Pennsylvania Real Estate Investment Trust
Q3 2013 Earnings Call Transcript

Published: 29 Oct 2013

[Operator:]

Good morning and welcome to the PREIT Q3 2013 Earnings Conference Call and webcast. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note that this event is being recorded. Now I’d like to turn conference over to Heather Crowell. Ms. Crowell please go ahead.

[Heather Crowell:]

Thank you and good morning everyone. Welcome to PREIT’s third quarter 2013 conference 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, October 29, 2013 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 CEO and Bob McCadden our CFO. It is now my pleasure to turn the call over to Joe Coradino.

[Joe Coradino:]

Thank you, Heather. With our operating metrics now inline with our peers including renewal spreads of 6.5% portfolio occupancy of 93.5% and average rent growth of 2.5% we are pleased to report a 4.7% quarterly increase in adjusted FFO per share and a 7.3% increase year to date. All of these were critical objectives that we outlined at our Investor Day almost a year ago. Same store NOI grew by 2.1% for the quarter and we expect full year same store NOI growth to be between 2% and 3%. Make no mistake about it we aren’t satisfied with our quarterly results it was a solid not a stellar quarter. I am pleased that we are delivering on our priorities of strengthening our balance sheet, improving our operating metrics and elevating the quality of our portfolio. Now it’s time to raise the bar, reset our goals and focus on expanding our platform through organic and external growth opportunities. With competitive metrics, we are intently focused on quality, quality people, quality tenants and quality properties. We are pleased that within the past year we have eight new members of our management team that bring the fresh perspective to our already strong team. With that I will discuss some specific highlights from the quarter. On the balance sheet front, this quarter we closed on the sale of two power centers Christiana Center in Newark, Delaware and Commons at Magnolia in Florence, South Carolina the decision to sell these was designed to capitalize on their maturity and allow us to reduce overall indebtedness. We extended the mortgage loan on Logan Valley and paid off two additional loans on Wyoming Valley and Exton Square Malls one of which was subsequent to quarter end. As a result of our extensive efforts this year, our bank leverage ratio for total liabilities to grow its asset value was 48.7% at the end of the quarter. We are pleased with the progress we have made on our balance sheet and will look to strengthen our financial position and create fit flexibility with respect to our capital position. Regarding our operational performance, we continue to show improvement in our metric. Same store NOI was up 2.1% for the quarter and stands at 2.8% year-to-date. Excluding lease termination revenue same store NOI improved 2% for the quarter and is up 3.4% on a year-to-date basis. Same store mall occupancy increased to 93.4% an increase of 90 basis points over last year. Non-anchor occupancy has exceeded our 90% goal for the year and is at 90.6% an increase of 150 basis points driven largely by growth in our premier malls and more modest engine on core growth malls. Gross rents were up 2.5% at our mall properties driven by increases in all of our mall property categories excluding those classified as non-core. Renewal spreads for small shop tenants continue to be strong and were 6.5% for the quarter and 5.5% year-to-date. Portfolio sales at 381 per square foot has held up in this challenging environment impacted by slow job growth, the political landscape, warmer than expected weather during back to school season all resulting in need based shopping. We had not seen any impact on transaction activity or quality since sales have trended up over a longer period of time and retailers are generally healthy. To come back of these results we are continuing on our efforts to upgrade our tenant mix, introduce exciting new retail concepts and experiences such as restaurants and entertainment uses and adding new amenities to our common areas. By way of example, we'll be adding Wi-Fi to three properties next month and we're also adding play areas at three properties. We have also added product search functionality to our PREIT mall app and these are simply ways that we continue to enhance the shopper experience. We are also making progress on improving our portfolio quality through our dispositions and re-merchandizing efforts. We currently have two more properties under contract subject to normal due diligence and closing conditions could close by the end of the year. We have a non-refundable deposit on Chambersburg Mall with certain closing conditions in the process of being satisfied for a potential closing in November. As previously discussed contract for South Mall was terminated during the quarter. It's a hybrid center a line up power center tenants and anchor tenants with a small inline component where market has a redevelopment opportunity and a buyer couldn't secure their tendency during due diligence and terminated the contract. We are currently negotiating a contract with another party. We do continue to generate nearly 80% of our same-store NOI for more premier and core growth properties which generates sales of 447 per square foot. Year-to-date same-store NOI growth at these properties was 3.3%. We continue to drive quality of tenants in our properties with custom solutions based on property and market knowledge. At Plymouth meeting mall, we’ve signed over 15,000 square feet of new leases this quarter with notable regional and national retailers including J. Crew Factory, Schuylkill Valley Sports, Things Remembered and Smashburger. These new tenants will join the recently opened Kay Jewelers and seem to open Uncle Julio’s Mexican Restaurant. At Moorestown Mall this quarter we announced the Rizzieri Salon a local award winning salon, were relocated flagship’s location to the Moorestown Mall next year to add to our unique line up of [sorting] after tenants not typically found in a mall setting. At Washington Crown Center located in the Marcellus Shale region we're in the process of transforming the mall with category dominant retailers including the recently opened Marshalls which we expect will be followed by other large format merchants, solidifying the mall as the retail hub in its market. In terms of growing our business we’re preceding and execute on organic opportunities developing our shadow redevelopment pipeline and making progress identifying external product. Organically we’re focused on properties where value creation prospects are highest. The fourth quarter will bring about the opening of the new Regal Premium experience theater, Marc Vetri's Osteria and Firebirds in Moorestown Mall bringing occupancy to 83% up from 68%. We're enthusiastic about the progress we've made in pre-leasing the gallery. We're making significant strides in finalizing several catalyst transactions that will define the direction of the project. We anticipate delivering a project that is a focal point for the City of Philadelphia drives the transformation of the retail landscaping in the city and the evolution of the carter into a vibrant shopping entertainment and dining industry that capitalizes on its urban environment through offerings that are positive, trend setting, unique and evoke the passion of our diverse market and consumer base. Externally we’re reviewing several acquisition opportunities and are in discussions to add these properties to our portfolio. While we’re not in a position to discuss any specifics, we are looking for properties that are or can easily become accretive to our metrics and which are complementary to our proven skill-sets. With that I’ll turn the call over to Bob McCadden to give you more color on quarterly and year-to-date financial performance and our revise earnings guidance.

[Bob McCadden:]

Thanks Joe. We reported solid results for the third quarter and increased our FFO guidance for 2013, which I will touch on a little bit later. First let me cover the quarter’s highlights. FFO as adjusted was $32 million or $0.45 per diluted share for the quarter reflecting adjustments of approximately $800,000 per interest rate hedging losses and other non-cash charges. This compares to $25.1 million or $0.43 per diluted share last year. Last year’s quarter included approximately $5 million of adjustments for employee separation charges. Same-store NOI was $65.3 million, a $1.3 million or 2.1% increase compared to 2012 third quarter. Excluding lease termination revenue, same-store NOI was $65 million, which was also $1.3 million or 2% increase over the prior year. The improvement in same-store results primarily were attributable to increased rental revenues driven by improvements in occupancy and higher average rental rates. While we were able to hold the line and CAM expenses during the quarter, we experienced the $3.5 million or 28% increase in real estate taxes in third quarter of 2013 compared to last year’s quarter. Approximately three quarters of the increase was incurred at our four New Jersey properties due to a combination of higher assessments and higher tax rates. While we anticipated some increase in taxes this year, we didn’t anticipate the size of the increase when tax bills were received in the third quarter. In addition, the prior year’s quarter included the benefit of a successful real estate tax appeal at one of our other properties. A number of other factors impact our overall operating results including the sale of three properties in the first quarter and the completed sale of two power centers, Christiana Center and Commons at Magnolia this quarter. The sold properties generated $4.1 million of NOI in the third quarter of last year and $1 million in this year’s quarter. We also sold a condominium interest in connection with a ground lease located at Voorhees Town Center for $10.5 million. We recorded gains totaling $45.1 million in the sale of properties this quarter. In addition, the newly acquired 907 Market Street property, The Gallery, contributed $1.2 million of NOI in the third quarter of 2013. Interest expense for the quarter was $26 million or $7.9 million lower than last year’s quarter. The improvement reflects lower average borrowings and lower average rates. Average borrowings were $310 million lower than last year and the effective interest rate on our borrowings during the quarter was 5.25%, a decrease of 67 basis points from last year’s quarterly average. Outstanding debt at the end of the third quarter including our proportionate share of partnership debt was $1.8 billion, a decrease of $353 million or approximately 19% from September of 2012. This year’s quarter included dividends on preferred shares of $4 million led to the 2012 preferred share issuances as compared to $2.4 million in last year’s third quarter. As Joe mentioned, in the third quarter we repaid a $65 million mortgage loan in Wyoming Valley Mall and are currently in the market to refinance the property. We also exercised first of two extension options would adjust as the mortgage loan on Logan Valley Mall and paid down the principal balance concurrently by $12 million. In connection with the principal reduction, we recorded non-cash interest charges led to swap cost that had been deferred in other comprehensive income. In October we repaid $66.7 million mortgage loan on Exton Square Mall. Excluding Wyoming Valley Mall, we currently have about 20 unencumbered assets in our portfolio which generate approximately $72 million of adjusted NOI. Our liquidity position is strong. At the end of the quarter, we borrowed $70 million to fund the Exton mortgage loan repayment and for working capital purposes. We currently have $240 million of liquidity available to us under our credit facility. We also don’t have any material mortgage loans with higher maturity dates until July of 2015. In the third quarter, we recorded approximately $2.5 million of other income related to the sale of historical tax credits on 907 Market Street compared to $1.8 million which was recognize in last year’s quarter. As disclosed in last year’s 10-K, the increase is the result of additional tax credits that were sold in 2012. G&A expenses for the quarter were $8.1 million which represented a $600,000 reduction from last year’s third quarter. The lower level of G&A expenses reflects reduced executive headcount and other corporate cost savings. Since the end of the second quarter we signed a purchase and sale agreements with potential buyers for Chambersburg and North Hanover Malls resulting in a triggering event under the accounting rules for impairment. We recorded impairment charges of $23.7 million at Chambersburg Mall and $6.3 million at North Hanover Mall to write-down the carrying value of each property's long-lived assets to the respected estimated fair value. Since the transactions with the potential buyers are not yet closed, these estimates are subject to change. On the leasing front, we executed 235,000 square feet of new non-anchor transactions and 185,000 square feet of non-anchor renewal transactions. For these renewals we generated an increase of 6.5% compared to expiring gross rents. On the anchor and large format front, we executed 11 renewals for 714,000 square feet as rents that were comparable with rents of expiration. We have no remaining anchor expirations for this calendar year. As Joe mentioned, comp stores sales were $381 per square foot at the end of the quarter. If we exclude the nine core mall properties which were under agreement or being marketed for sale, sales per square foot would have averaged $390. We are adjusting our earnings guidance for 2013 by raising both ends of our FFO guidance range by $0.01 per share and our FFO as adjusted guidance range by $0.02 per share. We expect that GAAP earnings per diluted share will be between $0.29 and $0.34. We expect FFO per diluted share to be in the range of $1.79 to $1.83 and FFO as adjusted to be in the range of $1.89 to $1.93 per share. The assumptions underlying our revised earnings guidance are generally consistent with those set forth earlier in the year. Aside from the completed 2013 sale transactions and the acquisition of 907 Market Street, our guidance does not currently contemplate any other material dispositions or acquisitions. In addition, our guidance does not assume any additional capital market transactions other than that already disclosed. With that, we’ll open it up for questions.

[Operator:]

Thank you. (Operator Instructions). And the first question comes from Brandon Cheatham with SunTrust.

[Brandon Cheatham:]

Hi. Good morning. Thanks for taking my questions. Just real quick, I was wondering if you could provide an update on the seriously vacated anchor space at New River Valley Mall?

[Joe Coradino:]

Sure. That space was vacated in August of this year and we are currently in negotiation at the letter of intent stage for a replacement anchor.

[Brandon Cheatham:]

And is that something that you think should commence in the fourth quarter or is that next year?

[Joe Coradino:]

Occupancy, no. Occupancy would not commence in the fourth quarter. We're working towards‘14 occupancy.

[Brandon Cheatham:]

Okay. You saw in tenant sales that were kind of reached during the quarter, what exactly is driving that. Is that same across the portfolio or is there certain tenants that are weaker than the others. Can you kind of dive into that a little bit for me?

[Joe Coradino:]

Sure. I mean clearly sales have been impacted by whole host of factors I referenced, the political [morass] [ph] in DC, weather conditions in the Northeast which weren’t very conducive going back-to-school season, selective retailer underperformance in the junior’s category, but not primarily in the junior’s category, but certainly not limited to that. And of course slow job growth. And while we believe the rated shales going forward will moderate, we also believe that with the constraint supply, Mall sales will continue to grow at a slower rate. And it’s worth noting that over a longer period we look at 2009 to 2013, sales in our portfolio have increased approximately 14%. And so we’re not really seeing any impact on quality or quantity of leasing at this point.

[Brandon Cheatham:]

Okay. On the real estate tax expense that you mentioned, how much is that expected to be reoccurring in nature, how much of it had to do with the better or worse comps first 2012 same store NOI?

[Bob McCadden:]

Yeah. From a big picture perspective, the couple of things happened. If we look at our entire portfolio, we saw about 16% increase in real estate taxes in 2013 over 2012. And if you further slice it in our New Jersey properties, we actually saw 46% increase from year-to-year. So, that was a fairly dramatic impact. We hope that this is a one-time effort. Essentially if we look at what's happening in New Jersey, obviously New Jersey the state not unlike many others were affected by cut backs in state support from municipalities resulting from federal cut backs as well. And in New Jersey, we saw a shifting of the tax base from residential folks in the communities to commercial property owners. So we don’t expect the same level of increase in the subsequent years. If you look at properties outside of New Jersey, average rate was more in line with kind of inflationary increases. On an annualized basis, the impact of the taxes this year take into account any leakage that we have for vacancy or tenants who pay us gross rents is roughly on annualized basis it’s about $1.9 million impact and New Jersey is contributing about $1.6 million of that total.

[Brandon Cheatham:]

Okay. Thank you.

[Operator:]

The next question comes from Ki Bin Kim with SunTrust.

[Ki Bin Kim:]

It sounded like you had some positive upbeat on Gallery at market side, maybe you could provide a little more color on what type of tenants you think are the most likely to move in and maybe some rough numbers around cash outlay and yields and if they are going to be unique about the leases that you are going to do, will it be a bigger percent rent component, will it be a traditional lease, maybe just some more color all around?

[Joe Coradino:]

Well, first off, good morning. As excited as we are and as much as I would like to, I have to remain somewhat restrained about the Gallery. What I would tell you about the tenants is they are clearly first to market and I would say that’s first to the region and that they are quite exciting and will define the project. In terms of giving you something directionally that would be probably saying more than I like to say at this point. Other than this is going to be a tenant driven redevelopment. This is not going to be a project that we are going to start. If you build it, they will come. This is going to be first who get them and then you do the redevelopment. In terms of the investment, I think it’s premature to really give you anything at this point, but we are -- as I said in my script, we are making a great deal of progress moving forward in negotiations with two impact retailers that will really define the project. What I would consider to be a transformative not just for the property, but probably for retail in Philadelphia.

[Ki Bin Kim:]

I mean, just maybe I catch it in a different way that’s more general, I mean you guys have owned for contiguous blocks. Would the retailers be taking potentially, I guess the scope of that would include all four or would it include half of it? And second part of my question is city of Philadelphia, are they going to have a substantial hand in this, just given where they located and I know it’s a great location in terms of half density, but does seem like a rough neighborhood in a certain aspect?

[Joe Coradino:]

Well, you asked the bunch of questions here; I am going to kind of try and respond to all of them. First off, with respect to the city of Philadelphia, I will start the back end and work forward. The city of Philadelphia, it’s already committed to the project as the state of Pennsylvania, they both already made financial commitments to the project. We are anticipating and we are in discussions with them to expand that commitment. With respect to the -- you mentioned that we have owned it, we actually, it's actually been a 10-year acquisition. It's important to note that the last piece was just acquired in April of this year. So, it's not something that we really have controlled, we've been working towards controlling it, but only really took co-ownership of the three blocks in April. And with respect to the space the tenants would take, I would look at it as an anchor transaction if you will, and so they would take combined in the neighborhood of north of a 100. And your other comment that I have to take a little bit of exception to you called it a bad area. Well, there are 20 million suburban commuters that come in and out of the Gallery annually. There is a convention center drawing several million people that connect whether connected to their property, there is a 5 million tourists to the Historic District to the right or to the East of the project. And lastly Philadelphia has now become the third largest residential CBD population in the U.S behind only New York and Chicago and we are -- and much of that population is due south of the property and much of the residential value is in the million plus range. So I think it's important to look at Philadelphia as a transformed city. I’ll give you an example, we've gone in a little more in a decade from a half dozen side wall cyber cafes to 296 cyber cafes. So I again take a little bit of exception to the big neighborhood.

[Ki Bin Kim:]

Okay. (inaudible) it was great demographics density wise, it seems like when I walk on that area it could be little questionable, that’s what I meant.

[Joe Coradino:]

Okay.

[Ki Bin Kim:]

I think if you want to query.

[Joe Coradino:]

No problem.

[Operator:]

The next question comes from Ben Yang with Evercore.

[Ben Yang:]

Joe maybe for you, Sears said this morning that they intend to begin closing stores as leases expire and it looks like you have 13 Sears leases expiring between now and 2016. So maybe a bit early, but I was wondering if you could maybe talk about your plans for this real estate of Sears closes?

[Joe Coradino:]

Obviously, we have not received any announcement with Sears. We're in regular communication with them. But we also have sat down and looked through our portfolio regarding the expiring Sears as we've actually looked at all the Sears location throughout the portfolio. And in many we have contingency plans. We think there is opportunities. Some will be more difficult than others, but at this point Ben it would be difficult to answer your question with specificity.

[Ben Yang:]

So you didn’t brought with broad strokes, you can’t talk about the contingency plans that are more likely to be successful versus those that are more challenging?

[Joe Coradino:]

Well, first off, I mean, Sears is performing well in our portfolio. We did a review of their sales volumes as recently as this week. So we don’t have a good, a lot of concern. And again I think with specificity, it’s hard to say at a particular center, we think that in many cases the series boxes are smaller boxes than they are typical prototype which would allow you depending on the position in the mall to utilize it for what I would consider to be some of the larger mall-based retailers H&M, Uniqlo, Forever 21, et cetera as possible replacements, where in many of our malls we are unable to fit them in, it becomes very difficult and high capital expense. And with this situation you can go from a low single-digit to a rent that’s significantly higher. And I guess the final point is I don’t want to negotiate with you publicly on this telephone call. So again we are on it, we understand the opportunities and downsides and we will deal with it as appropriate.

[Ben Yang:]

Got it. Appreciate those comments. Maybe switching gears to the balance sheet, it looks like you use the line to take out the loans at Exton Square in Wyoming. Were you anyway forced to do that, to build up the unencumbered asset for the longer term game plan to put them fixed rate that on those particular properties?

[Joe Coradino:]

Well, as I mentioned Wyoming, we are currently in the market so that was really kind of a temporary situation. But we do have an interest in freeing up our balance sheet to provide us with greater flexibility going forward. So you will probably see overtime shift from and covering properties with mortgages to have a more financing support with unencumbered asset pull.

[Ben Yang:]

So the line balance, $90 million today. So that's probably used somewhat permanent financing for you guys at this point?

[Joe Coradino:]

No, I expect we will be looking at different financing opportunities over the next six months.

[Ben Yang:]

Okay. Can you elaborate further?

[Joe Coradino:]

Not at this point.

[Ben Yang:]

Okay. Great. Thank you.

[Operator:]

Thank you. And the next question comes from Daniel Busch with Green Street Advisors.

[Daniel Busch:]

Thank you. Occupancy looks like it’s continuing to decline at a pretty healthy clip over 90% from the mall portfolio. Just looking at the full breakdowns, how much opportunity I guess a run way is left in the opportunistic malls? And as the top two tiers I guess still up are you seeing demand increase at I guess that third tier?

[Bob McCadden:]

Yes. Although we have actually seen on a year-to-year basis somewhat of a decline in the opportunistic portfolio, I think some of that has to do with repositioning. As Joe mentioned we have some exciting things going on at Washington Crown Center. So to some extent we are creating vacancy in order to accommodate some additional tenants in the future. But we do believe that there is opportunity to drive the occupancy rate which is now in the mid 80s to something higher than that.

[Daniel Busch:]

Yeah. I guess I am curious as if in your discussions if a retailer isn’t comfortable with the rents maybe at the premier growth malls, have you seen their appetite to move I guess further down your quality? So I am just trying to get a sense of where that occupancy at the opportunistic portfolio, I guess can you grow to?

[Joe Coradino:]

I mean there are clearly tenants who find that their business model works better in that second tier mall. And there would be tenants like Body Central and Charlotte Russe and Rule, so you are seeing those tenants move into that second tier property. We are also saying as you saw Bob mentioned the Washington Crown example. We are also seeing what are typically strip center based tenants like Marshall and Ross et cetera move into a second tier mall environment, also is another category that is moving into second tier, so we are taking full advantage of that. And by the way as we occupy that bottom part of the mall, that bottom tier of malls we will continue to work for opportunities where we are either going to improve them to the point, where we are going to move them into our core growth or we are going to think about bringing them in the market. I think through as you think about our runway to improve leasing spreads. If you look at, we have got 7.7% year-to-date increases in leasing spreads in our premier and core properties. We think that there is a runway beyond that and those core growth properties in spite of what is a sort of couple of quarters or flattening sales.

[Daniel Busch:]

You kind of hit on my second question, but just like a little step further, you have success disposing of, I guess the non-core properties and the ones that you lay non-core properties thus far. And as you do that you are creating, I guess a new bottom. How should we think about your disposition cadence over the next couple of years. And I guess how many of those opportunistic malls, where do you think the split is and the opportunities are, how many of those can move up versus kind of out of the portfolio?

[Joe Coradino:]

Well, first off, the thing we want to do is sell, we want to shelf if you will, which is we want to dispose the properties that we have on the market right now or under agreement. We are optimistic about the properties that we have on market right now. So that's sort of one step, as you think about which properties in that next year could be brought to market or be brought into the core growth category. It's a difficult call to make, because if you would have asked this question a year ago, I would have said Washington Crown Center. But one of the things that we are dealing with is the fact that we have six malls in the Marcellus Shale region. And we are all the sudden finding that Beaver Valley, a property that we had on the market which we think by the way was not priced appropriate by the market, is a property that we are receiving not only increasing shales but demand from retailers, hotel operators et cetera. So, it's a little bit of a different question, because again if you look at that category, those six malls for the most part sit in that category. And so we're going to need to be somewhat thoughtful and selective about what we bring to market and what we don't bring to market. I think there is probably one or two malls that sit in there right now that we may in fact bring to market at some point.

[Daniel Busch:]

Alright. Thanks guys.

[Operator:]

Thank you. And the next question comes from Nathan Isbee with Stifel. Please go ahead Mr. Isbee. Your line is live.

[Nathan Isbee:]

Sorry about that. Just going back to the disposition South Mall termination, could you give a little bit of color around what happened there and if you look at the two that are teed up any relation to the South Mall buyer and why you are comfortable those will go through?

[Joe Coradino:]

No, there is no relation to the South Mall buyer at this point. But South Mall is a little bit of a unique situation it’s not a pure sale. It’s a redevelopment play. I mean it was the food market that everybody knew who the food market was, this was not a surprise, who took a little long with a little bit indecisive et cetera, so we lost the first buyer. We're currently in negotiations with another buyer. Also by the a redevelopment play. So that’s a little bit a typical of the other properties and again at Chambersburg Mall we do have a hard deposit up. And as I said in the script we're anticipating closing that condition, the ball is in court and we’ll get the conditions resolved. In over we've got a little bit of time on but there are a number of buyers that have expressed interest in handover that sit behind the one who is has it under agreement at this point. So again level of comfort there. And so we're okay, we understand the south deal again quite a typical.

[Nathan Isbee:]

Okay. And then could you just talk a little more broadly about the sale market there is clearly more buyers out there for these types of assets, the more year ago. And talking about cap rate compression, can you talk about from your perspective for instance that you have under contract, what the cap rates are and broadly what you think you can get, which one of those lower should I think versus six months a year ago?

[Joe Coradino:]

Well, I mean I would agree that there are buyers out there. And I think in terms of pricing and cap rate, if you look at what we've done already the power centers were sold in that 6% to 7% range with Commons in the 8% range from a non-core mall perspective typically in a 10% to 11% range. Although depending upon the quality of the asset, the sales performance et cetera, you may end up seeing a higher cap rate. I think if you look at us, while certainly be willing to engage in that cap rate discussion, we’re approaching it from a more strategic perspective and it’s about driving the quality of our portfolio, because we believe that with the improved portfolio when you combine that with improved operating performance, stronger balance sheet we’ll begin to see improvement in our trading multiple.

[Nathan Isbee:]

All right. Thank you. And then you mentioned in your prepared remarks about some leasing at Plymouth meeting, can you talk a little bit more about that in terms of how much is outside on both sides, in the restaurant and then in the lifestyle versus the interior space?

[Joe Coradino:]

I think with respect to deployment one of the tenants which is the J. Crew factory outlet is a fronts on the outside, Uncle Julio’s which is a pretty cool Mexican concept if you will that we’ll be opening soon has both mall frontage and exterior frontage. The balance of the tenants that we spoke about will be inside the mall. You’ve got Smash Burger who has outside access on the other side of the mall, The Hickory Roadside if you will, Schuylkill Valley Sporting Goods inside the mall. So, and again I talked about Kay Jewelers opening inside the mall. I think Plymouth meeting mall is kind of coming of age if you will. The original redevelopment strategy that we put in place that was sort of taken off track by the down turn in the economy is beginning to come to profusion. Significant tenant interest will take occupancy there up into the 88% approximate range. So we are moving in the right direction. And we do have a fairly sizable list of prospects that we are working on for the balance of interior space.

[Nathan Isbee:]

And these are full long-term leases?

[Joe Coradino:]

Yeah. That’s correct, these are long-term leases.

[Nathan Isbee:]

Alright. Great, thanks. And then just one last question on Gallery, clearly a little too early to start naming names, but can you talk a little bit about, you said it’s a tenant-driven project. Can you talk a little bit about how you view the capital allocated here and what type of returns you would require to get this done in such a tenant-driven project?

[Joe Coradino:]

Well, I mean look we, let me respond to your question regarding the tenants first. And that is that I mean we obviously want to be in the position when we decide to go forward with this deal that we have in other word comfortable and we have significant preleasing. And so that’s kind of the condition pressing and that’s what the Gallery team is working as we speak. And so it’s not going to be a project where we are going to sign one lease and then move forward, we’re going to want some significant preleasing. Now with respect to the returns, it’s a bit early to start having a discussion about that other than we typically look at 200, 300 basis point over our trading cap rate as a return hurdle. And we will put the Gallery to that same test.

[Nathan Isbee:]

All right. Thank you very much.

[Operator:]

Thank you. And next question comes from Michael Mueller with JPMorgan.

[Michael Mueller:]

Hi. A couple of questions, one, thinking about the Gallery for a second, I apologize if I missed this. But can you talk is there an updated timeframe that you are thinking about for to get the project going once the leases are announced?

[Joe Coradino:]

Well, if you recall, Michael, we originally talked about we were taking two directions with the Gallery sort of at the same time. One is a kind of high fashion when we characterize there is food and trends fashion. The first thing we want to do is by year-end our goal is to determine a direction on the Gallery with respect for those two choices and we are on track to do that. With respect to the timing, again going back to my comments that I made in May, I think it's going to be preleasing driven. We're going to want to identify the tenants execute leases with them and have a comfort level that there is a queue of tenants that we can do deals with if we think about transforming this property. So to a great extent that's going to determine the timing of it. And the other thing I think you should keep in mind as you think about timing is one of the keys to being able to execute any kind of a plan as Kmart vacating their space. Their lease doesn't expire until August of next year. So that's driving it partly as well. So again, we are at the point right now where we’re starting to put the pieces together. And I think it's a little early too early to talk about when we are going to start and what the returns are because first and foremost, we want to finalize deals with the tenants.

[Michael Mueller:]

Okay. And then sticking with the theme of investments and capital deployment, you talked about looking at different opportunities and wanting to grow the portfolio, a couple of questions tied to that. One, I mean when you're looking at acquisitions and stuff like that, is it primarily in the Mid-Atlantic, is it in Pennsylvania as well or do you see yourself expanding a little bit and is it a site from the Simon JV for the development, is it pretty much all acquisitions you're looking at not any sort of development?

[Joe Coradino:]

Well, first of, I mean we tend to concentrate kind of up and down the East Coast if you will. I don’t see that changing with any immediacy, but one never knows at this point because primarily what we're looking for is assets that are accretive to our metrics. Remember 90% inline occupancy, $400 a square foot in sales. And obviously we like stronger markets better. We don’t want to find ourselves in a position where we're buying what we're selling if you will. So again, so I think the geography we've tried to stay is a commutable distance if you will. And we're looking for a higher quality assets that are additive to the portfolio. In terms of the only real development we're thinking about right now is the Gallery, but we’re certainly not in the market to look at ground up development at this point.

[Michael Mueller:]

Got it. Okay, Joseph. Thanks.

[Operator:]

Thank you. The next question comes from Michael Bilerman with Citi.

[Michael Bilerman:]

Yes. Good day. Just a question on the leasing numbers, page 9 of the supplemental, the third quarter new leases 235,000 square feet at $27 with the high TI relative to that cost. I am just curious what is happening, where is that leasing done because you have to look at the average gross rents in the existing portfolio, premier malls at 66, the core malls at 42 making up almost 85% of your NOI and then the opportunistic in non-core in a 26, yet occupancy is down year-over-year. So I am just trying to put it all together.

[Bob McCadden:]

This is Bob. I don’t know if it’s specific to any property sector. One of the things that maybe impacting the way we’ve disclosed our costs. Often times if we are doing, I’ll use the martial as an example that you cited earlier at Washington Crown. We are putting in reconfigured spaces into the properties. We’re including and (inaudible) describe it as just tenant allowances because it also includes landlord work. Some other companies may not necessary include that in our cost of deal, but we've essentially include any incremental cost that we have as part of our determination of what your net effective rent is.

[Michael Bilerman:]

Right, but the gross dollar of 27 seems quite low for a large square footage, is there a deal that's impacting that square footage?

[Bob McCadden:]

I think if you look at the average size of the deal, it’s probably, think about we’re doing more large format transactions that I don’t have these specifics. So I think it’s likely get those for you in terms of some general direction. So we have a couple of gym deals, and large format shoe operators and that numbers. So those kind of typically taking space that less desirable and we’re reconfiguring space generally at the end of the Mall during (inaudible) to accommodate those tenants.

[Michael Bilerman:]

And that was just filling pure vacancy at that point the 235,000 square feet?

[Bob McCadden:]

And not necessarily all pure vacancy, again you take out, if we take out a couple of those larger tenants, you are seeing numbers out a little bit more in line with what you saw in the first couple of quarters.

[Michael Bilerman:]

So that number doesn’t concern you anyway?

[Bob McCadden:]

No. I don’t think it’s indicative of any trend.

[Michael Bilerman:]

And then you provide some pretty disclosure in terms of the anchor rollover and as well as anchor stores into the mall, is there anybody that doesn’t have options to renew in the next couple of years?

[Bob McCadden:]

No, I think we are now that cycle with most of our anchor tenants where they are working off their original lease options, contracted options.

[Michael Bilerman:]

Right so no one has final…

[Bob McCadden:]

The only place we have it is in Exton mall, there is a Kmart on an out parcel and has a final lease option in 2016.

[Michael Bilerman:]

And then is there any dark rent paying anchors at this point?

[Bob McCadden:]

No.

[Michael Bilerman:]

South Mall 36 million books value, where was the contracted purchase price?

[Bob McCadden:]

We are not going to discuss that at this point, as we are still in negotiation with other buyers.

[Michael Bilerman:]

I guess from a net book value to you would have taken the impairment if it was below the net?

[Bob McCadden:]

Yeah, if we got to that point, a determination was made at the offer was legitimate, it was below that, that’s true for any property.

[Michael Bilerman:]

Right, but just if you had a contracted purchase price, we should take the -- your net book value on the [276], I have to assume that your contracted purchase price was above that number potentially lower than maybe book value gross, but it was above the 27.6 million?

[Bob McCadden:]

Yeah I mean, a lot of it’s assumptions that you are throwing at around Mike on that we can comment on that.

[Michael Bilerman:]

Well, if the contracted purchase price was below 27.6, you would have previously had taken the impairment, correct?

[Bob McCadden:]

Yeah. It was quite good as expect as it was to be sold, the answer would be yes.

[Michael Bilerman:]

Okay. And in terms of the go after segment, can you just provide an update in terms of capital, timing and what you expect there as a return?

[Bob McCadden:]

I think we are likely to break ground in the spring. I don’t think we are - we are still finalizing the deals with the tenants as well as with our joint venture partner.

[Michael Bilerman:]

But total potential size in June is about a $80 million or $100 million project neighborhood?

[Bob McCadden:]

Yes, in that neighborhood. And so our commitments with the 25% of that number.

[Michael Bilerman:]

And then any other sort of future development or redevelopment capital that’s been target outside of galleries you’ve spent a lot of time talking about?

[Bob McCadden:]

No. As Joe mentioned that we are looking at a shadow redevelopment pipeline obviously in response in the earlier question that would include potentially if we get the opportunity to buy back some department stores or to get department stores spaced back, but at this point there is really nothing that we’ve committed to. We are in far enough stages of development we don’t want to talk about them.

[Michael Bilerman:]

Okay, thank you.

[Operator:]

Thank you. And we have a follow up question from Ki Bin Kim with SunTrust.

[Ki Bin Kim:]

Thanks. Just a couple of follow ups. On your comments about making additive acquisition from a quality standpoint, how should we think about how you fund those deals? And when you talk about redevelopment earlier you want to do have a return that’s only a couple of 100 basis point return like cap rates would that be the same for that [issue]? And it seems it might be a little bit too high just given the quality of that with your prior pursuing work versus where you are trading. So I was wondering if you provide a little color on that and if equity is part of that equation, issuing equity?

[Joe Coradino:]

With respect to future acquisitions at this point, I think everything on the table in terms of how we would finance it. We would consider the joint venture as a capital partners. We would consider if every form of financing that's available we would take it into consideration. Certainly if the time was right and the stock price is right, we would have to think about raising equity to finance a significant transaction. But at this point we're talking hypotheticals.

[Ki Bin Kim:]

Okay. And just one last question on in terms of your disclosures, I think you guys are talked about working on some redevelopment one of the deals. But what is the total I guess expected investment value of your redevelopment pipeline?

[Joe Coradino:]

Other than minusing up Moorestown Mall which will be completed largely by the end of this year and the Gallery, we really haven't expressed a view that we have acquired redevelopment pipeline. So at this point, we don't have any material capital commitments to vote it’s a redevelopment. And when we further decline the Gallery project at that point we'll be able to decides the investment and we'll disclose that.

[Ki Bin Kim:]

Really nothing internally have signed to some other JCPenney bounce that might come back to you guys?

[Bob McCadden:]

We don't know that any are coming back or what the opportunities are.

[Joe Coradino:]

I think at this point, all of what you just asked are works in progress. Some early discussions with Sears, JCPenny, nothing much going on and we are looking strategically at a couple of assets, but again to Bob’s point really have not identified or marked any properties that we're going to get the work on other than the Gallery at this point which is we’ve talked about earlier on the call as a work in progress.

[Ki Bin Kim:]

Okay. Thank you.

[Operator:]

(Operator Instructions).

[Joe Coradino:]

Thank you everyone. We're looking forward to what we're hoping is an energetic and productive holiday season for our shopping centers and retail partners. And we look forward to seeing many of you in November at the NAREIT Convention. Have a great day.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.