Pennsylvania Real Estate Investment - Trust (PEI) Q2 2018 Earnings Call
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03-Aug-2018
Pennsylvania Real Estate Investment
Trust (PEI)
Q2 2018 Earnings Call
Total Pages: 12
1-877-FACTSET www.callstreet.com Copyright © 2001-2018 FactSet CallStreet, LLCPennsylvania Real Estate Investment Trust (PEI) Corrected Transcript
Q2 2018 Earnings Call 03-Aug-2018
CORPORATE PARTICIPANTS
Heather Crowell Robert F. McCadden
Senior Vice President-Strategy & Communications, Pennsylvania Real Chief Financial Officer & Executive Vice President, Pennsylvania Real
Estate Investment Trust Estate Investment Trust
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate
Investment Trust
......................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Christy McElroy Ki Bin Kim
Analyst, Citigroup Global Markets, Inc. Analyst, SunTrust Robinson Humphrey, Inc.
Hong Zhang Spenser Allaway
Analyst, JPMorgan Securities LLC Analyst, Green Street Advisors
Caitlin Burrows Karin Ford
Analyst, Goldman Sachs & Co. LLC Analyst, MUFG Securities America, Inc.
......................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would
like to welcome everyone to the PREIT Second Quarter 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.
Ms. Heather Crowell, you may begin your conference.
......................................................................................................................................................................................................................................................
Heather Crowell
Senior Vice President-Strategy & Communications, Pennsylvania Real Estate Investment Trust
Good morning and thank you all for joining us for PREIT's second quarter 2018 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. Statements that PREIT makes today might
be accurate only as of today, August 3, 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 Coradino, PREIT's Chairman and CEO; and Bob McCadden, our CFO.
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Q2 2018 Earnings Call 03-Aug-2018
I will now turn the call over to Joe Coradino.
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Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust
Thanks, Heather. And good morning everyone and thanks for joining us as we share our enthusiasm for a bright
future. As we sit here today we've completed the transition into a high quality mall REIT as evidenced by the
impressive roster of recently executed leases, our successful anchor replacement effort, improving operating
metrics and a realizable vision for our marquee project, Fashion District Philadelphia.
As the recovery – as the retail recovery gains momentum, we continue to be positioned to take advantage of the
recovery underscored by increases in FFO, same-store NOI, occupancy sales, average rent on new deals, and
renewal spreads this quarter. With a distinctly different tenant base and completion of our first multi-family
addition on the horizon, we are leading the way into the new mall paradigm. We've reached an inflection point,
[ph] have impaired the (00:02:23) portfolio, improved anchor offerings at more than half of our properties, and
introduced new tenants to the portfolio that were not prospects available to us in the past.
Having accomplished all of this amidst the uniquely challenging retail backdrop has distinguished us. We believe
that how we managed through tumultuous situations defines who we are. And the foundation we've established
and strengthened ahead of this sector allows us to move into a phase of growth, driven by our redevelopments
coming online, our compelling portfolio concentrated in Philadelphia and D.C., attracting both a continuous flow of
new tenancy and vast opportunities to densify with apartment and hotel properties.
It's almost exactly two years ago the news of Macy's plan to close 100 stores rocked the retail landscape. Since
then, we've been steadfast in our innovative approach to merchandising, forging a new mall definition. Today,
we're proud to report that we have filled all of our anchor boxes that we had available. And we continue to reduce
our Sears count with plans on their way to replace two additional stores, which will take us down to only five
Sears stores.
We're pleased to announce that we have signed three leases for our final Macy's box at Plymouth Meeting, and
we have fully executed the lease with Studio Movie Grill to bring their immersive luxury movie-going experience to
Willow Grove, our first asset to eclipse $700 per square foot in sales. These new anchors along with Von Maur at
Woodland will complete our anchor repositioning program in 2019.
The success of our anchor replacement program and robust tenant demand is a testament to the strength and
compelling nature of our well-positioned portfolio. Further validating improved quality of our portfolio, we've
executed leases with an impressive roster of high performance and many new to portfolio tenants. Our
redevelopment program at Woodland Mall, slated to open in Q4 of 2019, is ramping up as we secure catalytic
tenants that are new to our portfolio and will cement Woodland Mall as the dominant mall in its strong
marketplace.
We have signed leases with REI, Altar'd State, and the second Urban Outfitters in our portfolio. Tenants of this
caliber reflect the brand that PREIT has created and the speed to execution inherent in our work. Among other
first to portfolio names across our platform, we've signed new leases with Maggie McFly's, Fatburger, &pizza,
Phenix Salons, Edge Fitness, and Ardene, a Canadian fashion retailer. Evidence that the retail world has evolved
well beyond its homogeneous past and that retailers and other destination tenants have expanded their worldview
to consider the new more – mall model as a vibrant destination for their business expansion.
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Q2 2018 Earnings Call 03-Aug-2018
Furthering this view toward the future is our recently announced partnership with 1776 to bring a retail incubator
to Cherry Hill Mall, where we can be among the first to bring innovative, emerging digitally native retail concepts
to our consumers.
Our approach to reinventing the mall experience is also apparent in yesterday's Fashion District announcement,
where the partnership revealed an exciting lineup of tenants to create the vibrant destination here in Philadelphia
we have long envisioned. These tenants include, City Winery, Dallas BBQ, AMC Theaters, Polo, H&M, Forever
21, Asics, Levi's, Columbia, Skechers, Francesca (sic) [francesca's] (00:06:30), and others, delivering the next
generation of consumer experiences, the retail landscape evolves to further integrate lifestyle and dining
concepts.
At a press conference held yesterday, Michael Dorf, CEO of City Winery, commented about what a great
opportunity Philadelphia offers with its affinity for great food and music. As our partner Macerich mentioned on
their call yesterday, we made a conscious decision in order to ensure maximum success for our tenants and
shoppers to have one high impact opening which could best be accommodated in September 2019 given the
evolution of the project and the incorporation of several exciting dining and entertainment concepts.
Over 80% of the project is either leased or in advanced negotiations, and we're really excited to deliver this
transformative project to our [ph] world-class city (00:07:31) and deliver to you a steady cadence of new tenant
announcements, including transactions in progress with a top quality entertainment tenant featuring bowling, ping
pong and billiards, as well as an artisanal Italian market with culinary events, restaurants and retail space.
Further evidencing our evolution is improving operating results. Excluding lease terms, we showed strong
improvement over Q1, representing a 300-basis point swing. While termination fees can be inconsistent, there is
value in considering them in our performance as we get paid for the value of these – of the lease while
maintaining the near-term ability to re-lease the space, leading to future NOI growth and tenancy improvement
opportunities.
We recognize this is a change from prior guidance assumptions, but consider this as the next step in improving
the quality of our portfolio and being more consistent with our peers. When you have a quality portfolio, the
decision to take a termination fee is a positive.
During the quarter, we recognized several material termination fees. These were in amount greater than 100% of
the remaining lease obligation for these tenants. Where we have signed leases are in negotiations for over 90%
of the space previously occupied by these tenants. Sequentially, we generated an improvement in average
renewal spreads in our wholly-owned portfolio to 7.5% average rents, so new deals were up 25% and the volume
of small format leasing more than doubled in our wholly owned portfolio.
NOI weighted sales are over $500 per square foot with Willow Grove, Springfield Town Center, Moorestown and
Plymouth Meeting malls growing by 5% or more, led by Mall of Prince Georges, which is over 9%, evidencing
increased productivity following our remerchandising.
Our top five properties are reporting weighted average sales of $607 per square foot growing at a weighted
average of 3.1% clip. On the anchor repositioning, we have 280,000 square feet under construction for 2018
openings, and 230,000 square feet executed for 2019 openings, and we have 230 basis points of non-anchor
occupancy leased but not yet open.
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Q2 2018 Earnings Call 03-Aug-2018
As we continue to look at opportunities to improve our portfolio through disposition in tandem with our capital
allocation strategy, we initiated the process to transfer the mortgage loan secured by Wyoming Valley Mall to the
special servicer. This property has a $74-million mortgage loan and has two anchors closing this month.
Looking to the future, we're well-positioned for growth. We've leased our available anchors, obtained
commitments for 90% of the spaces; we took termination fees for; we're curing co-tenancy; we're improving the
rents on new and renewal deals; and Fashion District will come online with a great tenant mix.
The densification of our assets is another great opportunity to enhance our growth trajectory while improving our
capital position and diversifying our income stream, a natural step in our continuous portfolio improvement and
value creation endeavor.
With that, I'll turn it over to Bob to review our results and expectations for the year.
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust
Thanks, Joe. We had a strong quarter across all facets of our business. I'm going to start with an update to our
earnings guidance, review our financial and operating results, and then cover our capital plan.
We are reaffirming our FFO guidance for 2018 after giving effect to employee separation costs and [ph] the right
offer (00:11:45) cost associated with the refinancing of our bank credit facilities. FFO as adjusted is expected to
be between $1.50 and $1.60 per share. We are adjusting our estimates of GAAP earnings to give effect to these
items, plus the asset impairment charges recorded in the quarter.
We expect a GAAP loss of between $0.62 and $0.73 per share. Our same-store NOI guidance range of 1.25% to
2.25% includes lease terminations fees. As a point of reference, our original guidance range was roughly the
same both with and without term fees.
For the full year, bankrupt tenants, net of the replacements, are expected to reduce 2018 revenues by an
incremental $2.6 million on top of the $5.6 million impact we experienced in 2017. That number is up $200,000
from the last quarter reflecting second quarter events. Co-tenancy adjustments are expected to be approximately
$3.1 million in 2018 compared to $1.3 million in 2017, again reflecting the full impact of anchor closings.
Income from anchor replacements, higher temporary leasing, and other [ph] common area of revenues, further
CAM (00:12:59) cost savings and additional lease terminations will help to mitigate the impact of these factors.
Key replacement tenants slated to open in the second half of the year include Belk, Tilt and Onelife Fitness at
Valley Mall, and HomeSense and Five Below opening at Moorestown Mall with additional tenant openings in the
first quarter of 2019.
During the second half of the year, we will experience the impact of store closings from terminated tenants and
bankruptcies while facing tougher comps up against 2.5% and 3% from last year. Fashion District was expected
to contribute $0.01 to $0.015 in 2018. We anticipate spending an additional $100 million to $125 million on our
redevelopment and anchor replacement program over the balance of 2018. Combined with the $70 million spent
in the first six months of the year, we're on target with our original business plan.
Turning to operations, we reported FFO as adjusted of $0.39 a share, which was above analyst consensus. After
adjusting for the dilutive impact of asset sales, FFO was up 9.5% for the quarter. Same store NOI growth at
10.7% was driven by a 6.4% increase in revenues, including lease termination fees. Total occupancy at our core
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Q2 2018 Earnings Call 03-Aug-2018
malls was up 20 basis points to 93% and non-anchor occupancy was up 30% – 30 basis points to 91%. When
factoring-in executed leases, we would add an additional 140 basis points to our total occupancy and 230 basis
points to our non-anchor occupancy.
We have over 800,000 square feet of executed leases in our pipeline for future openings in our same store
portfolio with almost 360,000 square feet slated to open this year, contributing $4.5 million of annualized
revenues. The balance will open in 2019 and will contribute an additional $4.8 million of annualized revenues.
Sales per square foot at our core malls increased 2.1% to $489 per square foot, and NOI weighted sales of over
$500 a square foot. Our leasing team was active delivering 83% more leases during the quarter than the first
quarter. This momentum has carried through to the early part of the third quarter as well. Average renewal
spreads in our wholly-owned portfolio during the quarter remained in the mid-single digits at 7.5%.
With respect to our same-store performance, we were able to more than offset the negative impact of
bankruptcies and co-tenancy claims with incremental revenues from anchor store replacements and higher lease
termination revenues. To be specific anchor replacements added $1.7 million to our top line and lease termination
revenues were up $5.2 million over last year second quarter. Bankruptcies at our same-store properties reduced
NOI by $900,000 during the quarter compared to last year, and co-tenancy claims reduced rents by an additional
$800,000.
Operating expenses were relatively flat reflecting ongoing cost management efforts and improvement in our utility
margins, reflecting the benefits of a mild spring weather. Interest expense for the quarter including our share of
joint ventures increased by $1.7 million. The increase was due to an increase in weighted average borrowings
and a 15-basis point increase in average interest rates. These were offset by higher amounts of capitalized
interest.
Interest expense also included the accelerated amortization of deferred financing costs associated with our
refinanced bank facilities. During the quarter, we recognized $34.3 million in impairment charges from Wyoming
Valley Mall and our undeveloped land parcel in Gainesville, Florida. The Gainesville property is under contract
and the buyer has posted a hard deposit.
I'm going to wrap up with some highlights from our capital plan. In May, we successfully completed the recast of
our $400 million unsecured credit facility and a total of $300 million unsecured term loans ahead of the schedule
maturities in 2019 and 2020. We were pleased with the execution of this transaction as we were able to maintain
substantially all the key economic terms of the previous facility. No change in interest rate spreads, no change in
cap rates, and no change in leverage covenants. We also extended the maturity out until 2023 with the available
extension options on the credit facility.
The $27-million non-recourse mortgage loan in Valley View Mall matures in July 2020, beyond that our next step
maturity doesn't occur until 2021.Our liquidity position continues to be strong with $298 million of available liquidity
at the end of June. Our bank leverage ratio was 51.5% and our net-debt-to-EBITDA was approximately 8.3 times,
in line with our expectations.
With 92% of our debt either fixed or swapped, we continue to be well positioned to manage through a period of
rising interest rates. On a rolling 12-month basis, our FFO as adjusted payout ratio was 52% and our [ph] FAD
(00:18:27) payout ratio was 88%. Last week, we announced our 166th consecutive dividend maintained at $0.21
a share for the third quarter payable in September.
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Q2 2018 Earnings Call 03-Aug-2018
And with that we'll open it up for questions.
QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] Your first question comes from the line of Christy McElroy from Citi. Your line is
open.
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Hi good morning everyone. Hey, Bob, just wanted to follow-up on the guidance, so in terms of the same-store NOI
revision, it sounds to me from your comments like the term fees are higher than the rent that you're leasing in
2018. So just in keeping same-store NOI including lease term fees unchanged that implies other degradation in
core growth that you're seeing, so maybe you can provide some color on that.
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Sure. We had a – the tenants where we received termination fees there is about $1 million of income that we
otherwise would have received in 2018 had it not been for the early termination of those leases.
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
And then just maybe some color on what's driving that just in terms of bankruptcies or what else is – what are the
other kind of moving parts within same-store.
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Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
I'm sorry, Christy, can you just repeat that second question?
......................................................................................................................................................................................................................................................
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Yeah, sure. So, in terms of the other – the additional degradation that you expect in same-store on top of the rent
loss from the termination of those leases. Just provide some color around that, what are the other moving parts
that's driving same-store NOI growth excluding [ph] lease termination fee is (00:20:21) lower?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Okay. I think in addition to obviously the impact of the store closings, there was going to be some variability
around bad debt sponsorship revenue and timing of tax appeals. Then last year second half of the year, we
received a favorable benefit of a real estate tax appeal which we don't anticipate having at the same level this
year.
We also saw a little bit of erosion in one of our tenants who pay a percentage of their rent in sales – percentage of
their revenue based on sales. And we expected some improvement in that, we haven't seen it yet but that still
remains to be same. So that's another factor that we're going to be factoring into our revised guidance
assumptions.
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Q2 2018 Earnings Call 03-Aug-2018
Christy McElroy
Analyst, Citigroup Global Markets, Inc. Q
Okay. And then just to be clear on lease termination fee guidance. So I think at the beginning of the year you
were around $1.5 million to $3.5 million, last quarter you've guided to the upper end of that range. And now you've
– you're at about $7.5 million. So inherent in that one – inherent in the new guidance range, are you assuming no
additional lease termination fees in the back half of the year or should we expect a higher – a number higher than
the $7.5 million?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Yeah. We – at the upper end of our range we would expect maybe up to an additional $1.5 million of lease term
fees. That's again going to be a binary transaction, we either get all of that or none of that.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Hong Zhang from JPMorgan. Your line is open.
......................................................................................................................................................................................................................................................
Hong Zhang
Analyst, JPMorgan Securities LLC Q
Yeah. Hi guys. I guess as it relates to the lease termination fees you received this quarter, was this one large
tenant that closed down a lot of shops or a lot of small tenants closing shops?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
It was a combination, we had a couple of tenants with a large number of stores closing and we had one large –
one tenant with a large termination fee. But again, I think the important point – we're focused on the wrong
aspects of this discussion. I think the point is that 90% of that space is either lease or under commitments for
lease. So we would expect to receive the benefit of that most likely in 2019 but that's the – I think the key point to
be made in this discussion.
......................................................................................................................................................................................................................................................
Hong Zhang
Analyst, JPMorgan Securities LLC Q
Got you. Thank you.
......................................................................................................................................................................................................................................................
Operator: And your next question comes from the line of Caitlin Burrows from Goldman Sachs. Your line is
open.
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Caitlin Burrows
Analyst, Goldman Sachs & Co. LLC Q
Hi, good morning team. I guess I was just wondering on Fashion District now and how we should think about the
expected build up to stabilization in 2020. So, I guess when you guys open in September next year and say that
stabilization is in 2020, does that mean by the first quarter you expect to be there or kind of build throughout
2020? I realize that's pretty detailed but it is a big driver of future numbers.
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
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Q2 2018 Earnings Call 03-Aug-2018
Yeah, I think the – thanks for your question. I think we're going to start with a higher level of occupancy when we
open in 2019. So we'll have certainly a build-up throughout 2020. But in all likelihood, you would see the
stabilization occurring in the second half of 2020 as you would have your normal to seasonal openings occurring
in the second half of the year.
......................................................................................................................................................................................................................................................
Caitlin Burrows
Analyst, Goldman Sachs & Co. LLC Q
Okay. Got it. And then I was just wondering on – you mentioned Wyoming Valley probably going back to the
lender, what sort of timing you expected there. And then also I think Valley View was the other Bon-Ton property.
You also mentioned there is a mortgage there that matures in 2020, so any update on what you plan to do at
Valley View?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
On Wyoming Valley, I don't think it's appropriate for us to comment on that process. But in Valley View...
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
At Valley View, I think – this is Joe Coradino and I think with respect to Valley View, we are still working for
through our options there. I mean obviously it's a non-recourse debt and we have that to consider. We're also
looking at backfilling anchors. We will be very careful about our capital commitment as it relates to that. But we're
still looking at all of our options at Valley View. And as Bob said at Wyoming, we're going through a process and I
don't think we want to comment at this point.
......................................................................................................................................................................................................................................................
Operator: Your 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 [indiscernible] (00:24:47). Good morning, guys. So the lease renewals, the percentage – the leases that
you are doing on a percentage rent basis has been growing over the past couple of years now, I think it amounted
to about to about 20% of all renewal activity. Can you just help me understand what's going on there?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Hey, Ki Bin, this is Bob, I just want to kind of put some things into context. The number of tenants that we have in
our portfolio that are paying a percentage of their sales [ph] and lower (00:25:19) minimum rent is relatively
modest by historical standards. It's probably less than 60 tenants in total.
And I think what you've seen in the last couple of quarters is just reflecting of the working through of some of the
tenants that were either coming out of bankruptcy or in a trouble tenant state where we were using that
methodology as a way of maintaining occupancy while we continue to find the replacement tenants.
If you look at the term of those percentage sales leases, it's generally a year, year-and-a-half. So we don't see
that as an ongoing part of our portfolio rather kind of a short-term fix dealing with some of those specific tenant
situations.
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Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc. Q
Okay. And in terms of the new lease accounting language, looks like you're about $8 million for this year, that's
what you're trying to include in terms of internal leasing costs. How much of that do you expect to expense next
year?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Now, I think if you look at our historical run rate has been on average about $5 million – I'm sorry $6 million per
year. And if you look at – I think you covered it in your report, so roughly about $5.25 million or $0.07 – $0.07 to
$0.08 a share would be the impact to our 2019 results.
......................................................................................................................................................................................................................................................
Ki Bin Kim
Analyst, SunTrust Robinson Humphrey, Inc. Q
Okay. Thank you.
......................................................................................................................................................................................................................................................
Operator: And your next question comes from the line of Spenser Allaway from Green Street Advisors. Your line
is open.
......................................................................................................................................................................................................................................................
Spenser Allaway
Analyst, Green Street Advisors Q
Thank you. Just another one on guidance so co-tenancy adjustments were up relative to 1Q, is the $3.1 million
you referenced in your opening remarks, is that based on known closures today or is there any cushion baked
into guidance in the event that closures increase?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
It's generally based on known or anticipated closures. But for the most part we don't have any – we don't expect
in the balance of 2018 to see any additional anchor closures that would result in an increase in that estimate.
......................................................................................................................................................................................................................................................
Spenser Allaway
Analyst, Green Street Advisors Q
Okay. Thank you.
......................................................................................................................................................................................................................................................
Operator: [Operator Instructions] Your next question comes from the line of Karin Ford from MUFG Securities.
Your line is open.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
Hi, good morning. I was wondering if you could give us more detail on why the costs went up at Fashion District
and why I guess such – commensurately why the return came down.
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
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Q2 2018 Earnings Call 03-Aug-2018
Sure. Hi, Karin, this is Joe. Essentially, the – when we originally conceived that project, we were not going to have
a entertainment component and in fact probably not build out the top level. And for a couple of reasons not the
least of which as you go around this country and you look at vertical developments you'll see lots of vacancies on
the top floor.
We saw an opportunity to fully occupy the top floor with entertainment and at this point we have an executed
lease with AMC, as well as in lease negotiations with the entertainment concept that I mentioned on the call,
bowling, ping pong, et cetera. And the cost for that was not in the original project cost. In the case of the movie
theater, we had to literally raise the roof in order to accommodate the stadium seating and that was the – and that
was really the biggest reason that entertainment component that drove the cost increases.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
And it's just because that third level is not fully leased yet that you're not getting incremental return – as high in
incremental return on those incremental dollars, is that right? I think [indiscernible] (00:29:29).
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
No. Actually – actually the third level the numbers for the lease up of the entire top level is in the pro forma and is
reflected in those revised returns.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
Okay. Okay.
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust A
I would add by the way that as it relates to the project about 85% of the project is either completed, contracted, or
bought out, or allowances. So we have very little cost exposure on a going forward basis.
......................................................................................................................................................................................................................................................
Karin Ford
Analyst, MUFG Securities America, Inc. Q
Great. And then just a last question on the guidance. Again, so is my math correct that is you did 4.3% same-
store NOI growth in the first half that in order to hit the midpoint you're implying kind of zero percent NOI growth in
the back half, and if so just what are the puts and takes that bring – I know you're having a lot of anchors come
online, what takes that down to zero?
......................................................................................................................................................................................................................................................
Robert F. McCadden
Chief Financial Officer & Executive Vice President, Pennsylvania Real Estate Investment Trust A
Yeah, I think there your math is right and we expect kind of flattish second half of the year. But I think the key
point is that we haven't really recognized the impact yet in our operating results or the Toys "R" Us and Bon-Tons
bankruptcy closings and associated co-tenancy. Those closings didn't occur until late in the second quarter or
obviously the early part of the third quarter. So that's going to be the biggest drag that we have. Again just that the
point there is that yeah we have made some pretty good progress on identifying backfills for some of those
bankrupt tenants.
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1-877-FACTSET www.callstreet.com Copyright © 2001-2018 FactSet CallStreet, LLCPennsylvania Real Estate Investment Trust (PEI) Corrected Transcript
Q2 2018 Earnings Call 03-Aug-2018
The additional thing which I mentioned in my – I guess response to Christy's question is that we were up against
some tough comps from last year. Again we received the benefit of a couple of favorable real estate tax appeals
last year which we don't anticipate for this year. And then as I mentioned also we have international tenant that's
had some sales issues that's going to be potentially impacting our percentage sales and percentage rent revenue
from that tenant, which we have in multiple properties.
......................................................................................................................................................................................................................................................
Operator: And there are no further questions at this time. I will turn the call back over to our presenters for some
closing remarks.
......................................................................................................................................................................................................................................................
Joseph F. Coradino
Chairman & Chief Executive Officer, Pennsylvania Real Estate Investment Trust
Well, thank you all for participating in the call. Enjoy the rest of your August, and I'll see you all in September.
Thank you.
......................................................................................................................................................................................................................................................
Operator: This concludes today's conference call. You may now disconnect.
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