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Edited Transcript of PEI earnings conference call or presentation 26-Feb-20 4:00pm GMT

Q4 2019 Pennsylvania Real Estate Investment Trust Earnings Call

Philadelphia Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Pennsylvania Real Estate Investment Trust earnings conference call or presentation Wednesday, February 26, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heather Crowell

Pennsylvania Real Estate Investment Trust - EVP of Strategy & Communications

* Joseph F. Coradino

Pennsylvania Real Estate Investment Trust - Chairman & CEO

* Mario C. Ventresca

Pennsylvania Real Estate Investment Trust - Executive VP & CFO

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Conference Call Participants

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* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Vince Tibone

Green Street Advisors, Inc. - Analyst of Retail

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. And welcome to the PREIT Fourth Quarter 2019 Earnings Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Heather Crowell. Thank you. Please go ahead, ma'am.

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Heather Crowell, Pennsylvania Real Estate Investment Trust - EVP of Strategy & Communications [2]

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Good morning, and thank you all for joining us for PREIT's Fourth Quarter 2019 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, February 26, 2020, 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 who are on the call today are Joe Coradino, PREIT's Chairman and CEO; and Mario Ventresca, our CFO.

I'd now like to turn the call over to Joe Coradino.

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [3]

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Thanks, Heather, and good day, everyone.

We're nearly 2 months into 2020. And as we look back where we were a year ago, it feels a little different. We're beginning to believe that the headwinds are slowly subsiding, and the work we've done positions us to capitalize on an improved operating environment.

With last night's earnings release, we announced completion of transactions, confirming that we were on our way to shoring up our balance sheet. The effort includes selling over $300 million in assets in the form of nonincome-producing land for multifamily and hotel densification, operating outparcels and a; sale-leaseback of 5 mid-tier properties.

We entered into this sale-leaseback transaction for 5 properties that will deliver $153.6 million in proceeds, netting approximately $57 million in liquidity. The transaction is structured as a 99-year lease with an option to repurchase. The agreement also provides for release of parcels related to multifamily development and is subject to ongoing lease payments at 7% with annual escalations.

The land sales represent Phase 1 of the multifamily densification plan. We have signed purchase and sale agreements with 4 buyers on 7 properties for $125 million. This phase will include 3,450 of the 5,000 to 7,000 units that are buildable. Upon receipt of entitlements, we'll close on these land sales, which will allow us to reduce our leverage levels. Note that this represents only half of our land available for densification, and we expect to monetize the balance as part of Phase 2.

Additionally, the company has 2 hotels and 12 additional outparcels under agreement of sale, which are expected to net an additional $12 million in liquidity. These transactions demonstrate our ability to efficiently access internally generated capital and, together with potential modifications to our credit facility's covenants, create the runway needed in order to complete execution of our business plan. The company has had productive discussions with its lenders, with a goal of modifying its debt covenants in the short term through September 30, 2020.

To avoid covenant violations and ensure compliance with its obligations, the company is also in discussions to modify the terms of its debt agreements on a long-term basis. In the near term, we expect to experience stress against our leverage ratio, fixed charge coverage and our unencumbered debt yield covenants. And in abundance of caution, we notified you of potentially exceeding our covenant limits. However, while our ratios are tight right now, we're currently in compliance with our loan covenants and expect to modify them by the end of March.

The bank group has acknowledged the work we have done to shed noncore assets, including 18 underperforming malls to which we raised nearly $900 million. This capital was redeployed into our value-creating redevelopment program wherein we took action to aggressively reduce our exposure to department store consolidation. We have unquestionably differentiated our portfolio and are at the early stages of recognizing the benefit of our efforts. We've created a company that can internally raise over $300 million, and we expect this to aid our discussions with the bank group, bringing about near-term resolution. We're in a business that has, in the past few years, experienced volatility from a disruptive business model.

There are and will always be retail bankruptcies, liquidations and closings, but we've taken proactive steps to manage the disruption. We sold underperforming properties. In those 18 malls that we disposed of, we have seen over 40 department stores closed. It would not have been prudent to allocate capital to assets when we pay it to obsolescence. Conversely, of Macy's 125 announced store closings, we will have only 1 in our portfolio, a testimony to the quality of the portfolio we've created.

Another step we took was diversifying our tenant base. In fact, today, 47% of our non-anchor space is leased to non-mall uses, including dining and entertainment, health and wellness and off-price merchants, which are traditionally found in open-air centers. These uses motivate the modern consumer and allow us to serve more customers. As stewards of stakeholder capital, we firmly believe that serving the customer will enhance the value of our properties, benefiting all of our constituencies over the long term.

We executed on this aspect of our plan by being the first to proactively take back department store space. We replaced 13 department stores in 3 years, contrast this to our peers who are looking at well over 2 dozen vacant boxes. We've executed on this action plan deftly and have dramatically improved the credit of our underlying cash flow stream, having doubled our commitment from TJX, Burlington, Dave & Buster's, Darden and Regal since 2012.

Given today's announcement of over $300 million in capital-raising initiatives, our balance sheet is headed in the right direction. As we look toward 2020, we believe we are better positioned to deliver on expectations than in 2019. We recognize this is an optimistic view and, at the same time, don't think you'd want someone else sitting here on this call that doesn't believe in the business. We're on a mission to prove malls have a bright future. We're the sole operator of mass appeal, economically accessible retail and entertainment properties with admirable underlying demographics and high barrier-to-entry markets. And we are confident our position as an innovator at the forefront of shaping consumer experiences positions us well as we move towards solid ground in retail.

Fashion District Philadelphia, Mall at Prince Georges and Woodland Mall, our 3 high-touch redevelopments, continue to generate interest from consumers and tenants at a rapid pace. Both Mall at Prince Georges and Woodland will be beneficiaries of our densification program.

At Fashion District, traffic is robust, with over 4.8 million shoppers since September 2019, as exciting tenants continue to open and build momentum with a 47,000 square foot industrious co-working facility next in line. The project is over 80% leased and 90% committed. Notable recent additions to the property include outlet tenants Armani Exchange and Eddie Bauer; full price retailers Sephora and Torrid; and experiential destinations AMC Theaters, Round One, Wonderspaces and REC Philly. In the next few months, we will welcome more new-to-Philadelphia tenants, including Kate Spade, DSW, Windsor, YOYOSO and Clair de Lune. These exciting retail brands will be joined by international fast fashion retailers Primark and Ardene.

At Woodland Mall, we continue to see traffic growth in the double digits and saw our comp stores pop up over 10% to over $600 per square foot following the opening of the expansion wing in October. With the entire property benefiting from the sought-after additions, we expect the excitement will continue as we welcome Sephora and White House | Black Market this spring.

There continues to be a tremendous opportunity for this property to continue to exceed expectations as we deliver more aspirational brands, solidifying it as the winner of the consumer dollar in Grand Rapids. We have a number of anchor replacements still to come online this year with 2 Michaels stores opening at Plymouth Meeting and Moorestown malls, where they round out the former Macy's stores. Dick's Sporting Goods will replace a former Sears at Valley Mall. Sales at the property are up 5.9% in 2019.

This March, Burlington will replace Sears at Dartmouth Mall, another market-dominant asset that has come out the victor as 2 competing enclosed malls have closed in this market. We're underway with re-leasing stores closed as a result of bankruptcy. We've executed or at lease to replace 93% of the space. Approximately half of the backfills are temporary, allowing us to capture upside as the environment improves.

We are clear that non-anchor leasing is how we will ensure earnings growth gets back on track. And we're up for the task of introducing new tenants and diverse uses throughout our portfolio.

And now I'll turn the call over to Mario, who will discuss the quarter and our guidance in more detail. Mario?

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Mario C. Ventresca, Pennsylvania Real Estate Investment Trust - Executive VP & CFO [4]

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Thanks, Joe.

From an operating perspective, the key themes that define this year's performance continued to define our operating results for the fourth quarter: the rationalization of tenant store count through bankruptcies and store closings, completing our anchor replacement program and backfilling in line space. As a result of our anchor repositioning efforts, we benefited from the incremental revenues from tenants that have opened in 618,000 square feet since January 1, 2018. In the fourth quarter of 2019, these new tenants contributed a total of $1.5 million of new revenues to the portfolio and $3.4 million for the year. These tenants will contribute $7.5 million on an annualized basis.

Our Core Mall portfolio, which contributes nearly 90% of our NOI, continues to deliver metrics that indicate stability and highlight the quality of our portfolio that we have created.

From an occupancy perspective, we ended the year at 95.5% total, including anchors, and 92.9% for non-anchor space. Average gross rents were just under $60 per square foot, and occupancy costs are reasonable with room for improvement at 12.3%.

Our comp sales are up 5.7% for the year, at an all-time high, to $539 per square foot. Of note, we now have 8 assets performing at over $500 per square foot and 2 assets at over $700 per square foot. We outperformed the National Retail Federation holiday sales estimate, with sales growth of 4.2% over 2018's November and December. This absolutely speaks to the positive consumer reception to our asset repositioning and anchor box replacement initiatives.

We have 425,000 square feet of executed leases in our pipeline for future openings in our same-store portfolio which will contribute $13.1 million of annualized revenues. This revenue will come online and hit our P&L towards the back half of the year and annualize into 2021.

Renewal spreads have been driven by our wholly owned asset performance. Our consolidated portfolio significantly outperformed our joint ventures, registering positive annual renewal spreads of 6.7% non-anchor under 10,000 square feet and 5.5% non-anchor over 10,000 square feet as compared to negative 10.5% and flat, respectively, for the joint venture portfolio. We secured 8 anchor renewals during the year comprising 807,000 square feet, bringing our total renewal activity to just under 1.6 million square feet of transactions.

Our renewal leasing pipeline and activity is another indicator of significant positive momentum in and retailer commitment to our enclosed mall portfolio. Same-store NOI, excluding termination fees, fell outside of our previous guidance for 2019 due to the acceleration of rent relief for a large-format bankrupt tenant over what was previously projected. For the month of December, NOI, excluding termination fees, for our wholly owned assets increased by 0.30% for the month. This positive inflection point supports the guidance I will discuss later on the call.

We reported FFO as adjusted of $0.34 per share compared to $0.51 in the prior period after accounting for the dilution from asset sales. Last year's fourth quarter included the incremental impact of land sale gains of approximately $0.10 per share.

During the quarter, we closed on the sale of 3 outparcels to FCPT, and the Woodland REI parcel was closed in January. In the fourth quarter, we also sold our last remaining undeveloped land parcel in our portfolio. During the quarter, we recorded the previously announced $2.7 million gain on sale of the 3 recently developed outparcels. We have not committed at this point to monetize any outparcels other than the 12 we have under contract to be sold, but we believe these to be an attractive source of capital going forward.

Let me now review our capital plan and provide some additional details on our earnings guidance. During the quarter, we spent $49.3 million on redevelopments and department store replacements, bringing the total spend to $183 million for the year. In 2020, we expect to spend approximately $100 million on our announced pipeline projects. We ended the year with $48 million of available liquidity. Based on completed initiatives and those underway, we expect to generate an additional $113 million of liquidity during the year.

Last night, we issued guidance and our underlying assumptions for 2020. We expect FFO as adjusted per share to be between $1.04 and $1.28. Our guidance includes a reserve of $2 million at the midpoint and $3 million at the low end for bankruptcies and store closings. We've assumed lease termination fees of between $1 million and $2 million with $1.5 million at the midpoint.

In our 2020 guidance, we have assumed land sale gains of $14.4 million to $28.8 million as a result of our densification initiatives. Excluding these gains, FFO is expected to be $0.89 per share at the midpoint. The key drivers of the variance to 2019 FFO are: higher interest expense as a result of increased borrowing and redevelopments being placed into service, which equates to $0.13 per share; the sale of outparcels which were removed from same-store NOI in the amount of $0.015 per share. These are partially offset by lower G&A of $0.04 per share and same-store NOI growth of $0.01 per share. We expect to realize $3.6 million of incremental revenues from our anchor replacement program in 2020. 2020 store openings coupled with the annualization of rents from major tenants that opened last year are driving our performance.

From a balance sheet perspective, we expect to invest approximately $100 million to complete our redevelopment pipeline. This consists mainly of the balance of spending at Fashion District and tenant-specific costs to complete our 4 Sears replacement projects at Woodland, Cap City, Dartmouth and Valley malls; our 3 ongoing Macy's replacement projects at Valley, Plymouth Meeting and Moorestown malls; and the cost to complete construction of the Studio Movie Grill at Willow Grove Park.

As we work toward the completion of our 10-K, our auditors are reviewing our liquidity position and debt covenant compliance. The current status of ongoing discussions with the bank group may impact the auditors' opinion. As we said earlier, we are engaged in productive discussions with our bank group and fully expect that this will be resolved before the end of the first quarter.

We are a company on the move with a positive trajectory. We have unquestionably improved our portfolio, and this progress is manifesting itself in our operating metrics. The progress announced on the capital raising front provides us with ample liquidity and will serve to increase balance sheet stability. This will provide the runway for the company to benefit from the valuable platform we have created.

And with that, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Christy McElroy with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [2]

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It's Michael Bilerman. And if I do an accent, can I do like 2 questions and pretend to be like 2 people?

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [3]

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It depends what your first question is.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [4]

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Right. I want to go back -- I wanted to start on the liquidity situation and really try to understand the Board and management's perspective regarding the dividend, which is -- and I respect that you have all these capital transactions that are working. But you're in a position right now where even though you fully expect to get clearance on your covenants, you're in a really tight position. And I'm struggling to understand why you would maintain 130%, 140% payout ratio this year based on the guidance and not try to pay that dividend in stock just to retain that capital to be able to execute what you need to execute. And that's -- I'm just struggling really hard why you've maintained this dividend for the last 3, 4 years when you've been so tight, and now we're going to be spending money for the dividend rather than retaining any free cash flow.

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Mario C. Ventresca, Pennsylvania Real Estate Investment Trust - Executive VP & CFO [5]

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One of the motivations in paying the dividend -- and by the way, we haven't -- we've thought long and hard about it, difficult decision, has been attempting to balance our share price in light of the disconnect in the public market pricing as a company. We recognize 20% is unusual. And we'll continue to take that into consideration as we look at future dividend periods. But with $13 million in leases coming online and FDP stabilizing, our FFO payout ratio, net of land sales, is about 90%. On an AFFO basis, we're at about 85%. But Michael, I mean, I don't want to do anything other than appreciate the question and understand the point.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [6]

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I mean land sales are not core income, right? Dividend is generated from core operations. Land sales are helping you gain some liquidity from a debt perspective. I guess I'm still struggling to understand why maintaining a $0.21 quarterly dividend when your free cash flow before land sales is less than that, right? You're increasing your leverage even though I recognize it's 80 million shares. And so the dividend is not massive. But you're putting yourself more in a box by doing that. That's why I struggle to really understand why even maintain it in the first quarter, the most recent dividend, when it was going to be above 100%, excluding the land sales.

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [7]

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I appreciate the point, and I think I've given you the answer to that, the Board and our -- and management has reach a decision based on.

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Operator [8]

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Your next question comes from the line of Ki Bin Kim with SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [9]

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I want to go back to the covenants. If you pursue the sales-leaseback, I would think lenders would probably treat that as that. That will probably certainly push you over the limits. So it sounded like you're pretty confident that you'll get lender modifications by the end of the first quarter, which is only a month away. So what are the kind of practical...

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [10]

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Yes, let me give you -- let me sort of take a step back here. First, we're in compliance with all of our covenants today. That's first and foremost. We want it to be transparent, and we wanted to just lay it out there. It's -- it probably will have a negative effect, but it's something that we see a solution in the near term by the end of the month. We've been in ongoing discussions with our lenders. It's a very positive discussion. We were in Charlotte on Monday and the meeting ended with the bankers congratulating us on the work we've done on our portfolio. We expect to bring it to resolution. I don't really see the -- I mean, obviously, the transaction you're speaking about will impact one of our covenants. But I think in the converse of that, it will bring in significant capital to the company.

I know on one of your -- on your report, you mentioned that it was expensive capital. At 7%, we view that capital as not dissimilar to a 5% loan with 20-year amortization.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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Yes. So before I get to that point, would the lenders require a higher interest rate? Is that the likely outcome? Is that in your guidance as well?

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [12]

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Well, at this point, we're not prepared to discuss the terms of our agreement with the lenders. But we fully expect to bring it to resolution.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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Okay. And when we wrote that it was expensive cost of capital, we're comparing it to the relative other options you have available, like cutting the dividend, which brings me to my second question.

I'm just really trying to understand the rationale for keeping that dividend. Is it because, at this point, given where the equity markets are and how they're treating malls and Penn REIT stock, from a real practical standpoint, the possibility of a shareholder return without a cash-in-hand dividend deals fairly limited. Is that the primary reason to keep that dividend? Because at some point, there's going to be a tipping point where it's less about shareholders and dividends and more about company going concern and employees and things like that. So I'm just kind of curious about when you reach that tipping point.

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [14]

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Well, no to your question is that the reason behind it. And I think I answered this question for Michael. I mean, essentially, we saw a disconnect between our share price and the value we've created. And we kept the dividend in place. As we move forward, we understand it is a -- it's a pretty high coupon, and it's something we'll take into consideration with our Board certainly prior to the next dividend payment.

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Operator [15]

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Your next question comes from the line of Mike Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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A couple of questions. I guess first of all, you talked about CapEx spend of $125 million to $150 million this year. Some of that is tied to redevelopment. I guess what's the split between recurring and redevelopment? And then, I guess, if we look at Page 8 of the sup with the detailed guidance breakdown, how do you have ongoing redevelopment activities but your CapEx goes to 0 on Jan 1 -- or your capitalized interest goes to 0 on Jan 1?

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Mario C. Ventresca, Pennsylvania Real Estate Investment Trust - Executive VP & CFO [17]

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Mike, it's Mario. The split between the 2 capital numbers, we've proactively managed our capital expenditure program looking forward into 2020 when we prepared the 2019 budget. Recurring tenant allowances are roughly $20 million, plus or minus. Recurring CapEx was somewhere in the $6 million to $8 million range.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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Okay. So if you have, call it, $30 million of recurring, $100 million to $125 million of redevelopment, development, why does your capitalized interest go away completely in 2019 -- or 2020?

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Mario C. Ventresca, Pennsylvania Real Estate Investment Trust - Executive VP & CFO [19]

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We're essentially -- we've been capitalizing the interest on the redevelopment spend. You'll see it in the 2019 representation on the guidance. It was roughly $13 million. We expect to bring all of the projects that are currently under redevelopment into -- placed into service during the year, with Dartmouth in the beginning of the year, with the Burlington open; and through midyear with Studio Movie Grill, which is expected to open late in the first half of this year.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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Okay. So literally beginning in the first quarter, it goes to 0 then is the way to think of it?

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Mario C. Ventresca, Pennsylvania Real Estate Investment Trust - Executive VP & CFO [21]

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Yes.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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Okay. And then, I guess, on the sale-leaseback transaction, can you give us a sense as to what sort of an investor you did that transaction with? I think you said it was 5 mid-tier malls. Any color on what those malls were?

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [23]

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We -- I mean it's essential -- Mike, this is Joe. I mean it's essentially a well-capitalized fund that has done this sort of thing before and someone we believe is -- we've had this deal in hand for months and really sat on it and thought about it and sat on it and thought about it and signed a day before yesterday. We think it will be a relatively 60, 90 days, maybe 120 at the outside to closing.

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Operator [24]

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And your last question comes from the line of Christy McElroy with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [25]

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Great. So I wanted to just sort of come back to sort of the dealing with your covenants and your lease, the lender modification at least for the release, it sounds like that's only a short-term modification up until September. And obviously, you have these liquidity transactions that are still subject to due diligence, customary closing conditions, securing entitlements, so that capital that I would say is at risk, right, those deals are not closed yet. You get to September 20, things may not be better. You have massive amount of maturities coming in '21 and '22 as a percentage of your total. I guess how should we think about everything that's going on...

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [26]

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You should think about it as we're -- we have already begun discussing the long-term transaction and anticipate having that in place well before that expiration.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [27]

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And how should we think about the security or the cost of getting to these transactions?

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [28]

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Given the fact that we're in the midst of a negotiation right now, I'd rather not discuss the terms of the transaction.

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Operator [29]

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And your next question comes from Vince Tibone with Green Street Advisors.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [30]

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Just one more on the covenant point here. I'm just curious if you see as part of the long-term solution a potential equity raise being required either by the lenders? Or is that something you would consider to get under compliance on a longer-term basis?

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [31]

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It's not under consideration at this point. Remember, there's a couple of things I think that, first off, $300 million-plus is a significant amount of capital in our -- our foreseeable capital expenditures are closer to $100 million. But also the residential piece is Phase 1, so there is a second comparably sized transaction out there that we have the ability to call on. And also, we've sold off about $30 million in outparcels -- or we sold off $10 million, we're about to close on an additional $20 million with FCPT. We -- as we have taken back these anchors, one of the advantages of doing that is when you take back the anchors, you no longer need anchor approval to put in outparcels. So we've created a significant inventory at this point of outparcels. So we have significant levers at our disposal through the multifamily and the outparcels, to bring any sort of organically created additional capital and don't really see an equity raise in our future at this point. I mean maybe all the analysts on the call give us a buy rating as a result of the capital we raised, and we'll be able to see a significant increase in the share price. But short of that, I think, right now, we're going to focus on raising capital organically.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [32]

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Got it. And then one on the sale-leaseback transaction. So the initial rent payment looks like it's just shy of $11 million. What's the coverage on that in terms of what those properties are generating from an NOI perspective? And just in terms of maybe, let's say, a downsize scenario potentially, if these product malls start to deteriorate and, let's say, the NOI declines below the ground lease payment, is there any put option on this type of transaction that there would be with a secured mortgage debt? Or how would that work, let's say, if the NOI at a property fell below the rent payment, are you still obligated at the corporate level to pay that rent payment? Is there any ability to almost just put back the mall to them? If you could just maybe talk about both those factors a little bit, that would be helpful.

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Mario C. Ventresca, Pennsylvania Real Estate Investment Trust - Executive VP & CFO [33]

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Yes, Vince, I don't want to get into too many of the details. The buyer is in due diligence at this point. Although they've visited all the properties, and they're very comfortable with the real estate, I mean, we talked about the quality of the assets that these -- that the fee sale will apply to. These are solid middle market. And actually one asset located outside of Philadelphia and Moorestown, New Jersey, we have Valley Mall, where we just invested significant capital. The payments, as you said, are about $11 million, $10.75 million, on the 7%. We have an option to repurchase the land underlying the properties. There is no put at this point in time or included in the transaction. But they're really the details that we're prepared to discuss at this point.

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Operator [34]

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Your next question comes from the line of Ki Bin Kim with SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [35]

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Can you just provide some more details around the sales-leaseback transaction and multifamily land sales? Just curious about the language. Obviously, whole deals are subject to due diligence and other conditions. But I'm just curious if this is something new or if this is the same thing that we've been expecting from Penn REIT for the past couple of quarters. So I guess I'm just asking about the certainty for both transactions and the timing.

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [36]

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Sure. Let me take a step back. We have been talking about it for some quarters. We decided to create a very competitive process with respect to the multifamily. And so we went out to a number of bidders. I think at one point, we had as many as 30 CAs signed for the 7 properties, went through a very exhaustive process to reach a conclusion. And the -- our expectation is that this will -- about half of them will close this year, about half next year, just generally speaking. As you think about entitlements, both Springfield Town Center and Mall at Prince Georges are entitled. And several of the other properties, we started the entitlement process in some cases over 1 year ago, maybe 2 years, and we're fairly well along. On one of them, we received the first vote this week, are expecting approval in 2 weeks. So we're well along on the multifamily transactions and continue to sort of create -- to have that be a priority.

As a result, as it relates to the sale-leaseback, I mean, it's just customary due diligence that anyone who is making $153 million investment would want to do on the assets. And without giving the list of assets, we have a pretty high degree of comfort that, that will come to closing.

I just want to go back for 1 minute on the multifamily, 2 of the properties are -- is a repeat buyer that we've done business with in the past. And we -- again, we have a pretty high degree of certainty that we'll bring these transactions to closure. Is that helpful, Ki Bin?

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [37]

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So when you -- yes, it does. But just to clarify one more thing, you said half will close -- well, you expect half to close this year, half to close next year. The $125.3 million, is that for both this year and next year? Or is that just reflecting...

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [38]

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Yes, you'd split that in half.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [39]

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The gains in guidance -- and the gains in guidance for this year reflects half or that reflects -- I'm just curious about the -- because it sounds like you're spreading it over 2 years. But the gains in guidance, is that half the gains? Or is that for both in total?

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Mario C. Ventresca, Pennsylvania Real Estate Investment Trust - Executive VP & CFO [40]

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Yes -- so we have, as Joe said, we have half the parcels closing in the latter half of this year, Ki Bin. So there would be 3 closing this year and 3 closing next year in 2021.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [41]

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Okay. And just going back to the sales-leaseback, what quality or grouping of malls are the 5 assets behind the ground lease? Would it be your Tier 1 group or Tier 2 or 3?

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [42]

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Ki Bin, I think we've made the point that it's a group of middle of the portfolio assets. I don't want to give a list at this point.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [43]

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Okay. And just last question for me. Why is your share count a little bit higher in your 2020 guidance versus where you ended the year in '19?

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Mario C. Ventresca, Pennsylvania Real Estate Investment Trust - Executive VP & CFO [44]

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It's a function of 2 things. It's the dividend reinvestment plan and the employee incentive compensation rolling into next year -- or into this year actually.

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Operator [45]

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And there are no further questions. I would like to turn the call back to the presenters for any closing comments.

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Joseph F. Coradino, Pennsylvania Real Estate Investment Trust - Chairman & CEO [46]

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Well, thank you all for being on the call today. We'll continue to keep you updated on our progress toward our balance sheet stability. From an operating perspective, we're proud of the portfolio we've created. And we believe we've taken the right steps to get here. Thank you all again for being on the call and have a good day.

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Operator [47]

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