Pennsylvania Real Estate Investment Trust
Q1 2019 Earnings Call Transcript

Published: 3 May 2019

[Operator:]

Good morning. My name is Christine. And I will be your conference operator today. At this time, I'd like to welcome everyone to the PREIT 1Q '19 Earnings 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] Thank you. Heather Crowell, EVP Strategy and Communications, you may begin your conference.

[Heather Crowell:]

Thanks, Christine. Good morning and thank you all for joining us for PREIT's first quarter 2019 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 May 3rd, 2019. 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 Bob McCadden, our CFO. It is now my pleasure to turn the call over to Joe.

[Joe Coradino:]

Thanks, Heather, and good morning everyone. We are enthusiastic that our results endorse our strategy. We grew same-store NOI excluding termination fees by 2.2% this quarter, and are maintaining our guidance on both FFO and same-store NOI. We have created a quality platform through proactive portfolio management including asset sales, strategic remerchandising, and redevelopment investments. And while we have made short-term concessions with challenged retailers, our strategy has put us in a position that we are able to cover 87% of the space impacted by bankruptcies this year. The quality of the portfolio has driven our ability to come in at the top end of our peer group with same-store NOI results and to maintain our full-year guidance. Since we began our remerchandising and disposition efforts, sales have increased approximately $150 per sq ft, over a 40% improvement, to 517 per sq ft. Sales at our top six properties, which account for over 50% of our core mall NOI, rang in it at 621 sq per ft registering robust growth of 4.2%. It's worth noting that following our extensive remerchandising, as we predicted sales and traffic at Mall at Prince Georges' have delivered the largest increases in our portfolio eclipsing 550 per sq ft and joining the ranks of our premier properties. Total occupancy grew by a robust 100 basis points over last year's quarter and as our anchor redevelopments and pipeline of leases come online. We are very pleased to report traffic at our comparable properties for the Easter season was up 6.5%, particularly noteworthy is that our properties where we have recently completed remerchandising efforts, traffic was up 7.2% more evident that our strategy is hitting the bull's eye. Excluding Fashion District, we have 613,000 sq ft of leases signed for future openings. Four hundred and ninety four thousand of space is expected to open in 2019, contributing annual gross rent of $10.4 million. And 119,000 sq ft will be opening in 2020 contributing annual gross rent of 2.3%. Eighty eight percent of this revenue is incremental for space not currently occupied. And 48% of the pipeline revenue is from leases with tenants opening in our premier properties. This will create significant incremental portfolio of value by virtue of the low cap rates the market ascribes to these assets. All anchors in our core portfolio area leased. And we have over a dozen new stores opening this year in former department stores. Now of the anchor replacements remaining, on an average these tenants will pay nine times the rent the space originally delivered. Also noteworthy, we had three JCPenney options exercised this quarter. And we have no remaining 2019 anchor expirations in our core mall portfolio. Twenty nineteen is a breakthrough year for PREIT as we further our mission to redefine the mall experience and position the portfolio for sustainable growth. Catalyst projects Woodland Mall, Plymouth Meeting, and Fashion District will all open this fall. Construction at Woodland Mall will be completed this year with REI opening next week, BlackRock Bar & Grill opening this summer and Branmar, Urban Outfitter and the expansion wing opening in October. This quarter we signed Cheesecake Factory for only their second Michigan location. With the addition of Branmar, the region's only new Apple Store and the Cheesecake Factory, this property will take its place as a trophy mall and a top performer in our premier portfolio. At Plymouth Meeting, we have five diverse uses opening in the former Macy's. They will transform the property and offer more reasons for our customers to visit the mall, expanding our trade area, and increasing customer visits. DICK'S Sporting Goods, Burlington, Miller's Ale House, Edge Fitness, and Michael's would be open this fall. These tenants are expected to deliver over four times the sales productivity as Macy's had and continue to differentiate this property from its competition. And we are just a 139 days from the opening of Fashion District. And the momentum is ramping up on what is sure to become the next great destination in Philadelphia. The high profile, multi-dimensional project will meet unmet demand for retail, dining, and entertainment in Philadelphia. It's more than 85% committed with notable tenants including Century 21, Burlington, H&M, Nike, Ulta Beauty, Hollister, Columbia Sportswear, Guess Factory, Forever 21, AMC Theaters, Round One, and City Winery. The company is getting stronger, our core portfolio continues to improve and we're fortifying our balance sheet. Year-to-date, we've completed asset sales generating cash proceeds of $43 million and improved our liquidity position by over $70 million, when including the benefit of moving Capital City Mall into our unencumbered asset pool. We are currently pursuing asset sales opportunities that could generate proceeds sufficient to recapitalize the company, which are being underwritten by various capital sources. As part of this recapitalization initiative, we're making tremendous progress on our densification program, with entitlements either secured or underway at all of our Philadelphia and DC properties. We have several institutional investors engaged and we will continue to pursue this, with speed the execution, a top priority. The densification of our properties has a multitude of benefits. First, we create a vibrant community, which is made possible by the amenity rich environments, we offer as a foundation. Having been focused on diversifying our tenant base, we have put ourselves in a position to deliver variety, convenient, dining and entertainment options. Second, we enhance our balance sheet by monetizing the multifamily platform of 5,000 to 7,000 units. That implies a land value of between 150 and 300 million. In so doing we are enhancing the value of our assets and the value of the company. We are focused on adding diverse uses throughout our portfolio and continue to drive our team to think about the mall, as an interconnected social hub rather than just a place to shop. We have created a portfolio that is benefiting from improving traffic and sales, is well positioned for the future and we have certainty and excitement around anchors. And we're in the process of adding multi-family units and hotels to our properties. Now, I'll turn it over to Bob.

[Bob McCadden:]

Thanks, Joe. We have the strong quarter with same-store NOI increasing by 2% over last year and 3.2% at our wholly owned properties. Key drivers of the NOI increased include contributions from anchor replacements and other tenants that opened after the first quarter of 2018. This was partially offset by the impact of lost revenue from bankruptcies. May REIT FFO for the quarter was $0.17 a share and $0.26 a share on an adjusted basis which was ahead of consensus by a penny. Before we get into some of the other operating metrics and earnings guidance, let me highlight a few items that impact on our quarterly FFO results and financial statement presentation for the quarter. As expected, we adopted the new lease accounting standard and because of required changes in the GAAP financial statements, we revised our supplemental to provide additional details and our presentation of wholly owned and joint venture NOI. We're disclosing the detail components of lease revenue and operating expenses, so you can more easily track the accounting changes and update your models. We're now required to expense the cost of our internal leasing and legal personnel, who work on lease transactions. Our G&A expenses now include approximately a million and a half dollars of these costs in the quarter. The national tenants had filed for bankruptcy protection reduce our same-store anyway for the quarter by about a $0.5 million. We've been aggressively working to backfill these expected vacancies and anticipate having a significant portion of the space, relate to permanent and temporary leases by the end of the year. That these tenants contributed annualized revenue of $8 million in our core portfolio. The 2019 impact of the anticipated closures on same-store NOI, net of replacement rent is expected to be $2.8 million, which is covered by tenant specific assumptions and our general bankruptcy reserve. We do not anticipate any further impact toward 2019 projected NOI as a result of these bankruptcies experienced to date. In fact, Sears has assumed all the leases in our portfolio. We incur debt extinction costs a $4.7 million when we defeat the Capital City Mall mortgage. By un-encumbering this recently redeveloped property, it will add approximately $40 million and incremental borrowing capacity to our credit facility this year. At our current line rate, we will realize interest savings of approximately $900,000 each year for the next three years. We sold the first of two remaining development parcels at Gainesville, Florida for $5 million and the remaining parcel is under contract for sale in the third quarter for an additional $10 million. As a result of this transaction, we recorded $1.5 million impairment. We reorganize some of the revenue functions by eliminating two officers and three staff positions, which will generate annual savings in excess of $900,000. In conjunction, we took a $700,000 charge for severance cost in the quarter. At Jacksonville Mall, North Carolina, we continued our remediation and construction efforts. Earlier this week, Belk opened its remodeled new prototype store for the average comparable day this year. We expect record insurance recoveries of approximately $4 million to $5 billion by the end of the year. These are included in our FFO guidance, but we do exclude them from income for our FFO with adjusted guidance. At the end of March, we had opened an additional 315,000 square feet of space when compared to March of 2018. Embedded in this net absorption is also reduction space lease a temporary tenant by 93,000 square feet another validation of the strength of our portfolio in the face of industry headwinds. Now, let me provide some updates to our capital plan. In our year-end earnings call, we targeted initiatives to generate an additional $70 million of liquidity in the first-half of the year. We've already exceeded that goal. And as Joe mentioned, we have additional efforts underway to improve our liquidity position. During the quarter, we spent $22 million of redevelopment and department store replacements, and end of the quarter with $227 million of available liquidity more than sufficient to fund the cost of our announced redevelopment projects. In our release last night, we reaffirmed our February guidance for FFO was adjusted between $1.20 and $1.34 per share. The key following assumptions underlying our guidance remain unchanged. Same-store NOI excluding lease termination, expected to grow between 1 and 1.9%, lease termination revenues are assumed to be between $2 million and $4 million and land sale gains are assumed to be between $5 million and $10 million. In our non-same-store category, the sale of Whole Dood's parcel at Exton Square Mall, closed earlier than anticipated, and we expect Wyoming Valley to exit the portfolio in the third, rather than second quarter. These changes did not materially impact our overall view of operating performance for the year. And with that, we'll open it up for questions.

[Operator:]

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

[Mike Mueller:]

Yes, Joe, just love he slipped in there casually. We may recapitalize the company right in the middle of the comments. So that was pretty good. I guess the question here is starting off with that, are you contemplating, is it several JVs, is it one big JV transaction or something else?

[Joe Coradino:]

Are you speaking with respect to the residential land in terms of the recapitalization?

[Mike Mueller:]

I thought you were talking about the company, like an overall entity type.

[Joe Coradino:]

Yes, I mean, our sense is that we have significant value in 5,000 to 7,000 multifamily units. We think the valuation of that is between 150 million and 300 million, and we're actually working on a number of fronts, we have several institutions that are reviewing the opportunity, and we're also looking at individual sales as well. So we're sort of keeping our optionality open, if you will.

[Mike Mueller:]

Okay. So it sounds like it'll all be residential based as opposed to retail, is that fair?

[Joe Coradino:]

I think at this point, that is our primary focus because it really is selling non-income producing land. It has minimal impact on the company's performance and does give us the ability to recapitalize.

[Mike Mueller:]

Got it. Okay. And then just one quick question on Fashion District, you mentioned 5% leased and committed, where do you think that project is likely to open with occupancy level?

[Joe Coradino:]

I think we're going to open up in plus or minus 70%, this year we will open up in September. The theater will then follow in, theater and entertainment will follow in November, and we're expecting that by early to mid-2020 where around 90%.

[Mike Mueller:]

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

[Joe Coradino:]

Thank you.

[Operator:]

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

[Christy McElroy:]

Hi, good morning. Just wanted to follow-up on the opening remarks about the leasing spreads, I'm just wondering if you could provide a little bit of additional color on the portfolio deals that drove the percentage in lieu leasing. Are these rent adjustments just on 2019 expirations or should we expect sort of more of these adjustments in future years for these struggling retailers? And I realize you have ramped floors, but you also kick out rates as well?

[Joe Coradino:]

I think a couple of things, one is there were a number of leases where we did percentage and moved 32 leases, about 120,000 square feet and we really look upon that as available space, right. If you couple that with the fact that of the closings and bankruptcies, we've experienced already this year, we think we're going to cover close to 90% of that. And so we made those deals really to keep the space occupied. The average term was less than two years. And so that space is for all intensive purposes occupied and available and no we don't, we don't think that that is a condition that will continue. We think it was again a very prudent business decision given the situation in front of us and the opportunity to sort of release the space in a relatively short term. With respect to kick-outs, there are no kick-outs. But again these are short term deals and we're expecting the currently release the bulk of that space.

[Christy McElroy:]

Okay. And then sorry if I miss this point, but just in regard to the NAREIT FFO guidance. You have the good amount of insurance recoveries in there, I think what is that related to and maybe you could discuss the timing of when those would hit?

[Bob McCadden:]

The insurance recoveries relate to Hurricane Florence which impacted Jacksonville more last fall. So much of the work has been done but the way the accounting works is we actually don't recognize the recovery revenue until the insurance companies process the claims. We expect the bulk of that to come in during the second quarter of this year, second and third, but most of it in second.

[Christy McElroy:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Caitlin Burrows from Goldman Sachs. Your line is open.

[Caitlin Burrows:]

Hi, good morning. Maybe just on the topic of same-store NOI growth for this growth, it was up 2.2%, I think this did has some benefit of easier comps on snow removal costs but I guess going forward given that this is ahead of your full-year plan, could you just give a sense for the pressures that we should expect over the rest of the year, is it just occupancy headwinds or is there other pieces?

[Bob McCadden:]

Yes, Caitlin, I think what you expect to see is I think when we provide our initial guidance, we had guided towards kind of the lower end. So, we outperformed in the first quarter but we'll see the impact of the bankruptcies more so in the second and third quarters and the backfilling some of that's already beginning to occur. But you'll see the big pick up toward the fourth quarter. So you'll see a little bit of softness in quarters two and three just as we absorb the impact of the bankruptcies.

[Caitlin Burrows:]

Okay. And then maybe just on the topic of CapEx and TIs, so the Page 19 of your supplement shows it was only one but one over 10,000 square foot lease where the initial rent appears to be 821 and the TI was 1701, so hey I was just wondering if I'm reading it right that that appears to come out to a negative net effective. And if so I guess what make you go forward with that deal?

[Joe Coradino:]

As you said, Caitlin this is Joe. As you say, that was really one transaction. It was a key tenant and it was it was an expansion at Plymouth Meeting. And given that we had we have five tenants opening and the new anchor box in the fall, we believe that that was a relatively conservative projection of percentage rent. And we have significant upside as a result of that traffic. I mentioned that we're expecting sales in that of those five tenants to be four times what we're getting from Macy's and commensurate traffic. So that was a transaction that was done, eyes wide open to keep an important tenant in Plymouth Meeting for a transaction that was driven. The rationale was really around anticipated percentage rent.

[Caitlin Burrows:]

Got it. And then maybe one last thing if I could back to that you were talking about the land and the multi-family units could generate a couple hundred million dollars of value potentially. I guess over how long do you think it would take to realize that based on some of the other land transactions you've done?

[Joe Coradino:]

Well, that's something that we're pretty deep into right now. So I'd rather not comment and negotiate the transaction on the earnings call, so to speak. But as I mentioned in my remarks, it's a high priority and speed execution is key.

[Caitlin Burrows:]

Okay, thank you.

[Operator:]

There are no further questions at this time. Mr. Joe Coradino, I will turn the call back over to you.

[Joe Coradino:]

Well, thank you all for being on the call. I just have a couple of closing comments that I think are important for me to make, one you know we're real proud of what we created here, we've got a great management team and we're delivering, we're transforming the portfolio, we're generating improved traffic and sales, NOI growth, fully leased tankers, a plan to strengthen our balance sheet and an exciting densification initiative underway. We were the first and to dispose of assets, the first to take back and repurpose anchors and we're going to continue that trend in terms of our recapitalization strategy. So look forward to good things in the future. Thank you all for being on the call.

[Operator:]

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