Pennsylvania Real Estate Investment Trust

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Preet second quarter 2022 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. I would now like to turn the conference over to Heather Crowell. Please go ahead.

Thank you. Good morning, and thank you all for joining us for Preet's second quarter 2022 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 9, 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. We continue to partner with SAFE 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 our investor base for their continued engagement in this process. Members of management on the call today are Joe Cordero, Preet's Chairman and CEO, and Mario Ventresca, CFO. Joe?

Thank you, Heather. Good morning, everyone. Having just celebrated 10 years as CEO, as I now reflect on how much our team has accomplished through numerous market fluctuations, we're now executing on our plan to reduce debt and increase common and preferred equity valuations. This is being accomplished through a strategic focus on operational performance, asset sales, mortgage refinancing, exercising our credit facility extension and addressing the upcoming fashion district remargin payment. We've positioned ourselves to execute this strategy over the past ten years through a substantial reshaping of our portfolio. We sold obsolete assets with limited future prospects and proactively replaced anchors with a productive mix of tenants that spanned a variety of new, exciting uses. As a result of these efforts, our properties have emerged victorious in the face of cyclical economic changes. It's noteworthy that tenant sales are growing, traffic is ahead of last year and 2019, and leasing activity remains robust, with occupancy improving by nearly 5%, all of which improves the value of our properties. We have identified additional asset sales that will allow us to further improve our liquidity position and continue to reduce our debt. It is noteworthy that we remain in compliance with all of our debt covenants by a significant margin. We're delivering strong results in the face of inflationary pressures impacting our customers and our tenants. We've executed 346,000 square feet of new leases so far this year. We are evolving our tenant mix, driving traffic, yielding increased tenant sales, provides the ability to drive rents. To put this into context, I thought we would highlight some properties and the success of our asset-specific strategies deployed with each market's unique characteristics in mind. Capital City Mall in Harrisburg, Pennsylvania, for example, one of our shining stars in the winner-take-all category, where two competitive malls have become obsolete, resulting in sharply decreased retail inventory. We have the only fashion department store in 50-plus miles in Macy's and the only Dave & Buster's in over 75 miles. Sales have grown over 20% from $453 per square foot in 2019 to $542 per square foot today. We've been able to leverage this position to attract expanding retailers, to open their only locations in Harrisburg, including Rosen Remington, Lovisa, and Box Lunch. At Willow Grove Park, we have over 55,000 square feet of new stores opening, including new to portfolio and new to region tenants, Box Lunch, Rosen Remington, and JD Sports. Sales at this property are an impressive $771 per square foot. As compared to June 30th of last year, we've increased our non-anchor occupancy by 620 basis points to 94.6%. And we'll further evolve this asset with the opening of Tilted 10, bringing a family entertainment center featuring laser tag, bowling, mini golf, virtual reality, pinball, and over 200 games and attractions to the property, which will extend dwell time. At Springfield Town Center, were underway with Lego Discovery Center, expected to open next year, the first of its new prototype in the United States. Another step in transforming this property into a vibrant multi-use hub, creating the preeminent family entertainment destination in the D.C. market. Morristown Mall is another great example of reshaping our traditional mall assets, creating value for stakeholders. In addition, to a dining and entertainment lineup and fitness offerings, we have transformed Macy's into a value retail hub, including HomeSense, Sierra, Five Below, and Michaels. Now, Cooper University Healthcare is under construction with its outpatient facility, which is expected to open its initial phase in the second half of 2023. We're also pleased to have closed on the sale of land for 375 multifamily units. We have led the way in diversifying our tenant base, resulting in broadening the customer appeal of our properties. In the past decade, we've increased the space dedicated to off-price and fast fashion by 250%, providing more cost-efficient options for our customers during periods of rising costs. We believe this work positions the portfolio well to navigate evolving economic conditions. As we look ahead, we're turning our attention to options to refinance our credit facility at the end of 2023. Toward that end, we continue to raise capital through asset sales, which is a top priority. Since our last call, we executed on the sale of our interest in Gloucester premium outlets, multifamily land at Moorestown, and several out parcels. We've applied asset sale proceeds and excess cash from operations To pay down debt by $82 million, our liquidity position as of the end of the quarter at $128 million is stronger than it has been since the onset of the pandemic. Our immediate priority is achieving our credit facility extension. As of June 30, 2022, we're in compliance with the liquidity and corporate debt yield requirements underlying the extension, are in process of conducting the required appraisals. We have an additional 200 million of asset sales in progress and remain intensely focused on bringing these to closure. We expect to execute on the sale of multifamily and hotel land at Springfield Town Center this year. As we move to securing entitlements and closing on our first phase of multifamily land sales, we are bringing phase two to market and expect to be able to execute on this more expeditiously considering our hard-foot entitlements and tenant approvals. This should generate an additional $100 million in proceeds. On a year-to-date basis, same-star NRI and FFO are showing growth. Traffic is strong heading into the back-to-school season, up nearly 3% over last year. Renewal spreads are positive. and we have approximately 6 million in revenue yet to commence. With occupancy stabilizing and strong sales, we believe we can further drive rents, enhancing portfolio value. Now I'll turn it over to Mario to review our financial results.

Thanks, Joe. We continued to see strong fundamentals in the second quarter, while at the same time monitoring the evolving landscape. Liquidity is tracking ahead of our original business plan, at $128 million, up from $110.5 million at the end of the first quarter. This morning, we reported second quarter 2022 NAE REIT FFO of $9.3 million, or $1.72 per share, and FFO as adjusted of $9.2 million, or $1.71 per share. For the six-month period, NAE REIT FFO was $8.1 million, or $1.51 a share, And FFO, as adjusted, was $4.4 million, or 83 cents per share. On a quarterly basis, the primary drivers of the variance to 2021 actuals were the gain of $8.8 million from the sale of our Morristown multifamily land parcel and a decrease in G&A expense of $3.8 million. On a year-to-date basis, Samster NOI, excluding lease termination revenues, was 3.6% higher than in the comparable six months ended in 2021. This was driven by increases in revenue as a function of our strong leasing, collections, and tenant sales performance. For the second quarter, same-store NOI was 96.6% of 2019 levels. The primary driver of the decrease relative to 2021 is the recognition of COVID-related adjustments that positively impacted the second quarter of 2021. As Joe mentioned, core mall sales increased to $605 per square foot at the end of the second quarter. This compares to $539 per square foot at the end of 2019. This is an increase of over 12% that was driven by outperformance from a broad base of retailers within our portfolio. Leasing momentum continues to be strong. During the quarter, we signed 350,000 square feet of new and renewal leases. Some other noteworthy achievements. Core mall total occupancy was 93.8% as compared to 89% at the end of the second quarter of 2021. This is an improvement of 480 basis points. Core mall inline occupancy. ended the quarter at 90.5% versus 86% at the end of the second quarter of 2021. This is an increase of 450 basis points. Total lease occupancy, which captures the volume of our leasing activity, is at 95%, an improvement of 240 basis points over the second quarter of 2021. And renewal spreads, they were positive at 2.3% on a year-to-date basis. During June, we sold three assets, generating total proceeds of $49.6 million, and gains on these transactions of $19.6 million were recorded during the second quarter. With the proceeds from these sales combined with excess property cash flow, we paid down the revolver by approximately $37.7 million and the first lien term loan by $18.1 million. Subsequent to the close of the quarter, we used over $3 million from the sale of additional out parcels to make further paydowns. Looking ahead, we are focused on translating all of this activity into organic revenue growth and continuing to sell assets opportunistically with the goal of reducing debt and interest expense and driving earnings growth. To reiterate what we have said previously, we fully expect to achieve the credit facility extension later this year. With that, we will begin our Q&A session. Heather?

Thanks. I will now read the questions we received over the portal. The first question is, is the company on track to meet debt obligations and interest payments with lease revenue and cash from asset sales to maintain positive cash flow and solvency?

Yes, as we noted in our prepared remarks, we expect to be able to execute our credit facility extension, and we are in the process of reviewing our options to refinance the facility. We currently have $128 million in liquidity and over $200 million of asset sales in the pipeline to facilitate our debt reduction plan. The company does remain cash flow positive from operations.

Thanks. Our next question is, What is the current leasing environment like? Are you seeing continued strong interest in Preet's properties? How about interest from experiential offerings such as camp or indoor miniature golf and entertainment venues?

Yes, we continue to see strong leasing demand. On a leased basis, our total occupancy is an impressive 95%. And we continue to attract a wide array of tenants and experiential offerings remains a top priority for us. Along these lines, we've tilted tent opening at Willow Grove later this year and Legoland Discovery Center at Springfield Town Center next year, in addition to several new retailers expanding in our portfolio. We're also pursuing several indoor golf and active entertainment opportunities.

Thanks, Joe. The third question is, if necessary to successfully renegotiate the term loan when it comes due or to avoid court supervised restructuring, Would you consider selling your interest in one or more of the mixed-use centers you own half of or even selling one of your malls to pay down more debt?

We do have over $200 million of asset sales pending. Our top priority is maximizing value for all of our stakeholders, and we will consider all options to achieve this. It's noteworthy that we recently sold our 25% interest in Gloucester Premium Outlets. From our perspective, all options are on the table.

Okay, great. The fourth question is, what plans are in the works to ensure that the recent reverse split was beneficial to the company as well as shareholders?

We are executing on our strategic plan to improve the share price by focusing on operational performance, asset sales, mortgage refinancing, exercising our credit facility extension, and addressing the upcoming fashion district remargin payment.

Okay, next question. What is next for the company?

As part of our effort to transform our assets into vibrant, multi-use destinations with shop, dine, play, live, and work options, we're at work creating value throughout the portfolio through the addition of a variety of uses, including apartments, entertainment, fitness, healthcare, workspaces, and new retail. At the same time, we're on track to execute our credit facility extension and looking at options to refinance in 2023. Toward this end, we are reviewing all strategic options available to the company.

Okay. Is the company considering raising equity by issuing additional common or preferred shares?

At this time, the company does not plan to issue equities. But we are pursuing all other options to raise capital, including land and out parcel sales, JV interests, and whole property sales.

Thanks. How do you expect inflation to impact your properties? Consumers seem to be reducing their discretionary spending in order to buy food, fuel, and pay utilities.

Well, we operate in strong markets and are continuing to see strong traffic and consumer spending. Traffic is up 3% over last year and sales are up over 12% compared to pre-pandemic sales. That said, we believe we positioned our properties well to withstand varying economic conditions, including offering an array of retail, spanning traditional full price to value retail and fast fashion. It's noteworthy we've increased the presence of value and fast fashion retailers, by 250% in 10 years. Our one-stop shop model allows consumers to get everything they need in one trip.

Thanks, Joe. The last question is, how can investors be assured their investments are safe with your company?

We have a lot to be optimistic about here at Preet. With a portfolio concentrated in two top 10 markets in the country that's well-positioned to accommodate alternative uses, including health care, self storage, fitness facilities and apartments. We've taken the important steps to grow asset values, replacing anchors, driving new tenants and customers to our properties, adding hotels and apartments. Our properties are designed to withstand fluctuations in retail and consumer behavior. So we're full speed ahead in improving our balance sheet, having paid down over $80 million in debt with a pipeline of asset sales exceeding $200 million to unlock value for all of our stakeholders.

Thank you. That concludes today's Q&A session.

Well, thank you all for participating on the call today. We're at work creating value for our stakeholders.

And with that, ladies and gentlemen, that does conclude today's conference call. Thank you all for joining. You may now disconnect.