Pennsylvania Real Estate Investment Trust
Q1 2020 Earnings Call Transcript

Published: 21 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the PREIT Q1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]I would now like to hand the conference over to your speaker today, Heather Crowell, EVP, Strategy & Communications. Please go ahead, ma'am.

[Heather Crowell:]

Thank you. Good afternoon, and thank you all for joining us for PREIT's first quarter 2020 earnings call. We hope you’re staying safe and 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, May 21, 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 then we will take questions. We'll allow chance to everyone to ask questions, we will allow one question and follow-up per caller.Thank you in advance for respecting our time constraints. Joe?

[Joe Coradino:]

Thank you, Heather. We hope everyone is healthy and strong. This call is not about quarterly results. It's been over two months since we started closing our properties and began working remotely. Our headquarters in a significant number of our properties are located in COVID-19 hotspots.Nonetheless, we wanted to have this call to discuss the future of our business, how we navigated the challenges thus far, and how we are positioning the Company moving forward. As of tomorrow, we will have four of 21 malls reopen. We are operating in some of the more conservative states for reopening, but we are making progress.Our New Jersey properties are now offering curbside pickup for retail. By the end of this month, we expect some larger properties to open and hope that by late June, all of our properties will open. Of course, many of the uses the mall sector pivoted to, such as entertainment and dining will be later in the recovery process due to social distancing requirements.Unfortunately, there'll be some casualties in these categories that won't be able to sustain reduced capacity. We also know that weaker retailers are finding that there is value in their brick-and-mortar locations, as they struggle to make it within only online presence. What we expect will balance these challenges is the interest from new and more diverse uses, and the evolution of retailer platforms to offer continuous service to their customers through curbside pickup.We believe buy online, pickup at the mall is here to stay, as more retailers develop capabilities to service them through digital channels. Customers will be able to enjoy the collection of brands and experiences the mall offers on the go. So, while we're unable to offer a specific timeline or financial projections, we can talk about our view of the industry and our company moving forward.Given what we just outlined, we believe we are well positioned to meet the challenges we face. To that end, I wanted to take a moment to thank the warriors on the PREIT team. I couldn't be more impressed and proud of how people have pivoted and creating new lanes, worked across functions, and simply move things forward outside of their comfort zone.As is common knowledge, rent collections have been hotly debated. And while unequivocally still do us, many of our tenants opted not to pay during the initial closure period. Our leasing team accepted the call to action and began negotiating rent deferrals that at the current count will allow us to collect 45% of the outstanding April and May rents by the end of this year, and over 90% will be recovered by the end of 2021.We've taken a number of steps to preserve liquidity including reducing our common dividend, reducing capital expenditures and operating expenses, furloughing employees, and securing forbearance on real estate taxes and mortgage payments. In total, our actions are preserved approximately $50million in liquidity in 2020, enhancing our liquidity throughout the year and putting us in a positive liquidity position at year-end.We continue to push forward in the transactions we announced last quarter, and we've been successful in getting various municipalities to meet with us virtually to advance the entitlement process. We expect to finalize our multifamily transactions, allowing us to further our vision of creating mixed use community hubs, and improving our balance sheet. These steps we have taken and continue to take are creating the space to get our business to the other side of COVID.As we look forward, we are focused on consumer trends and believe our properties are well positioned to meet demand. Generally speaking, our properties cater to mass markets, price points are reasonable, and we have the right tenant mix. We believe people will continue to favor comfort, health or wellness and value. We have curated a merchandizing mix that's well suited for the future.We do believe there will be a shift away from mainstream and our mall properties in the larger metro regions, like Philadelphia, Washington, D.C., and Providence Rhode Island will benefit from this shift. Having exited lower productivity properties, more portfolio and replace department stores, we have a top quality portfolio in well-located, high barrier to entry markets. Our real estate is ideally suited to offer even more for our communities.In addition to multifamily, we're now exploring new and diverse uses like last mile fulfillment, outpatient medical facilities, educational facility, self-storage, and even cold storage. The potential uses for our properties given the powerful locations are almost limitless. While this is not about quarterly results, let me give you some insight into the quarter.The quarter itself was marked by events that have impacted the sector for the past few years, driven by pre-COVID bankruptcies and challenged tenants. Prior to the impact of COVID in March, same-store NOI ex-lease terms was a minus 5%, driven by decreased revenue from 2019 bankruptcies. This was in line with our prior expectations and things were proceeding according to plan.Traffic and sales were strong. Sales reached $542 per square foot through February, a 4.8% increase. Traffic was up 2.6% through closure of our properties. We had opened anchor replacement Dick's Sporting Goods at Valley Mall, Burlington is Dartmouth Mall, Michael's at both Plymouth Meeting and Morristown Malls.Despite this progress, the COVID-19 pandemic impacted the quarter and will impact our industry into the future in particular, the department store landscape. Department stores have long been challenged to regain their footing and we were among the first to recognize this and move to replace the underperformers.That said this crisis has certainly accelerated the challenges and resulting store closings. We're fortunate to be unimpacted by most of the closings and believe our Cherry Hill Nordstrom store stands to benefit from other New Jersey closings.Regarding JC Penney, we have 14 stores contributing 5.1 million in annual rent, which compares to 37 stores, which we had when we began reshaping the portfolio. We were encouraged to see they work through the support issues and believe there's a place for a scaled down penny. So, we look forward to working through this with them.We don't have any insight into store closures in our portfolio, but based on our internal review, factoring in sales performance, location within the property, opportunity for densification and non-recourse debt we believe our exposure is limited.As we look forward and thoughtfully take steps towards reopening, our perspective is that our malls will continue to be a unifying force a centerpiece in our communities. Malls are critical to local economic engines and are the center of their communities. employing thousands.Our portfolio employs 30,000 people at the local level, acting as gathering places for social activity with restaurants, entertainment, fitness, and traditional retail options. We're often the largest tax payers in our municipalities, paying more than $65 million in annual real estate taxes. And in our case, are generally the market-dominant retail hub, a position we expect to strengthen as we move out of this.During the closure period, our mall used worked hard to cement our place in the hearts of the communities which came naturally. Across our portfolio, we've held blood drives, food donations drive, provided meals to essential workers, donated much needed protective supplies.We value our communities and our malls continue to serve as a unifying force. Never has been more evident that our actions have a powerful impact and breeds determined to harness this power for the good of our communities.As we move ahead with rebuilding and plan ahead for the new normal, we're focused on creating a safe, healthy and comfortable environment for our customers and retailers. As we create value for our customers and retailers, we are implementing new programs to overcome brick-and-mortar limitations.In addition to curbside offerings, we're exploring creative personal shopping avenues, inventory, overstock solutions and virtual sidewalk sales, among other ideas. We'll now rest until we have the confidents that we have a platform that allows our tenants to continue operating, if something like this would to occur again and to assist in amplifying their platforms.Regarding property reopening, early results have been encouraging. The properties gain momentum overtime as more retailers reopen. We've seen traffic up by a multiple of 2 to 3 times since opening weekend, once we're open about three weeks. Initial occupancy is increased with each of our openings as more and more retailers have plans in place and the critical mass to reopen stores.At Magnolia Mall, which has been open just about a month, we will be at 82% occupancy by June 1st, and the Jacksonville Mall, which opened just two weeks ago, will be a 71% by June 1st. Retailers are reporting solid sales and delivery shopping with less traffic but more spending per customer. Local media outlets have praised our safety protocols. And it seems the further we move North on East Coast, the more frequently we're seeing shoppers wear masks.We're offering mask to each customer as they enter, have plentiful sanitizer stations throughout our properties, have increased our cleaning protocols, have welcome stations, our counting customers, develop social distancing protocols that allow for appropriate follow-up customers, while creating a safer and better sanitized environment to assist our customers in getting back to shopping and back to work.With that, I'll turn it over to Mario to provide some financial color and details on our liquidity position.

[Mario Ventresca:]

Thanks, Joe. This morning, we reported FFO of $0.14 per share. Through February, we were tracking essentially on plan. It's worth noting that we closed the first two malls in the country in suburban Philadelphia with the onset of COVID-19 impacting the quarter. The primary drivers of the variance to 2019 first quarter were things that same-store sales, same-store NOI decreased by $5 million, primarily due to the loss revenue from bankrupt tenants and write-offs related to prepetition receivables.Lost rent from bankruptcies, including our joint ventures totaled $2.9 million, which represents nearly 60% of the decline in same-store NOI for the quarter. Non-same-store NOI decreased by $3 million, due to asset sales, conveyance of non-store properties, and one-time payments received in the first quarter of last year. Interest expense is $1.3 million higher than the first quarter of '19, as a result of bringing projects online and additional borrowings. G&A offset this variance partially it was $500,000 less than the first quarter due to a reduction in headcount.During the quarter Modell's, Papyrus and Pier 1 imports filed for bankruptcy and all will be liquidating. Since the end of the first quarter, we experienced five national in-line tenant bankruptcies. J. Crew, True Religion, Rio Bravo, Hair Cuttery and ALDO, we have 16 locations with these retailers who occupy 61,000 square feet and pay gross rents at our share of $2.5 million.Moving on to our liquidity profile and the steps we have taken. We have successfully obtained real estate tax deferrals at six properties, delaying over $11.6 million in payments. We reduce capital expenditures related to redevelopment, tenant improvements and returning property level capital by a combined $25 million. We have obtained mortgage loan forbearance of approximately $8 million in debt service payments.We have reduced property operating expenses by $1.6 million. We have reduced G&A by $3.1 million, including furloughs of 37% of our staff, and eliminating or reducing certain corporate expenses. And as you know, we also took the necessary step of reducing our common dividend, which preserves approximately $45 million in 2020. Back in March, we announced that we completed the amendments to our credit facility, resetting our covenants through September 30th of this year.The amendment provided us with additional near-term liquidity through a reduced unencumbered debt yield used to calculate borrowing capacity, as well as inclusion of future revenue on signed leases. We have a longstanding relationship with our bank group and are currently underway with discussions regarding a long-term recast of our credit facility.Another key element of our balance sheet liquidity improvement plan is the series of capital transactions we announced with our last call. In light of challenges in the lodging business, we have extended the contracts on the two hotel parcel sales, with Woodland being extended for six months, and we expect it to close in the fourth quarter of this year, and Moorestown has been extended to a first quarter 2021 closing.Due diligence for the sale leaseback transaction has been extended for 120 days, and we are now expecting closing to occur in late 2020. The closings on the remaining eight outparcels with FCPT have been extended to June 23rd of this year. So, we expected these will close late in the second quarter or early in the third. Regarding the multifamily transactions, we did have a buyer for two properties terminate and have signed letters of intent with a replacement buyer for these projects.For the five remaining multifamily sale transactions, we have extended the due diligence periods and still expect to close on two of these transactions this year. Our liquidity forecast currently contemplates the revised timing of these transactions as well as the challenges presented by the current COVID-19 environment, and we see ourselves ending the year with ample liquidity and improving balance sheet metrics.With that, we will open it up for questions.

[Operator:]

[Operator Instructions] Your first question comes from line of Mike Mueller of JP Morgan. Your line is open.

[Mike Mueller:]

Quick question, on the Jacksonville and Magnolia reopenings, we've talked about occupancies in the 70s or 80s -- 70s and 80s, is that total center occupancy or in-line occupancy?

[Joe Coradino:]

That was in-line occupancy, Mike.

[Mike Mueller:]

Got it, okay. And then, can you tell us if you add up your ABR exposure to say temporary tenants, food, entertainment, fitness and probably co-working about what percentage of ABR where you talking about?

[Joe Coradino:]

I think we'll have to get back to you on that Mike, we don't have that our fingertips.

[Mike Mueller:]

Got it, okay. That was it. Thank you.

[Operator:]

Your next question comes from the line of Christy McElroy of Citigroup. Your line is open.

[Christy McElroy:]

Hi, good afternoon. Thanks. I'll just ask one, since we don't have a whole lot of time, but Mario, just to follow up on your comments on liquidity, just taking into account the deferral agreements that you've been able to execute, also the reduced cash collection in the near term relative to the expense and CapEx cuts that you're making. Do you expect to be in a cash burn position in second quarter and third quarter? What could that look like? Just wanted to get a sense for relative to cash on hand, in line of credit availability, how much of that you could burn through?

[Mario Ventresca:]

Hi Christy. Good afternoon. I'm not going to get into quarter-by-quarter details, obviously we're in the middle of discussion with our -- with our lender group, but as we outlined in the prepared remarks, we expect to end the year in a positive liquidity position. The modeling that we put forth takes into account the current cash burn resulting from our current anticipated collection rates. We've offset it by the liquidity initiatives we've undertaken and we've incorporated the re-forecasted timing of collection of those rents. It's primarily deferred April and May rents that we anticipate collecting, as Joe said, the 45% by year-end.

[Christy McElroy:]

Thanks. I'll cede the floor.

[Operator:]

[Operator Instructions] Your next question comes from Ki Bin Kim of SunTrust. Your line is open.

[Ki Bin Kim:]

Thanks. So in 2019 you guys had about $180 million of operating expenses including utilities and G&A so all inclusive. I appreciate the actions you guys have taken to preserve some liquidity and forbearance on certain costs, but longer term at -- how much can you actually cut while maintaining operational integrity for your malls and operations?

[Joe Coradino:]

Are you getting at a scale question?

[Ki Bin Kim:]

Well, I'm just saying -- I mean, not necessarily. I'm just saying like I would expect some of these cost cutting measures to be permanent. I'm just trying to get a sense of, if how much -- how much there is in terms of like permanent cost savings that you guys could achieve longer-term?

[Mario Ventresca:]

Yes, I mean, Ki Bin, what we outlined on the call was our initial view of the cost cutting initiatives and where we would move forward as a company. We obviously the cutbacks of $1.6 million at the property level, were primarily downtime reductions in services to the properties, and as we bring the properties online that $1.6 million will manifest itself back into our operating -- our operating statements. So beyond that we're always looking at opportunities to reduce costs. We're still evaluating our capital spend for the balance of the year at this point and we believe that there are some additional savings that will benefit the organization on that front going forward.

[Ki Bin Kim:]

Okay. And the transactions that you guys have outlined, selling land parcels, hotel parcels, how much of those you have hard deposits on and maybe you can describe the nature of those deposits? Just trying to get a better sense of the potential for it to actually close.

[Mario Ventresca:]

Well, the way in which those deals are structured is that closing is subject to getting entitlements. We're actively pursuing entitlements, as I mentioned in the script. We are conducting at virtually at this point. The buyers are -- have an obligation to close once we achieve entitlements. We're expecting to accomplish that on two properties, two of the multifamily properties this year and close this year.I would say generally speaking though the multifamily transactions are quite solid there as I -- I think I indicated last quarter or couple of quarters ago, we did not lack for perspective buyers. In fact, I mentioned I think we mentioned on the -- in the script that one of the buyers who was buying two properties had withdrew -- has withdrawn the follow up bidder, who has available cash in billions, signed a letter of intent and we are moving to agreements of sale.So, we feel pretty comfortable -- comfortable about the multifamily transactions and we also talked about on the -- in the script, the transactions with respect to the outparcels, which are scheduled to close in late June.

[Operator:]

Your next question comes from the line of Christy McElroy of Citigroup. Your line is open.

[Christy McElroy:]

Thanks for the follow up. Just in regards to the deferrals, have you -- have you also had to provide rent abatement as part of those agreements as well or are these strictly deferral? And if you expect to recover 90% of that April and May rent by the end of 2021, what is your expectation for the other 10%? What's the risk of some of those leases ending up in litigation?

[Mario Ventresca:]

Well, first of all, we have -- we have steered clear from rent abatements. In some cases local retailers -- we wanted to keep local retailers in business during this downtime. So, we put a program in place to help them through that, that's really where the -- where the variance sort of resides.And we define local retailers based on the number of stores they had in there -- that they owned. And I think that to generally answer your other question, I see this ultimately are getting resolved not in the court system, I've been wrong before but I've never found positive results in the court system. My sense is that we'll be able to reach a resolution without the courts, but I guess we'll see.

[Christy McElroy:]

And there been a lot that retailers have sort of said out there in the public realm, department store retailers have said that that they -- some of them said that they don't plan to reopen some stores. What are your conversations like on that front? And how are you thinking about additional co-tenancy risk here?

[Joe Coradino:]

Actually, I heard the same story as you did. And so far best we can tell, the department stores for the most part are all planning open all their stores. And that's been the communication so far. And having said that I, as I said in the script, I think we are going to see some department store closings. We think we're in pretty good position from that. We weathered the original storm and our exposure is much more limited at this point. But again, in terms of opening post COVID, the information we're getting from all of the department store chains that are in our portfolio is that they plan to reopen.

[Operator:]

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

[Joe Coradino:]

Thank you all for being on the call today. And stay well, that's the most important thing, stay well.

[Operator:]

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