during the quarter decreased by $17.4 million. The primary drivers of the decline in our wholly-owned portfolio were COVID-19 mall closures, associated rent abatement and percentage sales revenue declines of $11.5 million and lost rent from bankruptcies of $2.2 million. Note, we elected to record the rent abatements upfront in their entirety during the second quarter.

The impact of these onetime reductions in NOI and FFO is $0.14 per share. We also recorded an increase in credit losses of $3.7 million. Offsetting some of this was TAM and real estate tax expense savings of just under $2 million. Non-same-store NOI decreased by $2.7 million due to the sale of Whole Foods at Exton and the closure of several anchors in Valley View and Exton Square Malls. Interest expense was $1.6 million higher due to a higher level of borrowing than the second quarter of last year. We also focused on managing our cash expenditures. In addition to previous onetime savings in G&A and operating expenses totaling $4.7 million, we made permanent overhead reductions. We laid off 31 employees, and this is expected to save the company approximately $4 million annually in G&A expenses.

We also reduced planned capital spending for 2020 by $26 million. During the quarter, 9 of our tenants filed for bankruptcy protection. The store count impacted by second quarter bankruptcies was 51 in 2.1 million square feet, contributing approximately $10.2 million in annual revenues. Several tenants filing for bankruptcy during and after the second quarter were significant in both the number of stores and square footage, such as JCPenney, GNC, New York & Company, and the Ascena brands. We expect that most of the stores impacted by bankruptcy will remain open.

In April, we received a $4.5 million Paycheck Protection Program loan under the CARES Act, for which we expect to be granted complete forgiveness of the obligation. We also, during the quarter, negotiated forbearance arrangements for mortgages on 6 wholly-owned and 2 joint venture properties. And On July 24, we obtained waivers through August 31, 2020 on certain covenants and approval to enter into a $30 million bridge facility that, as Joe said, we expect to close today. For the duration of this agreement, which expires the earlier of September 30, 2020 or completion of a long-term credit facility expansion, dividends will be suspended. We have been engaged in discussions with our bank group regarding this recast of the credit facility.

Looking ahead, including our joint venture assets, we have over 325,000 square feet of executed leases in our pipeline for future openings, most of which are scheduled to open in 2020 and will contribute $11.7 million of annualized revenues at our share. This revenue will come online and hit our P&L towards the back half of this year.

During June, we completed our single-tenant outparcel sales initiative after closing on the remaining $14.4 million in outparcel sales with FCPT and recorded a gain on sale of $9.2 million in the second quarter for the 6 outparcels. The outparcel sale efforts gross proceeds totaled $27.8 million.

As we've reported in the past, we have 5 purchase and sale agreements with 4 institutional investors for the sale of our land dedicated to multifamily development. We continue to make progress toward entitlement of this land that will lead us to a closing. We have been extending due diligence and closing dates on these deals while we've been working through the zoning and anchor approval processes. We will also continue to extend due diligence as a result of COVID-19-related financing market challenges for the sale-leaseback transaction for the 5 properties for $154 million. This is now forecast to close in 2021.

And with that, we'll open it up for questions.

(Operator Instructions) Your first question comes from Christy McElroy of Citi.

Joe, you made a comment that you expect to I think, ultimately collect 85% of the COVID-period rents. Just if I think about the 15%, would you expect the majority of that remaining 15% to be -- as you think about a permanent impairment to your NOI going forward, as you think about occupancy loss that you suffered during the quarter that you'll continue to see and then permanent rent relief that you expect to put in place?

Christy, that's -- when we embarked upon thinking through our COVID-period rents, we decided that the retailers who were local, and we define them as having less than a certain number of stores that they own, that we were going to abate some of their rent. And they were both specialty retailers, carts, et cetera, as well as just local retailers who might operate one restaurant or something of that sort where they're kind of living out of the cash register. And for those tenants, we were more willing to abate. So the bulk of those dollars come from that and are really a onetime COVID event, if you will.

Okay. So is there any permanent rent relief as we think about whether a company -- retailer is going through the bankruptcy process or outside of bankruptcy that you're granting at this point?

At this time, no. Now, again, we're through about 60% of our -- of negotiating, let's call them marquee national tenants, some of which include [deferral.] I might add a number of tenants upon reopening that we were negotiating with, and it's more than 1 or 2, just decided, we're not going to negotiate, we're just going to pay to rent. And they paid all the back rent. So we're about 60% through with probably another 10% or 15% at hand, and that next 25% is going to involve some banging, so to speak. And hopefully, we'll resolve it outside of litigation. But that's a course of action we're not going to be shy to take, if necessary.

Okay. And then just in terms of the new $30 million term loan. Can you just give a few more details, like the rate, the term, any warrants, who's the lender? Is there any security against the loan? And is it -- it's effectively, I guess, giving you working capital as you bridge to get to the asset sale closing?

Well, essentially, as you said, it's a $30 million deal. It's at LIBOR plus about 800 bps. And it's a short term bridge. It matures September 30. And again, allows us to sort of smooth over the impact of those deferments and abatements during that period of time and really gives us the ability and the time to negotiate a longer-term deal with our banks.

(Operator Instructions) Your next question comes from Mike Mueller of JPMorgan.

Just two quick ones here. One, how did rent collections trend in July compared to that whole 53% COVID period? And then can you just give us an update on the timeline for the land sales?

Mar, I'm going to turn that one over to you.

Yes, Mike, it's Mario. As it relates to July, we actually, on a total cash received basis, meaning tenants that paid their July rent and a portion or all of their back rent, we ended up collecting 106% of our July billings during the month.

Got it. Okay. And then anything on the asset -- the land sale timeline?

Yes. I would say the asset sales -- do you want to...

At this point, the asset sales are really being driven by entitlements, and we are making progress on those, demonstrable progress at Willow Grove and Plymouth Meeting and Moorestown and our properties in D.C., both Mall at Prince Georges and Springfield Town Center. And our -- we did push them out a bit. But the expectation is that they will come to closing. And I think the schedule now is...

Yes, two will close the second quarter of next year with the balance ratably through the second quarter of 2022.

There are no further questions at this time. I turn the call back over to the presenters.

Well, thank you all for participating in the call. We'll continue to stay in touch. Again, look forward to, at some point, seeing one another. Again, we think we've created a portfolio, our -- the impact from bankruptcies has been not nearly as devastating as we thought it was going to be to JCPenney's. We have a portfolio that we think is able to withstand the impact of COVID. And we look forward to continuing to have the company grow stronger as we get to the other side of this.

So thank you all. Stay safe and stay strong.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.