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Pennsylvania Real Estate Investment Trust (NYSE:PEI)

Q4 2013 Results Earnings Conference Call

February 19, 2014 11:00 AM ET

Executives

Heather Crowell - Vice President, Communications and IR

Joe Coradino - Chief Executive Officer

Bob McCadden - Chief Financial Officer

Analysts

Craig Schmidt - Bank of America

Christine McElroy - Citi

Ben Yang - Evercore

Daniel Busch - Green Street Advisors

Michael Mueller - JPMorgan

Linda Tsi - Barclays

Ki Bin Kim - SunTrust

Operator

Good morning. And welcome to the PREIT Fourth Quarter 2013 Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. I would now like to turn conference over to Heather Crowell, Vice President of Communications and Investor Relations. Please go ahead.

Heather Crowell

Thank you, and good morning, everyone. Welcome to PREIT’s fourth quarter 2013 conference call. During this call, we will make certain forward-looking statements within the meaning of Federal Securities laws.

These statements relate to beliefs, expectations, 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, February 19, 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, and welcome to our call. 2013 was a standout year, marking metamorphoses of the company into a performance driven culture. We are proud of our accomplishments in 2013 and we enter 2014 with confidence, optimism, keenly aware of the challenges facing our industry, yet laser focused on the execution of our strategy and the pass forward.

Our balance sheet is strong and fundamentally different than it was 18 months ago. We have low leverage than we’ve had since 2005 and more liquidity than we have had in recent memory. We’ve achieved record occupancy levels with 95% total and 93.5% non-anchor occupancy and 2.6% same-store NOI growth, the highest in a decade.

We have substantially improved the quality of our portfolio with a disposition of three non-core malls that were averaging sales of $227 per foot and occupancy of 75.5% at this time last year.

FFO is adjusted increased to a $1.92 per share, an increase of 5% from last year. We increased our dividend 25% since last December. We are pleased the market has begun to recognize that our strategy is sound and we are delivering results. As we reflect on the strategic objectives we outlined for you at our last Investor Day, 16 months ago, let’s review some of the highlights.

Our balance sheet which previously caused concern for many investors has been a keen focus of ours and as a result of the great stride we made is really a topic for discussion at this point.

We have reduced our debt by over a $0.5 billion in the past two years and reduced our bank leverage to 48.4% the lowest since 2005. In April, we renegotiated our $400 million credit facility moving from secured to unsecured, increasing our borrowing capacity, extending term and reducing our interest rate.

In May, we launched an equity offering at our 52-week high, generating $220 million in proceeds. During the year we paid-off or refinanced $510 million of mortgage loans, leaving us with the growing pool of unencumbered assets.

In January of this year, we entered into term loan to take advantage of favorable pricing and bank credit market achieving the rate on the five-year term loan that is 25 basis points lower than our credit facility.

Tying this all together our interest costs have been substantially reduced and we have returned much of those savings to our investors in higher dividends, we have also -- we also have significant liquidity of $540 million.

On the operation side, we delivered strong results this year and expect further improvement in 2014. Same-store NOI improved 2.6% this year, in line with our guidance.

Occupancies are record highs with our same-store mall portfolio standing at 93.5%. Renewal spreads were strong at 4.3% for small shop leases. Average in place gross rents in our same-store mall portfolio are up 3.1% led by a 4.7% increase in our premier malls.

In key transactions, we opened Harrisburg PA’s first DSW, the only H&M in Grand Rapids, Michigan market, executed new leases with Marshalls, Ross Dress for Less, Jo-Ann Fabrics at Washington Crown Center, opened ULTA at Cumberland Mall, signed Dick's Sporting Goods at Francis Scott Key Mall, opened several key new restaurants in our portfolio, including BJ's Brewhouse at FSK, Red Robin at Bailey Mall, Iron Hill Brewery, Elena Wu and Burger 21 at Voorhees Town Center, Burger Monger at Willow Grove Park and grew occupancy by 620 basis points at Plymouth Meeting Mall.

Evidencing the favorable supply/demand environment in our sector, at the end of the year we had 212,000 square feet of leases executed to take occupancy in 2014. We currently have choices many new deals in our legal pipeline as we did last year.

A composition of our portfolio has changed substantially this year, as we disposed the lower quality malls. We are continuing our efforts on the disposition front and also evaluating the retail sales environment to make adjustments to our property level strategies in the face of a changing retail landscape.

We sold six properties this year, three of those were low productivity malls, which not only improves our metric but also improves our leasing leverage. We have three malls on the market at this time, North Hanover Mall, South Mall and Nittany Mall. We recently executed a lease with Burlington Coat Factory to fill the vacant anchor location in North Hanover, which we believe enhances the marketability and value of the asset.

Tenant sales in our same-store portfolio were relatively flat for the year, largely a function of the ever important holiday season. Taking into why this was the case, the weather this winter has been no secret, particularly on the east coast where you had the third highest snowfall in record compared to recent mild winters. This obviously has a considerable impact on our portfolio given our geographic concentration.

Let’s not forget the impact of the weather in the shortened holiday season, having driving sales online merchants. I will take a minute to talk a little bit about our perspective on online sales. We know the Internet and the variety and convenience it offers isn’t going away. But we also know people need to socialize, so we're focused on is the socialization of the shopping mall.

This will be the mall’s distinction when shoppers are making their decision on how and where to make a purchase. How are we dealing with this? We believe that offering people experiences beyond simply shopping will make for successful and vibrant mall environment. Dining and entertainment are key components in today’s shopping center. Early proof of this theory is the performance of this category.

Sales even during the snowy holiday season were up 6% for the comparable restaurants in our portfolio. This year, we opened 13 new restaurants and have several more in the pipeline. We are continuing to also add amenities that will lead to increased mold well-timed and offer some in-home conveniences like soft seating lounges, free Wi-Fi and play areas.

We’re also keenly focused on new technology and ways to replicate the convenience and varieties shoppers are accustomed to online. And we are focused on adding retailers to our portfolio that understand the importance of the shopper’s experience that are deploying the best omni-channel strategies. This brave new front and we are looking forward to sharing some exciting new developments with you soon.

On the technology front, last quarter, we spoke of our mall app that offers convenience by allowing them to search for a particular product from all retailers. Since its launch in September, this feature has been utilized over 600,000 times.

At Moorestown Mall, we are demonstrating our ability to get creative in a competitive environment. This quarter our vision for this property started to become a reality with the opening of the new Regal RPX Theatre and two of four anticipated restaurants, Celebrity Chef Mark Vetri’s Osteria and Firebirds Wood Fired Grill,

In fact, one of the areas most respected Food Critic gave Vetri Osteria a great review in this weekend’s paper. We are eagerly anticipating the opening of José Garces’ Distrito and Rizzieri Salon & Spa later this year. And the last piece to really distinguish this property will be the unveiling of boutique row, a collection of the areas finest boutiques whose merchandise will cater to the high-end demographic in this area.

Upon completion, the Moorestown Mall, we regarded has a beauty, fashion and culinary sanctuary and the model is when we believe will be replicated in other areas of the country. The final prong to our strategy was putting ourselves in a position to strategically grow our portfolio. With stability in our operations, we believe we have positioned ourselves to begin focusing on long-term growth.

One key element of our growth plan is reinvesting in our existing portfolio. We are currently reviewing several opportunities in our portfolio. Many of these opportunities stem from availability or anticipated availability of anchor space, which I'll address in a moment. But before I addressed that, let’s talk a little bit about the gallery.

Last month, Kmart announced, they will be closing their store in the first half of 2014. It was always our intention to recapture the store upon expiration at the end of August, so this news doesn’t impact our plans. We have spoken in the past about two potential directions for this asset. And while we have no specific news to share, we can tell you we have ruled out traditional fashion department stores.

Further, we know that food will be an important component and this will be a fashion destination. But the project is beginning to take an identity. We are working with two potential anchor tenants that would be new to the market along with several other key tenants, while simultaneously seeking additional public financing and considering JV opportunities in order to preserve our capital and maintain our liquidity position so that we can grow our portfolio.

Moving back to anchors for a moment and the question on everyone's mind, what about JCPenney and Sears? With respect JCPenney as you know, one of the 33 stores that the company plans to close is in our portfolio at Exton Square Mall. As noted in our press release, this market contains the best demographic in our portfolio and we are optimistic about the opportunities this presents for us.

On to Sears, we have one former, Sears location that’s currently vacant in our portfolio that’s at New River Valley Mall. We have a letter of intent with a replacement anchor for this location that will allow us to add additional small shop space as well. In terms of external growth, our partner is underway with pre-leasing Gloucester Premium Outlets, which will open in late spring in 2015.

With that, I will turn the call over to Bob McCadden to give you more color on quarterly and year-to-date financial performance and assumptions underlying our 2014 guidance.

Bob McCadden

Thank you, Joe. As Joe mentioned, 2013 was a noteworthy year for PREIT. We achieved record occupancy, the highest same-store NOI growth in a decade and ended the year with the solid balance sheet.

Turning to our operating results, FFO as adjusted for the fourth quarter was $41.7 million or $0.59 per diluted share. Last year we reported FFO as adjusted of $35.2 million or $0.60 per diluted share. 2013’s per share amounts include the impact of the 11.5 million share offering and a dilutive effect of our 2013 dispositions, while the 2012 quarterly results included add-back adjustments totaling $0.09 per share, comprised of $3.7 million of executive separation expenses and $1.9 million of non-cash charges related to the early repayment of debt.

Same-store NOI for the fourth quarter was $77 million, a $1.2 million or 1.6% increase over the 2012 period. Excluding lease termination revenue, same-store NOI was $75.9 million, a 0.3% increase over the prior period. Same-store NOI results for the quarter were impacted by top line growth.

Increased revenues were driven by improvements in occupancy and higher average rents. At December 31, non-anchor occupancy increased by 150 basis points to 93.5%, while total retail occupancy increased by 60 basis points to 95%. Average gross rents for small shop tenants in our same mall properties were up 3.1% as compared to in-place rents as of a year ago.

Revenues from the same-tenant sales and percentage rents were approximately $300,000 lower than prior period due to the weather related effects on holiday sales. CAM expenses were also impacted by the weather and increased by $1.5 million or 6.5% over last year due to a combination of higher snow removal expenses and energy cost in the quarter. Insurance expense was higher primarily due to a credit received in the prior year period.

Real estate taxes were up by $1.4 million or 10.8% primarily at New Jersey properties due to a combination of higher assessments and higher tax rates. Our bad debt expense for the quarter was zero. However, in last year’s quarter we actually recorded a $500,000 credit in bad debt expense due to the collection of previously reserved amounts.

Interest expense for the quarter was $23 million compared to $34.6 million last year, reflecting lower average borrowings and lower average rates. Average borrowings were $385 million lower than last year and the effect of interest rate on our borrowings during the quarter of 5.08% was 85 basis points lower than last year. At the end of the year, our average borrowing rate was 4.82% and our weighted average times maturity on our mortgage loans was 5.5 years.

G&A expenses for the quarter were $10.4 million, a $1.7 million increase from last year’s fourth quarter, reflecting higher incentive compensation accruals for the quarter. Outstanding debt at the end of 2013 including our share of partnership debt was $1.8 billion, a decrease of $271 million from the end of 2012. Our bank leverage ratio stood at 48.4% compared to a ratio of 62.4% a year ago.

Since the end of the year we continue to make improvements to our balance sheet. In January, we entered into two unsecured term loans for an aggregate of $250 million and made initial borrowings under the term loans to repay the $130 million amount, then outstanding under our revolving facility.

Our maturity schedule is very manageable with a $51 million mortgage loan on Logan Valley Mall, the only borrowing with the 2014 maturity. By its terms, the maturity date of this loan can be extended for another year.

In 2015, we have mortgage loans maturing on a number of high quality performing properties, Willow Grove Park, Patrick Henry Mall, and Springfield Mall among others. The average rate on the 2015 maturities is 5.69%. We will have an opportunity with these maturities to make further improvements to our balance sheet.

Regarding our outlook for 2014, we expect the GAAP earnings per diluted share will be a net loss between $0.01 and $0.09. We expect FFO per diluted share to be in the range of $2.01 to $2.06 per share. The midpoint of our FFO guidance represents a 12.2% increase of 2013’s FFO and 6.3% of our last year’s FFO as adjusted.

Let me bridge the gap from 2013 results. Same-same NOI excluding lease termination revenues were just north of $272 million in 2013. We expect same-store NOI growth of 2.6% to 3.2%, excluding lease termination fees. In 2013, we recorded lease termination fees of $1.7 million. Our guidance range assumes termination fees of $1.5 million on the lower end and $2 million on the higher end.

The assets we sold this year generated approximately $5.7 million of NOI in 2013. We incurred or will save about $3.1 million of interest expense related to these assets. A sale of these properties is about $0.04 per share dilutive to next year’s results.

The G&A run rate is assumed to be approximately $36 million at the midpoint of our range. We typically have higher G&A expenses in the second quarter due to the ICSC convention. Like 2013, 2014 third quarter will include approximately $2.5 million of revenue from the historic tax credits.

Interest expense will be favorably impacted by a full year of lower interest rates on our bank borrowings and mortgage loans that were refinanced and the issuance of common shares and the sale of assets to repay debt. Recurring capital expenditures and tenant allowances are estimated to be in the range of $45 million to $50 million reflecting an expected increase in leasing activity. Redevelopment and development capital expenditures are expected to be in the range of $50 million to $60 million.

Regarding the sequencing of our same-store NOI growth, we anticipate the growth will be back ended with higher growth rates in the third and fourth quarters. The weather-related factors that impacted our fourth quarter results have continued into the first quarter of 2014.

The first quarter may look a lot like 2013’s fourth quarter with lots of noise around weather-related expenses and significantly lower margins on our redistributed utilities. The early part of the year will also include disruption resulting from moving tenants around to accommodate our remerchandising and redevelopment plans at properties such as Viewmont Mall and Washington Crown Center.

Our guidance does not contemplate any other material property, dispositions or acquisitions but if you assume a mid-year sale of all non-core assets, our estimated FFO per share will be approximately $0.04 lower. In addition, our guidance does not assume any capital market transactions other than mortgage refinancings in the ordinary course of business.

With that, we’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) the first question will come from Craig Schmidt of Bank of America. Please go ahead.

Craig Schmidt - Bank of America

Thank you. Given the 0.2% same-store NOI in fourth quarter of ‘13 relative to your guidance for 2014 in the range of 26 to 32. We were wondering was some of the leasing deals moved from 2013 into 2014 or what has given you the confidence in such a lift sequentially?

Joe Coradino

I think -- I think, hi Craig. This is Joe. I think a couple of things. One is as we mentioned in the script, we’ve signed a number of transaction late in the year, right over -- to over 200,000 square feet of transactions late in the year that are not going to move in until ‘14 for the most part. And we also had a number of November, December openings that also impacted. We’re going to give a full year impact in ‘14 from very small tail if you will that we had in ‘13.

Craig Schmidt - Bank of America

And then given a Signet acquisition of Zale, I was wondering obviously a number of malls that have both tenants. Is there a potential for store closings or rationalization of this space or do you think those two concepts can co-exist?

Joe Coradino

Well, they do coexist right now and quite well actually. And our perspective on it is that they will continue to coexist but the reciprocal to that is that both of them are in phenomenal locations in our properties. So with one, we’re going to get a store back, when you like to have it on the 50-yard line in a corner location which is typically where the jewelry stores are located. So I think in either event, we’re comfortable with the acquisition. And by the way, editorially I think Signet is a great operator by the way.

Craig Schmidt - Bank of America

Okay. Thanks.

Operator

Our next question will come from Christine McElroy of Citi. Please go ahead.

Christine McElroy - Citi

Hi. Good morning. In regards to the $50 million to $60 million of redevelopments fund you expect in 2014. Can you talk about where those dollars are being spent? So what properties, how much of that do you expect to cut on line in 2014 and what kind of returns are you expecting on the capital. I’m just trying to get a sense for projects and timing?

Bob McCadden

The largest part of that amount, Christy, is that the Gloucester Premium Outlets, basically are share of development of that property, that’s going to -- as Joe mentioned that won’t come on stream until 2015. The balance of those dollars relates to we’re opening a couple of large floor mat retailers again later in the year and returns on those incremental dollars are typically in the high single digits.

Christine McElroy - Citi

Okay. And then just following up on your comments about adding restaurants and another sort of experiences to the mall. How many new restaurants would you expect to open in 2014. And of the 13 that you opened in 2013, how many of those were restaurant replacement versus sort of repositioning of space that was previously like anchor or small shop?

Joe Coradino

Of the 13 openings, the overwhelming majority were new openings. I am sitting here. I can't think of a replacement as I sit here although there could be one or two I’m not recalling. As it relates to ‘14, I don't think we have account as we sit here on the number of restaurants but we certainly can get back to you.

Christine McElroy - Citi

Okay. And then just lastly, your same-store NOI guidance for the year, you commented on it a bit. Just trying to get a sense for, you said it would be weighted a little bit more towards the second half in terms of timing of expenses in the first quarter and remerchandising in the first half. Can you give a sort of sense of what the progression should like to the year in terms of the growth rate?

Joe Coradino

Yeah. You are probably going to be close to flat for the first quarter as we sit here today and that’s going to be largely driven by what happens with weather between now and the end of March. We’ll probably see in the kind of 1% to 2% range in the second quarter and then 3% to 4% ranges in the third and fourth quarters.

Christine McElroy - Citi

Okay. That’s helpful. Thank you.

Operator

The next question will come from Ben Yang of Evercore. Please go ahead.

Ben Yang - Evercore

Hi. Good morning. Thanks. Maybe for Joe, I’m sorry to ask another question on the two -- three two same-store guidance but I totally get the recent leasing view that was going to help the 2014 numbers. Would you say that, I mean, is it driven primarily by handful of maybe a better malls given that and it looks like more than half year of your portfolio is still experiencing this falling sales?

Joe Coradino

Could you repeat the question, Ben?

Ben Yang - Evercore

Yeah, I mean what’s driving that same store. I mean is it the better malls or is it kind of across the portfolio and I ask because it just seems like -- I brought this up before in the past but I mean, it just seems like there is a persistent kind of broad and steep decline in sales throughout the portfolio. So I’m just kind of wondering what’s driving that number for 2014?

Joe Coradino

I think a couple of things, Ben. I mentioned that we sign a bunch of deals at the end of the year. We had a lot of late openings. I think in terms of property type, it’s driven primarily but -- what I’ll characterize as the A and B malls, right, as opposed to the C malls. It's driven by our premier and our core growth properties, not so much by the opportunistic group.

I mean, the reality is that you're seeing a number of tenants move to the B mall space. So it's a relatively robust list of tenants we’re looking at the B mall spacing. In some cases by the way there are typical power center tenants or open-air tenants that they’re moving to those centers like the Marshalls, the TJXs, the Rosses, Dress Barn, ULTA et cetera. So I mean, that’s driving it to an extent. There are also in-line tenants there, Body Central and Charlotte Russe, et cetera who are focused on that B mall space.

So I think it’s the As and Bs or the premier in the core growth properties that are driving it. To your comment around sales, by the way I can’t, you didn’t ask the question but I’ll answer it any how. To your comment around sales, we think weather has been a big problem for us.

I mean we typically winter is here get 15 inches of snow and we're approaching 60. We got 13 storms and it's been difficult to get out the shop. It’s been difficult to get out. And so we think that's had a big impact on our sales performance and I try and convince Bob McCadden that it is going to stop snowing.

Ben Yang - Evercore

So given your comment on weather and the impact on sales, I mean, do you expect the comp sales or kind of stay flat maybe fall into ‘14 as that part of the budget as well?

Joe Coradino

Yeah, we believe the consumer who has been all nice by the way will come out and shop, once the weather improves. I mean, it’s great to see -- it's great to go to a mall yesterday. So lot of traffic at the mall yesterday, it was into 40s. We need no snow and some shoppable weather.

Ben Yang - Evercore

Got it. And just a final question from me, maybe just comment on the BC sales market, you guys have been very active. You intend to continue to sell malls. I means what’s the market looks like this year, there are more buyers or there are more malls for sale and the cap rate expectation, how that’s changed from last year to this year?

Bob McCadden

I think -- Ben, this is Bob. With respect to property sales, I think Joe has always characterized this as, it's a very challenging dealing with some of the entrepreneurial buyers. I think he will hit a comment a little bit more on this.

Joe Coradino

I mean, its adventurous, there's no question about that. We had Hanover under agreement with earnest money that fell out of agreement. We signed an agreement with South Mall this morning. So we now have that under agreement of sale. Its adventurous, it’s -- I would say it’s the question. I think the last call is financing an issue. I said no, I think I now reverse my answer to the question and say yes it is. But we are focused on disposing those three assets and we’re confident that we’re going to get it done.

Ben Yang - Evercore

Got it. And why did these previous sales fall out? I mean sounds like financing might be an issue or anything else from diligence that kind of comes up?

Joe Coradino

No, actually it was in the most recent one, it was a financing issue. I mean with Hanover we've improved the property as I mentioned we now have the Burlington Coat moving into the least anchor position. And we think we'll be able to successfully sell that asset.

Ben Yang - Evercore

Got it. Thanks guys.

Operator

The next question will come from Daniel Busch of Green Street Advisors. Please go ahead.

Daniel Busch - Green Street Advisors

Thank you. With regard to the occupancy cost ratio finishing the year at 12.7, can you remind us what your target is from these deals?

Joe Coradino

The target is going to vary by merchandise category, but our goal is to continue to increase that occupancy rate. I think the near-term goal for us is moving up to 12.8% at the end of 2014.

Daniel Busch - Green Street Advisors

I guess, I just want a little more color on maybe how the, on average the occupancy cost ratio changes between your premier malls and then going down the quality spectrum. Can you sign the deal, the premier mall is at 17% or is it more like 15%?

Joe Coradino

No certainly we can. We do disclose in a supplemental the occupancy cost by tier. So I think it reflects what we would expect to see going forward certainly as you move up the quality spectrum. We’re able to drive the occupancy cost at a higher level.

Daniel Busch - Green Street Advisors

Right. But the premier mall is only I guess slightly higher than the core growth from the occupancy cost ratio disclosed. I guess, my question is that we see more embedded in higher rent growth opportunities in the premier mall compared to the core growth. And then looking at opportunistic being quite a bit lower than those tiers, is that actually a little more rent opportunity as lease expires in that piece of the portfolio versus what we may see in the core growth.

Joe Coradino

I mean, I think the answer to your question is we think one of the opportunities that we have as a company is driving occupancy in both the premier and core growth assets. And I think, we’re beginning to accomplish that and in ‘13 we’ll continue to do so. The one of our goals in the core growth portfolio is to begin to really move those assets. Some of those sit at 380, 390 a foot to take those north of $400 through merchandizing. And I think in the end that also presents an opportunity for us as the rollovers occur to drive those rents. But in that premier group, your specific question, it sits at 13.2 right now and we think there are significant opportunity to take that north of 15.

Daniel Busch - Green Street Advisors

Okay. Switching gears, what’s the strategy remaining at the strip center portfolio. Are you actively marketing those files remaining asset along with the three non-core malls.

Joe Coradino

That’s a too do for 2014. We have a joint venture with one partner and we are -- we will begin and hope to execute on a number of those sales this year.

Daniel Busch - Green Street Advisors

Okay and just one last question, following up on Christy’s question from earlier with regard to $50 million to $60 million redevelopment spent. As redevelopment picks up particularly with bigger project at some of your better centers, are you guys planning on providing disclosure some of your peers that outline the potential spend and estimated deals?

Joe Coradino

Yeah, I think we have done it historically. To be honest with the most of the spending that we have in our budget other than the Gloucester Premium Outlets, a lot of its kind of one off adding boxes or finishing up its dollars allocating to finishing up leasing on some of the properties that made it through our less redevelopment site cycle with still some vacancy, for example, Voorhees Town Center and Plymouth Meeting Mall. So when we initiate new redevelopment projects we will include the disclosure that we have customarily provided to investors.

Daniel Busch - Green Street Advisors

Okay. Great. Thanks guys.

Operator

The next question will come from Michael Mueller of JPMorgan. Please go ahead.

Michael Mueller - JPMorgan

Yeah. Hi. Few things, first of all, it looks like you pulled Beaver Valley from the to be sold bucket, so can you just talk a little bit about why now and what’s going on there?

Joe Coradino

When we put that on the market, it was -- it existed in a market that we felt it was challenge from a demographic and economic perspective and with Marshalls sale sort of being an opportunity in that region to Pennsylvania sale has been close to announcing but not quite announcing building a $2 billion plant about a mile from the property, that anticipated to bring 10,000 jobs.

And so given that we thought to better of really bringing it to market right now and we have seen occupancy move in the right direction there, we have interest from restaurants, hotels, et cetera, for outparcel opportunity, so we are looking really to harvest the value and would be a little bit more sort of watchful in terms of what the opportunities really are there.

And by the way that all true for other assets in our portfolio as well, I mean you heard about Washington Crown that’s a property, a couple of years ago we would have taken to the market, today it has an impressive list to tenants who would either have recently moved in or in the process of moving in and we have a pipeline of transactions that we are anticipating executing. So, again, either we are just being a little bit more, we want to make sure we harvest the value that’s there.

Michael Mueller - JPMorgan

So, likely you are still selling it but it is just further down the road at this point?

Joe Coradino

We may sale it or we may not sale it.

Michael Mueller - JPMorgan

Okay.

Joe Coradino

I mean it’s -- it remain to be seen, it depends on, again, we always talk about that opportunistic bucket as either up into the core group or out, and we’ll have look at that same test for Beaver.

Michael Mueller - JPMorgan

Okay. And couple of questions. Is this a last year that third quarter tax credit yet?

Bob McCadden

No. We still have a couple of years left on this. So there is actually two tax credits that we have received and I can give you the details, but they are laid out in our 10-K filing which we will make in another week or so. But we have another couple years left on the larger balance and there is some (inaudible) years following that.

Michael Mueller - JPMorgan

Okay. Got it. And then you mentioned the $0.04 dilution if you sold the malls that were currently being marketed mid-year? What is that assume for redeployment proceeds or just kind of pay down.

Bob McCadden

Yes. That’s pay down at our marginal cost for financing.

Michael Mueller - JPMorgan

Got it. Okay. That’s was it. Thanks.

Operator

(Operator Instructions) The next question will come from Linda Tsi of Barclays. Please go ahead.

Linda Tsi - Barclays

Yeah. Hi. In terms of bringing in more restaurants into your malls, is this a relevant strategy across your portfolio, in another words is it equally true across the premier core gross opportunistic malls or would you still prefer apparel retailers for certain mall types. I guess you sort of touched upon it with that your comment of brining in your restaurants to Beaver Valley.

Joe Coradino

Yeah. I think, Linda, that, it is a relevant strategy across our portfolio. I think as you move down the quality spectrum, you -- the kinds of restaurants you put in become more local if you will when you move into that opportunistic group, to the extent you are going to put a restaurant in, its unlikely that some of the national theme restaurants would locate there.

But we think it has application across the portfolio and really, I mean, Plymouth Meeting is a great example where the -- if you took the sales volumes of all the restaurants at Plymouth Meeting that we put in, not including the newly opened Uncle Julio’s by the way. They exceed both with the department stores are doing, in terms of sales volumes. So it has become a significant anchor at Plymouth Meeting and we see that incrementally as we had one or two restaurants to other malls also.

Linda Tsi - Barclays

Thanks. That’s helpful. And then just a follow-up, what is your expectation for renewal spreads in 2014? Can we expect the similar level to what we saw in ’13?

Joe Coradino

Well, I would add that we were -- through November, we were plus 4% in renewal spreads and we signed a series, a couple of large format international retailer to our portfolio, which really dragged us down, but it was the right deal to do. I think going forward if you look at ’14, we're going to want to be north of 4% in terms of our renewal spreads.

Linda Tsi - Barclays

Thanks.

Joe Coradino

You're welcome.

Operator

The next question will come from Ki Bin Kim of SunTrust. Please go ahead.

Ki Bin Kim - SunTrust

Thanks. It looks like your occupancy picked up a lot in the fourth quarter If you normalize, I know it is probably hard to do, but if you had to normalize some of the shops that are opened in the fourth quarter. What would your sales per square foot number look like? I mean, I would guess it’s up, so maybe it would be actually a positive comp, would that be a fair estimate?

Joe Coradino

Given that limited operating history of some of these stores, I think it's really very hard for us to project what the impact would be on our comp store sales. But suffice to say, we're looking, any time we're adding tenants to debate -- overall be accretive to our portfolio metrics, but really we just be guessing at this point.

Ki Bin Kim - SunTrust

Okay. And going back to the Gallery at Market East, I think you mentioned that you're looking at a JV partner. Would this potential partner -- did you, well I guess the first question is, did you identify it as partner? And the second, would the partner be -- would it be just a pure financial partner or someone with development experience?

Joe Coradino

Well, I'd say that we are considering JV partner in my remarks and we are. And it's -- I think we're primarily looking to find ways to be more -- given the size of that project and the potential capital spend, we're just looking for opportunities to be able to make more a decision that’s driven by being very careful in our deployment of capital.

Ki Bin Kim - SunTrust

Okay. And in your opening remarks, Joe, you mentioned that your -- I think if I heard correctly, you're looking at twice as many deals this time around versus last year. I wonder…

Joe Coradino

I did say that wrong.

Ki Bin Kim - SunTrust

Did you say that?

Joe Coradino

That's correct. I said that.

Ki Bin Kim - SunTrust

So I was wondering if you could just maybe add a little more color on that in terms of what does that mean in terms of square footage? And if you -- putting those, that comment in totality, what does that mean for -- is that representing 50 basis points of occupancy or 100 basis points. So I was wondering if you could add a little more, some more parameters around that.

Joe Coradino

Well, I've mentioned two things in my remarks; one is over 200,000 square feet of deal signed in December or late in the year more accurately. They're going to move in '14 and I mentioned twice the volume. We have over 300,000 square feet of leases in lease negotiations right now. So combined, you're talking about somewhere between 500,000 and 600,000 square feet in transaction that represents, do the math.

Bob McCadden

We expect our occupancy to go over 93.5. We would expect to see 100 plus basis points improvement by the end of 2014.

Ki Bin Kim - SunTrust

Okay. And just last question going back to Sears and JCPenney. And I'm sure this pile the ranges widely, but if you had to re-tenant that to another anchor tenant of similar size. Typically how much should we expect that you have to put in terms of redevelop more CapEx or was it that -- as that I involved that kind of re-tenanting for a box like that?

Joe Coradino

I don't think we know the answer to that question, because as you -- when you frame the question it's a situation-by-situation. I mean, we're doing a deal right now where we're replacing a series box and the unique situation is that Sears also occupied mall space, in addition to box at about a 48,000 square foot store plus mall space. So that uniqueness -- so that is we're taking back to 48,000 square feet, expanding that box, we are taking back mall space.

Again, each one is unique. So it will be a difficult question to answer. I think it’s safe to assume that given the rents that the anchors are paying, which is typically low-single-digits if that, that there is an opportunity to make an investment in the box and delivering a return that’s accretive to us.

Ki Bin Kim - SunTrust

Okay. That's it for me. Thank you, guys.

Operator

Ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Joe Coradino for his closing remarks.

Joe Coradino

First of all, thank you all for participating and for your questions. I’d just like to close by saying the year ahead holds many challenges and opportunities for PREIT. We believe that among those are key priorities. We need to execute on our disposition strategy, drive our operations through the introduction of more high productivity and experiential tenants that are winning the battle for the consumer dollar and finalize our redevelopment plans for the Gallery. Doing all of this without compromising our balance sheet or NOI growth. Thank you all very much for participating.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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