Pennsylvania Real Estate Investment Trust's CEO Presents at Citi Global Property CEO Conference (Transcript)

Mar. 4.14 | About: Pennsylvania Real (PEI)

Pennsylvania Real Estate Investment Trust (NYSE:PEI)

Citi Global Property CEO Conference Call

March 04, 2014 9:30 AM ET

Executives

Joseph F. Coradino – Chief Executive Officer

Robert F. McCadden – Executive Vice President and Chief Financial Officer

Unidentified Analyst

Welcome to the 9.30 AM session at Citi’s 2014 Global Property CEO Conference. This session is for investing clients only, and if media or other individuals are on the line, please disconnect now. Disclosures are available, appear, and on the webcast on the disclosures tab. We’re pleased to have with us Pennsylvania R.E.I.T and CEO, Joe Coradino.

Joe, we’ll turn it over to you to introduce your team and provide a couple of minutes of opening remarks and then turn it back over to me for Q&A.

Joseph F. Coradino

Thank you. Well, first of all let me introduce Bob McCadden our CFO; Heather Crowell, our VP of Corporate Communications and Investor Relations.

Good morning, everyone. I would like to start by reviewing 2013. It was a great year for us one in which we really took a seat at the table. So our report card if you will is our balance sheet is strong and fundamentally different than it was 18 months ago.

We have lower leverage than we’ve had since 2005 and more liquidity than we’ve had in recent history. 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 square foot and occupancy of 75.5% at this time last year.

FFO is adjusted increased to $1.92 per share, an increase of 5% from last year. We increased our dividend by 25% since last December. We reduced our debt by over $0.5 billion in the past two years and reduced our bank leverage to 48.4%, the lowest since 2005. In April, we renegotiated $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 in the bank credit markets achieving a rate on the five-year term loan that’s 25 basis points lower than our credit facility. Interest costs have been substantially reduced. 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 premier malls.

Our leasing pipeline continues to be robust. At the end of the year, we had 212,000 square feet of leases executed to take occupancy in 2014. And currently have choices many new deals in our legal pipeline as we did this time last year.

We sold six properties last year, three of those were low productivity malls, which not only improves our metric, but also improves our leasing leverage. We have three malls in the market at this time, North Hanover Mall, South Mall, and Nittany Mall.

With operations in our balance sheet stabilize and our portfolio composition improving, we are looking towards the future and our growth opportunities while maintaining balance sheet focus. One of our key redevelopment opportunities is Gallery, which we continue to believe a significant untapped value. We’re making progress in a number of discussions with catalyst tenants working towards securing public financing and considering return scenarios. We’ve been cautious not to commit until we have all of the key pieces in place to deliver an appropriate risk adjusted returns.

Now, I’m sure many of you heard about the transaction we announced yesterday by Springfield Town Center from Vornado. Make no mistake about it. We think this is going to be a great property. There is currently over 70% committed when the operating anchors are included, it’s located at the Springfield Interchange I-95, I-395 in the Capital Beltway, and it’s located in Fairfax County, one of the wealthiest and high income producing counties in the country.

Committed tenants include Topshop Michael Kors, H&M, Forever 21, Dick's Sporting Goods, Regal Cinema, Monteiro Group, Wood Ranch Barbeque among others. We’re confident this property will quickly take its place towards the head of the class among our premier malls or NOI grew by 4.9% in 2013.

We sell per square foot greater than $500. And it’s important that we point out to you that all of the underwriting was completed on Springfield Town Center assuming a conservative occupancy, cost ratio and sales per square foot $450.

With Springfield Mall, the complexion of our metrics changes. The percentage of NOI coming from premier assets increases to 44.5%, and sales per square foot grow to over $400, assuming the asset does $500 per square foot and we sell our non-core assets. And that’s assuming, our sales with the other properties remain relatively flat.

Let me also settled the other question on your mind leverage. We work so hard to get your balance sheet in order why this now. And you will have issue equity to fix it. We believe we have a number of other options, so that we don’t take that task. We have more power centers to monetize. We talked in our last call about potentially changing the gallery, which also have to starts some of the proceed risk of that project.

And we have additional non-core assets on the market and we may consider non-controlling interest in some of our better properties. We’re in this business to making long-term real estate investments, with high quality malls and the average rating. We believe the strategic benefits, so that in is caliber of asset to our portfolio that way to short-term in dilution. At the end of the day, having this asset in our portfolio will be good for PEI’s investors.

With that I will turn it up for questions.

Question-and-Answer Session

Unidentified Analyst

Great. We will take it of with the opening question that we’re asking each one of our round table discussions. What do think of the most misunderstood saying barriers your company specifically today? And what are you doing through adjust it?

Joseph F. Coradino

Well, quality of our portfolio 80% of our NOI comes from assets doing over $418 square foot in sales or a for a long-time we’ve been defining by our lower quality assets, and I think that’s relatively misunderstood, and now we’d add to that the one thing we really like to communicate as that we have a completely transform management team and as a result we’re keenly focused on the core business and continuing to drive that quality metric.

Unidentified Analyst

What do you think are the greatest misperceptions that the investment community currently has about Class B and C margins general? Your mall is specifically, if I think about sort of Class B malls, what do you think are the greatest misperceptions?

Joseph F. Coradino

Well, I think first of all which bifurcate C – B and C. I’m not sure investors have misperception to that C malls. And we’re to the extent we continue to own them our pretty focused on disclosing of those assets in a relative near-term. I think from a D mall perspective the misconception is that that these properties or not salvageable I think we’re seeing a significant movement by tenants to the B mall environment, and I think they are both mall based tenants like Body Central and Charlotte Russes, a couple of examples, as well as some power center tenant typically including all the Rosses and TJXs and Dress Barn et cetera. So, I think as it relates to the B mall, I think that they have a solid future in front of them.

Unidentified Analyst

If I think about, you tend to be grouped then with [indiscernible] what, how do you differentiate your story when talking to investors, when they say why should I buy Henry?

Joseph F. Coradino

Well, as it relates to the two examples you gave, I think there is a couple of things to no doubt about Henry one; we have eight of 20 malls in the Philadelphia market. So we had since control 45% of the mall space, I mean excuse me 45% of their space in the fifth largest retail market in the country. I think that’s a significant differentiator, and I think if you look at the acquisition at Springfield Town Center will give us a significant presence in the second top 10 metro, so I think from that perspective their key differentiators.

Unidentified Analyst

And then in regards to Springfield Town Centers I apologize for not being able to be on the cal yesterday, but I just read the transcript, it just wanted to talk about you mentioned in your opening remarks 70% committed with anchors, if I and then turn numbers that you were talking about yesterday, I think I heard 30% lease – 30% prelease.

Joseph F. Coradino

Yes I mean if you look at, if you look at our leases – some leases out for signature on a inline basis with that numbers as low 50s.

Unidentified Analyst

Low 50s.

Joseph F. Coradino

But I would add to that a very robust pipeline of prospects.

Unidentified Analyst

Okay, so 30% committed, and or 30% lease, 50% committed on an inline basis, and thinking about that 4.1% initial estimated deals, what sort of your confidence level in getting 75% by a year from now, I know that, I’m sorry by October, I know that you’re going to be more involved in the leasing up until that point.

Joseph F. Coradino

Well, a couple of clarifications, first of course we will most likely take place it in first quarter 2015. So I think in terms of achieving that goal, our goal is to surpass that.

Unidentified Analyst

So with the 75% in March or less than 75% at opening in October.

Joseph F. Coradino

75% it’s the – are closing this earlier 75% on March 2015.

Unidentified Analyst

Okay.

Joseph F. Coradino

And our goal is that, prior to that some point in early 2015 surpass that that 75% again to relatively robust with the prospects to the property.

Unidentified Analyst

Okay. And you talk a little bit about the funding of the equity portion, if I think about the mix of kind of non-core assets sale versus you talked about JV of the Gallery, JV of other better quality mall. How do you think about the mix of the proceeds from the type of the sales non-core versus some of the better centers?

Joseph F. Coradino

I think essentially you would have to prioritize those efforts. Clearly, we think first and foremost there’s a number of non-core assets on the mall – on the market that we would like to bring the closing prior to that proceeds from that would be in the $50 million to $60 million range.

And, second is the power center portfolio, and these are not sequential by the way, by any stretch there will be more. At the same time, as the power center portfolio is difficult to estimate for purposes, discussion of proceeds from that, but there are two what I would consider to be trophy power centers, where we have had significant reverse increase from a number of firms that are presenting here.

So we have interest in the power center portfolio, and that will be a second priority. I think the Gallery sits third on the list. And fourth is showing an interest in some of our higher-quality assets. And we look at that is kind of a tier down from the top assets if you will. So we will be talking about a Cherry Hill or that level of quality showing an interesting in it.

Unidentified Analyst

As you were looking at this deal and underwriting this deal, I’m thinking about it relative to your cost of capital. As I think about, sort of the mix of those asset sales and what the combined with the equity that you are issuing in Tornado. How do you think about the cost of equity kind of the blended cost of equity on the transaction?

Joseph F. Coradino

Well, I think, our – we view the cost of equity somewhere in the high single-digits when you blended in with our cost of debt, you’re probably talking about net of 50% leverage basis, somewhere in the Texas.>

Unidentified Analyst

And thinking about the 4.1% initial yield, I think you’re taking about – I’m sorry what was those 5%, 5.5%....

Joseph F. Coradino

5.5%.

Unidentified Analyst

…by 2018. What sort of beyond that, I mean, what kind of annual level of NOI growth do you see coming from this asset on an annual basis?

Joseph F. Coradino

Well, we come up back at our performance some of our premier group in 2013. We had NOI growth that was twice the company average almost twice we had 4.7% growth in the premier assets against the 2.6% portfolio average. We would expect to see growth in that kind of about 4% range on the long-term basis.

Unidentified Analyst

And just to clarify on the debt portion, I think you are currently expecting that the asset will be unencumbered out of the box?

Joseph F. Coradino

Right.

Unidentified Analyst

Was that based on – was that cost of debt based on your sort of line of credit or is that based on sort of an assumption for premier that you would expect to put on the asset?

Robert F. McCadden

We have – as Joe mentioned we entered into a couple of term loans earlier this year a 7.5 year term loan. We did borrow some of that under those earlier to repay our credit facility. So we would be looking in the short-term to continue to finance this project until it stabilized using bank credit. We also have a number of assets that are coming off of financing in 2015, some of them are better quality assets including Willow Grove Park, Patrick Henry Mall, et cetera. So when you look at that we’ve also articulated a view to continue to try to unencumbered some of the assets on our portfolio. So we’ll take a look at where we are in 2015 and 2016, and make a decision as to which assets if any we will encumber with long-term mortgages and where we might go to the bank greater by replacement market as well.

Unidentified Analyst

And if I think about this 3 million square feet of additional entitled space, and I think you talked on the call that you didn’t really describe much value to it at all, but is this sort of two years, five years, ten years out, what could you envision with those assets?

Joseph F. Coradino

Well, I think there is obviously residential opportunities there, hotel opportunities, as well as potentially office although the D.C. office market is, on total not a robust market at this point. I think it’s probably a more into three to five-year plan.

Unidentified Analyst

Three to five-year plan.

Joseph F. Coradino

To begin realizing that. And if you think about the 3 million square feet, it’s also some portion that can be entitled for retail. So there is an opportunity to introduce additional retail at the property.

Unidentified Analyst

Okay. Is anyone else has any questions from the audience at this point? Go ahead.

Unidentified Analyst

Can you walk us through your thought process on why you decided to do this transaction as opposed to buying back stock when you are trading such a large discount to NAV?

Joseph F. Coradino

Well, we think it’s a great asset. It’s a great real estate play, no question about that, given its location, given the demographics, the tenant roster, historic anchor performance et cetera. And from our perspective given where our portfolio is and we’ve been through our bag of tricks if you will, we’re executing on all of the – the points that I made earlier around leverage reduction, strengthening our balance sheet et cetera. And portfolio quality continuing to throw some lower quality assets and driving the premier group. We think is a key way to drive the NAV gap if you will right, that we – the discount that we think we’re trading that. Now, you obviously asked the question, you’re going to say that you think buying back stock may have been a better way, at this time we essentially chose not to do that.

Unidentified Analyst

Can you – we talked about the Gallery a little bit, can you sort of walk through your vision for that project? And as you think about JV in that asset kind of where with the timing or something like that has been above the near-term would have be sort of post three development, can you talk about your thoughts on occurs to?

Joseph F. Coradino

Sure, first of all, let me take a minutes just sort of describe the Gallery for those of you who may not be familiar with it, it’s in the Chambersburg of an enclosed mall that was built in the 70s, it’s three blocks are real estate on market Eastern Philadelphia that sits over the market east train station, 20 million commuters a year coming in/and out of that station, in/and out of the Gallery.

It is a immediately adjacent to the convention center the hotels associated with that and the convention – and the constitutional center, Libertyville at the Eastern end of the property. I think you also have to understand that Philadelphia has really become a Vibrant City we have the third largest CBD population in the country at this point and the fastest growing. So if you look at the Gallery is right for a redevelopment and in our perspective is that we think that food best passion a number of the new and emerging retailers are consistent with the tenancy and vision for the property.

The goal in terms of the steps prior to redeveloping the property really have to do with one simplifying the structure of ownership with the City of Philadelphia, step one. Two, is securing the significant amount of public financing. Step two and three is securing a number of what we will call impact tenants to insure the leasing of the project. All that needs to be accomplished prior to going forward and I’ve also talked in previous – that previous times about the fact that we’re also looking to securing a joint venture partner to help mitigate the risk associated with that.

Unidentified Analyst

From the purely a financial standpoint or I mean with the person to be, what the in joint venture partner being active and for the sort of – so we think…

Joseph F. Coradino

We’re looking at to both options at this point.

Unidentified Analyst

On the development, okay. Gotcha. Good can we step up to the microphone, I’m sorry. Thank you.

Unidentified Analyst

Related to the Gallery in the whole continued movement downtown in comments about this is the product of market across the street and have place in the vision and whether casino gaming is part of anything going out of the Gallery.

Joseph F. Coradino

The first company enters to disclosure. We own 40% of the land that because that the casino with proposed go on at Asian market. We’re not to be clear not a partner in the proposed casino simply a seller of land. There are a number of locations in Philadelphia were six that we’re initially proposed with that hearings that occur, the rumor may tells us, all right that the casino it is in market is a high upon probability.

I think you are probably six months away from a decision, and absolute decision on that we see that has additive to what we want to do and we see that because the proposed casino development would include a hotel on the part so as well and street level retail. So we see that is additive. The market is corner by the way is a kind of the last month hearing, and in the CBD right now is undergoing a lot of development, you know as we speak and that’s the development I should say.

Unidentified Analyst

[Indiscernible]

Joseph F. Coradino

In the casino.

Unidentified Analyst

[Indiscernible]

Joseph F. Coradino

Oh! Sure, I mean we’re it’s a obviously being with we own three blocks of real estate on market as we and our project will be a when it goes forward with significant catalyst, I mean a significant catalyst. And we think the time is right, as you take a little bit in the Philadelphia that everyone speaks about Philadelphia again take about Rittenhouse Square has being the center of population in income, we actually look at the data today, it’s Washington square which is do sell of market easily the housing values of Washington square equipped – Rittenhouse Square the income pass as well. So in terms of the geographical occasion of market is given the demographic 50 is the right time in right place.

Unidentified Analyst

[Question Indiscernible]

Joseph F. Coradino

No. No, they are exclusive.

Unidentified Analyst

As I think about your redevelopment and your sort of renovation capital that you are putting to work over the next few years – three to five years, can you talk about how your malls are evolving? What changes are you making at the asset level in terms of tenant mix and your malls in general need to become more experiences to survive these days that’s what the retailers want., can you talk a little bit about the changes that you are making within your portfolio at the asset level?

Joseph F. Coradino

Sure. Well, we would like to think that we were – we led the movement of bringing dining and entertainment to malls. And so we’ve been deploying that strategy in a number of our properties around your point creating experiential retailing. We would like to call it kind of the socialization of the mall.

Malls really need to become more than just places the shop, so we’ve done a number of what we believe to be innovative things in our properties. At Plymouth Meeting Mall, we introduced the first Whole Foods in a mall environment in the country. We also brought in a number of restaurants, half a dozen restaurants, most recently opened up [indiscernible] and it is really taking Plymouth Meeting when we bought the asset, it was performing its sales around 250 a foot. It sits now close to 330 a foot, and we are now able to complete the leasing of the mall interior which was originally a goal, somewhat delayed by the economic downturn.

At Plymouth, we've also introduced healthcare. So have a 20,000 square foot ambulatory care facility. If you take and look at Moorestown Mall another example where we did something we believe is quite innovative. We took two celebrity chef restaurants in Philadelphia moving into Moorestown Mall restaurants that the people stood in line, in queue on the phone to get reservations out in downtown Philadelphia are opening up into Moorestown Mall. We also opened up a Regal Premium theater, one of only about a dozen in the country.

So again experiential retailing, we think it’s important. We think that restaurants and entertainment are part of the key to also attracting the millennial to the mall. I think it’s sort of more on that question a little bit and talk about Internet if you will. We have introduced the mall app at this point, so a customer can go to one of our properties, download our app into a product search at our property. So they could find where they could get a [indiscernible] or a pair of Romany jeans what the stores carry and what the pricing is.

So, again, something that we think it’s important that we embraced the Internet and we be able to replicate that experience. So as the – as we begin to create this experiential retail, we want to make sure that the customers than just dining at the property.

We also have introduced a Wi-Fi in a number of our properties, and we’ll continue to do that as well. And we’re – as many of our peers are looking at ways to have the next day delivery, it will takes us a bit longer to get to that point, but it certainly – our goal of ours right now to begin what we would like to say embrace the Internet.

Unidentified Analyst

What sort of retailer participations you have and building outside app and sort of getting more retailers involved with embracing and tying down the new channel initiatives to the mall at the mall level?

Joseph F. Coradino

[Indiscernible]

Unidentified Analyst

Sorry, it s– so about 80% of the retailers on the mall basis participate in the product search app and what was the second part of the question? In terms of sort of the structural changes that you’re making in the malls, what are the retailers sort of doing differently?

I think, I mean I think the retailers are there goals are same is ours, their goals are to create experiences as I think we talked a little bit about, how that gap is find out the gap is leading the way with this in-store pick up and I think that a way that feature for some of these retailers but it kind of take sometimes if we don’t necessarily have the infrastructures, but that’s one of things that if they’re doing anything long-term our goals are aligned, there it’s a merge the brick-and-motor stores the online shopping. Are you creating any sort of off-store at the mall, but off store kind of stores?

Joseph F. Coradino

No, not at this time.

Unidentified Analyst

We haven’t seen too much and we always seen a little bit, so I think about that. Okay. Anyone questions. May be we can talk about leverage a little bit sort of what your current goals, I think we may seen in terms of with the acquisitions, but can you talk about sort of a year out, three years that where would you like to be in terms from a leverage perspective?

Joseph F. Coradino

Well. I think we are pleased and we are able to get 48% as we currently stand in leverage giving that, we won’t moving at the highest leverage in the sector, I think we want to execute on the Springfield transaction and to everything that we can in terms of asset sales, JV’s, et cetera is at a reference. To keep that our leverage in mutual transaction, I think you should work pass that we got receiving number both over 45% from a leverage perspective. Balance sheet, sense of our balance sheet is obviously important to us and to our shareholders.

Unidentified Analyst

So starting into the CEO role, can you talk a little bit about some of the changes that you’ve made internally within the organization?

Joseph F. Caradino

Sure. Well and I think, change number one that we did is pretty – added to no for a moment. I think we’ve got a focused on the core business and energy behind us and a focus behind this metric driven. I think the organization is being flatten to great extent, so people are really in touch with the core business from that, visiting assets understanding issues, problems, concerns et cetera.

On the front lines is supposed to learning about through the change a command if you will. So that’s one step, I think another thing that we’ve done is to bringing a number of new fresh talent. We have – in our home office which employes that 200 people over 10% of that staffs is new. And we are pretty pleased we have that trends from some industry leaders from timing from Maze ridge from GDP west field et cetera, I got some really solid pros in there that are bringing in fresh ideas and really helping them motivate the team. I think our results last year demonstrated the energy that we have around the business and around differentiating three and I think many of the moves that we’ve made in including the anticipated acquisition Springfield really around it’s under free.

Unidentified Analyst

We’ve got a minute left; so I will end with the rapid through rapid fire questions. Okay.

Joseph F. Caradino

Yes.

Unidentified Analyst

Yes. What working start NOI growth to be for your property sector in 2016?

Joseph F. Caradino

Yes. We’d like to see continue to be North of 3%.

Unidentified Analyst

If you could snap your fingers and so a portion of your asset today with no strength of that. In order to create your ideal portfolio, what percentage would you sell?

Joseph F. Caradino

20.

Unidentified Analyst

Are cap rates for your asset higher or lower one year from today?

Joseph F. Caradino

No. Well.

Unidentified Analyst

Thank you. Thank you guys so much.

Joseph F. Caradino

Thank you.

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