Pennsylvania Real Estate Investment Trust

Hello, and welcome to the PREET 2Q21 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to explore your question, press the pound key. Thank you. I would now like to turn the call over to Ms. Heather Crowell. Please go ahead.

Good morning, and thank you all for joining us for Preet's second quarter 2021 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 Preet makes today might be accurate only as of today, August 5th, 2021, and Preet makes no undertaking to update any such statements. Also, certain non-GAAP measures will be discussed. Preet has included reconciliations of such measures to the comparable GAAP measures in its earnings release and other documents filed with the SEC. During the call, management will answer questions from analysts and fund investors. We also invite individual investors to submit questions via email to InvestorInfo at Preet.com.

members of management on the call today are joe corradino preach chairman and ceo and mario ventresca our cfo joe thank you heather and good morning everyone what a great quarter we're back our release this morning marked an inflection point in the turnaround of our business and the evolution of pre it's now clear that the work we have done in creating a stronger portfolio by disposing 19 lower productivity properties Repositioning 19 anchor boxes with over three dozen new tenants and securing a differentiated tenant base that is comprised of 30% open-air tenancy is driving results. Our repositioning effort has yielded a concentrated, high-quality asset base in coveted markets with high barriers to entry that is attractive to an array of tenants and uses, driving continued growth for the company. Leasing activity, liquidity, receivables, sales, traffic, and NOI are all exceeding our internal expectations, and we are on track to deliver 13% to 15% same-store NOI growth this quarter for the year. This quarter, same-store NOI is up 62%. Yes, 62%. FFO is up 267% over the 2020 quarter, a reflection of the return from the lows of a year ago. In July, core mall traffic reached 93% of 2019. Portfolio rolling 12 sales are estimated to have reached a new high at 549 per square foot, an increase of 1.3% over last reported comp sales in February. Our leasing pipeline indicates vigorous demand for our space at 1.2 million square feet, exceeding any of the past five years. Cornwall total lease space is strong at 92.6%. Our balance sheet is improving as we look to harvest capital with opportunities to rebid our multifamily contracts ahead of us. This quarter's results were outstanding and validate the commitment and determination of the pre-team to whom I want to extend sincere thanks for their relentless efforts, delivering results across the platform to set us up for success. FFO is ahead of our plan at $0.10 per share for the quarter, 267% ahead of 2020 results. Quarterly change store NOI grew by 62%. which results in approximately 13% same-store NOI growth during the first half of the year. Compared to Q2 2019, our same-store NOI results reflect a 5% increase over 2019. Consumers are demonstrating a clear desire to return to in-person shopping, and our focus on bringing a mix of tenants to our properties that meets the changing needs of today's consumer is clearly resonating with customers. From grocery stores to apartment buildings to medical facilities and more, our properties have established themselves as the one-stop shops our communities are seeking. With core mall traffic reaching 93% in July and four properties exceeding 2019 customer traffic for the past three months and robust sales increases in May and June. Currently, 30% of our rent roll is derived from open-air tenancies including tenants such as Whole Foods, Aldi, Dick's Sporting Goods, Burlington, HomeGoods, Capital Grill, Yardhouse, Cooper University, Healthcare, Edge Fitness, Planet Fitness, Tilt, and Dave & Buster's, demonstrating the evolution of our portfolio from traditional enclosed mall retail to diverse destinations tailored to their respective communities following our focused effort to create a long-term, sustainable business model. These tenant additions act as a catalyst driving increased NOI sales and strong traffic alongside dramatically improved underlying tenant credit. Our properties are handling outpacing national sales trends, which is driving results. According to the National Retail Federation, June sales were down 1.9% from May and up 12.1% year over year. Sales growth is particularly pronounced in our portfolio, with June sales growing 10% over May and 16% over June 2019, with over 80% of our properties reporting increased sales. Based on our internal estimates, portfolio sales are estimated at $549 per square foot, $564 per square foot when Plymouth Median is excluded on the basis that the space is being marketed for alternative uses including technology and life sciences. Notably, this exceeds our last reported rolling 12 sales for core malls at 542 per square foot, evidencing the robust return in-person shopping. We're also anticipating a strong back-to-school season, with the National Retail Federation predicting spending will grow by 9.4% for students through high school and 4.9% for back-to-college. We're well positioned to benefit from this as we introduce a new rewards program and new tenants across our portfolio. The improved environment driving tenants' strength and financial stability has directly impacted our results. Contingent rents we agreed to as part of our COVID recovery transactions are exceeding expectations. Leasing activity, including our pipeline of leases, being finalized is strong at 1.2 million square feet. This is more new space than we leased in any of the past five years and approaching double our 2019 leasing performance. Yes, double our 2019 leasing. Future revenue from signed leases is over $10 million annualized. The tenant signing leases range from popular price fashion concepts, jewelers, specialty food purveyors, and large format entertainment options. On the anchor front, we're pleased to report that we've signed two new leases. Turn 7 at Morristown, which will open this October. Turn 7 is a specialty discount retailer that offers a wide array of brand name merchandise, including housewares, ready-to-wear apparel, and accessories. They source unique market products from online suppliers, bringing this online product into an offline environment. We're also pleased to report the execution of a lease with Phoenix Theaters at Woodland Mall. As one of the new theaters being built, we believe this demonstrates the strength of our position in this market. We're also on the cusp of executing a lease to replace the former JCPenney at Willow Grove Park to bring family entertainment to the mix at this iconic suburban Philadelphia asset. With the exception of just one anchor space that we intend to demolish a portion of in favor of residential development, all of our anchor space is now leased. All of our anchor space is now leased. At Dartmouth Mall in Dartmouth, Massachusetts, construction continues on the new lobby set to open next year. Drilling into this property story is a critical piece of what defines Preet, quality assets and strong markets. In this market, there is a right sizing of retail space and clear evidence that we're winning the battle for tenants and customers because of the work we have done. Here, our anchor repositioning program began two decades ago when we replaced Ames with Filenes that later became Macy's. Today, Burlington and Alvey are replacing the former Sears. H&M sits where Pahath used to, and Five Below and Buffalo Wild Wings replaced Ruby's, Tuesday's, and Catherine's. These proactive merchandising efforts allowed us to continue to cement our place at the top retail and leisure draw in a region serving nearly half a million people. Not one, but two competitive malls have permanently closed in this region, with one having already been demolished, leaving Dartmouth Mall as the only enclosed retail offering in a 30-mile radius. As testimony to our success, we are 96% occupied with tenants generating double-digit sales growth in June. This strategic re-merchandising tactic reverberates across our portfolio. At Cherry Hill Mall, our crown jewel, where sales estimates are nearing $900 per square foot, we have a robust leasing effort underway to take this fashion destination to the next level. We have over 37,000 square feet of new leases signed or being negotiated, including exciting clicks-to-bricks retailers Peloton and Purple, and new-to-market retailer Miniso, all of which highlight the value of placing a store in a compelling market at this top-tier asset. Cherry Hill continues to generate resounding consumer interest with traffic at 98% of 2019 for May, June, and July. And now, get this one, June sales at Cherry Hill Mall registered a 40% increase over June 2019. Our properties continue to evolve while maintaining their vital contributions to the communities they call home. Thousands of jobs and hundreds of community events depend on our properties and our efforts to create one-stop shops for our consumers are meeting with success. Our strategy to emphasize our portfolio's unique positioning creates value for all stakeholders when coupled with strong results and improved balance sheet. We are clearly capitalizing on the improving environment in our operating results and taking critical steps to improve our balance sheet. We recently announced closing on five mortgages, taking care of our near-term maturities. We are intently focused on creating opportunities to harvest capital through a multi-pronged approach. One, advancing our multifamily entitlement process to bring these transactions to closing. Two, simultaneously rebidding several opportunities in order to realize improved pricing. Three, pursuing additional densification opportunities, including senior living and hotels. Four, exploring other asset sales and joint ventures. And five, working to demonstrate improved valuations based on the composition of our tenancy. Our collection of properties designed to attract a broader array of consumers, strengthening the opportunity for our tenants and our underlying rent role. The reasons for our success are clear and distinct. We are capitalizing on the recovery because we positioned ourselves well to meet the needs of the modern consumer by virtually eliminating lower quality tertiary market properties and repositioning 19 anchor boxes with over three dozen new tenants. Our new tenants are more productive and have better underlying credit with 30% of the rent roll comprised of open-air tenancies. We have re-merchandised the majority of our properties with uses including food markets, dining, entertainment, fitness, value retail and healthcare, which drives traffic and sales. The results we are seeing are consistent with our expectations, which were unfortunately interrupted by COVID. But we are now poised for continued growth in 21 and 22. With that, I'll turn it over to Mario. Mario?

Thanks, Joe. We are continuing to see a rapid recovery of our business with incredible new leasing activity, collections levels that are exceeding our liquidity forecast, a sharp return of consumer spending, and overall improved perception of the space. To summarize key points demonstrating our progress, the company continues to generate positive net cash flow from operations. Strong tenant performance is significantly impacting our results and driving improved collections. Occupancy is forecast to continue to increase, which is expected to drive 13% to 15% 2021 same-store NOI growth. Net cash from operating activities totaled $34.5 million for the six months ended June 30, 2021, compared to net cash used in operating activities of $3.7 million for the six months ended June 30, 2020. This is primarily attributable to strong collection efforts and resolution of outstanding accounts receivable. Liquidity is tracking ahead of our original business plan. We ended the quarter with cash and unrestricted bank accounts of $29.7 million. When including capacity under the revolver, total liquidity was $104.9 million as of the end of the second quarter. Tenant performance and financial strength is improving with sales exceeding underwritten expectations. The national sales trends are encouraging and driving results. As Joe mentioned, the sales growth is particularly pronounced in our portfolio. Year to date, bankruptcy remained muted with only one insignificant bankruptcy during the quarter. Concurrently, leasing volume continues to improve, with leases signed and in negotiation accounting for 1.2 million square feet, 172% of 2019 levels, more than any of the past five years. We currently have an executed pipeline of 500,000 square feet of transactions for future occupancy, which represent over $10.8 million in annualized future rents. This morning, we reported results that demonstrate the sharp turn to the positive following a year impacted by pandemic and bankruptcy-related store closings. During the second quarter, we recognized the anticipated inflection point in same-store NOI growth due partly to the timing of COVID closures in 2020. On a quarterly basis, we are reporting NOI growth excluding lease termination revenues of 53.9% compared to the same period last year, translating to a 16.6% increase when 2020 second quarter is normalized for the $10.5 million in rental abatements granted. On a year-to-date basis, Samster NOI has grown by 9.4%, excluding lease termination revenue. Improved tenant health is driving a meaningful increase in contingent rent, or rent that is derived as a percentage of tenant sales, exceeding our internal projections by approximately $600,000, or 5.6% year to date. The $11.2 million in contingent rent year to date represents a massive 241% increase over the same period of last year. This all culminates in $0.10 per share of positive FFO for the quarter, compared to negative $0.06 in the second quarter of 2020. During the quarter, we were active in the debt markets, having refinanced five loans with proceeds aggregating $175.2 million at our share. Also during the quarter, as a result of our strong collections initiative, we reversed some previously accrued bad debt expenses at our same store properties, resulting from favorable COVID period settlements. This resulted in a $3 million pickup. In total for the quarter, including this bad debt reversal, we recognized an improvement of $8.1 million in credit losses over the year, over the last year. Collections remained strong, showing sequential improvement for the fourth straight quarter. We ended the second quarter collecting 88% of our billed rents and 127% of our rent roll when including collections of primarily deferred rent payments. This resulted in a reduction of accounts receivable balances of 5.9% or $2.6 million from the end of the first quarter leaving us with a total accounts receivable balance of $37.8 million, which is in line with pre-COVID AR balances. Strong operational performance, macroeconomic factors, increasing tenant health, and the outstanding effort put forth by the PREEP team are all contributing to the significant sequential improvement in collection rates since the onset of the pandemic. Current month collections with the exception of November of 2020 have increased for every month in the past 14 months. For the second quarter, we collected 88% of current rents. The momentum continued in July with 91.4% collected approaching our historical averages. As we look ahead with pent up demand for goods and services and a full pipeline of leasing comps should continue to improve. leading to an anticipated 13% to 15% same-store NOI growth this year. Our cash flow and liquidity forecasts have improved and are continuing to improve, and we believe we have surpassed the inflection point where NOI is growing. There is positive momentum in the space such that we should see cap rate compression and improved asset valuations. We are pleased with where we are currently and see continued reasons for optimism. With that, we'll open it up for questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Once again, if you would like to ask a question, please press Start in the number one. Your first question comes from the line of David Rothschild. I do apologize. There are no questions at this time. I would now like to turn the call back over to Mr. Carol Dino for closing remarks.

Thank you. And thank you, everyone. Economic and portfolio indicators are decidedly positive, and we are proactively taking advantage of these factors to improve our results. To recap, leasing activity is beyond impressive. Our liquidity picture is improving, and there are a myriad of possibilities to continue to create value for our stakeholders and preach future. Thank you very much for being on the call today.

This concludes today's conference. You may now disconnect.