Pennsylvania Real Estate Investment Trust

Good morning. My name is David, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PREET 4Q21 earnings call. Today's conference is being recorded. Thank you, Heather Crowell, EVP of Strategy and Communications. You may begin your conference.

Thanks, David. Good morning, and thank you all for joining us for PREET's fourth 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, March 15, 2022, 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 gap measures in its earnings release and other documents filed with the SEC. Last quarter, we announced that we have partnered with Say Technologies to offer an opportunity for any shareholder to ask questions of management. During this call, management will answer questions received over this Q&A platform. We thank those who participated in this process. Members of management on the call today are Joe Corradino, Preet's Chairman and CEO, and Mario Ventresca, CFO. Joe?

thank you heather and good morning everyone we're pleased with our sector leading operating performance and the tenant and customer demand for our properties we've continued our recovery ahead of expectation capitalizing on broad-based momentum and confirming that the work we've done in shaping our portfolio replacing anchors and re-merchandising has positioned the portfolio to perform our expectation is that improving fundamentals is leading to better valuations and opportunities to raise capital. The emphasis now, given the excellence of our operating platforms, is to focus on improving our balance sheet and reducing our debt by continuing to raise capital. Our dedicated team is focused on moving this company forward, continuing to deliver strong results, and executing on balance sheet initiatives. Most importantly, we're confident that we'll be in a position to exercise our credit facility extension later this year. Our plan to raise capital is more realizable than ever in this strong operating environment. We outperformed the top mall REITs in terms of same-store NOI growth, occupancy improvement, and sales growth, which speaks to the quality of our portfolio. We're experiencing unprecedented demand, with many of our properties having emerged as a dominant enclosed retail destination in their respective markets. with exclusive tenancy and the benefit of new anchors. In 2021, the company executed transactions for nearly three times as much space as 2019, 1.2 million square feet. Currently, we have nearly half a million square feet of new leases executed for future occupancy, which will deliver approximately $9 million in annual rent. This includes outstanding, noteworthy additions to our markets. Eddie V's, Warby Parker, and Mark Kane at Cherry Hill. Cherry Hill will now boast one of the best restaurant lineups on the East Coast. HomeGoods opening later this year at Cumberland Mall. Lego Discovery Center at Springfield Town Center, the first of this brand-new prototype in the entire country. This addition helps fulfill the vision for Springfield Town Center, differentiating it among other D.C. area retail properties and becoming a trophy in its own right. Tilted 10 at Willow Grove Park, replacing JCPenney. Tilted 10 will bring a missing element of entertainment to this iconic property that draws from surrounding counties. Phoenix Theaters, opening a new state-of-the-art movie theater next month at Woodland Mall. This theater replaces a second-run theater and matches the quality of the upgrades we've made at the property, including the region's only Apple Cheesecake Factory and Von Mars. Demand for space has been booming from traditional retail, emerging retailers, traditionally online brands, as well as non-retail players. Last week, we signed three new leases with Rosen Remington, an expanding concept for openings later this year, introducing them to new markets. During 2021, over 1.1 million square feet of space opened, including first to portfolio additions. Aldi at Dartmouth Mall, Miniso, Peloton, and Purple at Cherry Hill Mall, Power Warehouse at Cumberland Mall, Turn 7 at Moorestown, Rose and Remington, Lovisa, and Offline by Airy at Woodland Mall. Creating these refreshed environments has continued to drive consumer interest, leading to impressive sales growth for our tenants. So far this year, traffic is up over 14% over last year. now eclipsing 2019 traffic. January reported sales broke our previous record, up to 614 for our portfolio. Cherry Hill leads the way at nearly $1,000 per square foot. Approximately 75% of our portfolio is over $500 per square foot, with half generating sales over 550 per square foot. NOI growth continued to be substantial smashing our internal forecast based on the strength of the consumer and the robust holiday activity. On a same-store basis, NOI excluding lease termination revenue grew by 52.5% for the quarter and 26.4% for the year, bringing us to 92% of 2019 same-store NOI as we continue to charge back towards normalcy. This NOI performance offset the substantial interest expense, generating FFO of 17 cents per share. While all of this is a point of pride for us and indicates improving valuation, we are clear that we need to drive improvement in our balance sheet. The business is in excellent shape. Customers are shopping, new tenants are opening. There's demand from a variety of users, including multifamily and hotels, and we believe we can opportunistically extract value to improve our balance sheet. So, we are underway with executing on a three-part strategy to drive improvement, focused on timing, cost of capital, and liquidity. As it relates to timing, we are focused right now on extending near-term maturities, including exercising the one-year extension of our credit facility. We have completed six refinancing transactions over the last few months, extending those maturities. and we are confident we're in a position to execute the extension of our credit facility. The ultimate goal is to continue to improve the portfolio, taking advantage of robust sales and outsized demand for space while reducing debt so that we can realize appropriate value and refinance the facility at its expiration while investigating our strategic options. From a liquidity perspective, Last quarter we noted over 120 million in transactions we expect to close before the middle of the year. We have made meaningful progress in concluding entitlements, executing agreements of sale, and scheduling closings. We expect to utilize the capital to reduce outstanding debt, increasing our liquidity, and reducing interest expense, resulting in improved earnings. The company made advances in its capital raising efforts with closed transactions or executed agreements of sale for 105 million of assets and is finalizing or is executed letters of intent for $75 million of additional asset sales. With respect to the specifics, prior to the end of Q2, we plan to close on the remaining anchor space at Valley View Mall, Whole Foods at Plymouth Meeting Mall, out parcels located throughout our portfolio and a former Sears TBA at Moorestown Mall. And we're pleased to report that as of late yesterday, we have executed a purchase and sale agreement for the sale of Exton Square Mall. As we have mentioned previously, this property is better suited ultimately as mixed use with one apartment building already occupied and another under contract. The sale will allow the buyer to fulfill that destiny. closing is anticipated in approximately 90 days. On the multifamily side, progress continues, and we are pleased to report that our buyer has received final site plan approval, which allows us to move forward closing on the sale of the multifamily land at Morristown in May. As it relates to land for hotels, we've executed an LOI for Morristown Mall and Springfield Town Center. We expect to close on these on the hotel and multifamily transaction later this year. But before I turn it over to Mario to review our financial results, let me again be clear. We have achieved operational excellence by outperforming our peer group. We fully expect to achieve our credit facility extension through 2023. We're making great progress on improving our balance sheet as we finalize commitments for $180 million in asset sales in the coming weeks. and we look forward to refinancing our credit line in 2023 as the market continues to improve. Mario?

Thanks, Joe. We continue to see outstanding improvement in the fundamentals of the business, with sector-leading sales, occupancy, and leasing volume growth leading to NOI and FFO gains that exceeded our expectations. As identified in our release last night, the company notes that our 10-K will include a going concern footnote in connection with potential future obligations related specifically to the FDP term loan. As a practical matter, we are working with our JV partner that would result in continued compliance under the terms of the loan. To echo Joe's comments, we fully expect to achieve the credit facility extension. For 2021, the company was cash flow positive from operating activities. Net cash from operating activities totaled $69 million at year end. This compared to $5.9 million for the year ended December 31st of 2020. This increase in cash provided by operating activities was due primarily to diligent collection efforts of outstanding accounts receivable in the first three quarters. As a result, liquidity is tracking ahead of our internal business plan. We ended the quarter with cash and unrestricted bank accounts of $35.1 million. When including capacity under the revolver, total liquidity was $110.6 million as of December 31st, 2021. Tenant performance and financial strength continues to improve with sales exceeding underwritten expectations. We ended 2021 with comparable tenant sales of $603 per square foot, an all-time high that was eclipsed in January. During 2021 and so far this year, tenant bankruptcies have been inconsequential, and the leasing environment has remained strong. Leasing volume continues to improve, with activity at nearly three times 2019 levels, more than any of the past five years. During the year, we opened 148 tenants in 1.2 million square feet, driving core mall total occupancy to an improvement of 430 basis points at 93.2%, and non-anchor occupancy improvement of 130 basis points to 89.5%. We currently have a pipeline of executed leases for 497,000 square feet, representing approximately $9 million in annual revenue. Same-store NOI, including lease terminations, increased 53.8% during the quarter and ended the year with a 27.4% increase over 2020 which well exceeded our guidance of 13 to 15%. We delivered NOI that was 92% of 2019 levels. These results were driven by improvement in rents and significant sales increases, as well as reductions in bad debt as a result of improved tenant performance and collection of previously reserved amounts. We reported fourth quarter 2021 NAREIT FFO of $13.6 million, or 17 cents per share, And FFO is adjusted at $13.2 million. For the year, NAREID FFO was 5 cents positive compared to 2 cents negative in 2020, driven primarily by our property-level NOI improvement. Looking ahead at 2022, we expect Seamster NOI growth to normalize, with FFO benefiting from program land sales. With that, we will now begin our Q&A session.

Thanks, Mario. I will now share the top questions received on our Q&A portal. The first question, what is the company's plan to address potential delisting by the New York Stock Exchange?

We believe that executing on our plan to bring capital into the company to reduce debt and continuing to execute operationally will drive demand in the shares and alleviate the need to take other action. And we have until August 4th. to regain compliance, and we're keenly focused on achieving this.

Thanks, Joe. What is the plan to return to paying dividends on common shares, and what are some metrics and milestones shareholders can look for to see progress towards this goal?

Our credit facility prohibits payment of dividends, with the exception of those needed to maintain our REIT status. Our current agreement expires in December of this year end, and as we noted earlier, we fully intend to exercise our one-year extension option and continue our efforts to reduce debt such that we can refinance at the conclusion of the extension.

Thanks, Mario. What progress are you making on your capital raising activities? Is Preet on track to raise over $120 million through the sale of land and operating parcels by the middle of this year?

Yes. As we noted on the call, at present we have closed transactions or executed agreements of sale for $105 million. of assets and are finalizing or have executed letters of intent for over $75 million of additional land sales for a total of $180 million.

Thank you. How many of the land parcel sales are still being held up by permitting and rezoning? To what extent do these delays affect your ability to meet your turnaround goals and what is plan B should any of these fail to materialize?

We are making great progress on all of our multifamily and hotel land sales, Morristown, Springfield Town Center, Mall of Prince Georges, and Willow Grove Park, with one exception, which is Plymouth Meeting. It's the outlier where we continue to work through approvals.

Thanks, Mario. What's the current status of leasing activity? Are you seeing continued interest in Preet's properties? What are the prospects for filling the larger vacant spaces in your portfolio?

We are continuing to experience great demand for our properties across various sectors. As mentioned, we leased three times more space in 2021 than 2019 levels and more than any of the past five years. All of our anchors are occupied with the exception of one property, JCPenney at Muller Prince George's, half of which will be demolished to accommodate a multi-unit, multi-family building. Core mall total occupancy is now 93.2%. We have executed 120,000 square feet of new deals so far this year with a growing pipeline that includes tenants like Skechers, Lovisa, Box Launch, and Carter's, among others. We continue to see the appeal of the one-stop shop environment we're creating taking hold with tenants in the office, healthcare, and entertainment sectors continuing to show interest. As we head to closing on our multifamily and hotel lane sales, we expect the appeal of these assets to grow.

Thank you, Joe. What specific options is PJT exploring? Where are they in this process and what is the timeline for wrapping up?

Let me start by saying PJT has not been retained for debt restructuring purposes. They are exploring a number of opportunities to help raise external capital, including a variety of asset sale opportunities, as well as considering strategic transactions.

Thank you. What are the benefits of being an investor with your company, and what are the plans to bring more investors in?

Preet has a collection of great assets, and they're performing extremely well. having spent years pruning and redeveloping the portfolio. Our challenge today relates to our debt and associated interest expense. Toward that end, we've outlined a number of steps we're taking to raise capital and reduce debt to benefit all of our stakeholders. We're confident in our ability to achieve the credit facility extension option, and we believe we have runway to improve our balance sheet and attract additional investors.

Thanks, Joe. Our last question for the day is, to what extent will pending land sale proceeds be used to reduce and improve debt?

Yes, as we've said, the company's number one priority is to reduce debt. The primary purpose of our land and out parcel sale program is to reduce debt as quickly as possible, and the vast majority of the proceeds will be used for that purpose, debt reduction.

Thank you. That concludes our Q&A session for today, and I will turn it over to Joe for closing remarks.

Thank you, Heather. To reiterate our tactical plan, we've achieved operational excellence by outperforming our peer group, and we expect to continue that performance. We fully expect to achieve our credit facility extension through 2023. We're making great progress on improving our balance sheet as we finalize commitments for $180 million in asset sales in the coming weeks. We look forward to refinancing our credit line in 2023 as the market continues to improve. With that, I'll thank everyone for participating on the call today and wish you all a good day. Thank you.

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