Pennsylvania Real Estate Investment Trust
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Good morning. My name is Amy and I will be your conference Operator today. At this time, I would like to welcome everyone to the PREIT First 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]. I would now like to turn the call over to Ms. Heather Crowell, you may begin.

[Heather Crowell:]

Good morning and thank you all for joining us for PREIT's first 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, April 26th, 2017, and PREIT makes no undertaking to update 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 Coradino.

[Joe Coradino:]

Thanks Heather and good morning everyone and thanks for taking the time to join us today. Our first quarter results were disappointing, but anticipated and necessary. There were necessary in order to ensure the continued strengthening of the portfolio to enhance long-term shareholder value. We have been in front of the rapidly evolving retail business as evidenced by our record leasing volume for the past two quarters, our anchor replacement track record and our pipeline of tenants for future occupancy. We have executed five anchor leases since the beginning of the year with three being traditional department stores in the past two months, highlighted by the execution of a lease with [indiscernible] or Valley Mall. As we have the honor at kicking of earnings season for the mall REITs, we thought we would start with the provocative statement. We agree that the historical view of mall one that relies heavily on apparel and accessories really is dead and a new model is rising. We also agree that there is too much retail in this country, but we are alive and well with the bright future and continue to execute on achieving the anticipated growth outlined in the multi-year plan we issued last quarter. Here is why? We sold a significant amount of underperforming properties, nearly 40% of our portfolio in markets retailers will ultimately vacate. Prior to 2012, we operated in 13 states, 20 markets, 33 million square feet with sales of 365 a foot. Today we post the portfolio of quality properties in compelling markets where more than half of our NOI is generated from high barrier to entry major markets. And in properties we continue to own and improve, we have dramatically differentiated our tenant base and are responding to consumer preferences. On a same-store basis, we have nearly 1 million square feet more space dedicated to dining entertainment, best fashion, off price, big box and health and wellness than we did five years ago. Today's consumer craves a variety of offerings and is agnostic as to where they shop, they wanted all and a personalized social experience in one place. We are taking a consumer driven approach to crafting our tenant mix. We have long been transformative traditional more model, our first Marshalls opened at Cumberland Mall in 2002. Our first Whole Foods opened at Plymouth Meeting mall in 2010 and our first Dick's Sporting Goods as mall anchor opened at Patrick Henry in 2006. Since 2012, PREIT has been successful in transforming the company and improving the quality of our portfolio, our financial flexibility, our people and our relationships positioning the company for the growth cycle we are in. we have been refining the retail real estate experience by proactively replacing department stores and diversifying our tenant mix to enhance the consumer experience and reflect our visitors aspirations. The de-toxing , yes de-toxing we are in the midst of provides the freedom to crest this craft with special mix of tenants that reflect the mall experience today. We understand that the shareholders and the media are the captivated by the department store closings that have taken places as well as the in line bankruptcies. As a results, we believe our current share price reflects an overreaction to a retail cycle and fails the value of the underlying real estate or the value creation opportunities. All businesses evolve overtime and we believe we have the unique opportunity to continue to diversify our tenant base. Traditional department stores have grown over the years primarily through consolidation, they spend little effort rationalizing their store basis or investing in the store experience. In fact the department store is not as relevant to the consumer as it ones was. In well located real estate, the closure of these stores is a positive. There are significant consumer dollars some $2.5 billion up for grabs for retailers who capture their shopper. As it relates to in line store closures, there is a strong link between the retailers currently filing or considering filing a private equity investment. These retailers frequently took on significant debt, capitalizing in the low interest rate environment, most focus, took money out of the entities and did not invest sufficiently in their core business. This outcome for predictable. So the in line in anchor vacancies together creates supply and the demand comes from a variety of venues. There has been a real blaring of the between real estate formats, power centers, malls, strip centers, it's not the format to about the location, the market position and demographics. Dining, entertainment, outlets, off price, boxes that were traditionally power center players grocers, health and wellness these are all tenants that weren't historically part of a mall Arsenal, but their presence has been growing and continues to expand at our portfolio of properties, [indiscernible] a million fees of the sort after tenant store properties in the last five years and we have an additional 200,000 square feet of space in these segments currently in our pipeline. Every business evolves and innovators often get criticized. We executed a disposition program that was questioned with both Springfield Town Center were questioned and we have embarked on a proactive redevelopment anchor replacement program that’s being questioned. Our view point that quality is paramount led us to take these steps. To put it in perspective, we often talked about selling 16 malls, but these properties represented more than that. Prior to 2012, we operated in 13 states, 20 markets with 33 million square feet of space and sales at 365 a foot. Today we boast a portfolio of quality properties in compelling markets where more than half of our NOI is generated from properties in major metropolitan markets where the opportunities are finding locations as central as ours are scarce. Let’s define quality. So quality doesn’t have to mean luxury. We have been on the road and talking with over a dozen new investors in the past few weeks and touring them through our portfolio. It has been beyond refreshing to watch them taking the scenes in the heart of our portfolio and not just our top assets but what you would label as B plus assets. It’s providing an opportunity to take the wind out of the [sales] (Ph) of the notion that only trophy malls will survive. These are properties that are at the core of their community where people are out shopping on Wednesday afternoon and where retailers have recently invested in upgrading their stores. The interested parties have included a number of pure value investor to be rededicate it. This would have not previously taken as harder look as they are taking now. So we encourage you to come tour our properties with us, any of them and see for yourself that people really do still enjoy a quality mall experience. There is ample evidence that our move to quality was effective including our limited exposure following the 2017 store closing announcements with only 15 locations impacted. By way of example, we had no stores on the pay less closing list. We now have 17% of our portfolio dedicated to dining and entertainment and we are seeing a real impact from these efforts. Earlier this month, Lego Discovery Centre opened at Plymouth, this will be their only location in the market. It has more than replaced the traffic generated by the former Macy’s with evidence of increased car shopping. Next our ability to replace department stores is also a testament to the quality of our locations. Of 11 closed locations since the beginning of 2016, we have executed leases for nine replacements, fully executed leases and have executed LOIs on the balance. We have executed five leases with replacement anchors just since the beginning of 2017. The continued improvement in sales, occupancy and NOI at Springfield Town Center is yet another validation. Sales are at 525 per square foot without an [Apple] (Ph) and we have few new tenants under construction. We are maturing intensification opportunities of Plymouth Meeting in Exton with Springfield Town Center to follow, highlighting the underlying value of the real estate we own. Ancillary revenues continued to grow, we have signed new deals with major players that previously had in consummated transactions with us are executing the expanding Solar Array Program, new charging stations and growing our Easter photo sales and transactions. Over 40% of our same-store NOI is generated by our top five assets that produce sales of 588 per foot. We are introducing a dozen new to portfolio tenants with our first tower under construction at Cherry Hill. On an absolute basis, we have very limited exposure to Sears, one of the top credit risk tenants, this is result of our swift disposition program and our ability to consummate deals to replace them before taking back their stores. And one last, and probably most important point, on the evidence of our effective move to quality is the top notch team we've created. We have secured a deep bench of highly capable experienced professionals that rise to the occasions to stand out in a smaller more nimble organization bringing new relationships and a furiously competitive spirit. More than 50% of our corporate office employees joined the company within the past four years. We also think it's worth discussing tenant sales performance this quarter, while we acknowledge that certain retailer sales have soften, we want to point to had a two unique characteristics of this quarter. There was Macy's liquidation sales going on which drove traffic to these stores, as we all know Easter shifted back in the April this year and we did see sales move with it. Perhaps more important in our portfolio is the eight department stores in the transition. Over the long-term replacing these stores is an absolute positive, we expect there will be short-term deterioration in traffic and sales. We continue to make progress on our redevelopment and anchor replacements with several of our projects being delivered early. We are excited about the anchor boxes we are gaining control of as we have continued ability to drive NOI through parcel reconfiguration and the addition of outparcel. As we mentioned last night, we executed a new lease with [indiscernible] at Valley Mall a very exciting addition. Earlier in the month we executed a lease with Herbergers to relocate and expand into former Macy's space at Valley View Mall. The transaction that requires only a limited capital investment beyond acquiring the Parcel. And demolition will begin this summer to make way for Von Maur - mall. We believe the execution of three lease with expanding traditional department stores in a two month timeframe distinguishes us from our peers and speaks that the quality of our portfolio and our team. With that, I'll turn it over to Bob to further update you on our redevelopment progress and discuss our quarterly results. Bob?

[Bob McCadden:]

Thanks Joe. It's been an active quarter on the redevelopment front, construction is underway at Capital City Mall for Dick’s Sporting Goods at Magnolia Mall for Burlington and at Mall for Dick's Field & Stream home goods all of which will open this fall in former Sears locations. I want to point out that we took possession of two of these stores late in the first quarter and we'll have the new stores opened and operating by Holiday 2017. Every step of the anchor box turnaround process has been carefully planned as in the process of being executed. Our fashion outlets at Philadelphia construction and leasing progress continues in this transformative project in downtown Philadelphia. At the Mall of Prince Georges we are well along with construction on this cosmetic refresh and executing the remerchandising plan that will bring new and exciting tenants to this well local property. At Plymouth Meeting as Joe mentioned, we opened 33,000 square foot Legoland Discovery Center to great fan fair. This unique to the market attraction has been selling out regularly has driven traffic to level that exceeded and outflow department stores. Summit Media is a great example of how we can effectively differentiate our properties, but 45% of the properties comp store sales are generated from dining and entertainment tenants. We just signed another entertaining concept that will bring additional traffic to the property. Our Macy's plants continue to evolve based on the property bulls eye location we are running parallel past with multiple tenant replacement options, stay tuned for more exciting news. At Moorestown Mall, we have executed LOIs for a Macy's replacement that we are also really excited about. The replacement tenant will be first to market and among the very first in the country. From the capital to spending perspective, we invested $33 million in our redevelopment and anchor replacement projects this quarter. For the remainder of the year, we anticipate spending and incremental a $160 million to $180 million as our construction and tenant good out work ramps up. Turning to operations, in faced of the base of the headwinds from department closing, in line tenant bankruptcies and negative sentiment in the press of our sector, we performed in line with our internal expectations for the quarter. We reported FFO of $0.35 a share, after taking into account the $0.07 of dilution from asset sales, our earnings worth of penny from last year's quarter. Since the beginning of 2016, we sold eight low productivity malls including Beaver Valley and Crossroads Mall which closed in the first quarter as part of our strategic move to the quality. Same-store NOI at $59.1 million is flat to last year's first quarter, some key factors impacting a result include top line revenues which were impacted by approximately $1.5 million from tenants filing for bankruptcy in 2016 and 2017. The financial impact includes unsold vacancies, the restructure rents for certain tenant who we made an occupancy. In total, we had 89 impacted now we have seen 39 of these stores close over the past 15 months. At the end of the quarter, approximately 75% of the impact of the stores were covered. Results were also impacted by lower co-tenancy rents at properties with close bankers. The co-tenancy impact for the quarter was approximately $300,000, but the retail news is an all grim since beginning of 2016, we have executed new or renewal leases with expanding tenants such as L Brands, H&M, FootLocker, Capital and American Eagle with its area concept and 344,000 square feet incremental revenues from these expanding tenants contributed to our performance. We will see a positive contribution from our remerchandising and anchor replacement efforts later this year, when the first phase of the Mall of Prince Georges redevelopment comes online and tenants filling five currently vacant anchor boxes begin paying rent in the fourth quarter. Physical occupancy for our same-store malls finished the quarter at 92.9% which was down 90 basis points compared to last year's quarter reflecting impact of closed anchors. When taking into signed high leases or lease these occupancy increases by a 190 basis points to 94.8%. We have 725,000 square foot of pipeline of leases for future openings. When these tenants open over the next few years, they will contribute over $30 million of incremental revenues to our top line. From the timing perspective, we will open 560,000 square feet this year with an annualize rentals stream of $9.7 million at our share. The rest will open in 2018 except for Von Maur which is scheduled to open in 2019. We expect to add to the pipeline as we move a number of anchor replacement transactions from LOI to lease. Renewal spreads were positive reflecting the benefits of the improve portfolio. Looking forward, we expect spreads to be in the same ballpark for the next few quarters. Average rents for small shop tenants at our same-store malls increased by 1.6% to over $58 per square foot. Our sales growth continued as we close the quarter with sales of $465 per square foot, up $8 from 457 a foot reported at the end of last year. Operating margins at our same-store properties increased by 40 basis points to 60.4% reflecting continued emphasis on cost management and a mild winter across mid-Atlantic region where we have a significant presence. We did see significant increase of the real estate taxes at a number of our properties this year. While most of the increases were anticipated, we intend to appeal the unexpected increases consistent with our tax appeal program. From a GAAP perspective, net income attributable to pre-common shareholders was $6.6 million or $0.10 a share compared to a loss of $0.03 per share in the prior year’s quarter. The difference is due to dilution from asset sales and a gain on sale of real estate which occurred in the first quarter of 2016. Turning to the balance sheet, we have utilized the proceeds from asset sales and the January 2017 preferred share offering to fund our redevelopment spending and reduce debt balances by $167 million since the end of last year. The combination of lower outstanding debt balances and lower rates contributed to a $3.9 million interest expense savings for the quarter. Next week we expect to borrow a $150 million under our seven year term loan and repay all amounts outstanding under our line of credit. At the end of the quarter, we had approximately $243 million of borrowing capacity available under our banks facilities. Our average interest rate excluding non-cash amortization was 3.75%, 36 basis point reduction from the year ago. Our debt maturities are well laddered with approximately 85% of our loans maturing after 2018. We ended the quarter with 88% of our debt carrying either fixed rates or swaps. In connection with the planned term loan draw next week, we enter into additional swaps that will result in 96% of our debt effectively being fixed leading us well positioned to mitigate the impact of any increases in short-term interest rates. With respect to guidance, we are reaffirming our current year FFO guidance and revising our estimate of GAAP earnings to give effect to higher expected depreciation expense. FFO for the year is expected to be between a $1.64 and $1.74 per diluted share while net loss is expected to be between $0.15 and $0.05. As we discussed previously, NOI in the first half of the year is expected to be relatively flat. You can expect the second quarter’s performance to look similar to the first quarter. We will continue to be negatively impacted by the bankruptcies before revenues from tenants are leasing pipeline kick in during the second half of the year. We are still in discussions with the number of these tenants and our guidance reflects our best estimate of the outcome of these discussions at this point in time. And with that we will open it up for questions.

[Operator:]

[Operator Instructions] Your first question today comes from the line of DJ Bush of Green State Advisor. Your line is open.

[DJ Bush:]

Thank you. You talked a lot about the change in landscape of retail, the department stores issues that are out there, but you also are signing three department stores, new department stores leases at some of the vacancies that have cropped up. I’m just curious why not take this an opportunity to reduce your exposure to department stores further if you do think that industry is going to continue to shrink Joe.

[Joe Coradino:]

Well. first off keep in mind that we have about a dozen department store boxes right. And we announced three of them. Those three that we announced in all cases the [indiscernible] (Ph) we see is a great retailer. And an opportunity to bring them into a market Valley Mall in Maryland where we have a higher income consumer that was sort of start for fashion we think was the right decision. And we think that they are a good solid retailer with the solid future in front of them. In think in the case of Von Maur again, small company with 40 some stores it was the number one requested department store in the Grand Rapids markets so we are really meeting the consumer need. Herbergers at Valley View is tenant that is already in the mall and is a high performer unable to expand, this provided an opportunity to really jump from the 40,000 foot box store a 100,000 foot box with little investment on our part. But generally to answer your question, we are reducing reliant and exposure to department stores right. And much of what we'll be doing in the balance of those boxes is bringing in all price discounters, sporting goods, first to market concepts, et cetera, dining, entertainment. So for the most part I think we are consisting with your statement at the beginning. We saw those three instances as exceptions where we could really meet the need of a consumer in the market that was being unmet by a department store that we think is a performing department store that has some runway in front of them.

[DJ Bush:]

Okay. And then when we are looking at the eight thinker replacement summary and your discussions with potential new tenants to take some of these vacancies. Are the discussions different or the demand different for when you are trying to court new tenants to take a vacated Sears just given that Sears has probably larger issues versus someone like Macy's where it's going through some struggles with probably is a growing concern for the foreseeable future. Are the conversations or demand different for those boxes just given the dynamics of the two different department stores?

[Joe Coradino:]

I'm not sure I'm clear on your question. But I'll try and answer what I think you asked around demand. Given that the a number of our properties where we have department stores are well located, there is fairly robust demand in fact at Plymouth meeting right now. At Moorestown we did finally make a decision. We had probably double or triple the tenants that we needed to be able to fill the boxes. So there is demand out there. I think as I said in my script, I think that we are all of a sudden seeing tenants that might have before or looked at open year concepts, power centers or outlet centers be relatively agnostic as it relates to property type, and they have become prospects for the vacant department boxes. So he demand is certainly there. I wasn’t quite sure what you meant about Sears part versus the Macy's.

[DJ Bush:]

Yes. My point was when tenant were looking to take some of these spaces, they did look at Sears and think of it is that’s a business issues, Sears is struggling and it may not be an indication of how that center is doing whereas if its Macy’s, it could potentially be an indication at that property is not something that they want to invest in longer-term or be in longer-term that’s kind of what I meant between the differences.

[Joe Coradino:]

I understand. I understand. If it's got a Sears in it and the Sears is closing and we had a Macy's and the Macy’s closing why should we go there, right. What is wrong with the lead, I'll tell you. We have not encountered that, you saw our Q4, 2016 and Q1, 2017, I mean record leasing. I mean we have got people on planes flying all over the United States, I'll be in a plain in about three hours actually to me with the tenants. The demand is pretty robust and again we like to think that part of that is the effect that most Macy’s is closing in markets where they are oversaturated with Macy’s, I mean do we need a Macy’s in Cherry Hill and or Moorestown I doubt it or Plymouth Meeting and will they grow I doubt it, right. And so it really provided an opportunity for retailers that couldn’t find - pick Plymouth Meeting, a location were 92 million cars a traverse the road network around there. So, we have not seen retailers who have been negative based on the current tenancy. I think most retailers recognized that Sears problems are Sears problems, right. Macy’s on the other hand to a certain extent JC Penney was really about store rationalization in light of Macy’s case having acquired other store chains for years and never rationalizing finally doing that, impacted to a certain extent by online shopping and the ability to have somewhat of a reduced store count. So, it's been a net gain for us. And we are actually pretty sight, if we look out 18 months from now, it’s a pretty powerful portfolio. And obviously there are some things we can’t announce or haven't announced, but stay tuned for more exciting news.

[DJ Bush:]

Okay. Thanks, Joe.

[Joe Carodino:]

Thank you, D.J.

[Operator:]

Your next question today will comes from the line of Ki Bin Kim of SunTrust. Your line is open.

[Ki Bin Kim:]

Thanks. Joe, when you are signing these new leases recently are the actual terms in lease changing at all. Is there more favorable lease termination language or anything of that sort?

[Joe Coradino:]

Are you asking on the new leases once they are signed was the nature of the terms are they different and better than the previous ones?

[Ki Bin Kim:]

Yes. And [indiscernible] just focus on renewal rates and things like that, but I was wondering if that actual lease structure...

[Joe Coradino:]

I understand, I mean obviously these department store leases were signed during the ice age and between the co-tenancy language, the control, the cross easements, et cetera, et cetera all those points that end up being expensive to you as you look down the line to potentially their redevelopment ad, we are certainly making changes from co-tenancy language to how one participates in the easement agreement and making a lot of progress in that arena and doing better. I think if you did a comparison to what the prior documents have to what they are today, you would see a net positive.

[Ki Bin Kim:]

But how about for the tenant, what does the typical like lease terminations language look like today?

[Joe Coradino:]

Lease termination language, I mean putting an anchor and giving the right to terminate?

[Ki Bin Kim:]

I’m sure there is lease term to it so what is the penalty for them if they want to leave earlier than the lease duration?

[Joe Coradino:]

It is a default, if you are asking if we are doing deals with anchors where they have a right to vacate under certain conditions. That’s not been part of any of the deals that we have signed.

[Ki Bin Kim:]

Okay. The American Eagle [indiscernible] puts out a lease negotiation. Are those in the renewals stance, the kind of decreased rents?

[Bob McCadden:]

They were in the fourth quarter of 2016s lease activity in our supplemental.

[Ki Bin Kim:]

Okay. And with respect to your balance sheet you guys have a pretty significant capital deployment plan, 400 to 500 million for the next couple of years. Just curious about how you are going to fund that all, I know you have kept the preferred equity alive, so that’s part of it but just curious you know where the sources have been used and if you are going to also comment on the $150 million loan at Mall of Prince Georges that’s coming due like you put everything?

[Bob McCadden:]

So let’s cover - So we laid out in February our capital plans which I Ki Bin just kind of pointing you back to in terms of the sources and uses, I think it includes a number of items including construction loans, sales of assets, et cetera. We actually paid off the Mall of Prince Georges loan earlier in the year with the line of credit, I think we covered that on our fourth quarter earnings call.

[Ki Bin Kim:]

Okay I think [indiscernible] little bit old. Got it, how about the asset sales portion of it, you still have a bunch of strip centers or a couple of strip centers that I know at one point you are looking to sell. Not much news has come out of it, anything new?

[Joe Coradino:]

Well first of, as it relates to asset sales, we are continuing to work on the sale of our joint venture interest in our power centers, number one. Number two, we have engaged a broker, we are in the initial stages of looking at a JV for some of our higher quality assets and putting that in with a package of some core assets that's a second effort. A third effort is that we have opportunities to exit some of our office properties which we are engaged in currently. And our land sales we are working on sales of a land as well which we are making progress on. So all of that is sort of in the queue to execute our capital plan. And to the extent we can accelerate it a bit.

[Ki Bin Kim:]

Okay that's to clarify, I mean you said you are looking to JV some of your better assets, were you talking about malls or were you talking about something?

[Joe Coradino:]

Yes, I was talking about malls.

[Ki Bin Kim:]

I see. Alright I'll get back in the queue. Thank you.

[Operator:]

Your next question comes from the line of Michael Mueller of JPMorgan. Your line is open.

[Michael Mueller:]

Yes hi. Just I guess looking at your occupancy right now for shops of about 90.5%, can you talk a little bit about expectations as you move through the balance of 2017 where you think you could end the year on that aspect on an occupied basis as well as when you say lookout the 2018 what sort of targets can you think are achievable as well?

[Bob McCadden:]

So, Mike I think we expect to end the year somewhere in between 93% and 94% in small shops space at the end of the year.

[Michael Mueller:]

That's occupied not leased that's occupied.

[Bob McCadden:]

That's occupied, yes physical or economic occupancy. In our full-year plan we actually have that moving up to close to 95%. So we expect given the pipeline of leases that we have and certainly we have other things and things that we haven't yet brought to lease. We would expect to maybe take a halfway step there in 2018 and then get fully there the following year.

[Michael Mueller:]

Okay. You mean a halfway to the 95?

[Bob McCadden:]

Halfway to the 95.

[Michael Mueller:]

Got it okay. And then I guess it wasn't a big number, but the co-tenancy income or co-tenancy impact of about 300,000. Can you talk a little bit about some of the background of what triggered that? So was it in malls where there is more than one anchor vacant, or is it just maybe that's the only anchor that was vacant in that mall, but it was part of a lease or was it just part of a negotiation where this was back and forth and you end of that settling on that. But just any sort of color because people ask about co-tenancy all the time?

[Bob McCadden:]

Yes, I think that's given the fact that we have eight vacant anchors at the current time, I think that number is not unreasonable if you look at it on a per property basis. So it's generally I think we talked about previously, it's a handful of leases at a handful of properties that are ranging from as few as to maybe half of dozen or so at some of the other properties. But it's generally most of it tied to the anchors. And in some cases some of the old leases as Joe alluded to the anchor were considered to be there at least expected to be there forever so some tenants have leases that we are tied to specific named anchors. So when those tenants vacated then co-tenancy would kick in.

[Michael Mueller:]

Got it okay.

[Bob McCadden:]

But again before we leave that point Mike, just wanted to point out that we don't have any malls with more than one vacant anchor.

[Michael Mueller:]

Okay. I think that will be for now, thank you.

[Operator:]

Your next question comes from the line of Floris van Dijkum of Boenning. Your line is open.

[Floris van Dijkum:]

Question, Bob, on the revolver that you guys have outstanding that you've drew down on it, presumably when you're talking about your capacity, is most of that capacity on that remaining on that revolver?

[Bob McCadden:]

That’s correct.

[Floris van Dijkum:]

And doesn’t -- wasn’t that -- that has an extension option I believe until 20. When does that have to get refinanced?

[Bob McCadden:]

We have, it expires by its initial term in 2018. We have to one year extension options so we could, we can go to 2020 under its terms.

[Floris van Dijkum:]

Okay. And then a question for you guys on any more update on the FBI relocation. And what's the latest that you guys have heard?

[Bob McCadden:]

The latest we've heard and this is probably a little aged maybe six weeks is that they were down to the location in Fairfax County adjacent to Springfield Town Center, but I'm certainly not going to make a prediction on what's happening in Washington D.C. on there any circumstances.

[Floris van Dijkum:]

Okay. So, I guess we’ll have to wait.

[Joe Coradino:]

Yes. I mean we’re going to have to wait and -- we’ll wait and see. We’ve obviously been in touch with our representatives in D.C. and doing everything we can to say as in formed as we can.

[Floris van Dijkum:]

Okay.

[Bob McCadden:]

It encouraged the decision to go to Fairfax County.

[Floris van Dijkum:]

Right, another question I have, I guess one follow-up on Moorestown, you sort of alluded you had a lot of interest in that, but you don’t actually own box, right. Have you got an agreement ready to purchase that box from Macy's?

[Joe Coradino:]

We have reached agreement with Macy's and documents are moving back and forth right now.

[Floris van Dijkum:]

Okay. Presumably, you will give us more details ones all that has been agreed?

[Joe Coradino:]

Yes. As, Bob, alluded for us, these will be two first to market tenants they're not currently in the area. One is will be -- one of the first concepts in the country, so it's -- it'd be quite exciting when we concluded.

[Floris van Dijkum:]

Got it. And presumably that also means if you're splitting up the box will play has to more cost will that be included in all of the investment?

[Joe Coradino:]

Yes. Actually at Moorestown, we envision the box being split out in the three pieces with the third piece being a in addition to the two let's call them a stored, the third piece being a food market.

[Operator:]

Your next question comes from the line of Linda Tsai of Barclays. Your line is open.

[Linda Tsai:]

Yes. Hi. In your 4Q press release your CapEx guidance was the range of 225 to 250 in 2017, with the potential for some of these department stores interest to come back to you faster and sooner over the next few years. How are you thinking about CapEx in the coming years particularly is it relates to redevelopment of these department store boxes?

[Joe Coradino:]

So, when we set out our guidance, we had felt we were pretty prolong with the number of these transactions, so our capital spending both for this year as well as we laid out in the full year plan was still very comfortable with those number and ranges.

[Linda Tsai:]

Okay. And then, can you highlight what Von Maur might be doing differently from its peers that makes it more in demand. I realize that having a much smaller store base to begin with probably helped?

[Joe Coradino:]

I think for the most part, there a fashion department store that serves a market where they are well known and there is significant income available. I mean I would consider them on a level of a Nordstrom both in terms of merchandize mix as well as service, and they have a very well defined market. In the case of Grand Rapids, the city of about 1 million people living there. Our trade area around Woodland Mall has income over a $100,000. So, it was the right choice for Von Maur and again the customer based when intercept and information we got from our customers. It was the number one store in demand. So, we think they’ll perform quite well.

[Linda Tsai:]

Thanks and then finally at the beginning of the call you discussed the presence of too much apparel in the space. In your view, how long do you think bloodletting will continue in terms of news of store closures? Do you see this as like a two or three year process?

[Joe Coradino:]

Well, you used bloodletting, I used detoxing, either one works. When we look through our watch list, right, first off we obviously review it regularly and the tenants in our watch list are performing right now with trends that are pretty much in line with last year and have occupancy costs that are sustainable. The stores are profitable and again then occupancy cost is reasonable. The average is slightly above our average of around 13%. So, we don’t think we have significant store closure exposure, in the portfolio again we’ve paired our portfolio down to 23 soon to be 24 high quality properties and your other question around the apparel. We continued to see that number more if we pointed out a number of 17% dining and entertainment. We see that number going probably to 25% over some period of time, and also as I mentioned, we also begin to see certainly health and fitness the important component in mall which is not apparel based. So, there is significant movement away from apparel irrespective of whether or not there are bankruptcies or not bankruptcy. We’re being proactive about getting space back and introducing those various uses to the malls. I mean in our case in Plymouth Meeting Mall, our non-apparel tenant base is fully 45%, right. That number in the near-term is probably going to move north of 50. Now, the good news is the other tenants are showing a benefit of that from the fact that we have diversified our tenant base significantly away from apparel and so there is demand for apparel in the mall now. So, I think it will continue to more as I think one thing that customer has voted for we think it's pretty accretive vote for pairs fashion off price. There are two key categories. And even as we introduced apparel, their areas at all the sudden have become fair gain for malls.

[Operator:]

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

[Christy McElroy:]

Joe, can you discuss the recently announced Board departures? Why they left and what are the plans to replace those seats?

[Joe Coradino:]

Well, in terms of the Board departures, the two departures were made for personal reasons and we -- they were both along tenured Board members that exited for personal reasons. We're also --we also noted in our filing that we nominated George Alburger, who was the former CFO of Liberty Property Trust to join the Board. George brings significant financial and capital markets operational experience. He also by the way spent a number of years in the retail real estate business prior to joining Liberty. So we think George is assuming that he receives the appropriate shareholder vote going to be a great addition to the Board.

[Christy McElroy:]

Okay. Now, you've done this portfolio upgrade. You have this multiyear plan, but with the stock underperformance the market doesn't appear to be recognizing that. If there is an inherent discount to private market value and your stock and you efforts don’t appear to be helping now that discount. How do you think about the possibility of M&A or privatization today?

[Joe Coradino:]

Well, I mean first and for most, we've done a lot of work underway right now with upwards of dozen anchors various redevelopments et cetera. Our sense is that over as we begin to bring them to fruition that the hysteria, the overreaction disappears. The short sellers get squeezed out, nice piece to put the other day by the way on that exact topic and we begin to see share price appreciation in multiple growth. Having said that as it relates to a strategic transaction, Christy, you know the answer to this question, the answer is that we view our job as to drive shareholder value and to the extent there is an opportunity to be a private or public to do so from a strategic perspective, our Board will consider it.

[Michael Bilerman:]

Joe, it's Michael Bilerman in speaking ahead. In your comments, you've talked about the increased interest for institutional investors seeking to visit your properties, tour your properties. I'm curious whether you've had private market interest as well and are there private marketing they're looking this is an opportunity potentially given all the mass hysteria that there is around sort of retail real estate?

[Joe Coradino:]

Hi, Michael, I was waiting for you. So, not at this point, all of the folks who we toured them been on calls with by the way and have them going on tomorrow as well, have been public market investors. I would not be surprise if our space not pre-specific begins to see interest from private markets investor, but we have not at this point.

[Michael Bilerman:]

And then I guess, Bob, is there anything on sort of the lending side to malls have the lenders sort of taking all these information and looking at potentially providing loans on malls. Is that change or is there anything you can sort of talk about in that front?

[Bob McCadden:]

Well, right now as I mentioned earlier we haven't been active in the borrowing market there is our maturities are kind of pushed out in the future, but we have ongoing discussion with lenders. And they are focusing where they always been on the quality of real estate and the quality of tenancy. So, I don’t think those fundamentals have really changed in the last 12 months to 18 months. I think they continue to focus on good assets and good locations.

[Michael Bilerman:]

And then on the Board other than George, are you going to replace? Or you’ve seen a downsize of the board?

[Joe Coradino:]

Well, obviously, diversity is certainly important to us. So, we’ll continue to look for a candidate that would bring diversity to our board. And that’s an ongoing process that we’re engage in right now.

[Michael Bilerman:]

Okay. I thought Rosemary was -- she's got on the Board in 2012, is she older than that?

[Joe Coradino:]

Well, no, she was on the Board before, I - if you go back, she was one of the Board for a number of years. I think since the initial --

[Bob McCadden:]

I think from 1997.

[Joe Coradino:]

1997 to 2011, when I stepped in as CEO, I asked her to come back, which she did, so this is a sort of -- she's had a second run at it if you will.

[Operator:]

We have next question comes from the line of Karin Ford of MUFG Securities. Your line is open.

[Karin Ford:]

With the sale of Beaver Valley and Crossroads those two 2 remaining noncore malls with the evolution of the retail environment, has your -- have your thoughts changed on maybe any additional malls following newly into the noncore pool stating the malls are in the low $300 sales per square foot numbers and are there plans for all of those?

[Joe Coradino:]

I think as we look at our portfolio today, we continue to look for opportunities to improve it and further dispositions particularly exiting markets that are not primary markets are on the table. We’ve not made any decision at this point, but certainly we're looking hard at our portfolio.

[Karin Ford:]

Okay. And can you give us some characterization of the institutional interest you’ve seen as far in the JV interest in the core pool?

[Joe Coradino:]

It’s fair -- the way in which we’re approaching the JV transaction, very select group, I think less than a dozen. It's very early, most of those discussions will occur as ICSC in Las Vegas. So it’s a little preliminary to respond to that.

[Karin Ford:]

Okay. And final question from me. You said I think that the fashion outlets were progressing well, can you just us more color as to how leasing and construction and everything is falling together there?

[Joe Coradino:]

I was amazed that we walked through at the other day hadn’t been there in a couple of weeks. Construction is progressing, we’re actually beginning to reconstruct at this point. Vertical transportation is being installed. So the project is moving forward from that perspective, from our leasing perspective we said its about 70% committed tenants such as signed leases or LOIs and that effort is obviously continuing very stronger, we’re looking to have a big showing in Vegas that will be highlighted there. We think we’ll come to that convention with a very positive story around co-tenancy et cetera.

[Karin Ford:]

And any update on the potential residential component there?

[Joe Coradino:]

Only that there are -- there are discussions that are ongoing at this point.

[Operator:]

And there are no further questions. I now turn the call back over to the presenters.

[Joe Coradino:]

Thank you and thank you all for being on the call. Couple of closing comments, the work we’re doing in transforming the traditional mall model into an exciting venue that offers a diverse array of dining, entertainment and the most sought after retail venues complemented by boutique, grocers, health and fitness among others as we drive the vision of our company. In 24 months, we’ll take our places in AMO company with sales of 525 a foot, a dozen new anchors, our new comp asset opening operating in Philadelphia, NOI exceeding predisposition levels, 25% of our space committed to dining and entertainment, serious exposure minimized, thousands of apartments units opened are under construction on our sites and our multiple in line with the quality portfolio we have created. Thank you all. I'll look forward to talking with you soon.

[Operator:]

And this concludes today’s conference call. You may now disconnect.