Pennsylvania Real Estate Investment Trust Q1 2010 Earnings Call Transcript

| About: Pennsylvania Real (PEI)

Pennsylvania Real Estate Investment Trust (NYSE:PEI)

Q1 2010 Earnings Conference Call

April 29, 2010 3:00 PM ET

Executives

Garth Russell – KCFA Strategic Communications

Ron Rubin – Chairman and CEO

Ed Glickman – President

Joe Coradino – President, Management Company and Head of Retail Operations

Bob McCadden – CFO

Analysts

Craig Schmidt – Bank of America/Merrill Lynch

Nathan Isbee – Stifel Nicolaus

Quentin Velleley – Citi

Michael Mueller – JP Morgan

Ben Yang – Keefe, Bruyette & Woods

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust first quarter 2010 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. (Operator Instructions). This conference is being recorded today Thursday, April 29th, 2010.

I would now like to turn the conference over to our host, Mr. Garth Russell, with KCFA Strategic Communications. Please go ahead, sir.

Garth Russell

Thank you, Jeremy. Before turning the call over to management for their prepared remarks, I would like to state that this conference call will contain certain forward-looking statements within the meaning of Federal Securities Laws. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters that are not historical facts.

These forward-looking statements reflect PREIT's current views about future events and are subject to risks, uncertainties, and changes, and circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by these forward-looking statements.

PREIT's business might be affected by uncertainties affecting real estate businesses generally, as well as specific factors discussed in PREIT's press releases, documents PREIT has filed with the Securities and Exchange Commission, and in particular PREIT's annual report on Form 10-K for the year ended December 31st, 2009. PREIT does not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.

It is now my pleasure to turn the call over to Ron Rubin, Chairman and CEO of PREIT. Ron, the floor is yours.

Ron Rubin

Thank you very much, Garth. Welcome to the Pennsylvania Real Estate Investment Trust first quarter 2010 conference call. Joining me on the call today are Ed Glickman, President; Bob McCadden, CFO; and Joe Coradino, President of our Management Company and Head of our Retail Operations. Also in the room today are Vice Chairman George Rubin and General Counsel Bruce Goldman.

Today, we will discuss our first quarter results, the status of our current projects, and our expectations for the balance of 2010. After we conclude our remarks, the call will be open for your questions.

Before we begin, I would like to take this opportunity to thank our longest serving Trustee Lee Javitch, who is going to retire from the PREIT Board when his term expires on June the 3rd. For 25 years, PREIT has been served well by Lee's wisdom, thoughtfulness, and guidance, and we thank him deeply for his years of service and his meaningful contributions.

As we have discussed on previous calls, the effects of the economy continued to impact our results. Recently, however, there have been signs of recovery as evidenced by an uptick in tenant sales and by an increase in the number of new potential transactions in our pipeline. In addition, we are pleased that our redevelopments continued to generate momentum as is evidenced by sales exceeding $500 per square foot at both Jacksonville and Cherry Hill malls.

As we have noted in previous calls, regardless of the economic environment, the fundamentals of our business remain unchanged. Our management team is focused on strengthening our financial position and improving our operational performance, and maximizing the value of our properties. To do this, we are working to place tenants in service at mixed use elements where possible, increase NOI, improve occupancy, and generate positive leasing spreads as part of our strategy to create long-term value for our shareholders.

And with that, I will turn the call over to Ed Glickman.

Ed Glickman

Thanks Ron. Good afternoon and thank you for joining us on this call. It was a pleasure to have had the opportunity to visit with many of you during the past few weeks, especially since the position and outlook for the company has improved dramatically during the last 12 months.

In the first quarter of 2009, we were finishing construction on a number of our projects expectantly awaiting the opening of key tenants and searching for capital in a very difficult market. Our stock was well below $5 per share and we had a wall of debt maturing. This afternoon's call finds us in quite a different environment.

We have completed the construction phase of the Cherry Hill Mall, 801 Market, and Plymouth Meeting Mall. Our strategic tenants are not only opened but exceeding their own expectations. With the help of our bank group, we recently closed a three-year $670 million credit facility to refinance the previous line of credit and term loan.

We have also been able to reduce our outstanding convertible note balance by more than half and in the process save our shareholders over $50 million through discounted repurchases. As we hold this call, our stock is at over $15 per share, we have the liquidity to run our business, and we are beginning to see stability return to the economy. These are good things and give us reason to be optimistic.

Our optimism is mirrored by our metrics. We had a good first quarter. So the first quarter PREIT is reporting FFO of $0.55 per share. Overall NOI was $71.6 million with same-store NOI at $71.2 million. On the same-store basis, we were up by 1% against the comparable quarter. Portfolio occupancy ended the quarter at 89.3%, up 50 basis points.

Our sales have stabilized. We were up $1 year-to-year and significantly against the last quarter. We are seeing signs of increased leasing activity. As the space market begins to firm, we expect that leasing spreads will begin to stabilize.

We are optimistic that we are at an inflection point in our operating performance. We have employed capital to renovate and expand our asset base. We have acquired that capital through financial leverage. What we have not attained is the operating leverage that we expected.

In our next phase of growth, we hope to accelerate return on assets to lease up of our newly renovated portfolio without the necessity of the massive capital outlays of the last five years.

We are, however, cognizant that the recovery that we are experiencing maybe the eye rather than the end of the storm and we remain cautious in our outlook interactions. Overall economic metrics remain mixed and the world is not without its challenges.

In the relief that we are feeling will be prudent to forget the lessons of the past few years. Therefore, as we have discussed, it is our intention to delever the company.

Many of you have asked for clarity out to our capital strategy. It has always been our intent to operate the company with more conservative leverage. We expected that NOI from our redevelopments would naturally delever the borrowings that we used to finance those expenditures.

As the retail market slowed, our stabilization period extended and our leverage rose. Faced with this situation and with the concurrence of our bank, we first sought liquidity to complete our work in progress, then we sought stability by extending maturities, and now that we have accomplished those goals, we embark on the process of restructuring our capital stack.

We would like to operate at a lower level of leverage closer to our target of 60% LTV and with a longer maturity schedule. To accomplish this, we will pursue many tactics. First, we have amortizing mortgages, which naturally delever our assets. Second, we intend to opportunistically sell assets. Third, we expect NOI growth from leasing activities to create additional growth asset value. Fourth, we intend to restructure our capital stack by replacing debt with equity.

Given our current leverage, we cannot achieve our goal overnight. We do, however, intend to take prudent steps that will demonstrate our conviction to achieving the goals that I have just stated.

For those shareholders who have stayed with us through this challenging period, we appreciate your continued support, and we believe that your faith will be rewarded. For those that have left, we hope that you will view this call as an excellent opportunity to reconsider your decision.

Bob McCadden will now give you more details on our financial performance.

Bob McCadden

Thank you Ed. FFO for the quarter was $25.5 million or $0.55 per share. Net loss attributable to the first quarter was $17.6 million or $0.41 per diluted share. Increased interest expense and higher depreciation charges relating to assets placed in the service impacted both our GAAP net loss and FFO for the quarter when compared to the prior year.

As Ed mentioned, same-store NOI was up 1% when compared to last year’s first quarter. The quarterly results were positively impacted by $1.8 million of lease termination revenues and an improving retail climate that favorably impacted revenues from tenants paying either a percentage of their sales in lieu of fixed rent or percentage rents.

In addition, we had only two local tenants file for bankruptcy this quarter with minimal financial impact. Same-store CAM real estate taxes increased by $2.9 million from last year’s quarter. $1.6 million of the increase was from higher snow removal costs as record snowfall levels recorded in the mid-Atlantic region this winter, $0.4 million of the increase relates to the 801 Market Street office property, which was occupied in the third quarter of 2009 by the Commonwealth of Pennsylvania.

Real estate taxes increased by $0.5 million due to higher assessments and rate increases at a number of our properties. Where possible, we are aggressively pursuing property tax appeals in these jurisdictions.

Our expense recovery rates continued to be negatively impacted by short-term lease renewals, which often times take the forum of gross leases or a percentage of sales in lieu of minimum rent leases. Our expense recovery ratio decreased to 81.9% from 86.3% in last year's quarter. In the near-term, we expect to see downward pressure on the recovery ratios until such time as we are able to convert tenants back from gross to net leases. As tenant sales improve and our short-term renewals expire over the next few years, we will work to convert these tenants back.

Interest expense increased over last year’s quarter as a result of placing $220 million of completed redevelopment assets in this service since the end of the first quarter of 2009 and to a lesser extent slightly higher average interest rates.

At the end of the quarter, we had outstanding debt at $2.7 billion, a decrease of $40 million from the end of last year. Our effective interest rate for the quarter was 5.41% compared to 5.23% a year-ago. We expect our effective interest rate will move higher throughout 2010 due to the impact of higher spreads and the 2010 credit facility in term loans and anticipate refinancing of two (inaudible) mortgage loans that mature later this year. At the end of the quarter, 84.6% of the company's total indebtedness was fixed.

Turning to 2010 guidance, we are reaffirming our FFO guidance of $1.94 to $2.06. We modified our guidance for GAAP earnings by approximately $0.10 per share to reflect higher expected levels of depreciation and increased common stock equivalence as a result of our higher share price.

As a reminder, our FFO guidance does not include the effect of any acquisitions, dispositions, gain on the sale of non-operating assets or any significant changes in our capital structure.

With that, I will turn the call over to Joe Coradino.

Joe Coradino

Thanks Bob. We continued to improve our operational proficiency and are pleased to share with you metrics in the first quarter of 2010. Comp sales increased to $341 per square foot, slightly favorable to last year’s first quarter of $340 per square foot and a 2.1% increase or $7 per square foot over December 31st of ‘09.

Quarterly comparable store sales increased 5.7% over the first quarter of '09. We eclipsed $500 per square foot, a major sales milestone at two malls in our portfolio. At Jacksonville Mall, our comp store sales were $502 per square foot and at Cherry Hill $514 per square foot. Total portfolio occupancy increased by 50 basis points to 89.3. When temporary tenants are included, total mall occupancy increased to 90.1% and inline mall occupancy to 85.7%.

During the quarter, we opened an 188,000 square feet of space, consisting of 65,000 square feet of anchor space, 77,000 square feet of stores over 10,000 square feet, and 46,000 square feet of inline stores. Notable tenants that opened during the quarter include Whole Foods of Plymouth Meeting Mall, Bye-Bye Baby at Whitehall Mall, Petsmart at the Commons in Magnolia, Intoxx Fitness at Voorhees Town Center, Encore Shoes, A New Concept from shoe department in Nedny Mall, A Men's Warehouse at Dartmouth and the Buckle and Guest at Cherry Hill Mall.

We also proactively replaced four former Walden Books locations, after they announced significant store closings, two with Books-A-Million and two with a local operator out of Western Pennsylvania Bradley's Book outlet.

We do have over 200,000 additional square feet of executive leases for 2010 occupancy and another 400,000 square feet of leases being negotiated. Over the past two weeks Hhgregg opened three locations representing 90,000 square feet in our portfolio at Paxton Towne Centre, Wyoming Valley Mall and Red Rose Commons. Their stores at Christiana Power Center and Lehigh Valley Mall are scheduled to go up in mid-May.

Including these transactions we are expecting the inline occupancy of our strip and power center portfolio to improve approximately 700 basis to 95% before year end. Non-anchor leasing activities for the quarter totaled 610,000 square feet. We renewed a 132 leases totaling 489,000 square feet at an average rate of $20.56 per square foot, a decrease of 6.9%. These figures still include transactions with challenged retail concepts as well as portfolio wide renewals that encompass underperforming properties were refocused on maintaining occupancy.

55% of our renewals this quarter carried terms less than three years. For renewals with terms in excess of five years, which made up approximately 30% of the executed renewals, rent increase 6% upon renewal. Today we are going to documentation with 73% of our plan 2010 non-anchor renewals. On the anchor leasing front, we signed six anchor renewals representing approximately 400,000 square feet of space. We have five anchors totaling 613,000 square feet that are set to expire over the balance of 2010, three of which were renewed this month.

The environment for leasing space continues to improve driven in large part by recent solid sales volumes, while available retail open to buys or the premium, we are seeking select merchants to expand their existing brands and in some cases introduce new ones. Another very positive sign, we experienced no additional tenant bankruptcies during the quarter, a significant even considering the first quarter generally see despite of post holiday season filings.

We are pleased with the excitement generated by our completed redevelopments and remain committed to striving towards operational excellence. With the retailer sentiment on the upswing, we are optimistic as we prepare for the upcoming ICSC convention in Las Vegas. Now we’re open for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Craig Schmidt with Bank of America/Merrill Lynch. Please go ahead.

Craig Schmidt – Bank of America/Merrill Lynch

Well, thank you and good afternoon. I think your reported same store includes I have been usually renovated. Can you know what the same store number would be if you excluded those recently renovated asset?

Ed Glickman

Yes Craig, as we’ve done such a start of the redevelopment process we’ve included all of the properties in our same store portfolios. We’ve never caught those up, so we don’t have that information available.

Craig Schmidt – Bank of America/Merrill Lynch

Okay, and now that you have Whole Foods in Plymouth Meeting, where do you think non-anchor occupancy could be by year end?

Joe Coradino

We are anticipating, well first all Whole Foods is performing very well there, it’s one of their best openings in the region. We’re expecting occupancy at year end to be around 80%. We are seeing a demonstrated increase in interest from perspective tenants and obviously intent to take advantage of that.

Craig Schmidt – Bank of America/Merrill Lynch

And what will you be doing that Voorhees this year to trying to improve the occupancy there?

Joe Coradino

Well I mean first off we recently opened up in Intoxx Fitness and we have a number of leases in negotiations right now. So we’re optimistic that we’re going drive occupancy there for this year.

Craig Schmidt – Bank of America/Merrill Lynch

Okay, thank you.

Joe Coradino

Into the mid 70s.

Operator

Thank you and our next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Nathan Isbee – Stifel Nicolaus

Hi good afternoon. Joe you’d spoken about the 73% of the 2010 renewals that were signed here after signature, that should give you a pretty good idea of where your ‘010 lease spreads were going given your view that the 73%, where do you expect those to trend over the next few quarters?

Joe Coradino

Well first off, I mean we’re certainly seeing a decrease in rent lease but we don’t have a specific number that we can give to you regarding those leases that are completed right now, renewals that are completed right now.

Nathan Isbee – Stifel Nicolaus

You said five anchors were expiring this year, three were renewed, do you have any sense of the last two?

Joe Coradino

We’re optimistic that the remaining two will renew.

Nathan Isbee – Stifel Nicolaus

Okay, alright. Thank you.

Operator

Thank you and our next question comes from the line of Quentin Velleley with Citi. Please go ahead.

Quentin Velleley – Citi

Good afternoon. Just in terms of the way structuring of the capital spent and I think you spoke about four methods of doing that. The third one was potentially increasing NOI. Could you give us some kind of idea of the million dollar amount that you think that you can potential increase NOI, in order to help the rev of the company?

Ed Glickman

Quentin, I don’t know if you know that what’s in our supplemental this month that is quarter, we included a more detailed breakout of our portfolio which shows the amount of vacant space, by individual assets.

Quentin Velleley – Citi

Yes.

Ed Glickman

And we also provide obviously our rental rates for each of these assets and I think that we would look at it to standpoint of where we would occupancy today versus what a normalized level of occupancy would be in a more stable time. So that’s probably somewhere in the high 80s, below 90% levels. And you can certainly do the math against the number that we provided.

Quentin Velleley – Citi

So that’s high IDEs on the inline occupancy.

Ed Glickman

Inline right.

Quentin Velleley – Citi

And in terms of timing you would also sort of two to three year plan?

Ed Glickman

It will be probably a two to three year plan in terms of where we are today.

Quentin Velleley – Citi

Okay. And then just the fourth column [ph] of the restructuring of the capital spent was replacing debt with equity, given you’ve obviously done the line and you’ve had strong share cross performance pushing towards $16, I’m just wondering what howling back the Board and management from potentially rising equity now rather than sometime in the future.

Ed Glickman

Well we’ve been actively considering our next stops but we got a long process to go through in terms of positioning the company, including finishing up our line of credit and obviously we missed Europe conference. So we’ve had to go and had a lot of conversations with investors that we haven’t spoken with them a long period of time and we are currently considering what our options are.

Quentin Velleley – Citi

Okay. But there wasn’t or is there anything on the leasing front that you wanted to get done or there any assets that you close to selling that you want to do before you raise the equity?

Ed Glickman

There are no pending transactions but there are lot of we’re just to focus that we needed to get through before we are in a position to even consider an offering.

Quentin Velleley – Citi

Okay, thank you.

Operator

Thank you and our next question comes from the line of Michael Mueller with JP Morgan. Please go ahead.

Michael Mueller – JP Morgan

Yes hi, just like Cherry Hill for a second the non-anchor occupancy, looks like a one from in the 93 at yearend and the 87s at March 31. I guess how much of that is just kind of a seasonal down draft versus something where you kind of watch some occupancies that will be out for a little bit.

Joe Coradino

Actually the reason for that decrease in occupancy was driven by rolling the second flooring and including that in the vacancy number, taking that all in one, the second floor I referred to in the Nordstrom addition.

Michael Mueller – JP Morgan

Okay.

Joe Coradino

Okay, it’s about 19,000 feet that was added, effectively if like we follow its kind of a one year from completion of construction if it’s not lease, we move it from construction progress to inventory if you will.

Michael Mueller – JP Morgan

Okay. And other question, I think if I heard the prior question correctly or one of the prior questions, it was, were just occupancy trend over the next years to that high 80s number, where do you think that mall shop occupancy ends 2010 relative to where it ended 2009?

Joe Coradino

We’re up in the mid 80s.

Michael Mueller – JP Morgan

Okay, that’s it. Thank you.

Operator

Thank you. (Operator Instructions). One moment please. And our next question comes from the line of Ben Yang with Keefe, Bruyette & Woods. Please go ahead.

Ben Yang – Keefe, Bruyette & Woods

Hi good afternoon. In the supplemental it looks like several of your potential development projects go out of the pipeline specifically the gallery and pavilion end market is Springhill and While Clay Point, just curious what happened to these projects and maybe whether you’re planning to sell the land at White Clay and maybe even Springhill?

Ed Glickman

Yes, I mean Ben something is perfect for then and inactivity in terms of a specific milestone. So rather than continued to report so I think still a few (inaudible) in our construction progress now so we felt into better it could active and viable projects but it’s going to see a little bit longer before we get a lot of traction on them.

Ron Rubin

Ben, you should know that most of our development projects are driven by tenant interest, and so we don’t these projects on speculative basis and so while we’re talking to prospect of tenants we have to get a determination as to whether those expansions by those tenants are real before we bring those redevelopment projects into let's call it beyond the conceptual space.

Ben Yang – Keefe, Bruyette & Woods

Sure and can you just remind us what your pre-leasing hurdles are before you would actually begin construction on some of those projects?

Ron Rubin

Well, it's not a question of pre-leasing, it’s a question of anchor tenant driven, because all of these projects are driven by major tenants and so that really the focal point of deciding whether to go ahead with the project or not.

Ben Yang – Keefe, Bruyette & Woods

Okay, and just final question, I believe Ed that you mentioned that two local retailers that off for bankruptcies during the quarter but then, it also looks like your lease termination fees are considerably higher than they were a year ago, I was wondering if you could provide some color on maybe who is closing stores voluntarily and is it any particular type of retailer or maybe concentrated in a particular location?

Ed Glickman

Now there is actually one large termination that was little $100 million that was from a large format retailer, yes it’s not bankruptcy related, and the rest we’re kind of ahead – essentially we have some cases we have tenants who are looking to strength their concepts and they recently signed a lease and they have a lot of remaining obligation. So it’s not necessarily indicative of any particular asset category or merchandized category that was billed [ph] and only determination number for the quarter.

Ben Yang – Keefe, Bruyette & Woods

Okay, great. Thanks Ed.

Operator

Thank you and Mr. Rubin, there are no further questions at this time. Please continue with any closing remarks you may have.

Ron Rubin

Okay, thank you all for joining with us this afternoon, and for your continued support. I’m looking forward to the ICSC spring convention next month and we invite you all who are out there to stop by our exhibit. Our next earnings conference call will be August for our second quarter results. Thank you again and have a good evening.

Operator

Ladies and gentlemen, this concludes the Pennsylvania Real Estate Investment Trust first quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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