Pennsylvania Real Estate Investment - Trust (PEI) Q4 2017 Earnings Call
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15-Feb-2018
Pennsylvania Real Estate Investment
Trust (PEI)
Q4 2017 Earnings Call
Total Pages: 18
1-877-FACTSET www.callstreet.com Copyright © 2001-2018 FactSet CallStreet, LLCPennsylvania Real Estate Investment Trust (PEI) Corrected Transcript
Q4 2017 Earnings Call 15-Feb-2018
CORPORATE PARTICIPANTS
Heather Crowell Robert F. McCadden
Senior Vice President-Corporate Communications & Investor Relations, Chief Financial Officer & Executive Vice President, Pennsylvania Real
Pennsylvania Real Estate Investment Trust Estate Investment Trust
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate
Investment Trust
......................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Ki Bin Kim Floris van Dijkum
Analyst, SunTrust Robinson Humphrey, Inc. Analyst, Boenning & Scattergood, Inc.
Christy McElroy Linda Tsai
Analyst, Citigroup Global Markets, Inc. Analyst, Barclays Capital, Inc.
Karin Ford Caitlin Burrows
Analyst, MUFG Securities America, Inc. Analyst, Goldman Sachs & Co. LLC
Michael W. Mueller
Analyst, JPMorgan Securities LLC
......................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Good morning. My name is Julie, and I will be your conference operator today. At this time, I would
like to welcome everyone to the PREIT's Q4 2017 Earnings Call. All lines have been placed on mute to prevent
any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator
Instructions]
I would now like to turn the call over to Heather Crowell. Heather, you may begin.
......................................................................................................................................................................................................................................................
Heather Crowell
Senior Vice President-Corporate Communications & Investor Relations, Pennsylvania Real Estate Investment Trust
Thank you.
Good morning and thank you all for joining us for PREIT's fourth 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.
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Q4 2017 Earnings Call 15-Feb-2018
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, February 15, 2018, and PREIT makes no undertaking to update any such
statements.
Also, certain non-GAAP measures will be discussed. PREIT has included reconciliations of such measures to the
comparable GAAP measures in its earnings release and other documents filed with the SEC. Members of
management on the call today are Joe Coradino, PREIT's Chairman and CEO; and Bob McCadden, our CFO.
I'll now turn the call over to Joe Coradino.
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust
Thanks, Heather, and good morning to all.
In celebrating the Philadelphia Eagles' Super Bowl victory, Eagles center Jason Kelce eloquently said, hungry
dogs run faster. Hearing that it occurred to us that this has always been preached motto, hungry dogs run faster.
We've demonstrated this in a number of ways over the past five years. We were the first to pursue and conclude a
large-scale, low-productivity mall disposition program, we've been bringing in dining and entertainment to our
properties for years. We were the first to aggressively take on replacing department stores, and we think now is a
good time to point out that as far as we can tell, our Q4 same-store NOI results were ahead of the entire mall
REIT sector, and we put out 2018 expectations in line with hope high productivity peers for our wholly owned
portfolio. Our core operations are doing quite well.
[ph] So for pre-2017 (00:02:29) was a year of running faster, even as we faced headwinds. And we believe that
the results we shared yesterday and our projections for 2018 and beyond prove that we've distinguished
ourselves as a quality mall REIT, having delivered on all elements of our strategy. We delivered on our anchor
replacement strategy, leading the industry in leasing 9 of 11 vacant stores, setting the stage for future growth and
strengthening our foundation.
We delivered on our capital plan, strengthening our balance sheet by raising over $450 million, reducing our
borrowing costs and securing liquidity to fund our value-creating redevelopment program. We delivered strong
same-store NOI and occupancy growth, along with record new leasing activity in the face of a contracting retail
environment. Mall occupancy grew 180 basis points since the last quarter, with same-store NOI of 3% for the
quarter, both driven by leasing activity that was nearly double our 2016 activity.
We also delivered on Renewal spreads. In the fourth quarter, we improved our Renewal spreads to 10.8% for
tenants under 10,000 square feet and the year to solid 5.1%. These results confirm that our strategy to drive to
quality was the right approach. Moreover, our instincts to pursue certain initiatives ahead of many of our peers
were spot on and positions the portfolio well. It's noteworthy that the 17 malls we sold, 25 anchors have closed or
set to close. And these are generally in markets where further capital investment would not be a prudent decision.
As you've heard from our peers, the industry is in a state of evolution. And we believe we have been a step ahead
of the sea changes, and through our intensive portfolio management strategy have positioned ourselves with an
asset base that generates tenant demand, where tenant sales are improving and our redevelopment projects are
generating strong returns, while vacant boxes are abundant around the country, we've adeptly dealt with closings,
many of which were preplanned.
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On the anchor replacement front as 2017 kicked off, PREIT had 11 vacant anchors. During 2017 and January
2018, five of these anchors have been replaced with operating tenants. As we move into 2018, PREIT executed
leases for four additional replacements. This leaves two vacancies both with leases pending execution. The
results of this initiative is 17 sought-after tenants, spanning seven diverse uses, paying rents eight times greater
than the space was previously generating. But the story expands beyond these impressive figures and replacing
[indiscernible] (00:05:30) department stores, we're transforming our properties, driving new customers and
reinventing our platform.
Through our portfolio repositioning effort, our exposure to potential additional department store closures has been
dramatically reduced, and we continue to look to proactively take back stores where prudent. We've reduced our
Sears store count from 27 to 8, which includes Willow Grove Park subleased to Primark. We have gone from 31
J.C. Penney stores to 16. We went from 25 Macy's to 14, and we only have two Bon-Ton stores. Demand for
quality space is robust, and we've capitalized on this, having executed 76% more new leasing than in 2016 for a
record amount of space in 2017.
As a result of our tenant diversification strategy, the tenancy takes a new shape than in years past. As we look at
the leases we signed in 2017, excluding the few traditional department stores we signed, two-thirds of the space
we lease was committed to a mix of tenants that are the foundation of the mall of the future. Dining and
entertainment made up 19%, off-price accounted for 14%. Fitness was 9%. Sporting goods accounted for 8%.
Fast fashion was 8%, and shoes and accessories made up 9%.
As we move into 2018, we're in a strong position to drive revenue into the future, having executed leases for
future openings for 33% more space than we had at this time last year. As you know, many legacy retailers filed
for bankruptcy protection last year and one early this year. As the choppy retail waters of 2017 became apparent,
we quickly adjusted our operating plan to mitigating the impact of rent relief and early closings through an
aggressive focus on driving ancillary revenues and expense reductions, in an effort to maintain our operating
margins and NOI objectives without sacrificing quality. We renegotiated contracts to reduce expenses. We
reduced staffing as appropriate, and we instituted new revenue sources through the introduction of digital
advertising boards.
In addition to our intense focus on operations and evolving our mall experience, we executed on our plan to
strengthen our balance sheet, which continues to be a top priority. Since detailing our capital plan in January of
2017, we've raised gross proceeds of over $700 million, resulting in net proceeds of over $460 million. Notable
accomplishments include the sale of three low productivity malls and a non-core office building.
On the financing front, we secured the $250 million term loan tied to Fashion District Philadelphia, and early
refinancing of Lehigh Valley Mall generating excess proceeds and reducing the interest rate, refinanced Francis
Scott Key Mall, and issued two new preferred shares series for $292.5 million at significantly lower coupon rates
from our existing preferred shares, and the redemption in full of our 8.25% Series A Preferred Shares.
Being nimble was key to success in retail, and we're pleased to have raised the liquidity to fully fund our value-
creating redevelopment projects, well in advance of the spending needs. As such, we continue to work through
additional non-core land and asset sales.
Our redevelopment efforts are also generating outstanding results. At Mall at Prince Georges, we've delivered on
our redevelopment plan. We look forward to the openings of DSW, ULTA Cosmetics sic [ULTA Beauty] (00:09:34)
and [ph] Express (00:09:35) later this year along with three fast casual [ph] eateries (00:09:39), solidifying this [ph]
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Q4 2017 Earnings Call 15-Feb-2018
DC powerhouse (00:09:41) that continues to perform even while under construction. The common area
renovation is complete, new leasing is 95% committed and the project will be completed in June.
At Woodland Mall in Grand Rapids, Michigan, we're making good progress on the merchandising of the [ph] new
wing that will lead to (00:10:00) Von Maur. For the planned new remerchandise space, we are 65% committed
with a robust pipeline of interested tenants for this 2019 project.
In Philadelphia, this is a year we'll open up Fashion District. We've incorporated our share of NOI in our guidance
and look forward to releasing details, including the opening date and our tenant roster later this year. We continue
to work with third parties to explore the vertical development of this project, to incorporate multi-family housing. It's
noteworthy that on our completed projects and those nearing completion, such as Capital City, Mall at Prince
Georges and Viewmont, [ph] we believe (00:10:45) in delivering these projects under budget, on time and at
returns that are accretive to these assets, and given the newly curated tenancy are cap rate transformative.
Now before I turn the call over to Bob, I wanted to take a minute to update you on governance and sustainability
improvements we've implemented. Last week, our board appointed JoAnne Epps as a new Trustee. She brings a
unique background and a wealth of experience and look forward to her contribution and fresh perspective as we
can continue to evolve PREIT.
We also continue to evolve our sustainability efforts. In 2017, we added three new solar arrays to the two that
existed in our portfolio, and now offer electrical sic [electric] (00:11:35) vehicle charging at [ph] stations at four
(00:11:38) properties. PREIT properties now produce more than 8 million kilowatt hours of electricity from solar
panels per year. The environmental benefit accrued through the production of renewable energy at these five
properties is equivalent to a reduction in greenhouse gas emissions from more than 1,200 passenger vehicles
annually.
Additionally, as part of our Woodland Mall redevelopment, we recycled more than 20,000 tons of concrete from
demolition to be reused as building pads, parking lot base and site grading during the expansion phase of the
mall.
Now I'll turn the call over to Bob to cover our 2018 guidance, quarterly and full year results and our capital plan.
Bob?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust
Thanks, Joe.
Our 2018 FFO guidance has raised a number of questions. It's quite simply the result of our move to quality and a
simplification of our asset base. So let me take you through a reconciliation of 2017's actual FFO results to the
midpoint of our guidance range for 2018. Let's start with FFO in 2017 where we reported FFO of $130 million or
$1.67 per share. We will experience dilution of $6.8 million or $0.09 a share from dispositions. This includes [ph]
one of the (00:13:02) property we anticipate selling this quarter.
On a normalized basis adjusting for this dilution, our starting point for this year is $1.58 per share. Our 2017
results include a number of items where we expect lower contribution in 2018. Historical tax credit income will be
$1 million lower. Corporate revenues and other income will be lower by $2.5 million as a result of lower sales, [ph]
land sale (00:13:32) gains, and other items.
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Q4 2017 Earnings Call 15-Feb-2018
2017's non-store revenue – same-store revenue included $1.7 million of accelerated lease intangible income,
which is not expected to recur. These items account for $0.07 a share, taking us to $1.51. Excluding lease
termination fees, our same-store NOI at the midpoint of our guidance range has $4.5 million of NOI or $0.06.
Lower lease termination fees and slightly higher interest expense net of G&A cost savings and lower preferred
share dividends results in an approximate $0.03 reduction taking you to $1.54 per share. The incremental
contribution from Fashion District and a slightly higher share count account for the [ph] remaining (00:14:19)
difference to the midpoint of our FFO guidance range of $1.55 per share. The short-term dilution is the natural
consequence of our strategic move to quality; by shedding non-core assets and redeploying the capital into our
remaining portfolio, we are building a stronger foundation for future growth.
So let's go on to talk about our capital plan and operating results.
We have made significant progress on our capital plans since beginning of this year. Last month, [ph] we and our
partner (00:14:47) closed on the $250 million five-year term loan for Fashion District. The joint venture initially
borrowed $150 million with remaining $100 million available to us via a delayed draw option. We used our share
of the proceeds to reduce borrowings under our credit facility.
As of today, we have no outstanding amounts under the facility. Having closed on the term loan, we now have
immediate available liquidity to fully fund our anchor replacement and redevelopment program. In January, we
also expanded our [ph] $69 million (00:15:20) floating rate mortgage loan on Francis Scott Key at the existing
spread and swapped the loan to a fixed rate of 5.01%. With the available one-year extension option, the final
maturity of this loan is 2023.
Earlier this month, our joint venture closed on a three-year extension of its mortgage loan on the land parcel
across from Fashion District. We are in documentation to finance the construction loan on Gloucester Premium
Outlets with the new loan, which is expected at proceeds at or above the current loan balance and will close out
loan by the end of the first quarter.
After all these 2018 maturities are addressed, our next significant mortgage maturity won't occur until 2021. We
continue to improve our balance sheet, after giving effect to the first quarter's financing activity, we have
approximately $325 million of total liquidity available to us. At the end of December, our bank leverage ratio was
50.65%, and our net debt to EBITDA was approximately 8 times.
Our cash interest rate was 3.98%, a 4 basis point reduction from a year ago. 92.9% of our debt is either fixed or
swap 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 will generate up to $70
million of incremental proceeds during the balance of the year. This include the sale of our remaining non-core
office property, various land parcels, and other assets.
We invested $37 million in our capital program during the fourth quarter and $196 million for all of 2017. At the
end of 2017, we had approximately $300 million remaining to spend on our redevelopment and anchor
replacement program. We expect to spend about $180 million to $200 million this year and the balance in 2019.
Turning to operations. We performed in line with our expectations and ahead of consensus for the quarter. We
reported FFO as adjusted of $0.51 a share and a net loss of $0.05 a share. Same-store NOI excluding lease
terminations at our wholly owned properties increased by 4%. Contribution from anchor replacements, other new
tenant openings, higher ancillary income and cost savings more than offset $1.9 million revenue impact from
bankruptcies, and co-tenancy adjustments.
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Q4 2017 Earnings Call 15-Feb-2018
We also absorbed an additional $500,000 of bad debts related to fourth quarter and first quarter 2018
bankruptcies and higher than expected snow removal costs due to inclement weather in December. In contrast to
the performance of our wholly owned properties, same-store NOI, ex lease terms at our joint venture properties,
declined by 4% in the quarter. Bankruptcies accounted for $300,000 of the decline in joint venture NOI.
Overall same-store NOI ex-lease terminations blended to a 3% growth rate for the quarter. We ended the year
with total mall occupancy of 95.9%, non-anchor occupancy was up 10 basis points compared to last year at
93.8%. Total leased occupancy was 96.6% and non-anchor leased occupancy was 94.9%. As we look forward at
our same-store properties, we assigned leases for a total of 600,000 square feet of new tenants that will open in
2018 and 2019, which will contribute approximately $7.2 million in annualized rent at our share.
With respect to guidance, we introduced our FFO and net income guidance for 2018 with FFO per share expected
to be between $1.50 and $1.60. GAAP earnings are expected to range from a loss of $0.16 to $0.03. I've already
discussed the reconciliation of the 2017 results, but I'll walk you through some of the underlying assumptions.
2018 same-store NOI growth, excluding lease terminations, is expected to be a positive 1.25% to 2.25%
comprised of a positive 1.5% to 2.5% growth rate at our wholly owned properties and negative 2% to 3% at our
joint venture properties.
Bankrupt tenants, net of replacements, are expected to reduce 2018 revenues by an additional $1.3 million on top
of the $5.6 million impact we experienced in 2017. Co-tenancy adjustments are expected to be approximately $2
million in 2018 compared to $1.3 million in 2017, reflecting the full year impact of anchor closings.
In the case of bankruptcies and co-tenancy adjustments, the impact will be more significant in the first part of the
year and will be mitigated as replacement anchors open in the third and fourth quarters of 2018. We'll open
anchor replacement tenants at Magnolia, Moorestown and Valley Malls in the second half of the year, as set forth
in our anchor replacement schedule in the supplemental.
We assume lease termination revenues of $1.5 million to $3.5 million compared to $3.2 million in 2017. Capital
expenditures, including recurring CapEx and tenant allowances, are expected to be in the range of $220 million to
$240 million. And we anticipate recognizing a gain of approximately $2.5 million from the sale of our joint venture
interest in a non-core office property in the first quarter, and this will be a non-FFO gain.
Finally, our guidance does not assume any other operating asset sales, capital market transactions, other than
mortgage loan financings in the ordinary course of business.
And with that, we'll open it up for questions.
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Q4 2017 Earnings Call 15-Feb-2018
QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] And your first question comes from Ki Bin Kim with SunTrust. Ki, your line is
open.
......................................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc. Q
Thank you. Can you first talk about the cadence in same-store NOI that we should expect in 2018 given the –
some of the moving parts that you mentioned?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
So, I think the first quarter will probably if you look at it on a quarter-by-quarter basis will be the lowest growth
quarter, and we'll start to see acceleration in the second quarter and through the end of the year.
......................................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc. Q
Okay. And I think just historically speaking there's been some [indiscernible] (00:21:54) have been a little too
bullish in certain years, just given some of the moving parts. Maybe you could help just wrap it all around for us
and all else equal once you finish your redevelopment projects including FOP, your guidance for next year is
$1.55, what is the longer term FFO potential from [ph] Pen REIT (00:22:16) after some of these projects are
completed?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
I think a year ago we laid out our capital plan and outlook for the next couple of years through 2020. I think the
bankruptcies have probably set us back a little bit from a timing perspective, but we still expect to be on target to
reach the goals that we set out a year ago.
......................................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc. Q
Okay. I guess I was trying to see if is the dollar – from $1.55 is the growth potential [indiscernible] (00:22:47)
$1.85, something more concrete like that.
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Yeah. At this point we're not really prepared to give guidance beyond the current year, Ki Bin.
......................................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc. Q
Okay. And can you just remind me how your lease modifications work? I believe that you have to have an
extended term for those leases to be in the lease spread page in your supplemental, but for the ones that are just
pure rent modifications, what does that look like and how does that impact your view on 2018?
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Q4 2017 Earnings Call 15-Feb-2018
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Well, I think our guidance as I mentioned reflects specific lower revenues from bankrupt tenants, where most of
the lease modifications are occurring, so that's really baked already into our estimates for the year.
......................................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc. Q
Okay. Thank you.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from Christy McElroy with Citi. Christy, your line is open.
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Hey, good morning all. Just first on Fashion District and thinking about the $1.5 million to $2.5 million of NOI from
that project this year, how should I think about the timing of rent commencement, is that the majority of that in
Q4? And then sort of related to that, how should we be thinking about the capitalized interest that will start
expensing of those costs? Will you start expensing everything, or is it more gradual since the project isn't fully
stabilized?
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
As it relates to the income – hi Christy, it's Joe.
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Hey.
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
As it relates to the income from Fashion District, yeah, that will be the fourth quarter – all fourth quarter.
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Okay.
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
And as it relates to capitalized interest, that'll come in in phases as the property comes online, those spaces that
come online, the corresponding amount of allocated dollars will stop capitalizing interest on those spaces, but it
will take – the cessation of capitalized interest will occur over a period of time.
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Okay, okay, got you. And then just thinking about the sources and uses, I heard the $180 million to $200 million of
spend on redevelopment, I think I heard you say $70 million of proceeds from sales. I assume the rest of the
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Q4 2017 Earnings Call 15-Feb-2018
spending is funded off of the line of credit, just how should we be thinking about the movement of capital and how
you – and your leverage profile and how you would end the year from a debt to EBITDA perspective just given
that not a lot is flowing yet from the projects in 2018?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Okay. So as I mentioned, we still have the joint venture has $100 million of undrawn capacity under the [ph] FTP
(00:25:27) term loan, so that will be probably our initial source of funding for a Fashion District and the balance
will...
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Yeah.
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
... come from line of credit until the proceeds from the asset sales are realized. On a debt-to-EBITDA, we're sitting
at the end of December of 2017 at about 8 times, that will peak at about 9.1 times at the end of 2018, and then as
the NOI starts coming on from [ph] FTP (00:25:53) and the other anchor replacements that – we expect that to
kind of be the peak of our leverage at the end of 2018.
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Okay. All right. Thank you.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from Karin Ford with MUFG Securities. Karin, your line is open.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
Hi, good morning. Just – thank you for all the color on what's baked into the guidance from bankruptcy and co-
tenancy perspective. I was just curious if those numbers include any prospective bankruptcies that haven't been
announced yet, or is that – or box closures for that measure – matter, or is it just what you know and what's
happened already year-to-date?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
So the numbers that we – I cited were related to 2017 bankruptcies. When we build our guidance for the year
effectively, we bake in to our numbers on a unit-by-unit basis, what we think the likely outcome will be from
existing tenants. So to the extent we anticipate closures or any rent modifications, that's baked into our baseline
growth level, and it's not included in the numbers that I quoted. They're really related to bankruptcy or bankrupt
tenants that have already announced.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
Got it. And are you expecting any box closures in 2018?
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Q4 2017 Earnings Call 15-Feb-2018
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
I think at this point we feel good about the future regarding box closures and we're – as I said we've really
dramatically reduced our Sears count. We're down to 2 Bon-Tons, and any box closures that might occur this year
we think would be proactive, where we went out and decided to take back a particular anchor store, we had a
tenant to step in. As we continually look at opportunities to, again, mitigate exposure to sort of risky anchor shall
we call it.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
Got it. Next question is it looked like Valley View Mall moved from being held for sale to back into the operations.
Why did that fall out, and did you – are you seeing a change in the bid for asset sales?
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
Well, it's – as it relates to Valley View, it's a pretty good asset, I mean, look, we've sold off 17 malls. We certainly
are proficient in doing that. But when we looked at Valley View, it has rising NOI. We successfully replaced an
anchor, and we didn't want to do a relatively what we thought was a high cap rate deal, and we decided to sit
back and wait for a little bit of a better time. And really, we've got a non-core office building that we're about to
close on in the – this quarter, and we've got a lot of focus, obviously, in anchor replacements and in-line leasing.
And we'll sit and wait for better times, if you will.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
Got it. And last question just going back to Christy's question on leverage. So with – you're headed towards 9
times debt to EBITDA by year-end, any thoughts on reconsidering the JV sale of a core asset, or any additional
asset sales to bring that number down?
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
Well, we continue to engage in dialogue regarding JV asset sales. At this point, nothing has really whet our
appetite, if you will, because those kinds of deals are deals that pricing is critically important. And given the fact
that we've secured the capital to fund the redevelopment, and while 2018 is a peak year for us from a leverage
and debt-to-EBITDA perspective, as the redevelopments come online and much of that is already executed deals,
where you're under construction and you have firm opening dates, et cetera. So it's not a risk, if you will, a high
level of risk. So again, we're – we'll continue to look at JVs, as we look at all opportunities to improve the balance
sheet, but it's not at all costs, if you will.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
Thank you very much.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from Michael Mueller with JPMorgan. Michael, your line is open.
......................................................................................................................................................................................................................................................
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Q4 2017 Earnings Call 15-Feb-2018
Michael W. Mueller
Analyst, JPMorgan Securities LLC Q
Yeah. Hi. Couple things. First of all, I'm curious, I mean, the stock was halted for an hour, hour and a half or so
yesterday. I mean, do you have any color on why that happened, and why you reported pre-close?
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
We made a mistake and hit the wrong button at the wrong time.
......................................................................................................................................................................................................................................................
Michael W. Mueller
Analyst, JPMorgan Securities LLC Q
Okay.
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
Corrected it quickly and issued our release prior to market close, after deliberations with [ph] Council (00:31:20)
on the New York Stock Exchange, and we think that's – it was really a blip and it's behind us.
......................................................................................................................................................................................................................................................
Michael W. Mueller
Analyst, JPMorgan Securities LLC Q
Okay. Switching gears now on asset sales, Joe, I think you mentioned something was going to close – or Joe or
Bob, I think you mentioned something was going to close in the first quarter, and then you also talked about non-
core office, maybe some [ph] land (00:31:43), just can you size up the total dollar amount that you're expecting for
2018 in terms of asset sales?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Mike, it's Bob. We mentioned it's about $70 million.
......................................................................................................................................................................................................................................................
Michael W. Mueller
Analyst, JPMorgan Securities LLC Q
Okay. So that includes what you were talking about at first, something closing in the first quarter as well?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Right. So that's the only operating asset that we'll be selling in our – at $70 million number. The rest would be
land parcels and other non-income generating assets.
......................................................................................................................................................................................................................................................
Michael W. Mueller
Analyst, JPMorgan Securities LLC Q
Okay. So the only operating asset is going to be the office portfolio then...?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Right.
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Q4 2017 Earnings Call 15-Feb-2018
Michael W. Mueller
Analyst, JPMorgan Securities LLC Q
...or the office buildings? Okay, got it. And is that – most of that number, a good chunk of it or like about how
much of it?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
It's about a third.
......................................................................................................................................................................................................................................................
Michael W. Mueller
Analyst, JPMorgan Securities LLC Q
Okay. And the rest land? Got it. And then last question on CapEx [ph] TIs (00:32:33), you mentioned – apologize
if I missed this, but the $220 million to $240 million number that obviously has some bigger projects in there. What
would you think about normal course [ph] TI's (00:32:44) leasing commissions outside of major projects?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
So between recurring CapEx, [ph] TA (00:32:50), it's probably at $40 million.
......................................................................................................................................................................................................................................................
Michael W. Mueller
Analyst, JPMorgan Securities LLC Q
Got it. Okay. That was it. Thank you.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from Floris van Dijkum with Boenning. Floris, your line is open.
......................................................................................................................................................................................................................................................
Floris van Dijkum
Analyst, Boenning & Scattergood, Inc. Q
Great. Thanks. I wanted to – Joe, I wanted to make sure I caught this right. You said that on the anchor
replacements, the 9 of 11 that you have signed up, is that correct that we have you – we should expect an 8 times
rent multiple on those spaces?
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
That is correct, Floris.
......................................................................................................................................................................................................................................................
Floris van Dijkum
Analyst, Boenning & Scattergood, Inc. Q
So what would be the return that you would have gotten on the investment into those boxes?
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
High single-digits.
......................................................................................................................................................................................................................................................
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Q4 2017 Earnings Call 15-Feb-2018
Floris van Dijkum
Analyst, Boenning & Scattergood, Inc. Q
High single-digits, great. And the 300 – and just a follow-up question on the capital spend. You mentioned $320
million left to spend, that presumably does not include potential Bon-Ton recaptures or any further Sears
recaptures, correct?
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
Yeah. Just to correct, the number is $300 million, Floris, if I – just wanted to make that clear. And that does not
include any capital expenditures for any potential Bon-Tons.
......................................................................................................................................................................................................................................................
Floris van Dijkum
Analyst, Boenning & Scattergood, Inc. Q
Okay. Great. Thanks, guys.
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
Yeah. Thanks, Floris.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from Linda Tsai with Barclays. Linda, your line is open.
......................................................................................................................................................................................................................................................
Linda Tsai
Analyst, Barclays Capital, Inc. Q
Thanks. It sounds like closures in your unconsolidated properties are weighing on your SSNOI outlook. How long
might it take to get the SSNOI growth into the positive range? And then what do you think is a more of a
sustainable/stabilized growth rate for those properties? Is it in line with the consolidated?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
It's probably going to be a little bit less than the consolidated because of a number of those unconsolidated
ventures are the power centers would have lower growth trajectory. We're anticipating that most of the
bankruptcies that currently plague that part of our portfolio get filled by the end of 2018 and we should start to see
return to growth in 2019?
......................................................................................................................................................................................................................................................
Linda Tsai
Analyst, Barclays Capital, Inc. Q
And then would you ever consider selling out of your power centers?
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
Yes. We certainly would, and we continue to work on that.
......................................................................................................................................................................................................................................................
Linda Tsai
Analyst, Barclays Capital, Inc. Q
Thanks.
14
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Q4 2017 Earnings Call 15-Feb-2018
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
I mean, any non-core assets that we have, I mean, they give you- there were several questions regarding our
FFO guidance and really what's driving that is our moving to or continuing to move to our core business, right, and
moving to quality, simplifying the portfolio, and getting out of non-core businesses, and the sale of the power
centers is certainly on our list.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from Caitlin Burrows with Goldman Sachs. Caitlin, your line is open.
......................................................................................................................................................................................................................................................
Caitlin Burrows
Analyst, Goldman Sachs & Co. LLC Q
Hi, good morning. You talked about liquidity, but maybe as it relates to your dividend, the disclosure shows that
the pay-out ratio on FAD was up to 91% in 2017. I guess, just how do you think about the sustainability of the
$0.84 annual dividend at this point and balance that use of cash with other potential uses?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
So, Caitlin, this is Bob. We're very comfortable with the sustainability of the dividend and our multi-year forecast
shows actually increases in our dividend once we complete the current redevelopment and anchor repositioning
cycle. So, we're not going give a specific target for a potential dividend increase, but certainly it's something our
board looks at quarterly and we're optimistic about where the company has had it, so we're not even considering
any adjustment downward to the dividend.
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
Yeah, this is Joe. I would just sort of ditto that and say that we're completely comfortable with our dividend. Now,
again, many of the – much of the work that we're doing is execute at leases with construction in progress.
......................................................................................................................................................................................................................................................
Caitlin Burrows
Analyst, Goldman Sachs & Co. LLC Q
Okay. And then, just on the consolidated portfolio, in particular, you gave same-store 2018 guidance of 2% to
2.5%, but that also includes some of the development openings later this year, but that stabilized in 2019. I was
wondering if you could give any detail on the NOI you expect those development openings to contribute to 2018,
kind of what that means for the rest of the portfolio, and/or said differently the same-store growth excluding the
impact of development.
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Yeah. I mean, I don't know that we can break that piece out because the – it's basically anchor replacements not
so much the – I think we talked about Fashion District as kind of a pure redevelopment. The only other pure
redevelopment that we have would be the Woodland Mall, which is under construction. So, I don't think we're in a
position to be able to kind of break out that piece.
......................................................................................................................................................................................................................................................
Caitlin Burrows
Analyst, Goldman Sachs & Co. LLC Q
15
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