Pennsylvania Real Estate Investment Trust
Q3 2014 Earnings Call Transcript

Published: 29 Oct 2014

[Operator:]

Welcome to the PREIT Third Quarter 2014 Earnings Call. (Operator Instructions). I would now like to turn the conference over to Heather Crowell. Ms. Crowell, please go ahead.

[Heather Crowell:]

Thank you. Good morning everyone, welcome to PREIT's third quarter 2014 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, October 29, 2014 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. Good morning everyone. We had a great quarter, we continue to deliver strong results capturing the benefit from our improved portfolio to progress we have made in PREIT's transformation to a quality more company. Our focus on quality while improving our balance sheet and operational results is sharper than ever. Our strategy is designed to drive long term shareholder value as the market has continued to reward it's company with high quality properties of higher multiples. To continue the execution of our strategy is transforming our portfolio and is now (indiscernible). Same store NOI growth turned positive for the year inspite of the effects of a harsh winter that impacted our first quarter results and an outstanding quarter where we recorded 6% growth in same store NOI has resulted in year-to-date at 2%, remaining spreads continue to be strong at 4.8% year-to-date. During the quarter renewals executed for leases were terms greater than five years were 18.1%. Occupancy gains continued in the portfolio with same store malls increasing by 80 basis points for non-anchor space. This is inspite of declines at several premier properties where tenants are in the process of moving in for holiday. Leasing volume has been remarkable strong this year. Towards the end of the quarter we have executed over 395,000 square feet more of new leases than we had this time last year. As of the end of the quarter, we have over 400,000 square feet of leases executed in our (indiscernible) portfolio and it had taken occupancy. Where JVs were added to this total we have a robust 557,000 square feet of rent paying tenants not factored into a 930 occupancy figures. On disposition front we have continued the methodically reduce our exposure to non-core properties and in the past 1 and 2 months we have sold the place under agreement 12 properties and an interest in the gallery for a total of over 400 million in proceeds. In addition we’re adding (indiscernible) Pennsylvania to a non-core pool leaving us with two malls kind of being marketed. We also have an offer in our non-income producing land and we’re making progress in seller interest in two of our prior center joint ventures. The benefits of our improved portfolio is taking effect, we reduced our deposit store exposure having sole properties that are experiencing department store closings. We have also being to secure better rigs and slow shop renewals with longer term. As leases mature we expect to see greater impact from the effects of our portfolio improvement. As many of our peers we believe that retailer sales environment is changing, comp sales were up sequentially by 1.6% which were paced with the total basis they were relatively flat. The consumer is still somewhat cautious in our view and we expect sales to improve slowly in the fourth quarter. Inspite of the current sales environment we believe there continues to be opportunities to drive rents in our portfolio. Over the past two weeks Springfield Town Center in Virginia and Century 21 at the Gallery opened to tremendous success. Springfield Town Center is exceeding even our most optimistic expectations with improvements over our initial underwriting. Upon opening it was 81% occupied. We have commitments for over 80% of the non-anchor space and expect to achieve over 90% non-anchor occupancy by the end of 2015. The tenant line up is incredible, the crowds of people are unrelenting and the initial sales performance is exceeding retailer expectations. We have heard stories of executives washing dishes, merchandising shipped from other areas stores and stamping at it. The retailers, the customers couldn’t be happier. It's noteworthy that in place tenants are already talking about expanding or introducing other concepts they operate. The properties equipped with amenities that are designed to attract and retain customers like charging stations, free WiFi, children's play area and a dedicated court equipped with a children's library. We’re particularly excited to have entered into agreement with (indiscernible) to offer same day delivery service from this property. It's a first for us in a relationships, we’re looking to expand as we continue to find ways to embrace the omnichannel platform. With this tenant mix and a fluent trade area and unbelievable location we’re confident Springfield Town Center will exceed our expectations. Century 21 opened to the public just yesterday and we’re tremendously pleased with the warm welcome they have received from Philadelphians. This marks the first step in the Renaissance to the Gallery with Macerich as our partner. We’re poised to deliver a world-class project. Our discussion with the public sector continue to progress with the expectation that city council will consider a public financing package in December and ratify it in early 2015. As this process unfolds we intend to update you on our vision, scope schedule and returns. We’re methodically executing on asset sales in a manner that sets us apart from our peers and seizing the rare opportunity that an A quality asset. The pending acquisition in lease up at Springfield Town Center and the redevelopment plan for the gallery are transformative for our portfolio. We’re improving the quality of our leasing team, expanding relationships and growing retailers such as Uniglow, Field & Stream, Ulta Cosmetics, Vera Bradley and Michael Kors, all of whom we have signed leases with this quarter. From a balance sheet perspective we sit today with a leverage of under 49% representing continued sequential improvement. We had previously communicated a range of sale venture proceeds being sought of a 150 million to 400 million. Since the announcement of pending acquisition of Springfield Town Center we have raised approximately a 162 million with another 93 million in the queue. Our leverage at the end of September was 48.9%, after we complete the acquisition of Springfield Town Center and assuming we call for the 93 million in pending transactions our proforma leverage will remain less than 50%. As it relates to growth, in addition to our goal of exceeding our projections with our two great opportunities the Gallery and Springfield, we’re also focused on harvesting the natural growth that we expect from pruning of the lower quality properties. Our dominant position in the Philadelphia region has generated several redevelopment opportunities that we believe will drive asset values, sales and NOI. We have opportunity and density to be extremely well-located Plymouth Meeting Mall and are pursuing entitlements for a joint venture with a high quality extended stay hotel with PREIT's contribution being a vacant land parcel. Similarly we have a great opportunity to reconfigure Exton Square Mall situated in the dense demographic market our current portfolio has to offer resulting from the closing of the JC Penny store and a near term opportunity to recapturing existing Kmart store along the well-traveled road. We look forward to sharing details about these projects and others with you in the near future. For now I will turn the call over to Bob McCadden to give you more color on the company's operating performance.

[Bob McCadden:]

Thank you Joe. We had another strong quarter with solid growth in same store NOI and a 8.9% increase in FFO as adjusted per share. We’re adjusting our previously announced guidance, expectations for FFO to reflect the dilution from the same of North Hanover and Nittany Mall's in September of approximately $0.03 per share and other factors which individually are not materially. Let me cover some of the financial and operating results in a bit more detail. Same store NOI for the quarter was 63.7 million, a 3.6 million or 5.9% increase over the corresponding 2013 period. Excluding lease terminations same store NOI increased by 6%. The improvement in same store NOI was led by an increase of over 9% at our corporate [ph] assets and NOI was up in all property peers expect in our non-core group. Non-anchor occupancy and our same store properties was up 80 basis points and 91.4% and total occupancy increased by 50 basis points to 95.4%. As Joe mentioned we have a sizeable backlog of executed leases pending occupancy. Approximately 290,000 square feet of retailers are slated to open in the fourth quarter of our wholly opened properties and an additional 150,000 square feet of retailers were opened at our joint venture properties. But anticipate further occupancy gains by year-end. Following the sale of 50% interest in Gallery (indiscernible) we have reclassified the property into redevelopment. You will see this presentation in our supplemental. There is a lot of confusion around our reported results so let me try to clarify it for you. We experienced a 250 basis point improvement and operating license for the quarter. The improvement in operating results came from a combination of top line revenue growth which accounted for about half of the improvement and operating expense savings which contributed the balance. Rental revenues were up 2.8% for the quarter reflecting increased occupancy and higher average rents. I would out the expense reductions in the three categories which each accounted for about a third of the improvement, the first would be (indiscernible) and other expense reductions, secondly lower utility cost resulting from a mild-summer and three the impact of higher real estate tax assessments that were recorded in the third quarter of 2013. While some of the CAM expense savings or expect to be of a permanent nature, we anticipate operating expenses will increase in the fourth quarter reflecting a seasonality of CAM costs, utilities and other expenses such as property marketing. As a remainder in 2013 third quarter we received notice of additional real estate tax assessments at a number of our New Jersey properties. These additional tax assessments were for calendar year 2013 so we had to record a catch up adjustment in 2013 first and second quarters and last year's third quarter. However this was largely offset by additional real estate tax reimbursements that were also recorded in last year's third quarter. At the end of September we have opened about a 170,000 square feet of new tenants including Century 21 at the Gallery, also at Washington Crown Center, UNIQLO Willow Grove Park and Ulta Valley View Mall. Next month we anticipate opening new Dick Sporting Goods stores at Francis Scott Key and Valley View Malls. A remerchandise Viewmont Mall of the fourth quarter openings of Forever 21 and new Victoria Secret prototype and Buffalo Wild Wings. Including the tenants mentioned above, the healthcare office expansion at the Gallery and other retail tenants were at the portfolio we anticipate adding over 500,000 square feet of new leases to (indiscernible) by the end of the year. Interest expense decreased primarily from lower overall debt balances and lower average interest rates. In the third quarter our debt balance was a $131 million lower than a year ago and the average interest rate of 5.18% was 36 basis points lower than in the third quarter of 2013. Our liquidity position remained strong with over 480 million of cash and unused borrowing capacity under our bank credit facilities. Regarding our outlook for 2014, we expect the GAAP earnings per diluted share will be a net loss between $0.54 and $0.58. We expect FFO as adjusted to be in the range of a $1.94 to a $1.97 per share and FFO per diluted share to be in the range of a $1.81 to a $1.84. The revised guidance includes expected diluted of $0.03 per share from the third quarter of sales of North Hanover and Nittany Malls. We’re maintaining our expectations for full year same store NOI growth of 2% to 2.4% excluding lease termination fees. Finally while we continue to market a number of assets for sale a guidance does not contemplate any other material, operating profit dispositions or acquisitions. In admission our guidance does not assume any capital market transactions other than financing transactions and occurring in the ordinary course of business. With that we will open up for questions.

[Operator:]

(Operator Instructions). Our first question comes from Ki Bin Kim with SunTrust Robinson Humphrey. Please go ahead.

[Ki Bin Kim:]

So it does seem like a long (indiscernible) this quarter, but I want to focus on I think you said 500,000 square foot of leases that were signed but not obtained which I think was a same number last quarter. Could you just give us a little guidance on how much of this, I think you touched on it -- we should expect in the next four quarters and what are the lease spreads you’re achieving on those leases?

[Joe Coradino:]

These are actually, we’re talking about new leases. So we typically don’t report spreads on new leases. But 290,000 is going in the wholly owned properties we will take occupancy before the end of the year. We already have 65,000 in occupancy as we sit today towards the end of October and we have another 150,000 at our joint venture properties and that number includes Century 21 which opened this week.

[Ki Bin Kim:]

And so how does that play into your same store revenue number that you should report? Or that should be? How should that impact your same store revenue in the fourth quarter and I will leave it there.

[Joe Coradino:]

Well I expect to have a positive impact on the revenue number for the fourth quarter but we would anticipate a much more significant impact in 2015 because we’re only going to have many served up in for a month or two before the end of 2014.

[Ki Bin Kim:]

Okay I guess I was asking on the kind of normalized quarterly basis like how many basis points that should approximately add to your top line on the full quarter run-rate basis? Can you give us a sense of what the trend was versus your rental revenues on year-over-year this quarter that’s why I asked.

[Joe Coradino:]

I cannot give you a specific response to that question Ki, so we will have to think about it and get back to you.

[Operator:]

Our next question is from Craig Schmidt from BOA. Please go ahead.

[Craig Schmidt:]

These trends fell sequentially pretty significantly from second to third quarter but the expense reimbursement has actually increased, I wonder what was causing that differential?

[Bob McCadden:]

Well it's couple of things, I think the same store pool has changed. We have reclassified the Gallery out of the same store and as well the sale of two assets that closed during this quarter North Hanover and Nittany Mall's were excluded from the same store pool for the third quarter. So those changes would account for part of what you’re seeing Craig.

[Craig Schmidt:]

Would that reduce the expense for reimbursement as well?

[Bob McCadden:]

No typically the expense reimbursement ratio is lower and the properties that are no longer in the pool than they were previously.

[Craig Schmidt:]

Okay and then the stabilized return on Springfield Town Center that you raised from 55 to 67, is that primarily due to the 80 million of property development rights? And in your calculation what did you assume was the one time earn-out payment to Vornado?

[Bob McCadden:]

Yes we didn’t, we haven't provided that one time earn out payment.

[Joe Coradino:]

All of those things are factored into it, the value of the peripheral ground, upside on lease-up and the onetime payment to Vornado are factored into that we didn’t provide specific color on each item.

[Operator:]

Our next question is from Michael Mueller of JPMorgan. Please go ahead.

[Michael Mueller:]

I guess sticking with Springfield for a second, talked about the stabilized yield down the road but just given the leasing progress you were talking about, is there any change to the initial yield that you expect once you buy it?

[Joe Coradino:]

Mike, we don’t have specific color on that yet but as we, I would expect by the end of the year we will provide some additional color on that because part of what we’re doing on is as we signed these leases it's the matter of getting the tenants queued up you know two or three times of the year when tenants typically open, so that piece is still influx but we will provide some color in the near term on that.

[Michael Mueller:]

Okay and then just you gave some color on asset sales, what the plan was, what you have done so far, I mean what can you reasonably expect to execute from this point until Springfield closes or year-end '14 which ever metric you want to talk about, how much more do you think it will be hit by then.

[Joe Coradino:]

What we think you know roughly maybe $40 million we would close before the end of this year off the 93 and we’re optimistic we can make progress on the balance, if it doesn’t close by March 31, we’re hopeful that they would close in the second quarter of next year.

[Operator:]

Our next question is from Christy McElroy from Citi. Please go ahead.

[Christy McElroy:]

Just wanted to follow-up about on the (indiscernible) guidance decreased, the $0.03 of dilution that you spoke about from the North Hanover (indiscernible) given that the $32 million deal closed in early September, what was the average cap rate on that scale? It seems like it would have to be well into the double digits to get to that kind of dilution and can you also detail sort of the other factors that you mentioned that impacted that change in the ever flow range?

[Joe Coradino:]

Sure with respect to, the reason why we have maybe a great dilution than what you’re seeing is essentially right now most of the sales proceeds are sitting in catch on our balance sheet, since we don’t really have any short term debt that we could repay with the proceeds so you typically would see less of a dilutive effect that we can actually redeploy those proceeds into paying off higher coupon debt. So all of our bank credit is reduced to zero and we’re basically holding a cash pending the acquisition Springfield Town Center in the first quarter.

[Christy McElroy:]

So what was the cap rates?

[Joe Coradino:]

We haven't disclosed the cap rates.

[Christy McElroy:]

Okay and in terms of the same-store NOI growth in Q3, just trying to get a sense for how much of that 6% was driven by one-time expense savings versus more permanent changes? You talked about a number of different factors that impacted expenses. So stripping out sort of the one-time impact in Q3, what would same store NOI growth have been?

[Joe Coradino:]

It's hard to look at one time savings, you have got some of the stuff, it's a dynamic business. So we have a number of contracts for service providers, some of that was impacted as we renegotiated contracts or contracts came up for renewal and the second and third quarter so that has an impact. I think if you look at the tax piece, the real estate tax piece that clearly was a one-time benefit actually -- a last year that we got the benefit of it this year but we also as we have mentioned I think early in year we have made some reductions and reducing customer service centers at some of our low sales productivity properties that will generate annualized sales in excess of $1 million a year but there is a lot of clinical [ph] designs that add up to dollars.

[Christy McElroy:]

On fourth quarter should we expect to see another expense decline on same store?

[Joe Coradino:]

I would expect sales, expenses to revert to more normalized levels. One of the point just to remind you, last year we actually had a real estate tax assessment appeal that broke in our favor last year. So, we may or may not see something similar to that this year. So other, all of things being equally we expect same store operating expenses to be I don’t expect to see the same type of decrease that you saw in the third quarter.

[Operator:]

Our next question is from Ki Bin Kim from SunTrust Robinson Humphrey. Please go ahead.

[Ki Bin Kim:]

I just had a couple quick follow-up questions, if I remember your counting your methodology correctly, your (indiscernible) is always based on a physical basis and even though you might increase, your tenant sales may not because you wait a full year for any kind of sales to be reported. I guess my question is that -- is that correct and I think there is an Apple Store in Willow Grove that might not be in your tenant sales number, when is that going to be in your numbers and the second part to that question is I know it's a lot is what is your total tenant sales across your malls, without the 10,000 square foot definition.

[Joe Coradino:]

So first off, Ki, tenants become comp after 24 months and not 12 months. It's one answer, the other regarding the Apple Store that will come in Q4 this year and it should represent a significant uplift. But I mean I guess the other thing is you think about a sales generally, you’ve got a couple of things. I think you need to look at one is particularly in our premier properties there is a lot of moving around of tenants from high performance Victoria Secrets at Cherry Hill, the Uniglow is just moving in and not being (indiscernible) a lot of moving around, the junior's category is struggling I think across our industry which is another factor and the iPhone 6 came into being last week of September. So I think when you factor in some of the movement in the premier properties that becomes comp, when you think about the junior category, some of them are beginning to turn themselves around that your own prognosis for sales I think it's a positive one.

[Ki Bin Kim:]

And did you have the total mall sales data? I mean is that’s a metric that some other refi [ph] started to report. Just curious if you guys have had that information year-over-year?

[Bob McCadden:]

I think Joe mentioned in his remarks at the total sales were relatively flat this year compared to last year. And your other question on occupancy, yes we don’t include assigned leases unless a tenant has physically taken occupancy.

[Ki Bin Kim:]

And just following Joe's comment about Apple moving in the fourth quarter, the comp data. Do you have any sense of what that does to your reported sales numbers on a kind of same store basis?

[Joe Coradino:]

It will be very helpful Ki.

[Operator:]

(Operator Instructions). This concludes our question and answer session. I would like to turn the conference back over to Joe Coradino for any closing remarks.

[Joe Coradino:]

I would like to close by just saying what a great quarter. We’re delivering on our transformation to a high quality mall company. We remain committed to driving shareholder value, we’re confident that continued implementation of our strategy and realization of our goals will yield great results. We look forward to seeing many of you maybe next week. Have a good day.

[Operator:]

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