Pennsylvania Real Estate Investment Trust
Q3 2017 Earnings Call Transcript

Published: 2 Nov 2017

[Operator:]

Good morning. My name is Jodie and I will be your conference operator today. At this time, I would like to welcome everyone to the PREIT Third 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] Thank you. Heather Crowell, you may begin your conference.

[Heather Crowell:]

Thank you. Good morning, and thank you all for joining us for PREIT's third 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, November 2, 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. I'll now turn the call over to Joe Coradino.

[Joe Coradino:]

Thanks Heather and good morning. Thank you all for joining us. We're pleased with our results this quarter which are a testament to the success of our strategy. We're strengthening our portfolio and our results demonstrate that we're narrowing the gap between ourselves and the other high quality mall REITs. Including sales performance, same-store NOI growth, sequential occupancy gains and anchor replacements at a sector leading pace. Just as we led the way with non-core asset dispositions, we're leading the way in transforming the agro landscape. This long term business and malls in particular are undergoing the renaissance that we're excited about. It's no doubt a challenge environment, but let's discuss what we've been able to accomplish. And what we're doing to fortify our portfolio as we enter a new age of retail. Our accomplishments this quarter are impressive and we believe a direct result of the quality of the portfolio we have crafted over the past five years. Sales have reached a new high at $475 per square foot despite having anchors in transition at half of our malls. Same-store NOI excluding lease terminations from our wholly owned portfolio grew by 3.2%, while our entire portfolio increased 2.5%. Negatively impacted by our joint venture assets, which declined 2.3%. Year-to-date average renewal spreads were 5.8% for all non-anchored tenants in our wholly owned portfolio. Impacted by rent relief packages with tenants would file through bankruptcy protection. We've raised $289 million generating over a $100 million of net proceeds to advance our capital plan. We are completing the final steps of our capital plan that will allow us to fully self-fund our redevelopment and anchor replacement pipeline. We opened 578,000 square feet of new space, contributing to a 200 basis points sequential increase in mall non-anchor occupancy. And year-to-date, we have leased three times the amount of space compared to last year. We're establishing unique environments for our shoppers. We talk about diversifying our tenant base. We're referring to reducing our reliance on traditional mall retailer, including department stores, apparel and accessories. We are transforming our anchor mix with 10 of 11 anchor replacement solidified in less than a year. Our anchor leasing team has been firing on all cylinders and deserves a shout out for this amazing accomplishment in record time. In the past quarter we opened replacements with six diverse tenants and four department store boxes, with three more spaces under construction. We replaced three former Sears' stores. At Viewmont Mall we opened a Dick's Sporting Goods, Field and Stream combo and a new to market Home Goods. At Magnolia Mall we opened a new to market Burlington and have the balance of this space under construction for home goods and five below. At Capital City Mall, we opened Dick's Sporting Goods and have a premium fine wine and good spirits store opening in a few weeks. At Valley View Mall, Herberger's replaced Macy's. The average downtime when these replacements was less than nine months. We are replacing these anchors within the same year-to-date close, underscoring the quality of the portfolio, the demand for space and our proficiency in executing. The anchor improvement story continues, having recently executed leases at Valley Mall with U.S. Fitness Holdings a regional top tier fitness facility to operate a 70,000 square foot inclusive of an indoor and outdoor pool. Completing the box Tilt studios, we opened up a 48,000 square foot entertainment facility, that offers bowing, rides, laser tag and arcade games. These diverse uses will joint Belk, a high end fashion department store who will replace a proactively recaptured BonTon. At Moorestown Mall, two new to market retailers were opened in the Macy's space. And while we are in a liberty to identify them by brand, they will offer off price home furnishings from top designer brands and an outdoor geared retailers in the off price segment. All of these tenants are expected to open in Q4 '18 and were underwritten in our multi-year capital spending projection previously outlined. At Willow Grove Park, within a weeks of executing a lease to bring a high end dinning movie theatre to replace JC Penney in 2019. Regarding anchors, let's recap our staggering achievements over the past year. 11 anchors were proactively recaptured or close, 10 replacements are either open under construction executed or near execution. This leaves us with one, where we are finalizing on lease with some lead replacement tenant at Plymouth Meeting to situated at the best intersection in the Philly Metro, where 92 million cars pass by annually. Recent additions include Legoland Discovery Center, Cyclebar, [indiscernible] and the most recent addition is Five Woods. A live action high tech escape room recently voted one of the top five in the country by U.S.A. today. These tenants joined and already a collected and lined up that includes Dave & Buster's, Whole Fruits, J. Crew Mercantile and several top tier dinning establishment. Outside of the anchor space, we're focused on adding sought after brands. This past month we have opened two new H&M's, our first Zara and two new prototype watch stores. And we have executed leases for tenants not yet open that will contribute over $11 million in annual gross revenue when they come online. In addition to the tenants previously mentioned, these exciting additions include Whole Foods at Exton and new to region Dave & Buster's at Capital City Mall. First the portfolio into Miss Iny at Cherry Hill Mall, Charming Charlie at Springfield Town Center and Tilt Studio at Patrick Henry Mall. While this list of tenants validates the demand for space and quality assets, it also highlights our approach in bringing new and different uses to our properties to create experience that are compelling to our customers. Where we have replaced department stores results have been impactful. At Viewmont Mall where we have seen traffic and dramatic sales increases in the former series wing. And the property have seen sequential sales growth, which we expect to continue. At Magnolia Mall reports from the new anchor are strong. We are seeing increased activity in the formally under-utilized wing. We're confident that the work we're doing is paying off through increased traffic, improved retailer sales as well as strong NOI growth coming from these assets. The results validate the independent forecast we had completed where portfolio sales are estimated to exceed 5.25 per square foot exclusive of our fairly redevelopment. The forecast completed over the summer includes assumptions regarding all the work we have just laid out. And took into account in historic population trends as well as comparative center sales trends. Now our comp sales aren't the panacea. Organic growth is an indication that the moves we're making are strengthening our assets and increasing market share. And as we continue to execute on our redevelopment and remerchandising pipeline, we expect the value we have created in our portfolio to be recognized in our share price. In Philadelphia we unveiled a new name for our project Fashion District Philadelphia. While we always anticipated a project that included tenancy beyond outlets. The name change was really driven by the continuing improvement in Philly's brand, driving tenant demand for flagship, full price stores by some originally targeted for outlet concepts. The project has evolved and is changing the Philadelphia retail scene. The new Burlington storage open, where our transforming their former location into a new age premium AMC theater, to be the first new multiplex theater to open in Center City Philadelphia in decades. It will anchor the third level which is historically the most difficult to leasing in retail. We also signed H&M for the largest Philadelphia location and are bringing several outlets to the market brands which are new to Philadelphia. From a physical perspective, the murky queue bench trenches completely identifiable at this point and the exterior building for site is going up. At MPG, we just announced the tenant line up at the suburban DC Gym. New retailers include H&M, Alta, DSW, Five Below and Flight 23. New expanded prototypes were completed for Victoria Secrets and Bath & Body works were Pink and Wilkes-Barre and Kendall were added. Old Navy opened in the new right sized prototype store. And we have announced three new quick service dining additions. All of these improvements serve to only strengthen this asset which is headed to the $500 per square foot mark in sales. We also had a strong quarter with respect to our capital plan, raising a $100 million of net proceeds. The capital plan is a top priority and we're close to putting another non-core office building under agreement. Bob will walk you through the details of what remains to be spent. So we're excited about the work we're doing and certainly it is creating a stronger platform. With that I'll turn it over to Bob to cover our quarterly results, expectations for the balance of the year and details surrounding our capital plan. Bob?

[Bob McCadden:]

Thank you, Joe. Before I cover the operating results and discuss earnings guidance in detail, let me start with an update on the capital plan. As Joe mentioned we've been extremely active with capital raising activities since our last call. We completed the sales of Logan Valley Mall and the 801 Market Suite office condo yielding over $60 million in proceeds. Since the beginning of 2016 we have sold nine non-core malls and other properties rising over $300 million, which is being used to fund our anchor replacement and redevelopment program. In September and into October, we issued a $125 million of Series D Preferred shares at 6 and 7 As. We used the net proceeds to redeem our 8.25 Series A Preferred shares, which will result in annual dividend savings of $1.6 million. Earlier this month, our Lee High Valley joint venture completed an early refinancing of its existing mortgage loan which had a majority data of 2020. We took advantage of an opportunity to extend the maturity, reduce the rate and generate access proceeds. The new 10 year $200 million non-recourse loan carries a fixed interest rate of 4.06%. This transaction generated over $35 million of proceeds to us and we'll results in annual savings of $1.1 million. We are in great shape as it relates to our upcoming mortgage maturities. The loan on Francis Scott Key Mall maturate it March of 2018. And we're in documentation with the existing whether to extend our loan for an additional five years. The loan on Gloucester Premium Outlets matures in June of 2018 that can be extended for an additional year. We are currently discussing financing options with our JV partner Simon and we'll have more to report next quarter. As these 2018, maturities are addressed our next significant mortgage maturity won't occur until 2021. We continue to advance discussions with the bank syndicate for a loan and Fashion District. We're targeting proceeds in excess of a $100 million in our share from this financing which is expected to close in the first quarter of 2018. We continue to improve our balance sheet. Since begging of 2017, we reduced our outstanding debt by a $162 million. At the end of the quarter, we have $290 million of total liquidity, including a $190 million of borrowing capacity available under our bank facilities. At the end of September, our bank leverage ratio was just under 48% and our net debt-to-EBITDA was 7.2 times. Our cash interest rate was 3.80%, a 9 basis points reduction from a year ago. 95.6% of our debt of either fixed or swapped and debt maturities are well laddered. We are well positioned to manage through a period of rising interest rates. We are in various stages of completion with other transactions that we anticipate we'll generate up to $70 million of incremental proceeds by mid-2018. These include the sale of remaining 9 core office property, various land parcels and other assets. With respect to development, we invested $65 million on our capital program this quarter and a $159 million to date this year. As of September 30, we had approximately $330 million remaining to spend on this program. We expect to spend around $40 million in the fourth quarter and approximately $175 million to $200 million next year and the balance thereafter. Turning to operations, we performed in line with our internal expectations and analyst consensus for the quarter. We reported FFO as adjusted a $0.42 per share and net income of $0.05 per share. Continuing and it's been first noted during the second quarter, we saw a divergence in performance between our wholly own and joint venture properties, which were disproportionally impacted by bankruptcies and store closings. This divergence was reflected in relative NOI contribution, occupancy and leasing spreads. Same store NOI including lease terminations at our wholly owned properties was up 3.2%, while it was down 2.3% on our joint venture properties blending to an overall 2.5% growth rate. Bankruptcies had an overall $1.3 million impact in the quarter. Excluding this impact same-store NOI growth would have been approximately 4.7%. Non-anchor occupancy at our wholly owned same store malls was down 30 basis points compared to last year. Non-anchor occupancy at our joint venture properties fell 170 basis points to 92.1%. Average rent spread for our wholly owned properties during the quarter to 5.5%, compared to a negative spread of over 20% at our joint venture assets. As we look forward we will have added or will add a total of 660,000 square feet of new tenant and our same store properties in the second half of the year, which will contribute approximately $30 million and annualized rented our share. Turning to guidance, we are updating our FFO guidance to give effect the $0.05 per share dilutions in the third quarter asset sales and anticipated fourth quarter charges of $0.05 a share with redemption of our Series A Preferred shares and $0.02 per share related to the earlier payment of the mortgage loan at Lee High Valley Mall. In addition to these factors, we're also updating our net income guidance for gains on sales of real-estate and asset impairments FFO as adjusted for the year, is expected to be between $1.62 and a $1.67. We expect to come in to the lower end of our same store NOI guidance range, which implies our fourth quarter growth rate of 4.2%. Before we open it for questions, I want to turn it back to Joe for a comment.

[Joe Coradino:]

We are going into Q4 in 2018 with momentum. A transformed anchor base, a solid representation of sought after merchants waited towards restaurant, entertainment best fashion and off price. We expect bankruptcies to moderate and renewal rates to normalize in the mid-to high-single digits. With that I will open it up for questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Karin Ford of MUFJ Securities. Your line is open

[Karin Ford:]

Hi good morning. Just wanted to talk about, I appreciate the comments on where you've stand on this year's same store NOI growth, I am just looking into next year, now what you have a lot more visibility on the leasing you've done here in the second half. How are you feeling about the 2.75% to 3% same store NOI growth you had in your three plans for next year?

[Bob McCadden:]

Karin I think, that was actually an average range over a period as opposed to a specific 2018 target. We expect as you would have imagine, with a lot our redevelopments coming on stream late in 2018, and will being completing in '19. You are going to have greater growth in the back end of that forecast period and maybe more moderate growth in the early part of that.

[Karin Ford:]

Okay, great, fair enough. A second question is, can you just give us an update on, the sale potential JV interest in some of your core malls? And how is pricing going as you continue to market those assets?

[Bob McCadden:]

Well, first off, we've really, while we have continued the discussions on the JV interest in some of our core malls. We really focus on this position of noncore office properties and been quite successful at that. Have another one about to go under agreements soon. We see the absence of trades that's occurring , I think the buyers that are there for malls. I mean they read the news and I know the sentiment in the market. And they're spilling blood in the water right now. So, from our perspective we are not in a situation where we have to sale. So we have being very thoughtful and very careful and slow playing. Because gross pricing is important to us.

[Karin Ford:]

Great. And just last question from me. It sounds like Simon is planning to do a big densification project of picking that King of Prussia mall. Do you think that could hurt Cherry Hill or any of your other malls in the trade area? And what are your thoughts on densification opportunities?

[Bob McCadden:]

Well, we are in midst of densification. Preliminary densification opportunities ourselves. So, we think it's a good thing, I think that King of Prussia the trade area associated with this is pretty disbursed from certainly Cherry Hill or any of the other assets that we have. So, we don't see it is being competitive. We really see the opportunities that we have in our portfolio in places like Plymouth Meeting and Exton. And in fact, at Exton we do have an agreement with a couple of 100 units, the venture developer. So, in any event, we think densification is clearly to way to go. Residential is it good use right now. And I don't think the King of Prussia is being something that causes concern for any of our assets.

[Karin Ford:]

Thanks, very much.

[Operator:]

Your next question comes from the line of Hong Zheng of JPMorgan. Your line is open.

[Hong Zheng:]

Hi guys, good morning. It was touched on, you guys touched on it a little bit in the prior question. But can we expect any further mall sales from here particularly in your lower productivity malls?

[Bob McCadden:]

Well. We currently have Valley View Mall listed for sale. So we'll continue to work on that. And I would say, we'll always look for opportunistic situations to continue to drive quality in the portfolio. And so we are calling the portfolio, bringing the portfolio to drive that quality or something that is need to us if you will.

[Hong Zheng:]

Got you, thank you.

[Operator:]

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

[Unidentified Analyst:]

Good morning. This is KD Macana [ph] on for Christy. Can you update us on the trajectory for narrowing a lease expense spread? And how much attrition contribute to their acceleration in 4Q NOI growth. And then on the flip side, how are you thinking about the potential for further tenant fallout heading into 2018?

[Bob McCadden:]

So let me talk about kind of our renewal spreads KD, I think I mentioned that spreads for the same store properties were 5.5% to negative 21% the joint venture properties with significantly delete our operating results. The primary driver for the lower spreads this was the concession. Concentration and expansion deals that we've done with tenants of bankruptcy and others on the watch list. We've executed in the quarter 10 lease modifications with merchants reorganizing at a bankruptcy protection, rate renewals for the retailers on our watch list. So on a relative basis, these '18 transactions represent about third of what we concluded this quarter and significantly influenced the quarterly results. But as Joe mentioned in his remarks, we expect the impact of bankruptcy to moderate going forward and return to more normal levels than our average returns. Renewal spreads returned back to the mid-to-high single digit range.

[Unidentified Analyst:]

Okay, great. And then any commentary on your expectations for fall into 2018?

[Bob McCadden:]

We do not think that bankruptcies in 2018 are going to be at the level that we've seen in 2017. So we think they're going to moderate. I think our watch list is shrinking a bit. And we also think that we've gotten out in front of many of the problems already. So we think '18 is going to certainly be a better year than '17 from a bankruptcy perspective.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

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

[Floris van Dijkum:]

Great thanks. I saw some encouraging increases obviously FPG and also at Willow Grove. You're spending a lot of money on these anchor redevelopments. When should investors expect the portfolio is going to show more of these increases in sales? And do you expect that we're going to have that cross sometime in early '18 or how are you looking at that?

[Bob McCadden:]

Will you talking about sales as far as?

[Floris van Dijkum:]

Yeah. So sales.

[Bob McCadden:]

I mean I think at this point we're already beginning to see sequential increases in sales where we have opened new anchors. We're seeing it at Viewmont, we're seeing it at Magnolia with Burlington, Viewmont with Dick's Sporting Goods and Field & Stream and Home Goods. So already to beginning to see that. We were up in every asset every property from a sales perspective other than 8. When you keep in mind that half of our portfolio had anchors in transition. And I think we are beginning to see the results and we'll continue to in the coming months.

[Floris van Dijkum:]

Great. That's it from me.

[Bob McCadden:]

Thank you.

[Operator:]

Your next question comes from the line of DJ Busch of Green Street Advisors. Your line is open.

[Spenser Allaway:]

Good morning. This is actually Spenser Allaway on for DJ. I guess another one in terms of dispositions. I know you guys been early focused on sales of non-core assets obviously where you've had a lot of the success. But can you guys provide an update on where you are and trying to joint venture some of your power sale assets?

[Bob McCadden:]

That continues to be a work in progress as I reported a couple of calls ago. That is an agreement that was crafted prior to even the public company being formed. And has a very difficult by sale. So while the assets are generally quality assets. It is been difficult to bring it to conclusion. Although we continue to work on it.

[Spenser Allaway:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Karin A. Ford of MUFJ Securities. Your line is open.

[Karin Ford:]

Hi, just a couple of follow ups. You mentioned the rise of the Philly's brand, can you just give us your thoughts on, what could be the potential for a Phalli winning bid for the Amazon proposal. And how that could potentially boost the overall economic growth of the region?

[Joe Coradino:]

First of all you looks to gorgeous, wouldn't that be great. I mean look the Phalli sites that have been put forth are in relative close proximity to our project. But I think it a lot bigger than that in terms of what it could mean for Philadelphia. I mean let's not forget the fact Philly's hot anyhow. I mean we are city that in all aspects it's going to more in the move. And the Amazon bid would make a huge difference for us even in spite of the fact that we're on moves. So, I know there is a two sites adjacent depends campus. And there is also some other sites that while not in Philadelphia are pretty close facility can in difference instance. So, all that is something I don't have any inside into, what the status of the bid is but it's something that we participated in were we're helpful and crafting the response.

[Karin Ford:]

And just sticking on the Amazon theme. Are you more or less interested in having Whole Foods as a part of your properties now that they're linked with Amazon?

[Joe Coradino:]

I think it's a good thing. We have one Whole Foods open at Plymouth Meeting, we have a second one that is turned over to the tenant and about to open Q1 of 18'. I think it makes it even a better. They have announced that they are going to be deploying a number of store openings with their 365 concept that we are looking at a number of locations ourselves. I mean I can speculate. And it would be speculation that I mean I began to see that the Whole Foods starts to service as a pickup in and distribution center or for customers wanting to either pickup or bring back merchandise. I could see, I can envision Amazon book stores being incorporated in the Whole Food stores. So, I think it is a real net positive and we will continue to look to do business with them.

[Karin Ford:]

Great. Can you give us an update on the status of the residential piece of the Fashion District project?

[Joe Coradino:]

We are in discussion as we speak. A lot of engineering work is being done, communication between the parties. And obviously that's something that we think it would be a real benefit to the project .Because for couple of reasons, one is built in customers with residential above the project, plus nothing like that exist in Philadelphia, it would be a first. Our retail project with the residential over built. So, we are working on it and continue to mature it.

[Karin Ford:]

Great. And then just last one for me. Do you have any incremental visibility on any additional department store closures or any proactive take backs of any more departmental stores?

[Joe Coradino:]

Actually, good you ask that question. We've done a pretty thorough review of our portfolio and feel pretty good about it. I mean number one we have what is not the lowest but I think next the lowest exposure this year's lowest exposure to Bond Burlington. We've been quite proactive in our approach to department stores given the fact that either through closures we take back 13 stores 12 of them are spoken for ones in a way to being spoken for. So we're pretty close to saying we're done. We think we're well positioned for department store exposure going forward particularly again given the fact that we were extremely proactive in that arena.

[Karin Ford:]

Great. Thank you.

[Operator:]

There are no further questions in the queue at this time. I'd like to turn the call back over to Joe Coradino for the final remarks.

[Joe Coradino:]

Well thank you all for participating. It was we enjoyed speaking with you. And I know we'll see many of you in the next few weeks in Dallas. Thank you all, have a great day.

[Operator:]

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