Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the pre third quarter 2019 earnings Conference call.

This time, all participants are any listen only mode. After the speakers presentation, there will be a question and answer session.

You ask a question. During this session you will need to press star one in your telephone if you require any further assistance. Please press star zero I'd now like to hand, the conference over to your speaker today, Ms., Heather Crowell Executive Vice President of strategy in communications. Thank you. Please go ahead.

Good morning, and thank you all for joining us for <unk> third quarter 2019 earnings call. During this call will make certain forward looking statements within the meaning of federal securities laws.

These statements relate to expectations beliefs projections trend 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 FCC filings statements that preet make today might be accurate only as of today October Thirtyth 2019, and Preet makes no undertaking to update.

Any such statements also certain non-GAAP measures will be discussed pre does include reconciliations of such measures to comparable GAAP measures and its earnings release and other documents filed with the FCC.

Members of management on the call today, or Joe Coradino, Freights, Chairman and CEO , Bob Mccadden, our CFO and Merial ventresca, our incoming CFO .

Joe.

Thank you Heather and marry a welcome to the call before I begin my remarks, let me take a moment to introduce or incoming CFO Mario can trust.

America, it's been with breed for 25 years, holding a variety of roles in the organization.

Most recently he led our disposition program and oversaw asset management in operations, helping us to institute a more rigorous process in reviewing transactions all along he has been and asset to the company and I look forward to working with him as we charged Rps forward welcome Merial.

This is a challenging year be clear our strategy is working or future is bright.

Our results this quarter reflect a difficult environment largely as a result, the bankruptcies and anchor transitions, we were impacted by $10 million bankruptcy related closings on an annualized basis.

Starting the year by an incremental 6.5 million over 2018.

These tenants can and will be replaced with better merchants, but this can't be accomplished in just a quarter or too.

We acknowledge we didn't predict the pace or level of tenant fallout. However, we have taken deliberate and decisive action in situations, where tenants were reorganizing and have taken back space favoring short term vacancy over a long term commitment to an underperforming.

Taylor at below market rent.

Our 29 team results were impacted by an accelerated pace of store closings, we anticipate being back on track for growth in 2020 and with this expect to cover our dividend.

We already unique position to capitalize on the work we have done an harvest the returns when the capital we've invested we've strengthened our portfolio with a solid wind up of credit worthy new anchors and a diverse tenant mix now it's primarily a leashing game.

Where we focus on filling this space impacted by bankruptcy, attracting retailers with our quality portfolio and high barrier to entry markets.

We lease 13 department stores in less than three years, we brought in a diversified tendency to allow our customers to do more that suits their lifestyle and seven years, we've transformed our tech transformed our tenant base over 50% of our non anchor space is dedicated to dining.

[noise] Entertainment health and wellness and off price tenants that compares to just over 25% in 2012.

Since our last call we've changed the face and future pre we opened our three major projects fashion District Woodland Mall, and Plymouth meeting mall, two of which will take their places as trophy assets, we've generated traffic growth from the introduction of new tenants.

Over 1 million people I've visited fashion district since its opening in September and traffic is up over 40% woman mall and over 20% Plymouth meeting mall since their openings.

We know that our ability to demonstrate earnings growth and meaningful balance sheet improvement. Following a multiyear redevelopment program is paramount and we're keenly focused on driving revenue and improving our balance sheet.

With $12 million and sign leases coming online we are delivering we're delivering on our new investments while at the same time experiencing erosion revenue from bankruptcies.

With sales in our portfolio and an all time high inching closer to 550 per square foot, we expect to benefit from the momentum we have created for the company from the opening of our three major projects.

In Philadelphia, we open fashion district, a truly new experience in retail and entertainment space. We're looking forward to the opening of catalyst entertainment offerings and an active holiday season, We just announced the addition of prime Mark Kate Spade and support evidencing the teams.

Ability to secure highly sought after tenancy.

The project is 80% leased with leases out for an additional 6% of the space and a rapidly expanding list of bras prospects in light of our early success. The project is oversubscribed with prospects were being extremely deliberate and cure rating the remaining 15% of the space.

With brands and experiences that will solidify the project as a truly iconic destination in retail real estate and a must see for 43 million people visiting the region each year.

The expansion when the woodland mall formally opened on October 12, with the addition of von Maur Urban Outfitters, New prototype Williams Sonoma local tenants made in Michigan and pedal Nord Blackrock bar and Grill and treat go. So on these tenants will be joined by Cheesecake factory in November .

Fifth and White house black market and so forth in 2020.

Tenants are beating sales projections on a stronger opening with traffic up over 40%.

We will capitalize on the momentum here to generate an NOI growth in 2020, as we complete the lease up of the expansion wing to cement this asset as a top producer in our portfolio and the leading fashion and dining destination in Western Michigan.

At Plymouth meeting mall, Burlington, Dick's Sporting goods Miller, Zale house role by good year and edge fitness of open in the location of the former Macy's named one of the top 10 retail experiences by chain store age this new lineup of convenient and sought.

After tenants will be joined by Michaels restore cryo therapy and solar so on in the spring of 2020 traffic into the mall is up over 20% as these new anchors begin to change shopping patterns and attract new customers as we anticipated.

We expect this will be the next property that an apartment community further strengthening this award winning project.

The completion disease redevelopment will strengthen preach foundation and set the stage for a more stable portfolio over the long term.

Our current portfolio benefits again in 2020 from the completion of our anchor Reaper things at Dartmouth and valley malls, and the opening of yard House and studio movie grow at Willow Grove Park.

We are now poised to attack the leasing of our portfolio in a more aggressive manner using a fresh perspective. The mall is no longer ubiquitous business model and we have fine tuned our approach to sourcing local and regional businesses and digitally native brands.

We're expanding our new business team, which follows on the heels of having consolidated but the specialty leasing team into permanent leasing which has allowed us to fill 83% of the stores impacted by bankruptcy on a short term short term basis and have developed a new approach the filling space.

Impacted by impending store closures when a permanent basis.

As we look to releasing space impacted by bankruptcies and why did the extended timeline for delivering the NOI to organically delever, our balance sheet, we've modified our capital allocation strategy to reduce spending across all facets of the business and are in the market the source of fishing cap it.

It'll which Mario will cover in his remarks Mario.

Thanks, Joe.

I am excited and energized by the opportunity to move into the CFO role at pre.

As a longtime member of the team I appreciate the confidence the company is shown in meat and look forward to a bright future.

We were at a tremendous inflection point for our company as we are positioned for growth across our platform having been ahead of the portfolio improvement curb delivering sector, leading results on multiple fronts.

Including dispositions.

Anchor Repositionings, Redevelopments and Remerchandising of our properties.

As Joe touched on we have created a dynamic portfolio. One that we are evolving to serve the unique demands of a rapidly changing customer base.

We are experiencing strong demand for our well located in close regional mall space.

Our backlog of executed leases for future openings is significant.

With 62 tenants 537000 square feet and approximately $12 million of annualized revenue yet to come onto our rental.

We have added retailers, such as Burlington, Dick's Sporting goods bond mauer.

Our in house urban Outfitters.

Okay, all significantly improve the credit quality underlying our cash flows.

As Joe mentioned, we're focused on de levering the balance sheet, we are prioritizing our most efficient capital sources those that raise the most capital with the meet the least amount of earnings dilution.

On the multifamily lane sale front, our significant presence in the Philadelphia, and Washington, DC markets with their strong economic fundamentals and strengthening demographics provide our properties in these markets with several distinct advantages that are being recognized by multifamily developers.

As a result, we are currently engaged in a bid process with over a dozen qualified participants for the sale of multifamily land at seven of our properties. We are encouraged by the robust interest in the properties and expected document transactions with successful bidders by year end.

Through the normal course of our anchor repositioning in asset redevelopment programs, we have created significant value in Outparcel development.

Generally these transactions are triple net long term leases with solid credit experienced operators.

Given today's aggressive valuations for these types of assets.

We are in a position to recognize positive cap rate arbitrage between the trading cap rates went close regional malls and those for the net leased out parcels.

This spread is especially pronounced in our secondary market large trade area dominant properties with these factors is the current backdrop.

We have identified these dispositions as an efficient source of capital and have prioritize them accordingly.

We have letters of intent on the sale of three single tenant assets that we expect to close by year end and with additional transactions that are currently being evaluated.

During the quarter, we transferred Wyoming Valley Mall to the special servicer through a deed in lieu process.

This transaction is in keeping with our portfolio and balance sheet improvements strategies.

Currently we have no material near term debt maturities and have a plan in place to expand our capital base.

We have been active in the capital markets during the year, having closed on approximately $100 million in transactions with another $10 million under contract.

These transactions exemplified exemplify the creative approaches we are implementing to manage our balance sheet.

They run the gamut from vacant land parcel sales to creating incremental borrowing capacity by defeating secure debt in favour of increased capacity on our bank facility expanding an existing term loan to asset sales, including Outparcels and a mortgage that we took back on a non core asset sale.

These initiatives speak to the creativity and focus of our finance team.

I am pleased with the progress we have made and look forward to our future with that I will turn it over to Bob Mccadden.

Thanks Mario.

Last night, we reported FFO of 63 cents per share and FFO as adjusted of 23 cents per share.

Nonrecurring items accounted for 41 cents per share of ethanol in the quarter 38 cents from the Wyoming Valley transaction and three cents from that insurance recoveries.

Same store NOI, excluding lease termination revenues was 5.8% lower than the 2018 quarter.

During the quarter, we saw four tenants, including forever 21 to file for bankruptcy.

In light of F 21 scale in terms of store size and presence across the malls throughout the country. This filing was particularly impactful to the sector.

And our portfolio. They operate 14 stores in 219000 square feet and generate annual revenues of approximately $6.5 million.

Through the end of the third quarter in total we had 83 stores impacted by bankruptcies and 454000 square feet generating approximately $16 million annual revenues.

Compared to last year loss trend from bankruptcies and associated bad debts was $2.6 million for the quarter.

There may be additional store closings and or rent concessions in the future as these tenants work to the bankruptcy process and negotiate modifications.

Partially offsetting this revenue loss, where the incremental revenues generated through anchor replacements. Another large format tenants that have opened in 450000 square feet since the beginning of 2018.

In the third quarter. These new tenants contributed about $700000 of new revenues to the portfolio and $2 million year to date.

Annualized these new tenants will contribute five and a half million dollars in new revenues.

Occupancy at our same store core malls showed sequential improvement to 94.4%. Despite the impact of store closings as we open ankle replacements at Plymouth meeting all during the quarter.

Average renewal spreads in our wholly owned portfolio were 9.9%.

13.2% for small shop tenants and 6.5% for large format spaces.

When including leasing transactions from our joint venture properties renewal spreads for the quarter were 2.2%.

Other items impacting F.F. our results for the quarter include lower and away from our same store properties of approximately $2.2 million due to lost revenue from anchor closings and related co tenancy claims by other tenants and the sale the whole foods at Exton.

Corporate revenues were lower this year, because we saw the Wiregrass mortgage note and terminated a third party management contract. The 2018 period also included the last tranche of historical tax credit revenues at fashion districts.

Under the new lease accounting standard, we expensed $1.4 million of previously capitalized internal leasing costs and $4.2 million year to date.

During the third quarter, we spent approximately $66 million when our anchor replacement and redevelopment program.

As of September Thirtyth, we had commitments for construction contracts and tenant allowances.

Putting our share of fashion district of approximately $83 million those expenditures will be made through the balance of this year and into 2020.

In our release last evening, we revised our earnings guidance, we now expect FFO of between $1.37 and $1.44 cents per share and FFO as adjusted to be between a dollar eight and $1.14 per share.

Net income attributable to common shareholders expect it to be lost between 31 and 38 cents per share.

Key drivers.

Accounting for our changing guidance include lower land sale gains.

In light of conducting a more competitive process for the sale of the multifamily land, we solicited more bids and the interest of maximizing value, which results in a lower anticipated closing timeline.

At the midpoint of our guidance range land sale gains are now expected to be $4.3 million decrease of $5.3 million or seven cents a share.

We also are forecasting lower lease termination revenues previously we guided to a midpoint of three and a half million dollars based on our historical experience and potential lease terminations that were in our pipeline.

We now expect lease terminations of approximately $1.5 million decrease of $2 million or about three cents a share.

We reduced our same store NOI guidance due to the impact of additional bankruptcies in the third and fourth quarters lower than expected revenues from our common area program and delays in the opening of certain stores among other factors.

And finally, our guidance was favorably impacted by the inclusion of the gain from the Wyoming Valley transaction.

So thats wraps up our prepared remarks, so with that we'll open up for questions.

As a reminder to ask a question you will need to press star one and your telephone to withdraw your question press the pound key.

And your first question comes from the line of Ki bin Kim from Suntrust. Your line is open.

Hey, good morning. This is he going on with Kevin.

Your same store NOI guidance implies the ramp in Fourq you.

Can you just touch on how confident you are with two months left on a year and any other additional color you can provide around that.

Yeah I think.

All three of US mentioned the store openings that occurred in the third quarter that gives us the momentum to carry through to the fourth quarter and I think we mentioned in the second quarter call. We expect that the impact of the bankruptcies to really peak in the third quarter, which obviously was reflected in our results.

You know have opened or we'll open the next that in the next month in anticipation of the holiday season.

Okay, and then on the additional bankruptcies, you mentioned, which retailers caught you by surprise and have you added any new tenants to your your watch list for 2020.

Well I mean, we were we were obviously surprised by forever 21 in so far as we head negotiated deal that we were we understood we'd keep them out of bankruptcy.

And then they filed and obviously all bets were off so that was the that was the key sort of point that.

We were surprised by.

I think I think the as it relates to we'll watch list were I don't think we want to give a list of names when our watch list but.

We we continue to monitor a number of.

Of retailers.

And and look to replace them as the opportunity presents itself.

Okay, great. Thank you that's all from him.

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Your next question comes from the line of Michael Mueller from Jpmorgan. Your line is open.

Hi.

Yes, I guess first of all Joe when you talk about back on track for growth in 2020 coming on.

Does that hold true for stripping out the anticipated land sale gains next year and this year. So ex land sale gains you think you still have positive AFFO growth next year.

Yes, we do.

Okay.

And then second question and you talked about the traffic numbers that fashion district, but can you talk a little bit about what you're hearing from the retailers about actual sales versus budgets and just kind of any anecdotal evidence so far.

Sure, it's mostly it's mostly.

Anecdotal and color because obviously given its location we stay close in touch with retailers, but as we mentioned you traffic spin been great.

Retailers are reporting strong results.

During the opening week, 87% of the retailers reported sales ahead of expectations.

With some retailers reporting results that were triple and double.

Their initial predict projections show.

All things considered.

The property is is doing.

Phenomenal business.

I'm not sure how some of the food operators actually keep enough food inventory to shell.

To the crops that are there and I'm I'm I'm not choking about that.

So businesses business had fashion district.

Always could be better, but it's great.

Got it okay that was it thank you.

You're welcome.

Your next question comes from the line of Vincent Yu, both from Green Street Advisor Your line is open.

Hi, Good morning, you mentioned, some desires to improve the balance sheet, but it doesn't sound like mall assets sales are part of that plan I mean, I'm just curious why isn't the case and how do you expect to materially change you know the balance sheet leverage profile without asset sales or an equity raise.

Well, we did mention that we are doing outparcel sales as part of improving the balance sheet, but our our first and foremost goal.

Is to show Nonincome produce producing assets and that's the residential and we think we have a real advantage.

In terms of our particularly our Washington, DC and Philadelphia properties that we have the opportunity to do a significant amount of residential there born on on the on unused land.

And as a result that that in the Outparcels shales are sort of first order a business we've been.

We've been in and out of discussions regarding Jvs.

On on malls.

And we are you know we are cap rate sensitive as opposed to cap rate agnostic, which we were a little bit when we were selling all lower quality assets. So it's not something that's off the table, but I think in the order of priority step one is the residential land.

And again as we as we mentioned in our script there has been robust interest.

We have over a dozen.

Prospective buyers bidding for that.

We had 30 buyers signed confidentiality agreements that's number one.

At the same time, we're pursuing some outparcel sales and as their concluded coupled with a very rigorous effort on minimizing capital expenditures.

We will look at where we are and think about what next steps are necessary. If you know if any to improve the balance sheet. Because we'll also see and natural de levering occur as a result of our ramp up of fashion district and woodland limits.

Meeting and Dart myth and valley.

Okay, yet on the doesn't make sense just a few falls in that way what did the what does the potential amount of proceeds like rough ballpark, you think from let's say low income producing or no income producing assets that you mentioned like is it.

Sales of $100 million is it something much like rather trying to get a sense of how much given that could gain.

I'm sorry go ahead and finish no go out I'm, just trying to get a sense of like how much do you think you could really raise from the kind of you know residential growth basically let residential land plays or Outparcel sales.

Well given that we are asking for best and final offers on residential I'd, rather not get too specific on that but certainly.

It's you know, it's north of 100 million.

Okay. That's helpful. And then there's one more on the JV comment I'm just curious if your conversations have changed over let's say last six months or year with potential buyers and how their underwriting malls or how you know maybe some of the cap rates you're seeing from every year that they have top half of your portfolio like any any.

Colour on the private market would be would be helpful.

Well I think I think the color I could give you is we're seeing a higher level of interest.

Than than we had certainly previously.

With regard to cap rates.

I don't think Guy I don't think I have enough information to provide you with any specificity other than there are there are more people knocking on our door.

And certainly six months ago.

Interesting who are the are you able to share kind of or the capital sources. There. This foreign money is this U.S. institutions, maybe private equity I'm, just curious who's who who are the new players and the bidding which tracks put checks next to the first two you mentioned.

Okay.

All right now that that's really helpful. Thank you.

You're welcome.

Your next question comes from the line of Christy Mcelroy from Citi. Your line is open.

Hi, Good morning, guys. Thank you I'm just on the Reggie land given that you're closer to a transaction there if pricing still in line with the expectation that you mentioned a quarter ago that 150 to 300 million at Christie's and if you could it documents by year end at what point in 2020 would you expect to close.

Well again, Chris do you much as I'd like to.

Give you specificity, we are literally a going to document going to pick horses in the next week or two and are pretty deep into negotiations show I wouldn't want to.

Specifying a mail we expect to execute documents this year and moved to closing next year.

Okay fair to say that it's kind of coming in in line with your prior expectation.

Again, I'd, rather not get into a specific discussion with you, but we're not unhappy.

Okay and Joe you commented previously and I think there's a couple questions on the set that you bought in the context of your future growth expectations 2020, and beyond do you made the comment that you expect to cover that dividend and I just wanted to sort of understand that comment I know that some of that near term will come from asset sale.

But just in regard to getting a sense for more recurring operational cash flow. How do you start away the pros and cons of maintaining the payout at this level, which right now is pretty well above AFFO or fad I'm on a recurring basis and you know sort of on that basis at what point would you expect to covering your dividend.

So with.

As we've said a we expected to reach our peak, which were currently experience our fourth quarter does she improvement to our current <unk> payout ratio.

And with the 12 million in leases coming online and have DP stabilizing.

Based on the information have we're expecting to fully covered the dividend in 2020.

With operational recurring cash flow and not that includes land sales wins generated from the transaction right.

There were from operational cash flow, including land sales.

Okay I've, just lastly, you've you've looked into at the sale of your JV Stakes in power centers in the past I'm just trying to put some liquidity coming back you know in the market for power centers is this something that you would consider again just in the context of your your comments on assets have.

Sure we were we are always.

Looking for a creative ways to raise capital.

So far as were concern you know the the power centers, our interest into power centers, our for sale as a as we've talked with you before about there's certain complexity associated with that.

In terms of the nature of the by cells without taking too deep into that.

That's been somewhat problematic.

Those deals go back to.

Actually before the merger of the Rubin organization and pre so there are not necessarily optimal from our perspective.

Okay. Thanks for your time.

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Your next question comes from a line of Caitlin Burrows from Goldman Sachs. Your line is open.

Hi, good morning, I needed just one other quick on on the land sales. If you can say on how many different separate transactions, you're expecting whether its though one big one or multiple.

Well that's a good question.

We're going to do the number of transactions that maximizes the value of of the of the land that we're selling.

Just sort of general the answer to that question it could be one buyer could be as much as three.

Got it Okay and then another follow up on the dividend I guess, you mentioned in the earnings release creatively addressing the balance sheet. So I guess with respect to the dividend in particular.

How willing are you guys creatively address the dividend going forward and create onetime liquidity such as land sales.

This is something that was potentially more organically sustainable and what metrics that you'd be looking at to know that yesterday organically sustainable level.

<unk>.

I don't understand the question.

So you mentioned that in 2020, the dividend is gonna be covered and land sales contributions are going to can contribute to that but that's more onetime in nature. So then if we go out to like 2021.

What metrics do you think we should be looking at to know.

If the dividend so sustainable.

We are we cover and 21.

<unk> cash flow.

Yes.

Okay, then I guess moving to Forever 21, I know in the past you guys had mentioned that the size of your stores. The small it's to the expected impact I was going to be solved obviously some things have changed since then so I guess.

Thinking about the potential timing of the impact there.

When do you think you will be impacted by closures or rent adjustments.

Well, we're we're in the midst of negotiating with them right now.

I mean, it's.

Well I should right now like every day.

Shaw I'd, rather not get into too much detail only to say that.

One of the one of the impacts from it will be that we're going to look to take some stores back.

Primarily because we have tenants to replace them.

Which is which is new and different.

Than it was before.

And.

Obviously, there is also going to be in the remaining stores.

Some rent relief involved.

Okay, and then in terms of destination maternity could you just say what your exposure there isn't the outlook for those locations.

We have two stores.

So it's pretty Oh, yeah once in a joint venture. So I guess, if you want me to be really specific I've wanting to have stores.

And.

Okay, and then last topic is just on debt covenants I think there's multiple ratios that are nearing a than some of the limits, including consolidated liabilities tag gross asset value. So given that are.

Now expected receipt of land sale proceeds in 2020, where do you expect those metrics to trend over the next several quarters and what happens if you do cross one of those requirements.

So Caitlin I think we probably communicated for at least a year that we'd expect that the fourth quarter of 2019 to be the peak a stress period for most of the covenants. So.

We would expect again with the income coming online and land sale gains in 22.

20 expected to actually see those ratios improve over over the next couple of quarters.

So at this point, we don't anticipate breaching those are any of those covenants.

Okay. Thanks, that's all.

Your next question comes from a line of Michael Mueller from JP Morgan Your line is often.

Hey, I tried to get out of the Q and just couldn't figure out how to do with the I'm. Good. Thanks.

Okay.

And there are no further questions at this time I will turn the call over to Mr. Coradino for some closing remarks.

Thank you. Thank you for turning to call back to me.

And thank you all for being on the call, but before I end the call I want to take a moment to thank Bob Mccadden for is 15 years with the company. It's been quite a ride I tell people I've I've traveled more with Bob mccadden than most anybody.

On various and the ours and investor conferences, and I really want to thank him for being a partner along the way and working as a true professional to transition the role of CFO to Mary Mary of and Treska. So thank you Bob.

Thank you.

With that Oh, we'll end the call see you all in a L.A.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.