PEI
#Thank you.
Good morning, thank you all for joining us for PREIT's first quarter 2018 earnings call.
During this call, we'll make certain forward-looking statements within the meaning of the 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, May 2, 2018, 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 <UNK>, PREIT's Chairman and CEO; and Bob <UNK>, our CFO.
I'll now turn the call over to Joe <UNK>.
Thank you, <UNK>, and good morning to everyone.
Welcome.
An earnings call is a time for us to update you on our business and its future as it relates to our strategy, not only for the quarter but over the long term.
Our strategy has always been one that takes a long view and we feel good about the business and where we\
Thanks, Joe.
I want to review our earnings guidance first, move on to operating results for the quarter and the progress we\
There's clearly a disconnect between the valuation of our company and our share price.
Our share price is inordinately pressured by short interest.
We're confident our business is solid, fundamentals are improving, we have access to capital and a great portfolio.
We think there are ways to influence the short sellers, including refinancing our credit facility, which is underway, executing our business plan within our guidance range, maintaining our dividend, even increasing it over time and bringing JV partners on densification projects.
Now, we'll open it up for questions.
So Christy, other than the kind of few noncontrollable items, we were in line with our own internal expectations.
I think principally, focused on our top line revenue growth, we were basically spot on our internal budget for the first quarter.
I think, The Street may have missed just in terms of the cadence of our NOI.
I think we expect to have, first half of the year, probably a little bit [better] than we did last year, and with a ramp-up of NOI and FFO in the second half of the year, following the opening of anchor replacements, other seasonal lease-up.
Well we're expecting our average rent spreads to be in the mid-single digits for the balance of the year based on what we have on our pipeline.
Right.
In some cases, yes.
In other cases, they're just renegotiated leases for tenants set.
As you look at the term, typically they're 1-year terms.
So essentially keeping tenants in place as we identify their replacements.
At this point, yes, we're still comfortable where we are.
We think about where we were a year ago, we weren't at a much different place, although we had a much more challenging second quarter, which we expect to outperform this year.
So I think when you look at where we are at the end of June, I'd ask you to kind of reassess your expectation of our performance.
I think, we feel pretty comfortable where we are at this point in time.
Yes, <UNK> <UNK>, there's still a good deal of levers that we can push at this point as it relates to partnership marketing and specialty leasing, pop ups, et cetera.
There's a ---+ we feel good about it.
You're probably going to see some roll-down of that in the fourth quarter as we open up some of the anchor replacements.
So you'll see kind of an uptick in really the third quarter and then it come back down in the fourth quarter.
The number of leases that fall into that category are relatively de minimis compared to the total leasing volume that we did for the quarter.
So we don't have that information, but I wouldn't expect it to be materially impacting our reported spreads.
Well, I guess in our same-store numbers, we do not include lease termination fees, so that ---+ if you're looking to reconcile our FFO guidance, you'd certainly look at that.
But as Joe mentioned, we have a number of levers to pull.
We also think there'll be some normalization of expenses.
So if we look at our history of the last few years, often times you have a hard winter that may impact snow removal costs and utilities, but we find ways to make that up through cost rationalization elsewhere.
And we've seen ---+ again, we've seen a history of bankruptcy recoveries, payments.
They're not always easy to predict, but we typically take a conservative view and write-off the full amount of any prepetition amounts, and later on we get those recoveries.
That helps to again, mitigate the impact, but it occurs in a different quarter.
Sure.
We had about $600,000 of snow removal and utilities; and about $500,000 of bankruptcy-related bad debts.
And the plans are in place to replace that.
It's not a ---+ it's not being hopeful, it's being measured and having a plan in place that the team is executing.
Yes, some was just the normal seasonal cadence of occupancy.
Typically, the fourth quarter is obviously going to be your highest occupied quarter.
And then, occupancy trends down as some temporary tenants fall out of occupancy.
And they, in fact, come back into your statistics at the end of the year.
But on a quarter-to-quarter basis, again, compared to March of '17, total occupancy was up 50 basis points and nonanchor up 40 basis points.
And the other thing is, sales is kind of a leading indicator.
So obviously, we can't immediately capture the benefit of increased sales in the portfolio in the same quarter it occurs, but it does certainly give retailers the confidence that ---+ to open stores in our properties and to maybe move more aggressively on their expansion plans.
And, <UNK>, I would add to that, that occupancy is in line with our budget.
We were in line with the budget in ---+ to Bob's point, there is a lag between rising sales and occupancy, but it will necessarily follow.
We're flexible, and we'll be opportunistic as it relates to that.
In some cases, we'll use our land as our equity in the deal and maintain some level of ownership.
In the case of, let's say, the Exton example that Bob gave in his script, that's one where we'll realize $10 million in a sale.
Again, it's going to be different.
We see it as an opportunity to enhance our capital position.
So we're not of a mind where we're going to make a major investment in any of these projects, but rather use the value of the land, because we're ---+ take a case like Springfield Town Center or Fashion District in Philadelphia, where we've created significant value from a residential perspective, and we'll want to realize that value and minimize, if at all, making any kind of a capital investment.
Well as it relates to that right now, I don't think ---+ we have a lot of options in front of us with respect to the Bon-Ton stores, and ---+ which might include dispositions and could include retenanting.
So at this point, I think we're looking at our options and going to make a decision that is the best course of action given our capital objectives.
The $1.7 million was just for the first quarter, that was the benefit that we received, not only from anchor replacements but also new tenant openings.
So effectively, even though we absorbed the impact of co-tenancy and bankruptcies, we still delivered revenues kind of in line with our expectations.
So you're going to see some part of that ---+ obviously, the fourth quarter '17 openings, we get the full year benefit in 2018, and we'll also get incremental benefit in the ---+ really in the second, third and fourth quarters.
When you think about, we have HomeGoods and Five Below opening in the second quarter of '18; we have HomeSense at Morristown opening in the third quarter; and we also have a number of tenants at Valley Mall, Onelife Fitness, Tilt, Belk as well as others opening in the fourth quarter.
So we've already experienced some of it.
We'll see an uptick in the second quarter, a modest uptick in the third quarter and a larger impact in the fourth quarter.
I think part of it is related to dealing with some tenants that are probably, longer-term, won't be in our portfolio.
But the interim, as we kind of work through the transition and see the benefits of the ---+ many of the redevelopments, we'd expect those numbers to turnaround in the relatively near-term.
Yes.
That was really a function of timing, the tenant that reported in the first quarter of '17, because we had an extended close at the end of the year, we picked up their 2017 sales in our fourth quarter results.
So it's really a timing issue.
There was no significant erosion in the amount of percentage rents, it's just one of timing.
That is, correct.
No, I think that's what you see is kind of just the processing of some of these tenants through the portfolio.
Again, as I mentioned, this is, I guess, referring back to <UNK>'s comment, we have seen strong sales performance at a number of our ---+ many of our properties.
But I see this as more of a temporary phenomena as we kind of reposition the portfolio.
And these are tenants ---+ again, if you look at the terms of these deals, they're short-term in nature.
So these are not tenants that we expect to see 2 or 3 years from now in our portfolio.
Yes, we're kind of walking on a ---+ Bob is walking on eggs a little bit in answering this question.
I mean, essentially, you're keeping a couple of tenants in place through a percentage in lieu, if you will, with the ability to press a button and exit them and recapture the space.
And so, it's a way to keep space occupied while we're finding replacements.
And that's a fairly usual technique that's being used.
We think with the sales growth we're experiencing with the new anchors we're bringing into the properties, that replacing those tenants is going to be something that, while nothing is easy, it's going to be something we can accomplish in the near term.
But at the end of the day, if you look at our average rents on Page 13 of our supplemental, the average rents, including large and format ---+ large and small format tenants, were up 1% from last year.
So despite the fact you may identify specific renewal spreads, overall we're still moving the ball forward in terms of increasing the amount of rent we get per square foot in the portfolio.
That's GAAP basis.
That's a calendar year number.
I think we've seen ---+ as I mentioned earlier, we've seen some of it from the 2017 openings.
Yes, I would say maybe half of it will come in the back end.
Right, because the openings in '18 will have a much bigger impact on the '19 performance.
Well, I mean, that would be an easy assumption to make.
Certainly, the top 10 assets are performing better, but we have some good quality assets throughout the ---+ that lower half of the portfolio.
If you look at examples like Morristown mall where we got a Macy's back, and we're going to be putting 3 tenants in that Macy's space that's currently under construction.
Cap City Mall is a mall where we added a Dick's Sporting Goods.
And we're about to open up a ---+ the only Dave & Buster's in the Harrisburg market.
So the bottom line is, I don't want to throw the baby out with the bathwater here.
Patrick Henry Mall is another good asset, and Plymouth Meeting Mall, which is sitting at the very bottom of the portfolio, I've never been really comfortable assessing that on a sales per square foot basis, because so many of the successful tenants are well above 10,000 square feet.
And again, that's another place where that Macy's is going to be replaced with 5 new, exciting first-to-market tenants.
So I think we've got a little time before we make ---+ say yes to your question, because there's work being done.
Well, we just made a change to our board.
We brought on Jo<UNK>e Epps as a new board member, and Ron Rubin is going to be stepping down at the annual meeting.
And year before that, we brought George Alburger.
So we have 3 new directors on in a 4-year period.
And we'll continue to look at governance issues and try to improve the company from all perspectives.
We have a ---+ I think in our initial guidance, we had relatively modest amount that was included in our '17 ---+ or I'm sorry, our 2018 guidance.
You might see some of those for a couple of quarters, but we'd expect, by the end of the year, some of those gaps to decrease to narrow.
Just some typical seasonal leasing and some tenants that we were planning to replace.
So our jewelery category was up in the month of March, 2.4%.
On a rolling-12 basis, down modestly, but still performing extremely well, if you look at it as a group.
Yes, Mike, I just recognized that, when we're talking about the dollar amount of the decreases, it's less than $1 million, right, in terms of our difference between kind of a breakeven quarter from an NOI perspective and where we ended up.
So we don't think that's an insurmountable mountain to climb.
If you think about some of the things that both Joe and I talked about, we expect some of these things to be self-correcting, right.
As our history has shown, when we have a large bad debt expenses in one quarter, they tend to level out based on our expectations.
Weather-related expenses, again, we found that more often than not, we're able to kind of mitigate those through additional cost savings or at the end of the year, they tend to kind of even out.
And we do have, as I read through earlier, a number of anchor replacements opening as early as the second quarter, more in the third quarter and then a big slug in the fourth quarter.
So you will see certainly the cadence of NOI and FFO much more back-ended.
I don't have the information to share with you in front of me.
But we also have some significant lease terminations that we expect to record in the second quarter relating to Best Buy mobile and Tea<UNK>a.
And again that will ---+ you would expect to see those boosting our second quarter FFO results.
Well, we expect them ---+ we originally provided guidance of $1.5 million to $3.5 million.
I think we're now leading ---+ expect those numbers to be toward the upper end of that range.
No, no.
But that's ---+ we're talking about ---+ it's not a significant amount we're talking about in terms of the ---+ again, the scale of the company is such that you have a couple of unusual items that skew the results.
But we have, again, I mentioned, of the new store openings, $6.5 million of that at an annualized rate will come onstream in 2018.
That's [not] a full ---+ we'll get the full benefit of that, but certainly those leases will be coming on, and they are signed leases not yet in occupancy.
<UNK>, I mean, the bottom line is, we've looked at our performance, we have a plan in place that includes a number of things, including the anchors that'll be moving in, some of whom will be moving in earlier.
We'll do some ---+ have some pickups there, specialty leasing, filling some of the vacant boxes, the Tea<UNK>as, et cetera, partnership marketing.
So there's a plan in place, and we're comfortable with, and it's not hope.
So let's not get caught up on that.
Probably a bad word to have used.
This is a carefully considered plan that's being executed, and we believe that we will maintain our guidance.
Okay, good point.
When you look at your top 20 tenants, do you have a sense of how much more store rationalization might take place over the next few years.
The tenants you highlighted signed in this quarter, Five Below and Burlington, are not on the list, although Forever 21 is.
And with the top 20 tenants comprising 38% of your annualized gross rent, would you expect concentration to decline materially over time as the mix gets more diverse.
Well, first of, I think it's ---+ <UNK>, this is Joe.
It's noteworthy that 60% of our top 20 tenants had positive sales growth in the quarter.
And when you mention something like Forever 21, we think that a large part of that rationalization has to do with larger stores, larger-format stores, where they moved into former Mervyn's locations, mostly on the West Coast.
Our ---+ as we just announced that we signed a ---+ half a dozen Forever 21s for a total of about 35,000 square feet.
Our average size of our Forever 21 is 8,000 to 12,000 feet, not 60,000 or 70,000 or 80,000 feet.
In that case, I think from ---+ another one you would probably put on your list would be Ascena.
And we have worked through ---+ and they seemed ---+ they're ---+ as leases come up, and we're working through and have worked through much of the issues that have occurred through Ascena, Signet is another one that we've worked through the issues are ---+ with, and we actually will end up getting positive spreads from it.
So in your view, Ascena (inaudible) present much of a risk going forward in the medium term.
In our view ---+ yes.
We don't have a great deal of concern.
We think this is a much better year, and part of it is the portfolio that we are putting forth at this point, which is a portfolio, I think, that is compelling to retailers.
We sit with a significant number of our assets in the Philly and DC markets.
And I could go through asset by asset, but even ones that are not in the Philly and DC markets are in strong markets; Dartmouth, which is the Boston Providence SMA.
So in any event, we don't have a high degree of concern at this point.
We're navigating our way through the issues, and as they come up, we're fairing pretty well.
If there are no other questions, thank you all for participating on the call, and enjoy the rest of your day.
Bye now.
