Corrected Transcript
24-Feb-2017
Pennsylvania Real Estate Investment
Trust (PEI)
Q4 2016 Earnings Call
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Corrected Transcript
Q4 2016 Earnings Call
24-Feb-2017
CORPORATE PARTICIPANTS
Heather Crowell
Robert F. McCadden
Senior Vice President-Corporate Communications & Investor Relations,
Pennsylvania Real Estate Investment Trust
Chief Financial Officer & Executive Vice President, Pennsylvania Real
Estate Investment Trust
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate
Investment Trust
................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Karin Ford
Michael W. Mueller
Christy McElroy
Floris van Dijkum
Ki Bin Kim
Michael Jason Bilerman
Analyst, MUFG Securities America, Inc.
Analyst, Citigroup Global Markets, Inc. (Broker)
Analyst, SunTrust Robinson Humphrey, Inc.
Analyst, JPMorgan Securities LLC
Analyst, Boenning & Scattergood, Inc.
Analyst, Citigroup Global Markets, Inc. (Broker)
................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like
to welcome everyone to the PREIT Fourth Quarter 2016 Earnings Conference Call. All lines have been placed on
mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
[Operator Instructions]
Thank you. Heather Crowell, Senior Vice President of Corporate Communications and Investor Relations, you
may begin your conference.
................................................................................................................................................................................................................................
Heather Crowell
Senior Vice President-Corporate Communications & Investor Relations, Pennsylvania Real Estate Investment Trust
Thank you. Good morning and thank you everyone for joining us for PREIT's fourth quarter 2016 earnings 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. Statement s that PREIT makes today might
be accurate only as of today, February 24, 2017, and PREIT makes no undertaking to update 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.
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Members of management on the call today are Joe Coradino, PREIT's Chairman and CEO; and Bob McCadden,
our CFO.
It is now my pleasure to turn the call over to Joe Coradino.
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust
Thank you, Heather. And good morning everyone, and thank you for being on the call. We're genuinely optimistic
about our portfolio and our prospects for growth. This optimism stems from our confidence in the leadership we
have demonstrated in the face of a rapidly changing retail landscape.
Our forward-thinking focus on quality and the bold actions we have taken lay the foundation for continued
shareholder value creation. These bold actions include our aggressive disposition strategy, in which we sold 16
low productivity malls, early adoption of dining and entertainment uses was 17% of our space committed to dining
and entertainment. The off-market acquisition of Springfield Town Center, now approaching $530 per square foot
in sales and over 90% occupied. The reinvention of three city blocks in downtown Philadelphia, where Fashion
Outlets of Philadelphia will grand open in 2018. Our proactive approach to strengthening our anchor mix, recently
recapturing three Sears boxes that are now leased.
We made the decision to recapture the anchor stores with full knowledge that this would result in 2017 Same
Store NOI growth below our 3% goal. All of these actions together will fortify our portfolio, leading us to target
2018 to 2020 NOI growth averaging 6% to 8%.
We believe this will also take us to our new targeted sales goal, which is $525 per square foot and following the
development cycle and execution of our capital plan to targeted leverage below 47%.
We can talk about some of the events catching headlines in our industry, weak retail environment, department
store closures, retailer bankruptcies, and declining apparel spending. We will demonstrate how the actions we
have taken respond to these headlines. As you know, this morning JCPenney announced closing up to 140
stores.
To clear this up, we thought we would let you know we expect to have only one store impacted by this
announcement at one of our top assets. This is evidence of an undeniable truth in this industry, survival of the
fittest.
We've witnessed natural selection in the mall space with accelerated portfolio pruning across the sector and we
have seen it among retailers. Those that cannot keep pace with consumer preferences are closing stores. Those
malls and retailers who do not present an engaging customer experience simply will not survive. When we have
spent the past several years solving this problem, the metamorphosis of our company was timely and hasn't been
a coincidence.
It's a result of the deliberate actions taken in anticipation of the trends we're seeing with a goal of continuous
value creation. It's the result of calculated yet swift decisions that form the basis for the next stage in our
evolution, one where targeted investments serve to further improve the quality of our portfolio.
It all started with one fundamental premise, quality is paramount. A move to quality continues to be the guiding
principle of this company. We've been leaders in low productivity mall dispositions. We've sold 16 malls and now
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have 18 vacant anchors, and more to come. These properties generated sales of $276 per square foot. We now
boast portfolio sales approaching $470 per square foot, a stark contrast from when this management team took
over.
But this is about foresight not hindsight. This is about understanding how the business is changing and setting
ourselves up for success. We simply don't want to waste our shareholders' capital on third-grade malls. With
nearly 20 vacant anchors in the 16 properties we sold, I'd say we were dead-on accurate.
Today, we're putting our shareholder capital to work in places like Philadelphia, Washington D.C., Grand Rapids,
Michigan, solid growing markets with strong demographic profiles. We also bought Springfield Town Center,
despite a sharply negative initial reaction. We told you it would perform, and it has. Sales which were projected at
$525 per square foot are now approaching $530 per square foot, having grown every month. Occupancy is at
91% with almost 70,000 square feet having opened in 2016 and we're receiving unsolicited inquiries into
densification of the peripheral land.
We also were pioneers in recognizing the critical importance of bringing dining and entertainment to the tenant
mix in light of shifting spending habits, seeking experiences in addition to goods, mainly among the millennial
population.
Currently, we have 17% of our portfolio dedicated to dining and entertainment, which we expect will exceed 20%
in the near-term. Recently opened venues are acting as proof of this approach with impressive sales volumes
leading to overage rent in many cases.
At Exton, where we opened our first Round 1 Entertainment, the reception is indicative of the customers' desi re to
socialize and interact. It has quickly become the number two entrance of the mall, driving more traffic than the
department stores.
We've also been leaders in proactively rationalizing our department store mix. We've been at work reducing
traditional department store exposure for over four years. In 2016, we replaced or signed a number of anchors.
DICK's Sporting Goods opened at Cumberland, replacing the JCPenney. At Exton, Round 1 replaced the
JCPenney and Whole Foods is under construction, replacing Kmart.
A DICK's Field & Stream combo store, along with HomeGoods, is under construction to replace Sears at
Viewmont. And we recently announced the three additional Sears replacements that have been executed.
We've reduced our Sears exposure from 27 to 10. Notably, they are no longer one of our top 20 tenants. Just five
years ago they ranked seventh in our portfolio. We've reduced our Macy's exposure from 25 to 19, as it relates to
the three recently announced closings we have assigned LOI on one of the boxes and are in advanced discussion
for the other two stores.
We're particularly pleased at the announced Macy's closings at competitive malls in Massachusetts, Virginia and
Philadelphia, will serve to further strengthen our premier assets with existing stores located in these markets,
including Cherry Hill Mall, Willow Grove Park, Patrick Henry, Springfield Town Center, and Dartmouth.
And again, our JCPenney exposure has been reduced from 29 to 16. And as we mentioned, after today's store
closing announcement, we expect to get only one back.
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What's this anchor improvement and redevelopment work do for us? First and foremost, it drives shareholder
value through a geometric effect. It enhances the shopping experience and dramatically diversifies the tena nt mix
at our properties.
Let's look at the three Sears take backs, the composition of these three boxes. DICK's, a large-format sporting
goods retailer, Burlington, a discount department store, and Von Maur, a high-end fashion department store, all
with additional space for restaurants and inline tenants, creating value and variety and driving traffic sales and
newness and cross-shopping. It also improves our credit profile with two Fortune 500 companies.
These sought-after tenants with strong credit coupled with increased ability to drive inline tenant interest, sales
and rents, creates tremendous value at the asset level through cap rate compression and NOI growth.
And this arguably puts us ahead of the curve. We've touched 13 department stores in our portfolio over a threeyear time horizon at a time when there are 400 vacant stores, or 60 million square feet of department store space
on the market, putting us a step ahead in the completion circuit, similar to our approach in the disposition
program.
The result of all of this is a stronger portfolio positioned to capitalize on changing retailer and shopping behavior.
And these efforts set us up to be able to continue to attract high-quality tenants and customer traffic. Our 2016
results were strong, reflecting the work we've done to-date.
We should not forget what we overcame in delivering these results. Same Store NOI growth averaged 4.4%. In
2016, we delivered strong renewal spreads of 14.3%, when excluding leases that were restructured with
Aéropostale.
We also saw sales growth when others did not. We attribute this to our extensive and ongoing remerchandising
efforts, propelled by the retailer demand in our new portfolio. We delivered these results in spite of significant
tenant bankruptcies and anchor closings. 2017 is impacted by a number of factors, including anchor closures and
the related co-tenancy impact, and of course, bankruptcies from 2016 and 2017.
Now, let's take a minute to talk about this accelerated pace of bankruptcies and our view on it. We opened talking
about survival of the fittest and the consumer. Today's millennial consumer has clearly voted for fast fashion and
discounts, so you are seeing the likes of Wet Seal, The Limited, PacSun fall victim to this.
And we have responded to this, having added seven H&Ms stores to our portfolio just last year, recently signing
two more H&Ms, Zara and Primark. We're confident that we've created a portfolio comprised of well -located, highquality assets capable of overcoming obstacles and creating continuous opportunities.
We're confident that the moves we are making on the anchor side will drive demand for inline space as well.
We've talked before about the continuous cycle of improvement that begins with an improved portfolio and an
ability to attract higher-quality tenants. This is all part of that cycle.
There's a lot of movement in our industry and tenant base right now, and yes, stores are closing. But our view is
that we are detoxing our portfolio as we move toward a healthy environment and our future looks bright as a
result. We posted to our website a multiyear plan detailing how these efforts contribute to our future growth and
we urge you to review it. The plan lays out the path depicting how our bold actions set us up for accelerat ed
growth going forward. We have underway 12 projects, most of which will be completed by the end of 2018.
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As we complete major redevelopments, back-fill bankrupt inline tenants and replace department stores, delivering
strong rents, curing co-tenancy and driving the leasing environment at these properties, we're targeting average
NOI growth of 6% to 8% over the three-year time horizon from 2018 to 2012.
Now, let's talk about these projects. At Fashion Outlets of Philadelphia, exterior demolition is in full swing and the
balance of the interior access has been closed off to the public. Leasing continues to be strong, with
approximately 70% of the project in LOI stage or better.
At Mall at Prince Georges, in suburban DC, the renovation is underway to be completed this year and we believe
this will be our next $500 per square foot asset with the newly opened H&M outperforming expectations.
At Viewmont, one of the first dual concept DICK's Field & Stream combo stores is under construction, expected to
open ahead of schedule. At Exton, located in Pennsylvania's fastest -growing county, Whole Foods construction is
nearing completion. At Plymouth Meeting, the 33,000 square foot LEGOLAND Discovery Center will open in April
and we are in advance discussions to replace Macy's.
At Magnolia Mall, Sears has been vacated and we are underway for a 2017 opening for Burlington. At Capital
City, Sears has vacated and we're underway for a 27 opening of DICK's Sporting Goods.
At Woodland Mall, in Grand Rapids, Michigan's second largest city with a population of over 1 million, we have
executed a lease for our first Von Maur department store. The addition of this sought -after retailer will
complement the existing high-quality tenants at Woodland including Apple, North Face and Pottery Barn among
others and meet the retail demand of strong shopper demographics in the region.
Von Maur, along with an array of high-quality retail and enclosed small-shop space and 30,000 feet of quality
restaurants, will join the roster in 2019, strengthening this top asset.
We wholeheartedly believe that we have made the right decisions and that while 2017 is a transition year, if we
continue to focus on long-term value creation, we will be rewarded. Rewarded with continued opportunities to
bring new and exciting tenants to our portfolio and rewarded with a stronger multiple.
Most importantly, we think it helps us to prove our value proposition. We sit here today at a deeply discounted
valuation based on moment in time news reports that lack clarity and frankly, substance, and give no credit to the
quality of our assets or the momentum we've created. The opportunity is to buy shares in a high-quality mall
company with outsized near-term growth prospects at a steep discount to consensus NAV.
Think about what we're on our way to. A 24-mall portfolio led by Cherry Hill, Fashion Outlets of Philadelphia,
Springfield Town Center, Willow Grove and Woodland, sales exceeding $525 per square foot, a powerful
presence in two major markets, Philadelphia and D.C., market-dominant, franchise assets in strong secondary
markets, over 20% of space committed to dining and entertainment therefore, insulated from shifts in apparel
preferences, a strong diversified anchor mix and realistic densification opportunit ies in major markets leading to
thousands of apartments, hotels, and build-to-suit office space.
With that, I'll turn it over to Bob.
................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust
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Thank you, Joe. I want to cover results of operations and cover guidance on our multiyear plan. Regarding
operations, we had a strong quarter despite the drag on performance from the 2016 bankruptcies and related
store closings. Same Store NOI was 4.4% and 1.7% without lease terminations. Lower revenues from tenants
filing for bankruptcy in 2016 impacted our fourth quarter FFO results by approximately $700,000 or $0.01 per
share.
Our Same Store NOI growth rate was reduced by approximately 100 basis points in the quarter for the same
reason. On a year-to-date basis, bankruptcies reduced revenues in our Same Store properties by about $1.6
million or $0.02 per share.
Non-anchor occupancy for our Same Store retail properties finished the year at 93.6%, which was down 30 basis
points compared to 2015's ending occupancy. Store closings from bankrupt tenants disproportionately impacted
our joint venture properties, reducing our year end 2016 occupancy by 120 basis points.
Renewal spreads throughout the year continued to reflect the benefits of an improved portfolio. We opened
218,000 square feet of new tenants in the fourth quarter, including DICK's, Round 1, and H&M stores at the Mall
at Prince Georges and Patrick Henry Mall.
These fourth quarter openings will help us drive leasing momentum into 2017. We continue to build a strong
pipeline of leases for future openings with almost 0.5 million square feet of tenants with signed leases not yet in
occupancy.
These tenants, when opened over the next few years, will contribute approximately $10 million of incremental
revenue to our top line. After taking into account the $0.04 dilution from the 2015 and 2016 asset sales, we
generated a 7.5% increase in FFO as adjusted for the quarter to $0.57 per share. The increase was driven by
improved Same Store operating results, contributions from new properties, and lower interest rates.
Average rent for small-shop tenants at our malls increased by 1.8% to about $57 per square foot. Comp sales of
these properties increased 1.6% to $464 per square foot and occupancy cost of 13.1% provide additional room
for growth as leases roll in future years.
Our sales growth continued into 2017, as we finished January with sales reaching $468 per square foot.
Operating margins in our Same Store properties increased by 70 basis points to 64.9%, while expense recoveries
improved by 30 basis points to 93%. G&A expenses were comparable to last year's fourth quarter and up
modestly for the full year.
Our net loss attributable to PREIT common shareholders was $27.8 million or $0.40 per share, both comparable
to the prior year's quarter. The 2016 quarter included impairment losses taken on the two malls we've sold in early
2017 along with a land parcel that we are offering for sale.
Turning to the balance sheet, we utilized the proceeds from asset sales to fund our redevelopment spending and
we're still able to reduce debt balances by approximately $78 million since the end of 2015.
The combination of lower outstanding debt balances and lower rates cont ributed to a $3 million reduction in
interest expense for the quarter. Following a Series C preferred shares issuance in January and the sale of
Beaver Valley and Crossroads Malls, our credit facility borrowing capacity increased to $339 million. At the en d of
December, our bank leverage ratio was 51.1%, but 47.3% on a pro forma basis taking into account the January
transactions.
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Our average interest rate excluding non-cash amortization was 3.87%, a 32 basis point reduction from a year
ago. Our debt maturities are well laddered with approximately 80% of our loans maturing after 2018.
Our modified term loan facility incorporates a deferred draw feature, which will give us the flexibility to repay the
$150 million loan on the Mall at Prince Georges when it matures in a year, adding to our unencumbered asset
pool.
At the end of the quarter, approximately 90% of our debt was fixed or swapped, leaving us well -positioned to
mitigate the impact of any increases in short-term interest rates.
We are introducing our FFO and net income guidance for 2017 with FFO per share expected to be between $1.64
and $1.74. GAAP earnings are expected to range from a loss of $0.10 to breakeven.
In our press release, we provided a bridge between 2016's results and our 2017 guidance. While the release
provides a number of detailed assumptions, let me review some of the key assumptions and a couple of other
factors with you. The net dilution from asset sales completed during 2016 and 2017 is approximately $12.2 million
or $0.16 per share.
Our Same Store NOI growth expected in 2017, excluding lease terminations, is approximately 1% to 2%, which is
comprised of 1.5% to 2.5% growth at our wholly-owned mall properties and negative 1% to negative 2.5% at our
joint venture properties.
Bankrupt tenants will reduce 2017's NOI by an additional $4 million on top of the $1.6 million impact we
experienced in 2016. The financial impact of anchor closings and related co-tenancies is estimated to be
approximately $1.2 million in 2017.
Lease termination revenue is expected to be between $1.5 million and $2.5 million, down from $6.2 million
recorded in 2016. We expect lower interest expense, reflecting savings from applying the proceeds from asset
sales to pay down debt, repaying our line of credit balances using proceedings from the Series C preferred shares
issued in January 2017, and lower rates realized on completed and expected financing transactions.
Our guidance assumes we keep our Series A preferred shares outstanding during 2017. We have placed a high
priority on completing the sale of various non-core assets. Our capital plan assumes a future redemption of the
Series A shares as we generate proceeds from non-core asset sales. To the extent we complete the asset sales
in 2017; we will have an opportunity to redeem the Series A earlier than currently forecast.
We expect capital expenditures to be in the range of $225 million to $250 million, including redevelopment
expenditures, recurring CapEx, and tenant allowances. Our guidance does not assume any other capital market
transactions other than mortgage loan financings in the ordinary course of business.
Last night, we posted a multiyear plan to our website. A little over a year ago, at our last Investor Day, we
presented our roadmap for PREIT. Since that time we sold off eight malls and have identified a number of
opportunities to re-purpose anchor space with new and exciting tenants.
In light of the changes that have taken place in our business over the past 12 months, we thought it was important
to update our roadmap. So, if you have not looked at the plan yet, I would encourage you to do so.
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As Joe mentioned, we laid out a plan that targets NOI growth averaging 6% to 8% over the 2018 to 2020 period.
That growth is expected to come from a combination of organic growth and incremental returns on capital
invested in our existing assets.
The presentation provides more detail on all of the projects that Joe mentioned in his remarks and lays out the
assumptions to achieve our growth, leverage and liquidity targets.
Key assumptions include capital spending of up to $450 million, including the completion of Fashion Outlets of
Philadelphia, a major redevelopment at Woodland Mall, remerchandising of the Mall at Prince Georges, and
anchor replacements for Sears and Macy's. A significant portion of that spending will occur over the next few
years with many of the projects slated for 2018 openings.
Returns by projects will vary, but we're targeting between 7% and 10% returns on incremental capit al. Specific
return targets for individual projects are laid out on page 31 of our December supplemental.
We're targeting approximately $150 million of net proceeds from asset sales including interests in certain joint
venture properties, the sale of land parcels, and other non-operating assets in our portfolio.
As we've previously addressed, we would use a portion of the proceeds from the sale of non-core assets to fund
the redemption of our Series A preferred shares. In the interim, we plan to maintain the liquidity provided by the
preferred shares until we are able to secure replacement capital. We do not assume the sale of any wholly -owned
properties, but continue to consider the sale of a joint venture interest in one or more properties.
We also did not underwrite the incremental costs and returns from exploiting densification opportunities that exist
in our portfolio. We see additional upside potential in these opportunities beyond our current capital program.
Finally, page 8 of the deck provides a capital plan roadmap that summarizes our sources and uses towards our
leverage, debt to EBITDA, and liquidity targets.
Let me turn it back to Joe for a recap.
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust
Before we open it up for questions, let me reiterate where we are headed. A 24-mall portfolio led by Cherry Hill,
Fashion Outlets of Philadelphia, Springfield Town Center, Willow Grove and Woodland. Sales exceeding $525
per square foot, a powerful presence in two major markets, Philadelphia and D.C., market-dominant franchise
assets in strong secondary markets, over 20% of space committed to dining and entertainment, therefore
insulated from shifts in apparel preferences, a strong diversified anchor mix and realistic densification
opportunities in major markets, leading to thousands of apartments, hotels, and build-to-suit office space.
And now we'll open it up for questions.
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QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] And our first question comes from the line of Karin Ford from MUFG Securities.
Your line is open.
................................................................................................................................................................................................................................
Karin Ford
Q
Analyst, MUFG Securities Americ a, Inc.
Hi, good morning. Could you just give us a little more detail on what underlies the 6% to 8% Same Store NOI
growth expectation for 2018 to 2020?
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Hey, Karin, this is Bob. As we laid out in the deck, we're expecting about two or three quarters to 3% Same Store
NOI growth and then 7% to 10% returns on approximately $450 million of incremental capital to be spent over that
period.
................................................................................................................................................................................................................................
Karin Ford
Q
Analyst, MUFG Securities Americ a, Inc.
And could you just walk us through the economics of what a typical anchor replacement would look like? What will
be the purchase price? What will be the redevelopment spend? What type of rent increases and sales increases
would you expect?
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Well, the purchase price for the asset, first of all, is at least [indiscernible] (29:07) owned. And the purchase price
can vary anywhere from $1 million to buy an owned property back to $20 million. Typically, though, the spend
again depends on, if you are replacing a box with a box, right. In one case, we're putting a department store back
into a department store space, we're seeing a spend in the $5 million to $6 million range.
In another case, we're taking that department store, taking it down, redoing it and that number is probably going to
be in the $30 million range. But the returns tend to be fairly well situated within that 7% to 10% range.
................................................................................................................................................................................................................................
Karin Ford
Q
Analyst, MUFG Securities Americ a, Inc.
Okay. How much of the program would you characterize as proactive and how much of it would you say is
reactive?
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
A
As it relates to the anchor boxes specifically?
................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities Americ a, Inc.
Q
Well, just the whole $450 million capital?
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Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
I would say that for the most part, the majority of it is proactive and not a defensive move. We made a very
conscious decision as I mentioned in my script, not to invest capital in the second tier or third tier properties. And
so what we're doing is, in most cases strengthening an already strong position. And that's probably best
described by Woodland Mall, right. At Woodland Mall we're essentially taking a mall that's doing in excess of $500
a square foot, that has a premier tenant roster and adding to it a Von Maur, a fashion department store,
restaurants, and some pretty exciting inline retailers, very proactive.
At Fashion Outlet of Philadelphia, which is a significant portion of those $450 million; again, a very proactive effort
to bring high-quality retail, if you will, to Philadelphia City that has everything else but that. That answered your
question, Karin?
................................................................................................................................................................................................................................
Karin Ford
Q
Analyst, MUFG Securities Americ a, Inc.
Yeah, it did. Thanks for the color.
................................................................................................................................................................................................................................
Operator: Our next question comes from the line of Christy McElroy from Citi. Your line is open.
................................................................................................................................................................................................................................
Christy McElroy
Q
Analyst, Citigroup Global Markets, Inc. (Broker)
Hi, good morning guys. Bob, you mentioned $1.2 million impact from anchor closings in co-tenancy, which I think
is about 50 basis points on Same Store NOI, can you break that out between the lost anchor rent and a co tenancy impact?
And then Joe, you mentioned more department store recapture in coming years, how do we get comfortable with
a 3% – roughly 3% Same Store NOI growth forecast in 2018 to 2020 when you my continue to see a drag from
re-tenanting?
................................................................................................................................................................................................................................
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
I'll take the first piece of that Christy. It's roughly a couple hundred thousand dollars from lost anchor rent and
about $1 million from co-tenancy adjustments.
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
A
Christy, I think I may have – I mentioned more to close at the properties we sold, to be clear about that. I think
we're – our statement about JCPenney is, that in their 140 store announcement this morning, we will be affected
by one store; it's actually less than one store. If you want to split hairs here because, it was a former department
store and about 40% of it is already occupied by tenants other than JCPenney. So, we don't – as we look at our
department store mix today, we think we have a very strong, well-rationalized mix of department stores. I don't
see significant closures in front of us.
................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. (Broker)
Q
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Okay, got it. And with regard to that one JCPenney that you are getting back. You mentioned it's at one of your
top assets. Why do you think JCPenney is willing to sort of give back that store if it's a strong mall for you? Do you
have a sense for how they are sort of approaching this round of closings? And did they approach you or vice
versa?
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Well, let me sort of not keep the cat in the bag. It's Willow Grove.
................................................................................................................................................................................................................................
Christy McElroy
Q
Analyst, Citigroup Global Markets, Inc. (Broker)
Okay.
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Center is trending towards $650 a foot at this point. It was absolutely on a tear in terms of sales growth. And the
JCPenney store that was one of the first Ron Johnson prototypes.
I could stop there, or continue. And it really is not a traditional JCPenney. I think never really regain the former
JCPenney customer. And we see it as a great opportunity to really bring in tenants; we are high in the 90s, 95%,
96% occupied at Willow Grove. We see it as real opportunity to re-purpose the space and we've been in
discussions with tenants for that space for about 60 days now.
................................................................................................................................................................................................................................
Christy McElroy
Q
Analyst, Citigroup Global Markets, Inc. (Broker)
Okay. Thank you.
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
That answer your question? Christy, did that answer your question?
................................................................................................................................................................................................................................
Christy McElroy
Q
Analyst, Citigroup Global Markets, Inc. (Broker)
It did. Thank you.
................................................................................................................................................................................................................................
Operator: Our next question comes from the line of Ki Bin Kim from SunTrust. Your line is open.
................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc.
Q
Thanks. Good morning everyone. So, first I want to give you guys credit for selling some of these assets earlier
on and avoiding maybe some more pain down the road. But with that said, I just have a couple of questions here.
First on your reported Same Store NOI growth of 1.7% in the quarter. It looks like if you back out Springfield Town
Center's contribution of $2.3 million; it looks like the NOI growth – Same Store NOI growth would have been
maybe negative 1.5%. And at the same time, if I look at your operating metrics whether that be sales per square
foot or occupancy year-over-year, those are healthier than that negative 1.5%. So, what am I missing here?
................................................................................................................................................................................................................................
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24-Feb-2017
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
Well, there's a couple things. One, there were a number of lease terminations – well to start with, the impact of
bankruptcy. So, we had about $700,000 in the quarter. In addition, there were a number of proactive store
recaptures that were reflected earlier in the year in lease termination income. Some of these stores are vacant in
anticipation of the remerchandising initiatives that we have underway. Probably the most significant is the
introduction of Zara to Cherry Hill Mall. So, we terminated a UNIQLO lease at both Cherry Hill, Willow Grove to
make way for our future remerchandising impact. So, we have that as well impacting our fourth quarter.
................................................................................................................................................................................................................................
Ki Bin Kim
Q
Analyst, SunTrust Robinson Humphrey, Inc.
And – so I guess same question for 2017 guidance of plus 1% to plus 2%. If I back out – and I guess we're
assuming about $4 million contribution from the Springfield. It still looks like 2017 might be a flattish year, is that
correct?
................................................................................................................................................................................................................................
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
I think you're probably overestimating the contribution from Springfield. It's probably closer to $3 million
incrementally. But yeah, we would expect early part of the year to be flat and then the second half of the year to
pickup, based on the tenant openings and kind of whittling the impact of the 2016 bankruptcies, as we fill that
space with replacement tenants.
................................................................................................................................................................................................................................
Ki Bin Kim
Q
Analyst, SunTrust Robinson Humphrey, Inc.
Okay.
................................................................................................................................................................................................................................
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
And again as we open up the replacement anchors that co-tenancy drag goes away.
................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc.
Q
Okay, got it. And in terms of your guidance of $1.59 per share FFO in 2017, it's interesting that in your guidance
you're assuming that the Series A proffered is not redeemed?
................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
A
Yes, that is correct.
................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc.
Q
And so why is that? I mean it sounds like a material change from just a couple weeks ago when you issued new
shares I thought that would be used to pay down the older preferred?
................................................................................................................................................................................................................................
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Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
No, you should go back and read the prospectus supplement because I think it was clear that we did not explicitly
say we were going to use it to redeem the Series A. But let me give you some color on that. I think clearly we saw
the market as a great opportunity early in January. The market conditions were very ripe for us. So, we took
advantage for the market to raise that additional capital, which was really not initially planned.
If you go back six months ago, we didn't anticipate we would have that opportunity. Once we saw the opportunity,
we took it in light of the capital plan that we have laid out for you as of last night.
But we also have continued asset sales of non-core assets, joint ventures, peripheral land, et cetera that, we're
working very diligently to execute. And as we complete those sales, we'll use a portion of those proceeds to
redeem the Series A, which we can do – we don't have to do it all at once, we can do it in pieces.
So, our plan is as we complete asset sales, we'll nibble way out the Series A preferred, but we really can't predict
with any degree of certainty when those sales will be completed. So, for the purposes of providing guidance, we
just assumed that both the sales and redemption would occur in the year beyond 2017. But as we've all said,
we're working very hard to accelerate that. But at this point, we didn't want to set expectations that we couldn't
deliver on.
................................................................................................................................................................................................................................
Ki Bin Kim
Q
Analyst, SunTrust Robinson Humphrey, Inc.
Okay. When I'm reading your old press release it says possibly to redeem the outstanding Series A preferred
shares. So, I took that as that you want to do it. But I guess we're kind of splitting hairs here.
................................................................................................................................................................................................................................
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
Yes.
................................................................................................................................................................................................................................
Ki Bin Kim
Q
Analyst, SunTrust Robinson Humphrey, Inc.
But it sounds like with the capital needs you have in 2017, 2018, 2019, 2020 is that part of the reason why
because you need about $450 million of capital, maybe that's why you're considering keeping the Series A
outstanding for longer?
................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
A
Yes, it's a matter of time. If you look at the deck that we put out, we end the forecast period with close to $400
million of net cash, but in the interim there are points along the way where our capital constraints – our capital is
somewhat constrained. So, we want to give ourselves the flexibility to get through the short term. And then once
we have some clarity on asset sales and the timing of spending, [ph] that (40:32) will give us the flexibility to make
a different decision or consider a different decision on the Series A.
................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc.
Q
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Corrected Transcript
24-Feb-2017
Yeah. I guess I was just confused because why issue preferred versus debt given that I think the market mostly
assumes that preferred – treats preferred equity as debt anyway, but I will leave it there.
................................................................................................................................................................................................................................
Operator: Our next question comes from the line of Michael Mueller from JPMorgan. Your line is open.
................................................................................................................................................................................................................................
Michael W. Mueller
Q
Analyst, JPMorgan Securities LLC
Hi. Real quick just on the prior question. Just to clarify, make sure I understand this completely. So, even though
the $150 million of asset sales isn't in 2017 guidance, you're actually going through and trying to sell the assets,
you're just not putting them in there? And if you do sell them, you may end up taking out some of the preferred, is
that the right way to think of it?
................................................................................................................................................................................................................................
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
Yeah, that's right way to think about it.
................................................................................................................................................................................................................................
Michael W. Mueller
Q
Analyst, JPMorgan Securities LLC
Got it. Okay. And then on the Same Store NOI for the – I think it was for the guidance for this year, you talked
about the difference in terms of the consolidated assets versus the JV, and the JV was notably negative. Can you
talk a little bit about what's driving that disconnect?
................................................................................................................................................................................................................................
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
The big issue is that the JV assets particularly, the power centers, they had a disproportionate amount of anchor
closings, you had Sports Authority, you had a number of Old Country Buffets and other – these are big boxes that
take some time to fill.
So, our partners are anticipating leasing some of these boxes up in 2017, but you won't get full impact. And these
are the assets that we have been trying to sell, right. These are the three joint venture power centers that we are
actively working to sell.
................................................................................................................................................................................................................................
Michael W. Mueller
Q
Analyst, JPMorgan Securities LLC
Okay, that's helpful. And then one other question, you talked about the bigger CapEx spend, but if we're just
thinking about like normal course recurring CapEx, where do you see that level coming in in 2017?
................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
A
You're talking about like recurring CapEx and TAs?
................................................................................................................................................................................................................................
Michael W. Mueller
Analyst, JPMorgan Securities LLC
Q
Yeah, yeah. Exactly.
................................................................................................................................................................................................................................
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Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
It's like – call it $45 million to $50 million.
................................................................................................................................................................................................................................
Michael W. Mueller
Q
Analyst, JPMorgan Securities LLC
Got it. Okay, that was it. Thank you.
................................................................................................................................................................................................................................
Operator: Our next question comes from the line of Floris Van Dijkum from Boenning. Your line is open.
................................................................................................................................................................................................................................
Floris van Dijkum
Q
Analyst, Boenning & Scattergood, Inc.
Great. Thanks guys. Just wanted to touch upon – I guess two things. In terms of your anchor exposures,
obviously, it's great to hear about JCPenney. But I'm thinking about its not just – it appears like it's not just
downside, there's actually quite a bit of upside here if I'm not mistaken. Don't you have a 2017 exposure of a
Macy's box at $194 a square foot at one of your properties?
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Doesn't pop-up for us.
................................................................................................................................................................................................................................
Floris van Dijkum
Q
Analyst, Boenning & Scattergood, Inc.
I'm looking at your schedule, sorry, and I'm, maybe I'm looking here at which one it is, [ph] is $200 per square
foot, is (43:40) the Lehigh Valley? And I'm also looking at the Macy's, maybe these are – as I look at your
supplemental, maybe that's the first – maybe there're some renewal options in that as well, but that seems to be
pretty...
................................................................................................................................................................................................................................
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
Yes, there is, it says renewal option. I mean, it's obviously a great center. It's a joint venture with Simon, does
$550 a foot. And yes, that lease you're talking about has renewal options.
................................................................................................................................................................................................................................
Floris van Dijkum
Analyst, Boenning & Scattergood, Inc.
Q
Got it. So, you can't get at that yet, but...
................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
A
I would doubt very highly that would be one of the stores Macy's closes. I think it is the only store – only Macy's in
the Lehigh Valley.
................................................................................................................................................................................................................................
Floris van Dijkum
Analyst, Boenning & Scattergood, Inc.
Q
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Corrected Transcript
Q4 2016 Earnings Call
24-Feb-2017
Got it. Got it. Okay. And Joe, congratulations on becoming the Chairman. Just I had a question for you on your –
could you remind us maybe on the anti-takeover provisions for a Pennsylvania REIT? And would you opt -out of
MUTA for shareholders or the equivalent of MUTA?
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Yeah. MUTA is not applicable to us in Pennsylvania. So, I get your question, Pennsylvania is not the most
favorable shareholder state in terms of if you are getting at strategic questions. But we – it's not an option in the
State of Pennsylvania number one. And number two these are things that we're in constant communication with
our board about.
................................................................................................................................................................................................................................
Floris van Dijkum
Q
Analyst, Boenning & Scattergood, Inc.
Okay. That's it for now. Thanks.
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Thanks Floris. And thank you for the congratulatory words.
................................................................................................................................................................................................................................
Operator: Our next question comes from the line of Christy McElroy from Citi. Your line is open.
................................................................................................................................................................................................................................
Michael Jason Bilerman
Analyst, Citigroup Global Markets, Inc. (Broker)
Q
Hi, it's Michael Bilerman. So, Joe, as you went through the board process, can you just help us understand I
guess, Ron giving up the Chairmanship, but staying on the board. And why the board felt that having a Chairman CEO, and I recognize it's something that can be viewed important, but I think from corporate governance
perspective, a lot of people, investors and corporate [ph] consultancy (46:19) firms would like a split of the
Chairman-CEO role even with the lead independent trustee. So, how did the board in the idea of improving
corporate governance decide to maintain a Chairman and CEO role?
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
A
Well, first off, as it relates to Ron's decision, I mean he just felt that it was time that he wanted to step down. So,
obviously, a personal decision. He and I worked together for a long time and it was somewhat bittersweet. I think
– so as it relates to Ron, I think...
................................................................................................................................................................................................................................
Michael Jason Bilerman
Analyst, Citigroup Global Markets, Inc. (Broker)
Q
But he's staying on the board. So, it's really not, you're giving up the chairmanship role, but he's still on the board.
So, that really doesn't change...
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
A
Yeah, exactly. But obviously Ron and I worked together for a long time. First stepped down as CEO, now he
stepped down as Chairman. And it's nonetheless for me is something that I'm honored, just put it that way. As it
relates to the decision to join the two roles and nominate me, I think it was the board looked around at the
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Q4 2016 Earnings Call
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Corrected Transcript
24-Feb-2017
possibilities, at the opportunities, and simply made a decision in light of – again just what the opportunities and
choices were at the time.
................................................................................................................................................................................................................................
Michael Jason Bilerman
Q
Analyst, Citigroup Global Markets, Inc. (Broker)
But couldn't they just have named the Lead Independent Trustee Chairman, and actually split the roles?
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
A
That's what they decided to do, Michael. I mean, I get your point. I understand your question. But again, it was a
board-driven decision.
................................................................................................................................................................................................................................
Michael Jason Bilerman
Analyst, Citigroup Global Markets, Inc. (Broker)
Q
As we think about the stock prices, and I appreciate the presentation on the strategic overview and I appreciate
the bold actions that you've taken in terms of disposing of assets early relative to the peers that had similar assets
really pushing dining, entertainment, making the move to acquire Springfield from Vornado, bringing in Macerich
to the downtown Philly project. I guess the stock is basically anywhere from 2010, 2011, 2012 levels, right. So,
the stock unfortunately is not at a place where this has been rewarded. Now, we can debate where the stock
would be if you didn't take the bold actions that you did, but at the end of the day, the stock is meaningfully below
what you probably perceived.
So, you talked about the anti-takeover provisions for a Philadelphia-based company. At some point, do you now
as Chairman of the board have to take a deeper look and say, maybe we shouldn't be public, and we have to
more aggressively and not wait till 2020 on the strategic plan. But we got to do more decisive action today to
move this company forward and get it to a price where I believe it should be – where you believe it should be?
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
A
Well, a couple of comments to that. Number one, I mean we're clearly not happy with where our stock price is.
You make no mistake about it. It's been in a freefall since August. And I think as it relates to the work we're doing
though, we think that there is – there continues to be value to be harvested and that there has been somewhat of
an overreaction in the marketplace to department store closings. And we think, as I mentioned in the script, that
our portfolio is well-positioned to absorb this. And I don't think we're sitting around, sort of not taking action. I think
as you heard in the script, much underway.
We're trading at a significant discount. We think the actions that we're taking have the ability to close that NAV
gap, but at the same time, our board and myself are constantly looking at all options that are available to us in a n
effort to drive shareholder value.
................................................................................................................................................................................................................................
Michael Jason Bilerman
Analyst, Citigroup Global Markets, Inc. (Broker)
Q
If you think about where your FFO is, right, your guidance of $1.64 to $1.74 in October, the Street was at $2. So, I
take your point on freefall, at the same time, your earnings expectations has come in meaningfully below not only
where it stood as of last night, but where expectations were towards the end of last year.
................................................................................................................................................................................................................................
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Q4 2016 Earnings Call
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Corrected Transcript
24-Feb-2017
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Right. Well, again, we think there is a – there's, given the work that we are doing that from an FFO perspective,
we'll get back to where we were before we sold our first asset in 2012 as a result of the redevelopments, FOP,
stabilizing Springfield Town Center, the anchor replacements, Woodland, et cetera, et cetera. So, we're in a –
from an FFO perspective, we are in a trough, right, there's no question about that. But, again, we see that being
solved over some medium-range period of time.
................................................................................................................................................................................................................................
Michael Jason Bilerman
Q
Analyst, Citigroup Global Markets, Inc. (Broker)
Okay. Thank you.
................................................................................................................................................................................................................................
Joseph F. Coradino
A
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
Thank you.
................................................................................................................................................................................................................................
Operator: Our next question comes from the line of Karin Ford from MUFG Securities. Your line is open.
................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities Americ a, Inc.
Q
Hi, just couple of follow-ups. Can you talk about what type of traffic trends you might've seen at any of the centers
where you track it?
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Offic er, Pennsylvania Real Estate Investment Trust
A
Actually, Karin, at the two properties where we have comp traffic, that's both Cherry Hill and Moorestown, holiday
traffic was up. In the case of Moorestown, up double-digits. In the case of Cherry Hill, low single-digits.
So, the – from a data perspective, traffic at those two assets were up. From a sales perspective, which I think
really is a good barometer as well. We're seeing our sales continue to move in a positive direction. Even most
recently through January, we're now approaching $470 per square foot in sales. And we are adding by the way,
traffic counters that will become comp as time goes on. So, – but today, with specificity, just those two assets and
that's a positive story.
................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities Americ a, Inc.
Q
Thanks for that. And then just a last one sorry if I missed this Bob, but did you say what the sources of the $260
million of financing proceeds was going to be on page 8?
................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
A
No. I don't know that we did it. We didn't lay it out in the book, but we assume there's $100 million of construction
financing our share in FOP. There's an additional construction limit we have put on Woodland Mall. And the
balance comes from refinancing mortgages that come due over that time period and excess proceeds from those
refinancings – excess proceeds from mortgages as well as construction loans in two other larger projects.
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Q4 2016 Earnings Call
24-Feb-2017
Karin Ford
Q
Analyst, MUFG Securities Americ a, Inc.
Great. Thanks. Do you know roughly just an estimate of what the cost is going to be on those?
................................................................................................................................................................................................................................
Robert F. McCadden
A
Chief Financial Officer & Executiv e Vice President, Pennsylvania Real Estate Investment Trust
Not at this point.
................................................................................................................................................................................................................................
Karin Ford
Q
Analyst, MUFG Securities Americ a, Inc.
Okay. Thanks.
................................................................................................................................................................................................................................
Operator: We have no further questions in queue. I'll turn the call back to the presenters.
................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust
Well, thank you all very much for participating and for engaging with questions. We look forward to seeing you all
at various investor conferences over the next few weeks and months. Thank you.
................................................................................................................................................................................................................................
Operator: This concludes today's conference call. You may now disconnect.
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