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Pennsylvania Real Estate Investment Trust (NYSE:PEI)

Q1 2014 Results Earnings Conference Call

April 24, 2014 11:00 AM ET

Executives

Heather Crowell - Vice President, Corporate Communications

Joe Coradino - Chief Executive Officer

Bob McCadden - Chief Financial Officer

Analysts

Christy McElroy - Citi

Nathan Isbee - Stifel

Ki Bin Kim - SunTrust

Craig Schmidt - Bank of America

Ben Yang - Evercore

Cedrik Lachance - Green Street Advisors

Mike Mueller - JPMorgan

Linda Tsi - Barclays

Michael Bilerman - Citi

Operator

Good morning. And welcome to the PREIT First Quarter 2014 Earnings 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. Please go ahead.

Heather Crowell

Thank you, and good morning, everyone. Welcome to PREIT’s first quarter 2014 conference call. During this call, we will make certain forward-looking statements within the meaning of Federal Securities laws.

These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts and are subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company’s SEC filings.

Statements that PREIT makes today might be accurate only as of today, April 24, 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, and good morning. I want to start out by thanking two of our Board members for their contributions to the company over the past several years, George Rubin and Ira Lubert.

Most notably, George Rubin has been an instrumental member of the executive management team, driving our acquisition, disposition and development efforts for most of the company's history.

He has been a leader in our industry and he is a dear friend. We believe these changes will help to strengthen our corporate governance position by reducing the size of the Board and leaving us with an increased proportion of independent directors.

When we began our last call, we discussed being enthusiastic and optimistic about 2014. I want to assure you that the even the worst winter in 25 years and the second highest snowfall totals own record in our region have not dampened our enthusiasm.

To be clear, excluding weather-related expenses, same-store NOI was up over last year's first quarter. The geographic concentration of our portfolio has amplified the impact of the unprecedented 2013, ‘14 winter weather with record snow removal costs and utility expenses, but the winter is behind us.

The business overall is performing well and conditions are positive, demand for space in our portfolio remained strong and leasing activity is healthy. We are reconstituting our portfolio to one focus on high quality malls in the Eastern United States that is well-positioned to deliver NOI growth above our peers. We remained steadfast in the execution of this strategy and are excited about our future.

Same-store revenue grew by a healthy 3.8% this quarter. Our renewal spreads were 7.4% highlighted by 12.8% in our premier assets and over 19% on transactions where the term was greater than five years, strong indicators for the future.

And we have over 0.5 million square feet of new leases to take occupancy this year, including by the way, transaction executed yesterday, which explains the difference between the release and the script today.

These new leases will sharply enhance the quantity, the quality and strength of our tenant roster, including Century 21, Forever 21, Ulta, the Buckle, Francesca's, Clark's and Dick's Sporting Goods among others.

The transformation of PREIT is well underway. The pending acquisition of Springfield Town Center when coupled with the redevelopment of the gallery with Century 21 as its anchor, the remerchandising of our core growth malls and our disposition program will ignite this transformation.

Regarding Springfield Town Center whenever there is a sizable acquisition there is always execution risk. However, we are unwavering in our confidence that the acquisition of Springfield Town Center is in the best long-term interest of the company. The strategic location, superior demographics, quality of the renovation and demonstrated tenant interest confirms the potential of this property.

The property has it all, it’s accessible to mass transit at the confluence of three major interstate highways, it is located in one of the densest, highest income, well-educated, under retail trade areas with unemployment levels significantly below the national average. It has it all.

Historically, anchor sales worth the high end of expectations and several of the anchors have either completed or in the process of modeling in anticipation of the grand opening. Additionally, the current lineup of tenants, including a luxury cinema, upscale fitness center, new to market dining experience and top tier retailers is driving significant tenant interest.

Leasing progress is strong, with the approximately 65% of the in-line space commented and with a robust queue of prospective tenants and progress meeting our expectations. When Springfield Town Center is added to our portfolio and our non-core malls are sold, upon stabilization, our premier and core propriety portfolio are expected to generate in excess of 89% of company mall NOI that is transformative.

Company demographics will also be transformed. On a pro forma basis the weighted average number of household in the company’s trade areas with income greater than $75,000 would increase by approximately 3.75% and weighted average with income greater than $100,000 would increase by approximately 5.5%.

The median home value within their respective trade areas will increase by approximately 6%. We look forward to taking you through this stellar propriety and sharing our progress in the months to come.

We're also excited to announce Century 21 department store to anchor the eastern end of the gallery in approximately 100,000 square feet of the former [Strawbridge’s] (ph) building. The iconic brand shows the gallery for their first store outside of New York Metro area, which is testimony to the quality of the location with its access to mass transit, tourism, the office population and the residential neighborhood of Philadelphia.

Century 21 with its affordable luxury merchandise is serving as catalysts for other retailers’ restaurants and entertainment uses. The tenant is a perfect match to the new demographics of the Philadelphia CDD and it’s consistent with our vision of creating Philadelphia's only transit-oriented multi-used property offering excisable luxury retailing and artisan food experiences. We are creating a new retail corridor for Philadelphia that will be anchored by a very successful Macy's on one end and similar successful Century 21 on the eastern.

As the project has become more define, we expect to discuss costs and return projections during our second quarter call. We are focused on a more streamline project that is sensitive to our capital investment without compromise to our high single-digit return expectation for this asset. We continue to pursue public financing and discussion with potential JV partners and we believe this transaction enhances our ability to accomplish both.

Recent sales tends are not impacting tenant demand at our premier and core growth proprieties, giving limited supply and improving economic conditions. Leasing has been strong in our portfolio as we implement our propriety remerchandising plans.

These plans were design to improve the performance of key proprieties to selective tenant replacements. At Viewmont Mall, a mall that is historically over 95% occupied. We are successfully rightsizing tenants and selectively closing underperformance stores.

We have executed this with Forever 21 and are at lease with several other impact transaction that will drive rents NOI. The results are expected to deliver stronger sales and ultimately move the property into our premier group.

A similar story can be told at Jacksonville Mall where Forever 21 will strengthen the property’s draw as they are only store within 50 miles. A testament to the improving economic condition can be seen in the changing retail line-up at Washington Crown Center, one of our opportunistic properties.

We’re pleased to announce that we have signed leases with Ulta and Jo-Ann Fabric will join Ross and Marshall’s solidifying the retail hub in this market and dramatically improving the credit profile and performance of our tenant base.

In sum, we concur with the view expressed by most sell-side analyst that it is essential to add a high-quality asset base and are executing accordingly. We have improved our portfolio and are recasting our demographic profile and the strength and quality of our earnings.

As we discussed previously, we are intent on maintaining a strong balance sheet with leverage below 50% and in liquidity. Towards this end, we are underway with a number of transactions. We’ve begun the process of showing our interest in Red Rose Commons and are exploring opportunities to sell the remainder of our power center portfolio and are marketing our non-income producing assets. We’re also advancing discussions to joint venture better quality assets including The Gallery.

South Mall is under contract with a non-refundable $1 million deposit and is expected to close in the second quarter of this year. There is interest and we’re making progress on the sale of Nittany and North Hanover Malls. We expect the marketing process for North Hanover Mall will be improved when Burlington Coat Factory opens in May. At this time, we are not looking at any additional acquisition candidates and are focused on executing on the major projects we have under way.

With that, I’ll turn the call over to Bob McCadden to give you more color on the company’s operating performance.

Bob McCadden

Thanks Joe. As Joe mentioned, an otherwise solid quarter was overshadowed by some unusual weather related expenses. Let me cover the operating highlights and then drill into the expense variances in a bit more detail. From an operating perspective, we continue to track our 2014 business plan objectives.

Non-anchor occupancy at our same store retail properties rose by 20 basis points. If we were to exclude our non-core assets, non-anchor occupancy increased by 50 basis points. We saw an 80 basis point increase in occupancy at our Premier properties, a 30 basis point increase in our Core Growth Malls and a 60 basis point increase at our opportunistic malls despite several malls being impacted by planned store closings early in the year to accommodate second half 2014 store openings.

Rent per square foot were up 4.8% from the same period last year with increases noted in all the property tiers. Looking deeper at our renewals stressed for the quarter, which outpaced any other quarter since recession, we are happy to report that for transactions over five years, we generated renewal spreads of over 19%. When you break it down further by property tier that underscores the relevance of our focus on quality properties.

Our Premier Malls generated spreads of approximately 13%. Core Growth spreads were up 8%, Opportunistic Malls spreads increased 6% while non-core mall spreads declined 22%. The quality of new deals we executed is also something we are proud of.

We often don’t talk about exporting goods as an anchor but they really are a traffic driver. This quarter we signed a new lease with Dick’s at Valley View Mall and across Wisconsin and are under construction with another store at Francis Scott Key Mall in Frederick, Maryland.

In addition to these deals, we signed a number of tenants that we believe will help us drive sales increases at our properties where we previously were focused on maintaining occupancy. Sales per square foot were down modestly, taking into account the shift in the Easter Holiday for March 2013 to April 2014 and more closings students know nice conditions.

Let me share some fact about the impact of snow on our wholly-owned operations. In the first quarter, we plowed approximately 390 times when we estimated that we salted over 700 times. In total lead hours, our wholly-owned malls were closed due to weather. It equates to about 66 days. In very simple terms, each of our malls was plowed on average 12 times, salted over 20 times and closed for two days.

Same store NOI for the quarter excluding lease terminations was $62.4 million, a $3.8 million or 5% decrease over the 2013 period. The increase of snow removal expenses and utilities, net of tenant reimbursements were $4.5 million. If we normalized for these items, same store NOI would have increased by $700,000 or about 1.1%.

We also experienced a decrease in percentage rents and rents from paying a percentage of the revenues in lieu of minimum rent of approximately $560,000 from amount expected to be received in the first quarter, also weather related. Interest expense decreased $7.9 million primarily from lower average debt balances and lower interest rates. In the first quarter, our average balance was $259 million slower than a year ago and an average interest rate of 4.99% with 79 basis points lower than in the first quarter of 2013.

G&A costs were up about 2.5% for the quarter, reflecting higher compensation expenses. We expect our full year 2014 G&A to be approximately $35.5 million, down from our original guidance amount. From the balance sheet perspective, we expect the remaining part of 2014 to be relatively quiet.

We have mortgage loan on Logan Valley Mall with 2014 maturity but that loan contains an available one-year extension option. Our liquidity for this remains strong with approximately $533 million of liquidity at the end of the quarter including $495 million of available borrowing capacity.

Regarding our outlook for 2014, we expect GAAP earnings for diluted share will be a net loss between $0.14 and $0.20. We expect FFO as adjusted to be in the range of $2.00 to $2.04 per share and FFO per diluted share to be in the range of $1.92 to $1.96.

We expect same store NOI growth of 2% to 2.4% excluding lease termination fees reflecting the impact of the extraordinary weather related expenses in the first quarter. We will incur approximately $0.06 per share of accounting charges related to the employee separation expenses in the second quarter. We incurred approximately $0.02 per share of acquisition expenses related to Spring Towncenter.

Under current GAAP rules, these costs are expensed. If you remember previously, such costs were capitalized as part of the purchase price of an asset. While we have a deposit for the sale of South Mall, our guidance does not contemplate dilutive effect of such sale. If we close mid year, the sale would dilute 2014 FFO per share by approximately $0.02.

Finally, our guidance does not contemplate any other material property dispositions or acquisitions. In addition, our guidance does not assume any capital market transactions other than mortgage refinancings in the ordinary course of business.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is Christy McElroy from Citi. Please go ahead.

Christy McElroy - Citi

Hi. Good morning. Just to follow-up on your comments on your disposition program and reconstituting the portfolio. On two other mall conference calls this week, we've heard of sort of a strengthening in private market demand and financing for malls sort of at the mid-to-lower end of the quality spectrum.

Many of your mall peers have undertaken or are embarking on sort of very aggressive asset disposition programs. Can you provide your thoughts on whether or not you would think about a much more aggressive disposition strategy in this mart sort of beyond the non-core malls that you’ve identified in power centers, maybe testing the waters in more of the opportunistic malls?

Joe Coradino

We think -- hi, Christie, it’s Joe Coradino. We think that initially, we want to sell these three properties. We think that’s key at this point. And one, we have under agreement with hard money up and the other two significant interests and by the way, part of that interest is coming from buyers who were looking to put together portfolios by acquiring malls from some of our peers. And as we sell those three as those become real, we will certainly look beyond that but we also have a number of properties in our opportunistic group. We think we are improving and harvesting value-add up.

The discussions I just had about Washington Crown where we recently added ALTA and JoAnn Fabrics to Marshalls and Ross. I mean, that was a property that probably two years ago we couldn’t give away. And today, we really harvested significant value and we like the approach of shelling what’s on the shelf, if you will and then continue to improve the value of some of our other assets and bringing them to market if and when appropriate.

Christy McElroy - Citi

And Joe just a follow-up on that. In your opening remarks, you said sales per square foot trends are not impacting tenant demand at Premier and core growth properties, maybe I’m reading too much into that. But can you comment sort of on the opportunistic malls and how retailer are looking at sales trends and approaching purchase or leasing? Bob, I think you mentioned 6% re-leasing spreads in that bucket, but I’m just wondering how the conversations on those malls sort of differ from those on your Premier and core growth malls?

Joe Coradino

Well, for one, if you look at the example of Washington Crown, it’s an example we are really bringing what I would call power center tenants or strip center tenants to an enclosed mall environment. And that’s one of the opportunities I think that exists with the opportunistic property to bring in, what I would consider a typical retailers although -- pardon me, also national credit retailers. Rest of you are leasing for the most part in that group of properties is more local and alternative usage. And so it’s certainly it is more of a challenge at the lower end.

Christy McElroy - Citi

Okay. And then just lastly, Bob, to follow-up on your comment on percentage rent. How much do you think of the decline in percentage rents year-over-year was weather related? And sorry if I missed this in the disclosure, can you comment on trends and bad debt expense in Q1?

Bob McCadden

Yeah. As it relates to the percentage rents or percentage sales, typically, we are estimating that for budgetary propose, we aren’t really looking at the rolling 12 performance. So we would expect, keeping the first quarter that our actual number should track very closely to our budget but we were off by about 560,000 in those two categories.

It’s hard to separate just the general weakness in apparel from the weather related, but we think the large part of that declines was clearly weather related given the effect that we had in number of store closings, days when the malls were closed. In addition, even if the malls weren’t closed, people weren’t necessarily interested in going out and hit the malls. We’ve actually seen little bit of an increase in April since the weather has got little bit better. In fact, we’ve got a report just before this call of trafficking up at many of the properties.

Joe Coradino

Christie, I would also add one thing to the comment I made about the opportunistic malls and that’s Marcellus Shale. One has to keep in mind that we have a number of properties at half a dozen in the Marcellus Shale region where there is a great deal of activity around Shale and we are seeing some indications at those properties that there is economic development occurring as a result of that. And again, we had people on the market. We took it off the market. We are staring to see some positive trends there. We think there's an opportunity to harvest value before and if we take those markets, those properties to market.

Bob McCadden

And then just a closer loop on your bad debt question, I think our bad debt expense is tracking, again, our expectations which for the last two periods have been below our long-term historical average. So we don't necessarily see any negative surprises in the bad debt area this year.

Christy McElroy - Citi

All right. Thanks, guys.

Operator

Our next question is from Nathan Isbee from Stifel. Please go ahead.

Nathan Isbee - Stifel

Hi. Good morning. Just focusing on the same-store NOI for a second, can you give us a sense of how the costs flowed through in the quarter in light of the expectations were flat same-store NOI when you -- on the last conference call in mid to late February?

Joe Coradino

Sure. When we had the earnings calls, we had closed the month of January. And if we look at the composition of energy versus snowfall, we had obviously a pretty good handle on where we were with snowfall expenses. And we have to continue to see the higher energy costs quite frankly in February and March compared to the same period last year. So it was probably snowfall earlier in the first quarter and later it was the energy-related expenses.

Nathan Isbee - Stifel

Okay. But in the release you referenced, I think $3.5 million increase over last year. I assume that was all snow costs versus energy or that was --?

Joe Coradino

That was the combination of the two.

Nathan Isbee - Stifel

Okay. All right. And then on the Century 21 announcement, I understand it's a little premature to talk about other tenants, but could you give us a sense of Century can go both ways that they're in Jersey Gardens, which is more of an outlet center as well as street retail? So they're really defined on where they go. Would you say that your visions for the property are more discounts, perhaps layering in some outlets there? What would you say you're pursuing right now?

Joe Coradino

First of, let me -- first of, hi, Nate.

Nathan Isbee - Stifel

Good morning.

Joe Coradino

Good morning. Let me give you a little sense of their configuration. They are gong to take 16,000 square feet on the first floor at Addison market and the entire second floor of 801 Market if you will. So in essence, there will be an anchor to mall primarily. So it’s one piece of that. But I think it's important to keep in mind and we would envision that.

Remember, we have two levels below that. We have both a street-level and a concourse level, both of which are high-traffic areas. So we would envision that there will be two additional, let’s call them impact tenants, anchor tenants below them as well. So that that would in essence, anchor the eastern end of the property. And we see from here -- we might mix in a number of outlet centers, outlet tenants but that’s not going to be the necessarily the primary focus, if we end up doing it, we think there and we’ve done this sort of thing. By the way, there are other properties, which is for J. Crew outlets and Plymouth Meeting. It’s more of a high bridge. So, I would not see it as being -- again, as we move forward with the Gallery being a pure outlet center.

Nathan Isbee - Stifel

Okay, does Macy's have any say in that?

Joe Coradino

No. Macy’s is not our tenant. When I talked about Macy’s, I meant that they are across the street. I kind of see the East Market retail corridors as almost functioning like a mall. So you have a Macy’s at 13th Market and Century 21 at East Market. And if you are asking whether Macy's would have an impact on our ability to do this by impacting retailers making decisions. I don’t know the answer to that question. But they would not have a direct say on what we do.

Nathan Isbee - Stifel

Right. Understood. Okay. And then just focusing on Springfield, can you give us any sense -- I know it's only been a short three weeks or so since you made the announcement, can you talk maybe about some of the leasing progress that's going on there? And I know that there's one spot there for an anchor, an additional anchor on that property, what you perhaps envision there?

Joe Coradino

Well, I mean, the leasing interest in Springfield is, I mean, I don’t want to overuse the word, but it is -- the appropriate word is robust. We have -- we are working on that space that you are talking about. We actually have several tenants interest in that space and we are going to need to make a decision in the near term as to where we go with that. So to the extent, we are able to bring that to closure that would take a sizeable chunk of space, put it in the lease category, take it off the market and make a difference in terms of our ability to lease the balance to the mall.

So in short, we are making progress, we are making progress both in terms of that space and bringing in some, what I would call bridge aspiration, all tenants to the property as well. So again Springfield is some thing that I think as we get closer to grand opening in October and you get to see the property and you get -- we get to share more of -- more with you of the tenant roster, I think our belief in this property will become a belief of yours.

Nathan Isbee - Stifel

I look forward to that.

Joe Coradino

Thank you.

Operator

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

Ki Bin Kim - SunTrust

Thanks. Just a couple of quick questions on your FFO guidance. You decreased it by $0.015. Just curious, given that the (indiscernible) costs were probably about $0.05 of that miss in this quarter. And you also have additional item related to the severance costs of $2.6 million. Where do you expect to make up the difference?

Bob McCadden

I think we’ve got shared FFO and FFO was adjusted. So we’ve actually added back the severance cost and the FFO was adjusted line.

Ki Bin Kim - SunTrust

Okay.

Bob McCadden

And then with respect to the guidance, I think some folks have alluded to. When we made our initial earnings guidance estimate for the year back in the February, we did have some inclination as to the impact of weather-related expenses from our experience from January to mid February. We did include that in our original guidance, but we didn’t anticipate the continuation of the severe weather through the balance of February and into March. So we had been aware and taking that into account for portion of the quarterly results that we just reported, but again not the full impact when we made our initial estimates.

Ki Bin Kim - SunTrust

Okay. And on The Gallery, with Century 21, was this the original fast fashion disk retailer that you were talking about for the past year or so, or was there any kind of change in terms of that there's a tenant you were targeting for the center?

Joe Coradino

Well, first off, we have been trying to get Century 21 to come to Philadelphia for at least five years. They are fantastic retailer. The volumes that they do are almost mind boggling, and, I mean that, probably would neither exceed the volume that any luxury department store does in most day malls in this country. So we’ve been trying to get Century 21 to come to The Gallery for a while. And we really see it as a tenant that really is kind of in sync with the new customer in Philadelphia if you will, right.

All of those customers that we want to bring to The Gallery, the new residential Center City, the commuters, the conventioneers, the visitors to Historic District, the office workers, we think Century 21 will be a huge draw. It’s almost the cult following, right. It’s a very iconic brand. So yes, it was clearly one of our first choices. They have been very hesitant to make a move at in New York. So we are pretty excited that we got them to move out of the New York Metro and particularly excited that the gallery is going to be the choice because we think it is really the perfect beginning.

Ki Bin Kim - SunTrust

And maybe it’s a little too early, but could you talk a little bit about the CapEx that would be required and kind of rent you would be getting for this particular lease?

Joe Coradino

We really can’t talk about the particular transaction that we did with them at this point, the specifics of it.

Ki Bin Kim - SunTrust

Okay. And, I mean, given that you were at least last quarter talking about bringing a partner for this project, does this maybe throw a wrench into the process?

Joe Coradino

No, actually quite to the contrary. We think that this will help us to accomplish that.

Ki Bin Kim - SunTrust

Okay. Thank you.

Joe Coradino

This will help us to accomplish that. We think it makes a project that was a story and somewhat amorphous real, right. Particularly, again, there are other transactions that will follow this. We think it’s a real positive.

Ki Bin Kim - SunTrust

Let me ask another related question. So I know on the other side of the project, you’re looking at possibly bringing a higher -- a movie theater into Philly, which there is none of. Do you have any update on that and does this -- does this lease really accelerate some of the others conversations that you had with other retailers or any kind of color you could provide on some other incremental lease initiatives, obviously expect for this project?

Joe Coradino

Well, again, it’s a positive for potentially bringing in other tenants including a potential theater. And again with respect to the theater we want to do the right kind of theater, right. We wanted to be a -- I don’t know quite how to characterize it other than a more of an upper end upscale theater if you will, wider seats, reclining seats, serving food in the theater, etcetera, that’s a direction that we are heading.

Ki Bin Kim - SunTrust

Okay. Thank you, guys.

Operator

Our next question is Craig Schmidt, Bank of America. Please go ahead.

Craig Schmidt - Bank of America

Thank you. Do you know when Century 21 wants to open the store?

Joe Coradino

Yes, their plan is to open up in October of this year.

Craig Schmidt - Bank of America

Great. And then given the 65% inline commitments at Springfield, do you have a better sense of when that might close, that transaction?

Joe Coradino

Probably, I think probably in the first quarter.

Craig Schmidt - Bank of America

Okay, great. Thank you.

Joe Coradino

Thank you, Craig.

Operator

Our next question is Ben Yang, Evercore. Please go ahead.

Ben Yang - Evercore

Hi, thanks. Maybe going back to the guidance question. You guys have previously talked about how your (indiscernible) NOI growth would ramp this year. And kind of given where you guys sit after the first quarter, it does seem like you could miss your downsize guidance. So I was just wondering if there's anything new, maybe positive, that kind of offsets that first quarter decline, so you can actually hit the new guidance?

Joe Coradino

I think Joe talked a lot about it already on the call Century 21 as well as we have 500,000 square feet of signed retailers. They will take occupancy at the balance of the year and we still have a pipeline of other transactions we are currency working on. I think we said at out guidance, I think we are pretty clear in saying that we thought the first half is going to be rather flattish and then as we've accelerate into the third and fourth quarter, we would see a much more to use Joe’s where it's more robust growth and we still have those expectations for the second half of 2014.

Ben Yang - Evercore

Well, I think you said second quarter up 1% to 2% and the third and the fourth quarter up 3% and 4%. So, are those numbers higher? And I was wondering if you would commit to quantify how much higher your expectations are for those particular quarters?

Joe Coradino

I would say they are modestly higher. I'm not sure if I am prepared to give a specific percentage. I think some issues that were unclear three months ago are now more clear. We've also obviously been very aggressive in looking at our cost for the rest of the year and have taken steps to try to mitigate the negative impact of the first quarter on our chem expenses. So we’ll again be much more aggressive in trying to manage our costs in the latter part of the year.

Ben Yang - Evercore

So based on kind of Century 21 being kind of a new positive, I mean are they paying kind of inline rent or are they paying more of an anchor rent when they come online later this year?

Joe Coradino

I would say that they're paying higher than what is a typical anchor rate.

Ben Yang - Evercore

Okay. And then maybe final question, what's the cap rate on South Mall?

Joe Coradino

It's in the 10 range.

Ben Yang - Evercore

Great. Thank you.

Operator

Our next question is from Cedrik Lachance, Green Street Advisors. Please go ahead.

Cedrik Lachance - Green Street Advisors

Thank you. Joe, you made the couple of street retail acquisitions in downtown Philly on the Walnut and Chestnut Street, I believe. Could you give us some details as to what the strategy is there and how much capital has been spent and will be spent?

Joe Coradino

Well, it was really one acquisition and they were combined in sort of one deal. There was -- the acquisition was in the $19 million range, $19.5 million. And it is -- really the strategy behind it was quality retail and literally when you walk out our front door, you just about trip over it. And it was very -- it was in terrible, it’s got terrible tenants in there today. Rents on Walnut Street have now eclipsed $200 a foot. Across the street in this property, there is a major redevelopment going on. Cheesecake Factory is about to occupy the space. We acquired it and we've got a queue of tenants that want to move into this space. I mean in queue and we're kind of picking and choosing here. So it's really -- it's something that was a quick acquisition. It will be occupied, fully occupied in the near-term and nothing that we're going to spend a lot of time or to be a distraction.

Cedrik Lachance - Green Street Advisors

What do you expect the stabilized yields will be?

Joe Coradino

What was the question, I'm sorry Cedrik?

Cedrik Lachance - Green Street Advisors

When do you expect the stabilized yield will be once you have new tenants in there?

Joe Coradino

My sense is, it will be 8% to 9%.

Cedrik Lachance - Green Street Advisors

And do you expect to do any more street retail acquisition or is it just one-off here?

Joe Coradino

It was just a one-off deal.

Cedrik Lachance - Green Street Advisors

Okay. Just looking at your tenant sales and I recognize this is a short period of time, but what's surprising I think in your tenant sales is that the upper end of your portfolio actually has a greater sales decline than the rest of the portfolio. I would be intrigued as to what are the reasons for that. And in particular I would love to hear your sense as to what’s happened to Cherry Hill sales versus other properties?

Joe Coradino

Well, first off, and not, I am not one to ever make excuses. We had a really, really bad winter, I mean people have not been able to get out to shop. It's interesting, the malls, our malls are absolutely packed right now. The weather has broken and we're seeing preliminary very positive sort of trends, people carrying bags, don't have the direct sales information at this point obviously. But, I mean, again, weather was a big factor and everybody was really impacted by the timing of Easter. But weather was certainly a big factor.

Cedrik Lachance - Green Street Advisors

Okay. All right. Thank you.

Operator

The next question is from Mike Mueller, JPMorgan.

Mike Mueller - JPMorgan

Yeah. Hi. I apologize, if I miss this. But if everything goes, okay, and you are above the assets sales, which could be working on the joint venture side, about how much do you think you could have in 2014 in dispositions or effective dispositions?

Joe Coradino

Yeah. Mike, given the fact that a lot of these transactions are still in the early stages, I think it would be highly speculative for us to put numbers on all of that. I mean we could go through asset by asset, but quite honestly when you try to weight, we don't have a dollar plan that we're trying to execute the best plan in the long-term interest of the company. So to give information, I think it would not be -- not very meaningful to our investors.

Mike Mueller - JPMorgan

Okay. I mean, do you have a sense or rough sense of how much of it, thinking of a split could come from sales versus joint venture, capital raising that way, if you are thinking of that overall bucket?

Joe Coradino

No. I think, we are -- like any other business operations, we are looking at multiple opportunities and we will kind of pick and chose among that provide the best result for the company. So to the extent how we can make progress on the non-core sales, we will certainly pursue that. So we are looking at all these avenues at the same time.

Mike Mueller - JPMorgan

Okay. Thanks.

Bob McCadden

Mike, I guess, what you are really looking as your question is, is as it relates to our goal of maintaining leverage below 50% given what we have going on. I think it’s important to note that, as Bob said, we are looking at a number of different avenues, not just disposition of our non-core assets to three malls but JVs with -- in some of our power centers, non-income producing land, as well as potential JVs with call it high-quality assets. I think it would be -- and all of which is geared towards having enough capital to keep that leverage where we wanted to be to maintain the strong balance sheet and to kind of layout what we are going to get from each is difficult at this point because there is a number of discussions going on right now.

Mike Mueller - JPMorgan

Yeah. That's fair. That's fine. Just trying to get the size of the overall bucket, what you think was achievable this year, but, okay. Thank you.

Operator

Our next question is from Linda Tsi from Barclays. Please go ahead.

Linda Tsi - Barclays

Hi. It’s Linda Tsi. I appreciate that you are transforming the quality of the entire portfolio, but as it’s relates to say the premier and opportunistic malls? What are the major differences and how you are going about accomplishing this?

Joe Coradino

Between the premier and opportunistic malls, I mean, essentially the premier malls have already achieved the objective and obviously, one other things we want to do with the premier assets is to continue to improve the tenancy, to improve the quality of the tenancy, there significant demand in those spaces -- in those centers, add better tenants that are going to drive sale and NOI. So, I mean, I guess, that's sort of the typical real estate enclosed mall business.

If you look at the opportunistic assets, that's more of an adventurous process. As I mentioned earlier in the call, part of it is brining non-traditional retailers, more power centre kind of tenants to the properties. You also have a number in-line retailer that play more in that property type, the Charlotte Ruses, the Body Central's, et cetera, to bring those.

And also to add to local regional retailers, as well as non-traditional usage we are going to social security offices, junior colleges, et cetera. So it a little bit more creative energy at the end. In some cases, we have done that at the properties where we have on the market for sale, in some cases that's a work in progress.

Linda Tsi - Barclays

Thanks for that. And then I think it was mentioned that releasing spreads at the non-core malls were down 22%. What drove this and did this have much of an impact on your overall releasing spread?

Joe Coradino

What’s happen over the last few years is I characterize them as churn spaces. You have a number of tenants that might be natural tenants that we’ve continued to renew. In some case at the non-core malls that decreases each time they come up for renewal. And in a lot of cases they’re still paying more than what we would otherwise get from a local or regional tenant. But this is one of the reasons why we’re so focused on disclosing of this segment of our portfolio because we don’t necessarily see it as an opportunity to reposition any of these assets for the same type of growth we expect from the balance of our assets.

Linda Tsi - Barclays

And then did it have much of an impact on your overall releasing spread?

Joe Coradino

Yeah, obviously it did and to the extent that the overall average was in the mid seven and we saw releasing spreads above that for the top two tiers. So it’s a higher volume of transactions, so it did have an impact. I don’t have the numbers. I can get them to you later in terms of what this spreads would be, excluding that. But certainly, as I gave you the tiers, they were all evenly opportunistic were north of 6%, so clearly had an impact on the overall averages.

Linda Tsi - Barclays

Right. Thank you.

Operator

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

Michael Bilerman - Citi

Yeah. Its actually Michael Bilerman here. So Joe, I wanted to sort of go into the Springfield transactions. Since you’ve announced that transaction, your stock is down 12%. You’ve lost almost a $160 million in equity market cap. REITs over that time were up 1%, malls were up 3%. I guess, do you step back and sort of say, maybe the market is telling us something?

Joe Coradino

Well, I think, the market is telling us something. They’re telling us that they don’t feel the way we feel about the acquisition in Springfield Town Center. But we do think that overtime that the market will -- and by the way and that’s going to mean that we need to execute on the leasing, which is really the key job in front of us. There is no construction risk. Execute on the leasing of the property and deliver the kind of tenancies that we know we can deliver and demonstrate that at the end of the day that Springfield is going to be another premier asset in our portfolio.

And that Springfield Town Center is going to really be enhanced value of PREIT as opposed to be a detractor of the value or reduction in value. So it’s -- kind of look at it at this point is it’s a marathon, it’s not a sprint. The belief is in blind face at this point. So important that you get that. I mean, the kind of tenant interest in negotiations that we’re in at Springfield Town Center clearly tell us that this was the right thing to do that what we believed, we could achieve there is achievable and will be achieved.

The question or the job for us right now is one, to execute and two, to communicate that to the market. And we’ll be doing that on a regular basis. As we finish this call and go to Vegas and may read et cetera on non-deal road shows because we believe that if you think about this company, Michael and you think about this company with Springfield Town Center as a premiere property and you think about this company adding The Gallery to that mix.

The Gallery right now as a bad property is doing in the $400 a square foot range. Imagine with the Century 21 with the beast like that as an anchor, with additional sort of exciting new first market anchors and that property performing at that level and are having disposed at the lower quality assets and are having taken a number of the core properties up into the premiere group. I think the market will respond very well to that PREIT, to that transformed PREIT and that’s we’re up to doing.

Michael Bilerman - Citi

Correct.

Joe Coradino

And its going to take us a little bit of time.

Michael Bilerman - Citi

All right. Look I'm not doubting the potential quality of what Springfield will potentially ultimately be and what it means for the addition to your existing portfolio, but at some point the structure of that transaction and the price that you're paying in addition to capping the upside to PREIT because you got to pay the same cap rate on future upside on NOI, that in essence I think is really what the market is saying to you, not that hey, we don't mind. I think everyone wants to have a better quality portfolio, but the entry fee, the cost of doing it is what the market is effectively saying was, it's too much.

And you have a 40 -- I think a $46 million -- $46.5 million break fee. You've lost over three times of that in your stock that effectively, I mean, are you -- are you even contemplating going to Vornado and saying, what, you're going to be a 10% shareholder in our company. I think we got to restructure this deal for the benefit of both of us because it doesn't benefit you for our stock to be below 17 and it doesn't benefit us as we're trying to execute our strategy?

Joe Coradino

Answer to that question is no, we’re not contemplating that.

Michael Bilerman - Citi

No restructuring, no walk away, nothing?

Joe Coradino

No.

Michael Bilerman - Citi

So how do you get the stock up? Do you buyback shares? I mean, there's a big disconnect between sort of current value or potential value of the assets you own and where the stock is trading. So how do you narrow that gap?

Joe Coradino

Yet we execute.

Michael Bilerman - Citi

No other, sort of stocks coming out, stock buybacks, potentially looking at selling more assets, selling the company?

Joe Coradino

No, we talked about, Michael, we did talk about the fact that we’re looking at selling quality, some of our higher quality assets in the form of JVs. So we are looking at those kinds of things to maintain the strength of our balance sheet to maintain leverage below 50% in the phase of the acquisition of Springfield and the work to be done on the Gallery, looking at JCs of the Gallery, so it’s not -- we’re not doing nothing. At this point, we’re not considering remaking on the Springfield deal and we’re not, at least at this point thinking about a stock buyback.

Michael Bilerman - Citi

Okay. Thank you.

Operator

This concludes our Question-and-Answer Session. I would like to turn the conference back to Mr. Joe Coradino for any closing remarks.

Joe Coradino

Thank you. The accomplishments we’ve outlined during this call signal a major step in the transformation of PREIT. The new PREIT will have solid operational performance, including renewal spreads and earnings growth, driven by stronger tenancy and enhanced portfolio quality.

The pending acquisition of Springfield Town Center with its superior demographic profile, exciting tenant roster and the Gallery with Century 21, a premiere retailer locating one of the most dynamic corridor in Philadelphia, will drive our future performance, particularly when coupled with the successful repositioning of several of our core properties.

Our disposition efforts are progressing as our JV discussions for certain assets that will allow us to execute our strategy while maintaining a healthy balance sheet. To reiterate, the goal is to have a portfolio focused on high-quality malls in the eastern United States that is well positioned to deliver NOI growth above our peers. We look forward to seeing many of you at ICSC and NAREIT events in the next few months. Thank you very much.

Operator

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

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