Pennsylvania Real Estate Investment Trust (PEI) CEO Discusses Q2 2013 Results - Earnings Call Transcript

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Pennsylvania Real Estate Investment Trust (NYSE:PEI)

Q2 2013 Earnings Conference Call

July 24, 2013 11:00 ET

Executives

Heather Crowell - Vice President, Corporate Communications and Investor Relations

Joe Coradino - Chief Executive Officer

Bob McCadden - Chief Financial Officer

Analysts

Ki Bin Kim - SunTrust

Daniel Busch - Green Street

Ben Yang - Evercore Partners

Quentin Velleley - Citigroup

Michael Mueller - JPMorgan

Craig Schmidt - Bank of America

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust Second Quarter 2013 Earnings Conference Call. During today’s presentation the lines will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the call over to Heather Crowell, VP, Corporate Communications and Investor Relations. Please go ahead.

Heather Crowell - Vice President, Corporate Communications and Investor Relations

Thank you and good morning everyone. Welcome to PREIT’s second quarter 2013 conference call. During this call, we will make certain forward-looking statements within the meeting 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, July 24, 2013 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 CEO and Bob McCadden our CFO.

It is now my pleasure to turn the call over to Joe Coradino.

Joe Coradino - Chief Executive Officer

Thank you, Heather. We had a good quarter and following our reorganization and the reenergizing of the company we have the right team in place, a team that is galvanized and producing results. A year ago we told you that our priorities were clear consistent operational excellence improving our balance sheet and elevating the quality of our portfolio.

These priorities are wining power now. Today we are a healthier company with solid growth in same-store NOI occupancy and rents, a strong flexible balance sheet resulting from asset sales refinancing efforts and our recent common equity offering and a higher quality portfolio through successful and ongoing dispositions and remerchandising efforts. As we continue to make progress on our strategic objectives we are now turning our attention toward expanding our platform through organic opportunities as well as identifying external growth prospects.

First I’ll walk you through some of the highlights from the quarter and then review our plans for growing the company. On the balance sheet front our bank leverage or debt to gross asset value is now below 50% for the first time since 2005. Earlier in the quarter our common equity offering generated net proceeds of over $220 million with a number of rededicated investors reentering the company stock. The proceeds were used to pay down outstanding debt.

We also closed our new unsecured credit facility during the quarter that provides for additional liquidity and lower interest rate. And now substantially all of our debt is fixed the swap to fix as of June 30th 2013. With respect to our operational performance we continue to show improvement in our metrics. Same-store NOI improved by 3.8% for the quarter and 3.2% year to-date. Same-store NOI excluding lease termination revenue improved by 4.9% for the quarter and 4.2% year to-date.

Same store mall occupancy increased to 93.2%, an increase of 150 basis points over last year. Non-anchor occupancy was 89.6%, an increase of 200 basis points driven largely by a 330 basis points improvement in our premiere mall. Growth rents for the quarter were up 2.5% on mall properties driven by a weighted average 4% increase at our premier and core growth assets.

Renewal spreads were 5.2% for the quarter and 5.1% year to-date. Our sales of $384 per square foot reflect progress toward our goal of having the $400 per square foot portfolio. We are obviously not grow with our tenant sales growth but also aren’t overly concerned. Sales growth has moderated in certain categories but as we introduced new tenants to our portfolio and upgrade our tenant mix we are replacing short-term tenant through sales performance or contribution to the merchandize mix and our properties is not consistent with our emphasizes on improving the quality of our portfolio. We do continue to make progress on improving the quality of our portfolio through dispositions, asset repositioning and the addition of first to market retailers. Our asset disposition program progresses with two additional properties. South Mall and Commons at Magnolia placed under contract during the quarter.

In addition Christiana Center continues to move toward closing having received approval from the special service there. We are currently concluding the marketing process for Beaver Valley and North Andover and anticipate receipted bids over the course of the next few weeks. Interest has been robust having received over a 100 NDAs and we remain optimistic that we will move to closing.

We continue to generate over 80% of our same-store NOI from our premier and core growth properties which generated sales of 422 per square foot. During the quarter we opened stores of signed leases with noteworthy first to market tenants as a way to further differentiate the shopping experience in our properties and two exampled of these are Canadian retailer dynamite opened one of it’s first three U.S locations at Cherry Hill Mall, H&M and Soma will be opening their first Western Michigan stores at Woodland Mall it’s opened this place, opened it’s only store within 50 miles at Valley View Mall in Wisconsin.

We are in the process of growing our business executing and opportunities for organic growth and pursuing avenues for external growth. Organically we continue to advance opportunities to redeploy capital and properties where we can add significant value. We are executing the Moorestown redevelopment whether you are bringing dining, entertainment in first to market retailers to differentiate the properties from our nearby Cherry Hill Mall.

We are working toward a pre-holiday opening of Regal Premium theater experience, Marc Vetri's Osteria and Firebirds Wood Fired Grill. We also exciting to announce the execution of a lease for Jose Garces' Distrito, a Mexican concept which operates in three other locations including it’s popular Philadelphia venue. We are four of the welcome this Iron Chef and James Beard Award Winner to utilize the third of four liquor licenses is obtained by PREIT. Along side Marc Vetri's Osteria having to claim celebrity chefs opening locations at the suburban Philadelphia Mall are serving as a magnet to attract other best to breed regional retailers to further differentiate the property.

We also continue to make progress on furthering the plans for the Gallery project in Downtown, Philadelphia, and during the quarter also in the acquisition of the building at Nathan Market Streets. Earlier in the year we launched an intensive leasing effort taking this down to distinct pads. One highlighted by Food and Fast Fashion and the other our Luxury Department Store anchored center. This is our focus on Las Vegas ICSC and we are now engaged in meaningful discussions with a number of impact retailers as we work to define the project.

We are also pursuing other projects at our higher quality productive properties including the repositioning anchor boxes which will generate the best return on our invested capital. Beyond this we are advancing remerchandising efforts at a number of our core growth properties with several leases and active negotiation. Well this is what modest capital investment we expect these efforts to results in higher tenant sales productive and NOI growth with these properties.

Externally we are reviewing all opportunities that we identify within our core competencies and are accretive to our metrics. We are seeking our selected off market assets to our strategic fit for our portfolio. We have finalized our partnerships with Simon property group on Gloucester Premium Outlets in Gloucester, New Jersey. This project came about as a result of our position as the dominant retail landlord in the greater Philadelphia market place.

Partnership shouldn’t come as surprise to anyone given our preexisting relationship with Simon, which we view as a means to mitigate or risk as we benefit from their industry leading experience in the outlet arena. We look forward to sharing the more define growth plan as we review all of our opportunities within the context of our capital allocation strategy.

And with that I’ll turn the call over to Bob McCadden to give you more color on quarterly and year-to-date financial performance and our revised earning guidance. Bob?

Bob McCadden - Chief Financial Officer

Thank you, Joe. We are focused on continuing to deliver strong results as evidenced by our second quarter numbers and a upward revision to 2013’s FFO guidance which I will touch on later. With that as a backdrop let me review our second quarter results. FFO was adjusted was $28.3 million or $0.43 per diluted share for the quarter ended June 2013 reflecting net adjustments of $4.3 million for employee separation expenses accelerated amortization of financing cost and interest rate hedging losses. This compares the $21.6 million or $0.37 per diluted share last year.

Same-store NOI for the second quarter was $56.7 million, a $2.5 million increase as compared to 2012 second quarter. Excluding lease termination revenue, same-store NOI was $66.6 million, which was a $3.1 million increase over the prior year’s quarter. The improvement in same-store NOI resulted primarily from increased rental revenues driven by improvements in occupancy and higher average rates.

A number of factors impacting our overall operating results including the sale of three properties in the first quarter, the sold properties in Christiana Center generated a $3.4 million of NOI in this year’s second quarter and $1.3 million, I’m sorry last year’s second quarter and $1.3 million in the June 2013 quarter, and then we acquired 907 Market Street property contributed $1 million of NOI in the second quarter.

As of June 30, 2013 non-anchor occupancy at our same-store retail properties increased by a 180 basis point to 89.9%, while total retail occupancy increased by a 140 basis point to 93.3%. Average gross rents for small shop and our same-store mall properties were up 2.5% as compared to in place rent as of a year ago. In the quarter, we recorded employee separation cost of $1 million accelerated the amortization of a $100,000 of deferred financing costs and had hedge ineffectiveness of $3.1 million, the net impact of these items was ($0.065) per share.

Interest expense for the quarter excluding various charges was $28 million was $7.2 million lower than last year’s quarter. This improvement reflects the lower average borrowings, a lower average rate, average borrowings were $320 million lower than last year and the effect of interest rate and our borrowings during the quarter was 5.62%, a decrease of 46 basis points from last year’s quarter. As a result of our lower leverage ratio pricing on credit facility borrowings will be reduced to libor plus 170 basis points from a 185 basis points as of today. Outstanding debt at the end of the second quarter including our proportionate share of partnership debt was $1.9 billion a decrease of $350 million from June 2012.

This year’s quarter included dividends on preferred shares of $4 million relate to the 2012 preferred share issuances as compared to $1.8 million in last year’s second quarter. In May, we repaid the $56.3 million mortgage on Jacksonville mall and as asset currently remains unencumbered. In connection with this payoff, we recorded non-cash interest charges of $2.9 million led to swap cost that had been deferred in other comprehensive income. We also exercise the first the two expansion options and they are going to value mortgage loans ending in updated appraisal. We are currently evaluating proposals to refinance the mortgage loans by Wyoming Valley mall which expires in September. Finally, we notified the lenders and our mortgage lender expense in Square Mall of our intent to repay the loan on October 1st.

In the near-term following the repayment of this mortgage this property will become unencumbered increasing the pull of unencumbered assets and our portfolio to over 20. G&A expenses for the quarter were $9.6 million which represented a $600,000 reduction from last year’s second quarter. The lower level of G&A expenses reflects reduced executive headcount and other corporate cost savings. On a losing front, we executed 144,000 square feet of new non-anchor transactions and renewed 249,000 square feet. With these renewals we generated an increase of 5.2% compared to expiring gross rent, only anchor a large format front we executed five renewals for 395,000 square feet, with a combined uplift of 1.7% for the quarter. Deals as closer store New River Valley Mall in Christianburg, Virginia where we have signed letter of intent with a notable national anchor to replace that. In July, we renewed our final anchor tenant with the 2013 expiration.

Comp store sales continue to improve about $384 per square foot at the end of the quarter if we exclude the four non-square mall properties which are being marketed sales per square foot would have averaged $394. We are adjusting our earnings guidance for 2013 by raising the lower end of our range by $0.04 per share and the mid point by $0.02 per share to give effect to our continued NOI growth and greater visibility and to our operating results for the balance of the year. We expect that earnings per diluted share will be between $0.70 and $0.76 including and expect again on the sale of Christiana Center, you expect FFO per diluted share to be in the range of $1.78 to $1.82 and FFO as adjusted to be in a range of $1.87 to $1.91.

The assumptions underlying our revised earnings guidance are generally consists with those such forth at the end of the last quarter, aside from the completed 2013 sales the purchase of 907 Market Street and the pending sale of Christina Center, our guidance does not contemplate any of the material property dispositions our acquisition. In addition our guidance is not assumed any additional capital market transactions for the balance of the year.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Ki Bin Kim with SunTrust. Please go ahead.

Ki Bin Kim – SunTrust

That’s Ki Bin Kim, thank you. Quick question on the joint venture potentially if I’m in for the outlet center what is the strategic rationale for you, for them to depend on what you given that you guys own the land?

Joe Coradino

Well, I think the strategic rationale there is a couple of things; one we have an obvious dominance in the Philadelphia market with 8 of their 20 malls in the marketplace. Number two, we saw there is an opportunity where someone was going to develop an outlet center there given our position in the market, we were able to, let’s say and set ourselves in that process and bring it to sign in and they obviously are interested and are proceeding with us in the development of that property.

Ki Bin Kim – SunTrust

Did I have to do anything with various restrictions that are leases with certain retailers that made a restriction for Simon can do an outlet in that area?

Joe Coradino

No actually I saw your comment regarding that that it really didn’t; it was not related to that at all.

Ki Bin Kim – SunTrust

Okay. And if you could, I know its early, but maybe a broad sense, I would you, maybe give a general detail on Simon scope of that project and I think I know its early but, would the yields be inline with what Simon has been getting so far on their outlet developments which are close to 10%?

Joe Coradino

Well first half it’s going to be a 200,000 square foot center, but we’re still working through the pro forma etcetera and they would be premature to get into any detail beyond that.

Ki Bin Kim – SunTrust

All right and just last question, you have several assets out there in the market for dispositions and you said demand looks robust. The increase in treasure rates, how that have changed IR expectations for lot of these buyers which getting our financial buyers, whether it would be head of cap result going in, could you maybe discuss a little bit of that change in demand at all, or you have the expectation?

Joe Coradino

No, as I mentioned on the call, the interest in those properties are quite robust, I think driven to a certain extent by pursued redevelopment opportunities and we have not seen a significant reduction in buyer interest at this point. Clearly, there is more to an acquisition and redevelopment or reuse play than interest rates, but at this time we feel good and have not seen a drop of interest, the point of interest rate increase.

Ki Bin Kim – SunTrust

I mean just one follow-up on that, so you then mentioned a lot of plans on redevelop, well I guess repositioning certain retailers in your malls you went through a kind of a long list of one thing you highlighted, but in totality what are these older retailer guys you’re going to try and push out what are they generating a sales per square foot and but one thing you’ve identified they’re – are going to come in and what does that spread of what you expect new sales -- sales per square foot to look like and I guess from a dollar standpoint and how does that all square footage what is the scope of that program?

Joe Coradino

I'm sorry I heard the end of your question I apologize I missed the beginning, are you asking about existing assets for sale or properties where we’re going or working to acquire Anchor Boxes is that’s why all confused.

Ki Bin Kim – SunTrust

I was talking about when you’re, and you mentioned in the opening remarks about repositioning certain retailers so may be looking out a lower productive retailer and bringing for one that’s better suited for that mall or kind of mix. I was wondering if you could provide some details around what that previous sales per square foot will look like for on average and what the new retailer that’s positioned correctly could look like in your malls and may be you could apply some kind of square footage or dollar rate to the total program?

Joe Coradino

I don’t think we could provide a dollar amount to the program at this point, but I can answer your question, we’re not necessarily looking at properties where they are poor performers right. It may involve situations where anchors are oversized, it may involve situations where there is an opportunity to develop based on getting some level approval from the anchors, et cetera. But I would say that aside there is opportunity to say other instances where we’re working at taking back anchor positions yeah they’re typically performing in the $200 a foot range I mean not at a -- high level and we think we can add tenants in those spaces that will outperform that.

Ki Bin Kim – SunTrust

Okay. Alright, thank you.

Operator

Thank you. Our next question comes from the line of Daniel Busch with Green Street Advisors. Please go ahead.

Daniel Busch – Green Street

Thank you. Just a couple of follow-ups on the outlet development. A couple of the articles referred to the partnership with PREIT-RUBIN, is there a reason that the language as such or a reason why that -- joint venture is going to be done in the off-shoot of -- I guess the PREIT-RUBIN subsidiary?

Joe Coradino

I think I can answer that. The reference to PREIT-RUBIN was typically as we go into a development project we’ve made these are taxable REIT subsidiary as a place to park the deal before we make a solid determination at the structure. So, it will be an asset that’s owned, essentially will be owned by PREIT itself, PREIT associates with the operating partnership.

Daniel Busch – Green Street

Okay, okay. And then…

Joe Coradino

Its not a very, it’s not a very good branding idea. I was not happy to see PREIT-RUBIN in the article either.

Daniel Busch – Green Street

And I know it’s too early to talk about the size of the scope, but is the partnership are going to be a traditional 50:50 joint venture or is it going to be some sort of preferred interest?

Joe Coradino

No it’s going to be 25 to PREIT, 75 to Simon will hold.

Daniel Busch – Green Street

Okay. And switching gears you have, you paid off the Jacksonville Mall loan forgive me if I missed it, but are you planning to refinance Jacksonville Mall and just looking at some of the operating metrics for that mall, it looks like sales have been struggling there and given then a 20 premier properties can you give us a little color on what’s going on at that property in specific?

Joe Coradino

Well, it will continue to be a premier property, part of what’s going on there is, is cyclical it’s happened before it will happen again and that is troop deployment we lost about 11,000 customers and they’ll be back in October and November. So, I think it’s just a blip on the screen if you will and till we, we have every confidence that Jacksonville will continue to be one of our top performers.

Daniel Busch – Green Street

And as far as re-levering that property.

Joe Coradino

No I think our plan was just as a good asset and we are planning currently as to leave it on encumbered.

Daniel Busch – Green Street

Okay. And then I guess on last question on rent growth that, it looks like the rent growth particularly at the premier malls has picked up at the opportunistic malls I guess is still a flat or non-existent, can you talk about the ability to push rents at the higher quality properties versus you call it the B properties, what are you seeing there?

Joe Coradino

I think it’s clearly the reflection of the, it’s a function of demand if you look at our occupancy metrics of the premier assets they’re clearly at the mid-to-upper 90s. I think we’ve always said long our ability to push rents is going to be a function of driving occupancies that we’re taking yeah a number of staffs at the middle part of our portfolio lower end that you’ve seen I think increases an occupancy pretty consistently over the last year so we’re going to continue to push occupancy and once we reach a certain level I think we’ll have a better ability to push rents as well.

Daniel Busch – Green Street

And what is that, what is that stabilized occupancy where I guess that you guys are targeting for the portfolio?

Joe Coradino

With portfolio I think we’ve set a kind of a longer-term goal was the, around 95%.

Daniel Busch – Green Street

Okay. Great, thank you guys.

Operator

Thank you. Our next question comes from the line of Ben Yang with Evercore Partners.

Ben Yang – Evercore Partners

Hi thanks. Joe, you mentioned not being overly concerned about the slowdown in tenant sales growth. But it seems like very quarter about half of your malls report increasing sales another half report declining sales then and even if you focus on your premier and core malls more than half of those malls had declining sales and I guess I would have expected at some point we’d see a majority of your properties report increasing sales I mean, is that a fair expectation that there should be a more broad-based increase or would you may be characterize about half of your portfolio being perpetually challenged may be given the markets that they’re in or the competitive position?

Joe Coradino

Yeah it’s, there is not a single simple answer to that question. So let me take a shot at simplifying a complex answer. Number one, we have a number of larger format tenant drug stores who typically under perform that are included in our sales category. Over time we’re going to be rolling them out of those centers and bringing a higher productivity retailers into their spaces. Number two, we have a number of cell phone operators who are not reporting all of their sales, they report equipment and not service contracts, we’re not getting a complete count that’s something that over time we need to – we need to rectify or reconsider at least how we are reporting that. And I would add to that that there are a number of short-term general manager generated transactions that came online since we began that program. And as a result, they were put on permanent leases in hindsight license agreements might have been a better solution and so that they would not have been calculated in sales.

And finally, personal service uses such as haircutting, et cetera are in our calculation. And part of this by the way is the fact that there is no standardized way to record sales in our industry and so that’s really been what I – what I allude to when I say we’re not concerned about it. We’re not concerned about it, because we understand the problem and understand the solution, it’s not a question of that we’re obviously seeing renewal growth, right. So, clearly it’s not impacting our ability to increase our rents on renewals. So, bottom-line is we’re really not concerned about it and it’s a solvable problem.

Ben Yang – Evercore Partners

Okay, so I understand that may be some of the malls have an explanation, but I mean are there any premier or core malls that you may be should consider selling given that, despite the higher sales may be they don’t offer any meaningful kind of upside and same-store NOI, you can’t take that drug store and put it in a higher renting tenant, are there any malls that fall in that bucket that you might consider selling at this point?

Joe Coradino

Not at this time I mean we’ve obviously segmented our portfolio and we have a number of opportunistic assets on the market. I think what we want to do is, finish what we started which is to sell what’s on the market and we’re all – we’ll obviously continue to look at opportunities that further proven the portfolio, because again one of our – one of key business objectives is improving the quality of the portfolio and if we have an asset it doesn’t meet that qualification it’s something we’ll look through – we’ll look to dispose off, but at this time we want to finish what we started.

Ben Yang – Evercore Partners

Okay. And then just final question, any thoughts on where we might see a more broad based increase in sales throughout the portfolio?

Joe Coradino

That will be difficult to guess. I mean, we’re obviously, as we in order just, we have re-forecasted the back-to-school numbers downward from last year. So, we’ve got a - we’ve got an interesting back-to-school season in front of us and the economy tends to be and this is not a financial word a little squishy. And so, I mean, we were not optimistic not terribly optimistic about the balance of this year but we’re taking many measures to drive traffic I mean, social media, contest for back-to-school et cetera. But again, we’re a little cautious as we move into the back-to-school and holiday.

Ben Yang – Evercore Partners

Okay, great. Thanks, Joe.

Operator

Thank you. Our next question comes from the line of Quentin Velleley with Citigroup. Please go ahead.

Quentin Velleley - Citigroup

Hi, good morning. Joe it sounded like you are more positive on acquisition. So, could you maybe talk a little bit more about that? How should we be thinking about some of the opportunities? And also how would you be thinking about funding acquisition?

Joe Coradino

Well obviously as we - as we drop the gun to improve ourselves operationally than our leverage better position and improved our portfolio quality we’re turning our attention to opportunities to grow our platform. We’re looking at situations, where we could find them and clearly we’re in a mature industry. We don’t understand that but we’re looking for opportunities one-off privately-owned et cetera, where we could find opportunities that could be, where we would - where we essentially recycle some of the proceeds from the sale of our non-core asset.

And again, these - the assets that we would buy, we’re not looking to enter. We’re opportunistic then if you will. We’re looking to acquire assets that are either accretive to our metrics, which is again that 90% inline occupancy and $400 per square foot sales metrics with one that we can see a path to getting there in the relative near term. It’s a – it’s a challenging effort but one that we’ve begun to embark on.

Quentin Velleley - Citigroup

Okay. And then with the three mall sales, you have got Allentown, (indiscernible) North Hanover and Beaver Valley a close just from a modeling perspective I know, you don’t have those sales in Gardens but how should we be thinking about average cap rates and the total value of those three assets if you can speak broadly about that?

Bob McCadden

Yeah, Quentin this is Bob. I guess with respect to the - yeah we’re still waiting for a bid from the perspective buyers. We don’t want to influence their pricing and we’ll have more to talk about this I guess in the next quarter call but it’s premature to talk about pricing at this stage.

Quentin Velleley - Citigroup

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Michael Mueller with JPMorgan. Please go ahead

Michael Mueller - JPMorgan

Thanks. Hi. Just kind of a follow-up to the prior question, did you mention Joe in your comments about the timing for Christiana I miss that?

Joe Coradino

I didn’t - I don’t think I mentioned it specifically Michael but we finally have gotten special servicer approval this job must seem like its becoming I like to work here and finally got a special servicer approval. We’re looking at August close, end of August, early September close the Decatur now in a row.

Michael Mueller - JPMorgan

Got it, got it. And then going to - going to Quentin’s question now the three assets, where it seems like, the comments where you had bids on three assets or interest in three of the four correct?

Joe Coradino

Well the bids, was two of the properties North Hanover and Beaver are expected in the next two to three weeks.

Michael Mueller - JPMorgan

Okay. And do you think there is likelihood that you see a transaction in 2013 on those?

Joe Coradino

Well, we’re optimistic that, that will be the case.

Michael Mueller - JPMorgan

Okay. And last question, Bob I think you talked about the 917 Market NOI of about $1 million in the quarter I mean that, that’s a pretty decent run rate considering closed in April is that correct?

Bob McCadden

Yeah it’s a $1 million for the quarter.

Michael Mueller - JPMorgan

$1 million and that pretty much captures almost the full quarter impact though right?

Bob McCadden

Right. You don’t understand to that. As we mentioned in the past, the Kmart lease that’s in that building expires in 2014 but we’re now at a point, where we’re getting ready to talk about the Gallery redevelopment but that would be an integral part of our decision and the economic decision on the Gallery. And so, if we benefited to move forward that lease would likely not be renewed next year.

Michael Mueller - JPMorgan

Got it. Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Craig Schmidt with Bank of America. Please go ahead.

Craig Schmidt - Bank of America

Yeah. I guess, I have a question with the Gallery at Market East’s. What is the potential for the redevelopment dollars at that project and what kind of returns are you thinking off and maybe just an overall vision of what the retail it’s going to look like in that project?

Bob McCadden

Well Craig, well we’ve been talking about and I mentioned a little bit in my script is we’re really approaching the Gallery from two distinct directions from a let’s call it a leasing but more, more accurately vision perspective. So, on one hand, we’re meeting with all of the fashion-anchored department stores to look at a potential redevelopment of the Gallery that would be a very high end fashion oriented development that would – we believe be consistent with the new center to the population in Philadelphia.

In the converse, we’re at the same time working on a vision for the Gallery that we call fast fashion and food, which is essentially to work with some of the best fashion retailers that you know of from the H&Ms to the Forever 21 to the Uniqlo’s et cetera and included with that some exciting restaurants and prepared food operations for the property little bit of a different direction.

But again if you think about the new Center City population, its location is just between the Convention Center, Historic District on the Market East station that those - both of those visions are workable and we had - we had targeted late this year for making an announcement as to the direction, we’re going to head and we’re in pretty deep discussions with retailers in either categories. From a capital expenditure projection – perspective, I think it is be premature to give you a number again as we move forward to find a vision and start finalize the transactions we’ll be in a better position to determine the size, scope, cost and return of the project.

Craig Schmidt - Bank of America

Great. Thanks. And also, do you think so the department store, lease exploration concept should be included in the supplemental for a while. I just wondered given the store closing at New River, do you also have potential replacements at Nittany and Washington Crown Center given that lease exploration coming up in 2014 and 2015?

Bob McCadden

No nor do we have any indication that those - those anchors will close there.

Craig Schmidt - Bank of America

Okay so they are don’t as you can tell reasonably well and then most likely they won’t renew?

Bob McCadden

Yes matter of fact Craig bonds are just renewed at Washington Crown.

Craig Schmidt - Bank of America

Okay. Thanks a lot.

Bob McCadden

Washington Crown is actually quite a good story by the way in terms of what is going on there. We’ve got a number of stores medium format boxes under construction and asset that could have been on the list to disposed off it seems - which seems to be in the middle of resurgence.

Craig Schmidt - Bank of America

Thank you.

Operator

Thank you. Our next question comes from the line of David (indiscernible) with Desjardins. Please go ahead.

Unidentified Analyst

Thank you all. Good morning guys. I wanted to circle back to your long-term inline occupancy target of 95% and you are just under 90% right now. So, I believe, you mentioned previously that your goal is to achieve that objective by I guess 2015 so little over 500 basis points of occupancy increase between now and then which doesn’t seem like it’s too far away at this point now that we’re halfway through 2013. I was wondering if you – how much of visibility you have into that and how just from a modeling perspective how we should think about that in the sense of I mean is it going to be very backend weighted 2014 and early 2015 or is it going to be ratably kind of spread out over the time between now and then?

Joe Coradino

Well if you look at where we have big chunks of vacancy based on what we have in the books today if you will where we probably have a 150 basis points of leased based for 2013 openings that’s not reflected in our occupancy yet that would include the theater at Moorestown and includes some of the Moorestown redevelopment. That will continue into 2014 with the completion of Moorestown, again some of the other retailers that Joe kind of alluded too not by name but kind of strong regional retailers will also be taking occupancy at Moorestown in 2014. We would continue to make progress at some of leading mall where we’ve had historically high vacancy rate and the Gallery is another large project where we have lower than portfolio average occupancy where we think those are great opportunities to move those occupancy levels up. So I don’t know if it’s going to be all backend I think it’s going to come over time over that period but the back ending I guess some of the numbers that we talked that also include the 95% with five year of peak holidays series so we have also the benefit of the temporary leasing during the holidays.

Unidentified Analyst

Okay. So the 150 that you mentioned is that I mean is that effective to start this year or is it going over into 2014?

Joe Coradino

No, the 150 basis points you should see in 2013.

Unidentified Analyst

And then you mentioned there is something else I guess at Moorestown that’s going to spill over into 2014 I mean do you have any sense to how much that is or?

Joe Coradino

You’re talking about – you’re just talking about couple of restaurants, yeah.

Unidentified Analyst

Okay, okay. So if you got a 150 that gets you to about 91 and then you’ve got another 400 to go so I guess those are the properties how the leasing efforts going and I mean are you getting any traction at this point to where you could comfortably I mean obviously you put the target out there a 95% I'm just wondering how the progress is going at the properties you mentioned Bob?

Bob McCadden

And Washington Crown is another one that Joe alluded too, we have a number of boxes that are heat up take occupancy in the next 12 to 18 months so I think it’s really across the portfolio I don’t think it’s choosing high occupancy rates at our premier malls and core growth occupancy rates are just about at the 90% level today. We see those moving into the kind of the low to mid 90s over the next couple of years. So and then if you take out the non-core malls out of the numbers then make some progressively opportunistic I think it’s the game plan that I guess that to close to that number.

Joe Coradino

And by the way think about portfolio quality through occupancy going forward (indiscernible) significant (indiscernible) very good position by the construction with the retailers ultimately were relatively better tenant and drives sales. I think it’s all part of that formula (Indiscernible).

Unidentified Analyst

Right. So I guess just looking at a couple of specific properties in the quarter, Prince Georges and Palmer Park showed some pretty dramatic declines in occupancy from the first quarter. Are those just temporary and how do you going to be able to get those backup or what specific to happen at those individual properties?

Joe Coradino

Yes at the mall Prince Georges we’re actually opening up T.J. Maxx.

Bob McCadden

Two new anchors it’s going to be opening up in there prior to year end. Palmer…

Unidentified Analyst

Is that part of the 150 basis points that you mentioned Bob?

Bob McCadden

Yes.

Unidentified Analyst

Okay. And then I guess Palmer Park I guess we had a tenant that was actually freed up to open it didn’t open this year. So will they open next year or?

Bob McCadden

Yes, it will open in 2014.

Unidentified Analyst

Okay. And then just I guess the last question it was looking at your lease spreads and your anchor renewals in the quarter they were – are down quite a bit. Can you maybe talk about what the decline was and I mean is that a trend that’s going to continue or you having to cut rents to keep them there and what sort of I guess behind that fall in the quarter?

Joe Coradino

That was obviously one anchored tenant where we again we (indiscernible) the dollar amounts are relatively small so you’re talking about there has been $3.23 and $3.59. So if we don’t take as a material change now the other anchors that renewed were renewed at the same rental rate I mean I think that’s intake level they trend.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. Our next question is a follow-up question from the line of Ki Bin Kim with SunTrust. Please go ahead.

Ki Bin Kim - SunTrust

Thank you. Just a couple of quick follow-ups. The 150 basis points of additional occupancy, how is your kind of rise those rents in terms of where it is relative to your current portfolio rent?

Joe Coradino

It’s the mix of small shop and large format tenants without kind of building more in outs but I don’t know if I could give you a…

Ki Bin Kim - SunTrust

Well maybe on the small shops please.

Joe Coradino

Small shop space may get reflect of those the – it’s again it’s depending upon where the property is I think the rents are stoppable where they would have stay in their respective properties.

Ki Bin Kim - SunTrust

Also you that basically saying like flat these spreads on.

Joe Coradino

No, these are new.

Ki Bin Kim - SunTrust

Okay. New leases, right.

Joe Coradino

New leases where you’d expect to see some upside but again we don’t have the specific information.

Ki Bin Kim - SunTrust

(indiscernible) you’re kind of cutting in and out I'm not sure is that you.

Joe Coradino

I terms of – I said there are new leases so you would expect to get upside but we do not have the specific information to be able to answer the question precisely.

Ki Bin Kim - SunTrust

All right. Thank you. And on the same-store you guys I might have missed the like in terms of NOI for this year it has slowed down a bit maybe.

Joe Coradino

Well again well we’re breaking up one-offs as well.

Ki Bin Kim - SunTrust

Same-store NOI guidance for the year, do you guys already talked about that I might have missed it.

Joe Coradino

No, I think we didn’t specifically talk about that refer to our last quarter guidance. We’ll probably be – I think we in recent guidance to kind of 2% to 3% range will be probably at the upper end of that range for this full year even if we’re above this for the first six months we had some pretty strong additions last year in June we had the start up the medium network open at the Gallery so when you look at the second half comps it will be a little bit more challenging if you will so we’re still holding to our additional range that will be towards the upper end of it NOI guidance.

Ki Bin Kim - SunTrust

Thanks, that’s helpful. And I guess last question, I – it seems like you have a quite a few of occasions in a couple of J.C. Penney is coming to in 2014. I'm guessing it all the redevelopment plans that you talked about are sort of boxes but could you maybe give us a sense of how that would impact or disrupt temporarily same-store NOI or sales on I guess I'm not sure how much rent those anchors are paying but maybe rather more color on if how we see about same-store NOI growth to end maybe some upside.

Joe Coradino

Yeah, at this point we don’t have any specific plans to recapture any anchor boxes so again it’s premature to talk about what the potential upside is until we reach the termination otherwise we are making the assumption those anchors are going to renew in 2014.

Ki Bin Kim - SunTrust

Okay.

Joe Coradino

And we’re pleased with what we’re hearing at a J.C. Penney right now, I think there is – they’re moving in the right direction well obviously we’re anxious to hear their earnings call in about a month and see how they perform but right now we’re seeing more traffic in the stores more people in the stores it’s very different than it was several months ago. There is more of an opportunity with sales right now in terms of taking back stores and more working through that but it’s early and it will be pre-mature to talk about the impact with the center but we’re certainly factor that into any transaction we might enter into.

Ki Bin Kim - SunTrust

Right. But so far have you had any conversations (indiscernible) at the and if you are they don’t have to on ALS boxes.

Joe Coradino

No, we have not.

Ki Bin Kim - SunTrust

Okay. Thanks.

Joe Coradino

Thank you.

Operator

(Operator Instructions) I’m not showing any further questions at this time please continue.

Joe Coradino - Chief Executive Officer

Well, I just like to thank everyone for participating on the call. We have enjoyed the questions. They were challenging and we look forward to continually share our accomplishments and our path to growing the company in the future. Thank you very much and enjoy the rest of the summer. We’ll see you early in the fall.

Operator

Thank you. Ladies and gentlemen that does conclude our conference call for today. Thank you for your participation. You may now disconnect.

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