Q1 2023 Pennsylvania Real Estate Investment Trust Earnings Call

Participants

Joseph F. Coradino; Chairman & CEO; Pennsylvania Real Estate Investment Trust

Mario C. Ventresca; Executive VP & CFO; Pennsylvania Real Estate Investment Trust

Heather Crowell; EVP of IR; Gregory FCA Communications Inc.

Presentation

Operator

Hello and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the PREIT First Quarter 2023 Earnings Conference Call. (Operator Instructions)
I will now turn the conference over to PREIT to begin.

Heather Crowell

Good morning and thank you all for joining us for PREIT's First Quarter 2023 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, May 4, 2023, 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. We continue to partner with Say Technologies to offer an opportunity for shareholders to ask questions of management.
During this call, management will answer questions received over this Q&A platform. Members of management on the call today are Joe Coradino, PREIT's Chairman and CEO; and Mario Ventresca, CFO. Joe?

Joseph F. Coradino

Thank you, Heather, and good morning, and thank you all for joining us. We're pleased to report a strong start to 2023 with growth in NOI, occupancy and sales. The consumer continues to shop, dine and be entertained at our properties despite ongoing economic challenges.
As we advance our delivery of different uses and new-to-market tenants, we expect to continue to drive consumer interest, increasing traffic, sales and NOI. In fact, same-store NOI, excluding lease termination revenue, increased 5.7% for the quarter. Core Mall total occupancy increased to 93.5%, and Core Mall total leased space sits at 94.5% when including executed new leases slated for future occupancy, demonstrating the rapid pace of leasing activity.
Year-to-date, traffic is up 7%, driving comparable sales to $603 per square foot, squelching concerns over consumer spending. Average renewal spreads were strong at 5.6%, demonstrating a shift in pricing power to the landlord.
Currently, we have a pipeline of over 258,000 square feet of leases signed for future occupancy, representing over $7.2 million in annualized future rents. So far this year, we've signed over 140,000 square feet of new leases.
Our strong portfolio of real estate continues to attract tenants and customers with new opportunities to create value. For over a decade, we focused on expanding our offerings to go well beyond traditional mall tenancy, including leisure and entertainment options, as well as tenants that have traditionally located in open air centers, in addition to experiences that have served the broader community like grocers and health care.
This year, we signed Burlington and Springfield Town Center, who will join LEGO Discovery Center in transforming Springfield Town Center into a vibrant multi-use hub, becoming a go-to family entertainment destination in the DC market. With over 30% of Springfield Town Center's space dedicated to entertainment and dining, PREIT is creating the ultimate entertainment destination for the DC market. Adding to this plan, PREIT is planning to incorporate apartments and a hotel on site, further enhancing its appeal.
Earlier this week, we announced that ULTA will join the lineup at Dartmouth Mall, advancing its position as the leading enclosed mall in the region, following the closure of 2 of our competing properties. ULTA will round out the former Sears location, which is now home to Burlington and Aldi, highlighting our ability to replace outdated department stores with modern appealing tenants.
In particular, the beauty segment has proven to be extremely resilient and growing, with over 70% of consumers saying they don't plan to cut back on beauty spending.
And keeping with the theme of offering more to our communities and bringing in nontraditional uses, we're looking forward to welcoming Meritus Health and 25,000 square feet at Valley Mall. They joined over 200,000 square feet of health care facilities in PREIT's portfolio, including Cooper University Health Care and Moorestown expected to open in September and Main Line Health at Exton Square.
At Cherry Hill Mall, Brooks Brothers will make a return to the property, joining previously announced tenants set to open or having recently opened, including Levi's, Warby Parker, Psycho Bunny, UNIQLO and Eddie V's. Throughout the portfolio, we have 232,000 square feet of space signed for anticipated openings this year.
Looking ahead, we continue to see opportunity to improve and create value at our properties, including new tenant introductions and further multifamily opportunities. In 2022, the company sold assets generating over $113 million in gross proceeds and has applied these proceeds and excess cash from operations to pay down debt by over $157 million.
Earlier this year, we executed on the sale of Whole Foods at Plymouth Meeting Mall, which was completed in January. Coupled with excess cash, this enabled us to pay down debt by $29 million through the end of March this year. We continue to pursue entitlements and approvals for the multifamily property with the expectation to continue to move these to sale.
Our credit facilities, with a balance of $996 million as of March 31, 2023, mature on December 10, 2023, and work continues to address the upcoming maturity by pursuing all available alternatives, including refinancing, selling assets and engaging in discussions with lenders.
As we survey the economic landscape, we believe we have positioned our portfolio well to continue to thrive during periods of economic uncertainty. Our diverse tenancy offers shoppers an array of products, services and experience at various price points that drive repeat visits. We have sold off underperforming problematic assets and are experiencing continued demand for space with experts predicting openings outpacing store closings again this year.
PREIT has been ahead of the curve in reimagining the enclosed mall shopping experience as one of the earliest adopters of department store replacement efforts, replacing 20 department stores with over 40 different uses, which we anticipate will continue to entice the modern consumer, offering a broad diversity that prevails irrespective of economic conditions, demonstrated by recent traffic and sales growth.
With that, I'm happy to turn it over to Mario to review our results.

Mario C. Ventresca

Thanks, Joe. From an operational perspective, the business is performing well, reflecting improvement in same-store NOI growth, tenant sales, collections, leasing activity and liquidity.
First quarter same-store NOI increased 4.5% during the quarter or 5.7% when excluding the impact of lease terminations. These strong results were driven primarily by increases in rental revenue, net utility and ancillary income. Liquidity continues to track ahead of our business plan at approximately $117 million.
Total occupancy stands at 93.5%, which is a 90 basis point-increase over the first quarter of last year.
Leasing volume is strong and compares favorably to last year. During the quarter, we signed over 400,000 square feet of new and renewal leases. We currently have a pipeline of over 250,000 square feet signed for future occupancy, which represents over $7.2 million in annualized future rents.
Comparable sales ended the first quarter at $603 per square foot, with 9 of 17 properties demonstrating increases.
This morning, we reported first quarter 2023 NAREIT FFO and FFO as adjusted of negative $3.05 per share. The primary drivers of the variance to 2022 actuals for the first quarter were a $2.4 million same-store NOI increase, offset by a decrease of $1.8 million in non-same-store NOI resulting from the sale of Cumberland Mall and Gloucester Premium Outlets in 2022. Interest expense increased by $12.2 million, driven primarily by higher weighted average interest rates as compared to the first quarter of last year.
While we have experienced an elevated number of bankruptcies so far this year, affecting $1.7 million in revenue and 46,000 square feet, we remained compliant with our credit facility covenants and are pleased by the continued tenant interest in our properties. It is notable that earlier this week, we signed an extension of the mortgage loan secured by Cherry Hill Mall through December 1, 2023, with an additional 5-month option that is exercisable, subject to satisfaction of certain conditions.
The company's credit facilities with a balance of $996 million as of March 31, 2023, mature on December 10, 2023. The company is working to address the upcoming maturity by pursuing all available alternatives, including refinancing, selling assets and engaging in discussions with lenders. With that, we will turn to the questions we received on our Q&A platform.

Question and Answer Session

Heather Crowell

Thanks, Mario. The first question is, what is the current status of the credit markets for mall real estate? Can you continue amending and extending loan maturities? Will PREIT be able to extend, renegotiate or replace its first and second lien credit facility coming due this December?

Mario C. Ventresca

It's no secret that the credit marks are extremely challenging, particularly for enclosed malls. As we announced in our earnings release and discussed in our prepared remarks, we're pleased that we've successfully extended the mortgage loan secured by Cherry Hill Mall and now are focused on our remaining near-term maturities.

Heather Crowell

What progress are you making on asset and parcel sales? Are you trying to sell Exton Square? Do you have any more parcels that you can sell to Four Corners Property Trust?

Joseph F. Coradino

We have continued to evaluate opportunities for asset sales, including Exton Square and [Plymouth Meeting Mall] as well as our outparcels. However, we are not prepared to disclose details at this time.

Heather Crowell

While my strong preference is to keep PREIT's portfolio of malls as intact as possible, if it turns out that the best way to maximize shareholder value is to sell the most valuable properties or all of the properties, will you hesitate to do that? Along these lines, what is your plan going forward? And is there a 5-year plan in place when the market changes?

Joseph F. Coradino

Since the beginning of 2022, we've sold over $140 million in assets and utilized excess cash to pay down $190 million in debt, secured the extension of our credit facilities' maturity date and satisfied the remargin requirements with Fashion District Philadelphia. As we have previously noted, our plan is to spend the coming months exploring all possible options available to the company as our credit facilities matures, including refinancing, selling assets and engaging in discussions with lenders. We have demonstrated through our disposition history that we are open to selling assets and we continue to work towards finalizing the sale of our multifamily land and are exploring all possible options with our investment adviser.
With that, I thank you all for joining us today, and have a great day.

Operator

That does conclude today's conference. Thank you all for joining. You may now disconnect.