Pennsylvania Real Estate Investment Trust (NYSE:PEI)
Q2 2017 Earnings Conference Call
August 09, 2017 11:00 AM ET
Heather Crowell – IR
Joe Coradino – Chairman and CEO
Bob McCadden – CFO
Ki Bin Kim – SunTrust
Karin Ford – MUFG Securities
Michael Bilerman – Citi
Daniel Busch – Green Street Advisor
Floris van Dijkum – Boenning
Good morning. My name is Stefanie and I will be your conference operator today. At this time, I would like to welcome everyone to the PREIT Second Quarter 2017 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Heather Crowell, you may begin your conference.
Thank you. Good morning, and thank you all for joining us for PREIT’s second quarter 2017 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, August 9th, 2017, and PREIT makes no undertaking to update 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 on the call today are Joe Coradino, PREIT’s Chairman and CEO; and Bob McCadden, our CFO.
I’ll now turn the call over to Joe Coradino.
If you’ve been following the company for the past five years you know one thing, we tell we’re going to do something, we do it. We’re executing on our capital plan and fortifying our balance sheet with $75 million recently committed. With that we’re half way toward our goal of generating more than $150 million from non-core assets.
We’re generating outstanding results on the leasing front with a pipeline that is double what we had at this time last year, and nearly all of our anchor spaces are spoken for.
Our redevelopments are moving on pace and in many cases are ahead of schedule with 350,000 square feet of anchor space opening prior to holiday this year. And we had a quarter that was within our expectations and we’re on track to deliver on our multi-year plan targeting average NOI growth of 6% to 8% from 2018 to 2020.
We are not in the catastrophic environment, simply a course correction. Stores are still open releasing records amounted space. We’re not paying extraordinary TA to get there and as expected this is the trough. It’s likely as bad as it’s going to be.
And because of our proactive approach with anchors the issues are mostly behind us and provide a spring board in the second half of this year and on into the next year. We’re reaffirming our same store NOI guidance and again our multi-year plan.
So now I’ll say good morning. The first half of the year has been wild, however if you look at the retail environment through the PREIT lens, and this is what’s most meaningful to our shareholders, the fact that we have sold 16 soon to be 18 lower productivity malls, redefined this company and created a portfolio that’s compelling the retailers.
A quick review of the facts will put the company and our value proposition into perspective. We have executed more new leasing in the first half of the year and in all of 2016. Our wholly owned same store portfolio delivered 1.6% NOI growth.
We’re on target to achieve a 100% commitment on our anchor spaces by year end. Portfolio sales have reached an all time high of $468 per square foot — $478 per square foot excluding the malls held for sale. NOI-weighted sales were up to $495 per square foot when the properties listed for sale are excluded. $500 is well within reach.
Despite all the headlines focused on store closings, non-anchor occupancy at our wholly owned malls was flat compared to last year. Regarding anchors in the last two years including all announcements to date, 13 anchors were proactively recaptured or closed, nine replacements are either open, under construction or executed. Two are at least — the remaining two are LOI.
In reviewing all the anchor replacement deals at leased or beyond, prior tenants paid $1.90 per square foot on average, new tenants are paying $850 per square foot which is inclusive of three department store replacements. When the three department stores’ replacements are excluded, we’re generating a 10 times multiple on the replacement rents. These projects are generating solid eight plus percent returns.
As it relates to inline bankruptcies, in 2017 11 retailers that have stores with us filed for bankruptcy, of these we expect only 22 store closures. 80% of the stores that filed in 2016 are covered or remained open. 72% of the 2017 spaces are covered or remained open.
Now this figure is impacted significantly by H.H. Gregg. If you eliminate H.H. Gregg, it didn’t occupy mall space, 84% of the space is covered. We have over 1 million square feet of space executed for future store openings. It’s more than double what we had at the same time last year and will generate annual gross rents from these tenants, which include anchors and junior majors of over $16.5 million and our share.
Beyond this our pipeline of deals and active lease negotiations includes over 500,000 square feet and another $12.3 million of revenue, along with another half a million feet in active LOI negotiations. So the negativity facing our industry is rooted in store closings, fuelling the unfounded conclusion that brick-and-mortar retail is rapidly declining.
The truth is retail is changing as is what our customers expect out of visible environments. Crafting the right brand mix, which is a key driver to the consumer’s decision making process, is a critical step in evolving the experience.
We have brought in a unique and diverse merchandizing mix from Home Goods, T.J. Maxx, Burlington, Dave & Buster’s, Legoland Discovery Center, H&M, Zara, to Intimissimi, and let’s not forget Belks. We’re no longer in the business of homogenous properties. Apparel comprises less than 37% of our occupied space, with dining and entertainment coming at 20% and growing. We see continue to growth in fitness and wellness categories as we move away from undifferentiated apparel retailers and replaced tiered anchor stores at half of our properties.
Although it’s clearly a tough time, we’re up for the challenge. Our team’s motivated to execute on our vision to achieve sales of $525 a square foot, sector-leading NOI growth, and a balance sheet capable of continuing to execute on opportunities. We have the liquidity required to execute on our plan and are excited about where the company is heading.
Now let’s talk about the status of our redevelopment activity. At fashion outlets of Philadelphia, the project is taking shape. Stores are under construction, tiles’ being installed and the glass cube is underway. The velocity of leasing is increasing as we look to conclude a 100,000 square feet of additional leases in the next week. At Mall at Prince Georges, just outside the D.C., the interior renovation is underway for holiday completion. 86% of the project is committed with more prospects than we can accommodate.
On the anchor replacement front, Dick’s Sporting Goods at Capital City, Dick’s Sporting Goods Field & Stream and Home Goods at Duma [ph] and Burlington at Magnolia will be opening this quarter. We signed Belk at Valley Mall to replace Bon Ton, which we proactively recaptured.
At Woodland Mall in Grand Rapids, Michigan, as part of our mission to be good stewards of shareholder capital, we were able to reduce the overall project costs by nearly $50 million and maintain a return that is acceptable in a cap rate compressing project. The new scope will allow us to add Von Maur and approximately 30,000 square feet of shops and restaurants space.
Given our presence in high-barrier entry markets, we continue to densify our properties. It’s noteworthy that we do have some mixed used components in a number of our properties today and are actively pursuing opportunities to add of variety of new uses. At Springfield Town Center, we’re in discussion with a major office user. At Exton Square, we have an executed agreement with a national multi-family developer, Plymouth meeting, where we have hotel opportunities as well as the multi-family over build in Philly. And these are just a few of the densification opportunities in our portfolio.
In light of all these portfolio fortifying, value-creating work are reasonable 13% occupancy costs, nearly 40% of our NOI being generated from five properties with sales of $589 per square foot. Stability in retailer sales and our continued progress on our multi-year plan, we are unwavering in our belief that the public markets are undervaluing our company.
We’ve delivered solid results, tightened our guidance range, reflecting our confidence in delivering these results in this challenging environment. Obviously execution of asset sales could impact results or clearly improve our balance sheet and portfolio quality. As it relates to our capital plan in self funding our growth, yesterday we announced three transactions in accordance with our capital plan for approximately $75 million.
Improving our liquidity position has been a tremendous focus of ours and we’ll continue to be a key pillar in achieving top-tier status. This also serves us as another proof point of our credibility. Like I opened with, we tell you we’re going to do something we get it done.
With that, I’ll turn it over to Bob.
Thank you, Joe. We continue to make progress in all aspects of our business. Before I review our operating results and discuss earnings guidance, let me start with an update on our capital plan.
Yesterday’s announcement to sell three properties when completed will increase the total proceeds from our asset disposition program to over $800 million since the beginning of 2013. We’ve prudently recycled the capital raised into portfolio and balance sheet improvements.
We continue our marketing efforts on Valley View Mall and expected 2018 closing for this transaction. On the financing front we will request the $10 million earn out proceeds under the existing mortgage loan of Viewmont Mall after the replacement anchors open this quarter.
During the second quarter, we brought a number to potential construction lenders to fashion outlets to present the property. As Joe mentioned, the project is starting to take shape with tile being laid and tenant spaces being framed out. We expect to move that process forward this quarter and select the bank syndicate that will provide additional capital for the project.
Since the beginning of 2017, we have reduced our outstanding debt by a $104 million. At the end of the quarter we had a $183 million capacity available under our line and $225 million of total liquidity. At the end of June our bank leverage ratio was 49.1% and our net debt-to-EBITDA was 7.5 times.
Our cash interest rate was 3.8%, a 42 basis points reduction from a year ago. 93% of our debt is either fixed or swapped and 90% of our loans mature after 2018. We invested $61 million in our redevelopment program this quarter. During the second half of the year we anticipate spending an additional $90 million to $100 million as our construction ramps up.
Let me turn to operations. We performed in line with our expectation for the quarter and ahead of consensus. We reported FFOs adjusted of $0.39 a share which was in line with last year’s quarter, taking into account the $0.04 of dilution from asset sales. Same store NOI of $60.2 million was $200,000 above last year.
During the quarter, we saw a divergence in performance between our wholly owned and joint venture properties, which were disproportionately impacted by bankruptcies and store closings. This was reflected both in terms of occupancy and NOI contribution.
Same store NOI at our wholly owned properties was up 1.6% while it was down 8.4% at our joint venture properties. Non-anchor occupancy at our wholly owned same store malls was flat compared to last year at 90%. Non-anchor occupancy at our joint venture properties fell 560 basis points to 90.3%.
Let me spend a minute on the bankruptcy impact across the portfolio. For the full year we’re reforecasting a total impact of $5.7 million, with $4.7 million of that at our wholly owned properties and $1 million at our joint venture properties. To put this into context, this represents a 2% drag on same store NOI at our wholly owned properties but a 3% drag on our joint ventures.
In our initial guidance we assumed negative 1% to minus 2.5% same store NOI growth for the joint ventures. Based on current expectations this is now expected to be between minus 4% and minus 5%. Obviously, we’re working diligently to mitigate this impact on the portfolio. Notably, where we control the outcome we have fared better.
Some factors impacting the quarterly results include for older properties in the portfolio top line revenues were impacted by $1.6 million in bankruptcies and $300,000 from lower co-tenancy rents. We’ll start to see some of the co-tenancy impact mitigated as replacement anchors open for business this quarter.
We continue to see a strong backlog of executed leases with future opening dates. These tenants when they open will contribute over $16.5 million of incremental revenue to our top line.
From a timing perspective, tenants opening this year will generate annualized rents of $9.8 million at our share, tenants opening next year will generate annualized rents of $6.5 million with the balance opening in 2019.
Renewal spreads for non-anchored tenants were 5% for the quarter and 5.3% on a year-to-date basis, which was consistent with our expectations for the year. When excluding tenants that have announced significant store closing plans our spreads would have increased to 7%.
Average rent for small shop tenants at comparable malls increased by 2% to $58.78 per square foot. Net loss attributable to pre-common shareholders was $54.7 million or $0.79 a share compared to income of $0.06 per share in the prior year’s quarter. The difference is due to impairment charges recorded in the second quarter of ’17, dilution from asset sales, and a gain on sale of real estate in the 2016 quarter.
Regarding guidance, as Joe mentioned, we’re updating our FFO guidance to give effect to employee separation expenses incurred in the second quarter of 2017 and narrowing our guidance range.
We’re also introducing guidance for FFO as adjusted to give effect for these factors and revising our estimate of GAAP, earnings per share to give effect to the asset impairment charges recorded in the second quarter. FFO as adjusted for the year is expected to be between $1.66 and $1.72, which does not include the impact of pending dispositions.
With that, we’ll open it up for questions.
[Operator Instructions] Your first question comes from Ki Bin Kim with SunTrust. Your line is open.
Ki Bin Kim
Thank you. Good morning. Did you – I may have missed it, but did you update your same store NOI guidance for the year?
In Joe’s comments, he remarked that we’re reaffirming the same store NOI guidance.
Ki Bin Kim
Okay. So it sounded like the JV portion got worse, both — so what’s making the up the flack to maintain guidance?
I think as we would expect the normal cyclical uptick for leasing in the second half of the year. We talked about all the square footage that’s going to open in the next quarter or so. So we think that’s going to drive our performance in the third and primarily fourth quarters.
Ki Bin Kim
Okay. And so I guess the implied same store NOI growth of 4.5% for the second half — I guess are you still on target for that?
No, it actually doesn’t imply that. If you remember that same store NOI typically in the fourth quarter is about 20% higher than it is in the first three quarters, just because of seasonal tenants and all the ancillary income that we generate in the fourth quarter. So if you want to do the math it probably implies 3% growth to get to the lower end of our range and 4% growth to get to the midpoint of our range.
Ki Bin Kim
Okay. And just second question, could you talk a little bit about how your conversations with tenants are evolving? And if there is a big diversion between your tier 1, 2 or 3 mall groups?
Well, I mean clearly as you’re getting at sort of the purchasing power discussion, I mean clearly the stronger the asset, the stronger the discussion. The leverage, I would say, generally these days probably is slightly in favor of the tenant but that tends to change as asset quality improves.
I think that the other comment is that certainly there is a different dialog that occurs with a tenant that’s filed bankruptcy as opposed to new tenants coming to the portfolio. But I think the keeping — the overriding piece of information is that – is the volume of leasing that we’re experiencing.
I mean it’s quite dramatic, given what the market believes the condition of malls are, I mean we are — we’re seeing tenants come from Canada and Italy and fast fashions expanding, entertainment, retail — new retail concepts, fitness, grocers. And so, as a result, as we sort of look to the future our view is that the balance will begin to shift in favour of the land lord, again, given the significant demand that we’re experiencing.
Ki Bin Kim
And if could squeeze one more in, you mentioned that you think 2017 is a trough year. I guess…
No I mentioned — the point I was making is the Q2 is a trough.
Ki Bin Kim
Okay. So its trough ’17, not the entire ‘17 is a trough year, is that — to be clear?
Repeat that please.
Ki Bin Kim
Well, I was just going back to your opening remarks saying that you thought you were at the trough for fundamentals or same store NOI. I’m not sure exactly what you were referring to but I was just curious if you could maybe expand on that?
Yes. I mean my comment really went to the fact that when we laid out our plan, our multi-year plan going back almost a year ago, this is – now we certainly were clairvoyant and knew about all of the bankruptcies that were going to occur, but we expected this to be sort of the bottom; Q2 to be the bottom.
And that was driven by a couple of things, most of which was anchor closings. And remember a good deal of that was proactive on our part, alright. Taking back shared stores and as a result we experienced a period of down time while those tenants are being replaced co-tenancy costs et cetera.
And so, when I call this the trough it’s because, again between now and the end of the year of 350,000 feet of anchor tenants moving in and that continues to occur in ‘18 and ‘19. We had about 13 department stores impacted and all of those are well along in their replacements, and so, the trough comment really speaks to as they come back on board certainly you have the financial impact associated with them, which is a positive one as I outlined.
But you also have the upside in terms of driving traffic, driving sales, eliminating co-tenancy cost and doing — getting better rents in the former wings that where you had under-performing department stores occupying that space, and so all of that creates a very positive momentum that starts with reoccupying that space. So that’s the comment I was making around this being the trough and that we have an upward trajectory from here.
Ki Bin Kim
Okay. Thanks, Joe.
Your next question comes from Karin Ford with MUFJ Securities.
Hi, good morning. Are you guys still expecting small shop occupancy to end the year in a 93% to 94% range, and does your guidance assume any additional bankruptcies or any Arsenal [ph] closures?
Hi, Karin, this is Bob. I’ll take them one at a time. I think we’re still forecasting one non-anchor occupancy between 93% and 94%. And with respect to Arsenal [ph] our guidance does not assume any closings. In our discussions with the Arsenal [ph] we don’t have any reason to believe that there would be any store closings expected for the balance of the year.
Okay, great. Thanks for that. And I think you said in the last call that you’re expecting to meet with potential joint venture partners sometime during the second quarter. Can you just talk about how the interest is going on that front and where pricing is coming in versus your expectations?
Well, first off, they’re coming in the next week actually. We have a – we’ve several foreign buyers coming in the next week. But I think it’s also Karin, you give me an opportunity to sort of expand the answer on that question if you will.
First off, we’re on track to meet or exceed our non-core property disposition targets, and selling JV interest in our properties is an essential to that capital plan, because again, we have other options that we’re currently working on.
That’s not to suggest that we’re not continuing to explore these opportunities with institutional investors, and yes, they are due in next week. But the — we all are clear it’s a tough environment to sell interest right now and we’re not prepared to give anything away. Pricing discovery and pricing is quite important to us.
Okay. Thanks for that color. And then my last question is on Springfield Town Center, it looks like small shop occupancy has sequentially declined about 70 basis points. Can you just talk about what’s going on there and how that continuing lease up is going?
Well, at Springfield Town Center we’re currently around 90% occupied. We did experience a bankruptcy closing which we’ve already replaced, and a restaurant closing which was Wood Ranch Barbeque, through [ph] ‘21 was a closing. They are well underway with replacements actually.
We’ll probably announce a very exciting restaurant to replace Wood Ranch in the not just too distant future. And we continue to move it in a positive direction. In the near term we’ll take that 90% to about 92% from an occupancy perspective.
Okay. Thanks very much.
And by year end that number will be closer to 95%.
Got it. Thanks.
Your next question comes from Michael Bilerman with Citi. Please go ahead.
Great. So just a question, I guess how do you think about — I think in your opening remarks you talked about this unwavering view that the public markets are undervaluing your stock, Joe and the shares are the worst mall performer this year and were certainly the worst mall performer last year. And I respect the significant amount of work that you and the team have done to sell assets and refinance and backfill tenants.
But it seems as though the public market is not appreciating that specifically on pre relative to the peers, which you’ve also condemned but clearly not as much.
So I guess what do you do? Who do you turn to, other than just saying that you have an unwavering view that the public markets’ as a disconnect? Can you do something more aggressive to narrow that gap?
Well, we think – Michael, we think the work that we’re doing when you think about what’s happened in the space, if you will, there’s been a real kind of knee jerk negative reaction a bit over blown to anchor – the anchor closings and the inline closings.
We think the fact that we’re going to be in a position by year end to make a statement that we are — our anchor space is a 100% leased and to announce a list of exciting new tenants, many of which are new to the markets they’ll be going to. We think as we begin to populate some of the spaces in the mall with that million square feet of tenants that we have, that it will continue to make — it will make a difference and help to change the mind of the market if you will.
I mean it’s as simple as — I said this is a trough. I believe it is. We think our plan on a going-forward basis will generate outsized NOI returns and begin to get the attention of investors. And we’ve had steady stream of them through here over the past few months and continue to be active in that arena.
Do — would you consider selling interest in your higher, your best quality malls to I guess raise capital at a significant premium to where your implied cap rate is trading and use that capital to…
To delever or do a stock buyback, and is that — you mentioned some joint venture foreign capital partners coming in, is that now on the table as a more serious option, recognizing the fact that as you sell some of the higher end top of your portfolio the bottom becomes bigger the part? So I recognize there is some impact to that also other than just raising capital.
So, a couple of things; a qualified yes, is the answer to your question that we are looking at selling some of higher quality joint venture interest and some of our higher quality assets, and that’s something we would consider and actually have retained Estill [ph] to — and they have been through a process and that is what’s generating the meetings that I spoke about.
Because we recognize clearly one of the things that separate us from a multiple perspective from the higher quality mall REITs is our balance sheet and that’s something we’re very focused on continuing to improve. And we’re also looking at other revenues for that including other non-core properties and continuing to sell from the bottom.
Yes. Bob, just a follow-up question on the same store NOI. Your split between first half and second half of the last 15 years has been 48%, 52%. Your sort of math of 3% to 4% would indicate a much bigger weight to second half, right, using the traditional 48%, 52%, you’d come out in that 4.5% implied for the second half.
So, a – just help us narrow that gap, but two, more importantly you are looking at something that’s probably a $10 million to $12 million annualized NOI up in the back half of the year, $5 million to $6 million in the second half, but annualized $10 million to $12 million. That’s the big number and so can you just give some granular details surrounding that significant of a ramp in the back half of the year?
Mike, in my remarks I did mention that the tenants that are going to open this year, they will generate annualized rents of almost $10 million. So that is — I mean your analysis is correct. So, I don’t know that we’re that different terms of point of view. The other…
But that’s assuming they all start – so that assumes they all start June 30, right? So, that – just to meet the full or I’m sorry just to meet that number everything would have to start as is for the full back half of the year.
No. The — so if you look at our same store last year was roughly NOI in the second half of 2013 – I’m sorry, 2016 was $130 million, right, so each percentage is $1.3 million. So if you get to 4% you are talking about that $5 million of incremental NOI.
But you also have – it’s not just from permanent leases, obviously, with the number of vacancies that we have as with all the bankruptcies, we expect our short-term leasing program to be higher this year than in previous years because of the availability of inventory.
We also have seen significant increases in our partnership marketing program over the last year as we ramp that up. So there’s a number of other areas in the business where we can kind of drive revenues. We’re likely to be installing a number of digital screens in some of our higher end properties this year, which will generate ancillary revenue.
So yes, this is — we talk about this all time but its nickels and dimes – it’s a nickels and dimes business and we’re focused on looking at every lever that we can pull, not only just from permanent revenues but also looking at our costs, looking at contracts. Again, we have a list that we keep and discuss every Friday with the management team and we’re really onto stuff.
Okay, thank you.
Your next question comes from Daniel Busch from Green Street Advisor. Please go ahead.
Hey this is DJ. Thank you. Joe, so just following up on couple of Michael’s points. You sold 18 assets over the last few years, you’ve basically completed your non-core program — disposition program and you’re down to about 20 malls and a handful of non-mall properties.
So how do you think about portfolio management at this point? You just mentioned that there’s maybe some still opportunities or so, lower – particularly your non-core assets, but how do you balance selling more assets with trying to keep some sort of scale to leverage your operating and leasing platform?
DJ, we feel pretty good about that actually right now. I mean we could talk about — its certainly a balancing act, I won’t gild the lily, it’s certainly balancing act. But we’ve been able to attract a quality team of people. We feel we have the best production team here that we’ve ever had, make no mistake about it.
We’ve been able to do that and we’ve been able to continue to deliver the on the vision that we’ve laid out. And it’s also noteworthy that when FOP comes online right, we’ll be generating nearly the same NOI that it was generating prior to the initiation of the company’s disposition program over four years ago.
So, if you think about it what we’ve been sending out the door has been very low NOI assets that in among other things have been a drain on the company from a leasing perspective and a sort of retailer — didn’t present compelling cases to the retailers. So we think with the – with FOP coming online, with all of our redevelopments coming online, our anchor repositionings, that we can manage our way through the scale issue.
Okay. So yes, and you mentioned in your comments, you’re probably in a stronger position with your retailers at 20 assets today than you were at 35. But is there a number, kind of in the back of your head that says you know what — if we’re at 15 malls that made — that we need to at least have that many to either be big enough to matter to the public market or have — be at the table with the national retailers or what not?
Well, again, I’m not so sure that quantity is the issue. I think quality is the issue. We like the fact that when we look at the portfolio, we believe that we’re getting stronger in terms of those discussion with retailers. And I think when you — there are examples out there, I mean we are – we’ll be one of the first property owners, mall owners, in America to bring Intimissimi into one of our malls. It’s an Italian intimate brand company.
And we’re working with two Canadian retailers right now that we think we’ll be one of the first companies in the U.S. to introduce them into our assets. So while volume we believe we’re comfortable at, geographic concentration is something that you also can take out of the puzzle if you will. The fact that we have a concentration in Philly and in D.C. is an important part of sort of the magic sauce that we bring to retailers.
We think we’re – we have assets that are well located in major markets, and the one that – ones that aren’t in major markets are very market dominant, and so, our dialogue with retailers is getting stronger and not getting weaker.
Okay. And then as it relates to the JV operating performance, I guess this quarter or year-to-date, I think Bob mentioned that some of that has been due to more bankruptcies at those — I guess, I’m just looking at the two and specifically, Lehi [ph] is obviously one of your better assets and you have a partner that’s a best-in-class manager and operator of properties. I’m just curious why those have been more impacted relative to the wholly owned properties.
If you look at the JVs broadly, you had a couple of H.H Greggs and the power centers, you had few – all kinds of buffets [ph], Sports Authority and you have Lee High Valley, you had a disproportionate number of specialty retailers close this quarter. Obviously, Simon has been working diligently to fill those spaces on a – we expect that they would be filled with temporary tenants by year-end, and certainly we’re confident over time that they will deliver and fill those tenants with replacements that are paying rents at amounts equal to or greater than the tenants they’re replacing. But this is a cyclical business and it’s going to take them, even as the best-in-class operator to digest the bankruptcies and find the replacements.
Sure. Okay. And then I guess lastly on the change that — at the Woodland redevelopment, costs came down quite a bit but obviously, you guys mentioned that the expected returns came down as well. It doesn’t sound like the overall scale changed that much. You still have the Von Maur plus 33,000 square feet of restaurants. Can you provide any more specifics on why…?
Yes, actually the scale did increase actually, fairly dramatically. We had a number two sizable out parcels. We also had a row of stores that was adjacent to the mall entrance, and we also downsized the mall expansion from about 50,000 feet to about 30,000 feet. And we also eliminated a medium box anchor that would have been accessed on mall. So the scale was reduced fairly significantly, in terms of getting to that $15 million savings.
I would point out though DJ, that we have to a certain extent optionality here and in a good way. Now while we certainly can’t get back the 20,000 square feet that we reduced the inline stores, we do have the ability to add in the rest of it at some point.
And I think in addition to hey, just the fact that having optionality is a good thing, the other piece of it is if one thinks about this redevelopment occurring with a new Von Maur, by the way which was the most requested store by the customers who shop the mall with a new Von Maur, and some of the new inline, we think we’ll be actually be able to outperform the original pro forma we laid out by doing it as a Phase 2.
So we just thought at this time, prudent use of capital. I’d rather sit here two years from now saying, “Jeez, I should’ve built some more mall space. I’ve got too many tenants for the space”. And just being very prudent about our use of capital, we think was the right thing to do.
Okay. Thanks, Joe.
Your next question comes from Floris Van Dijkum with Boenning. Please go ahead.
Floris Van Dijkum
Great, thanks. Hey guys.
Floris Van Dijkum
Hey, Joe. Follow-up question on Michael’s point, and I guess, DJ sort of alluded to that as well. But – first, maybe if you can talk, the four anchor boxes that are still vacant, they are not yet in the cost, could you remind us the status and potential costs involved there?
I know that one of them you’ve bought back the lease hold interest, I believe, and the other one you bought back wholly owned. But if you could just remind people what — potentially incremental cost involved in getting those leased and rent paying?
Well, first off; yes, we did buyback Moorestown. And on the Plymouth transaction that was not a buyback but we entered into a long-term lease and without expending any upfront capital, so just to sort of lay that out. And in terms of the costs, all costs are in the capital plan.
Floris Van Dijkum
Did you get that one? All costs are in the capital plan.
Floris Van Dijkum
They’re in there. It’s a fully baked number I guess is what you’re getting at.
That’s what I’m – I’m not getting at it. I’m making that statement.
Floris Van Dijkum
That’s great. Would you to — sort of in line with the question that Michael — rather than selling your best assets, would you consider selling more malls like Wyoming Valley or Valley Mall to – and really to just point – prune this portfolio to 10 or 15 malls to get all of the capital issues off the table?
Well, we are certainly focused on getting as you said it, all the capital issues of the table. We think we’ve taken a major step in our recent announcement and we will continue to look for ways to do that. And that would include, by the way, continuing to look at pruning the portfolio from the bottom, looking at potential JVs, again, price is important. As well as other non-core assets that we have, out parcels et cetera, et cetera, so yes, we are — our approach to that Floris, is to be as clear and direct as possible. There’s no stone unturned.
Floris Van Dijkum
Great, maybe last question for me. Bob, maybe if you can touch upon the outlook for NOI margins and expense recoveries. Now that you are mostly through this non-core asset plan, how much of the pickup should we expect in 2018 and 2019?
Well, I don’t know that we’re in position to provide specific granular assumptions for ‘18 and ’19, but certainly as Joe mentioned, I think we view the second quarter as a trough in our business. We have lots of GLA and revenue coming on stream, which should obviously serve to kind of boost our margins.
And most of the haircuts we took as it relate to rent restructuring for some of the bankrupt tenants, we’ve moved from net leases to gross leases so we saw a little bit of a hick in our recoveries and we’ll see it for the balance of this year. But as those revised leases expire over the next couple of years, we would look to either convert those leases back to net leases with the existing tenants or be in a position to replace those tenants with performing tenants at that point in time.
So I don’t know if fundamentally we have a different view of recovery — expense recovery rates and margins than we did a year ago, but certainly, that will take place and unfold according to plan. But it may be a year or so behind.
Floris Van Dijkum
Great. Thanks guys.
[Operator Instructions] Your next question comes from Nikida Belli [ph] with JPMorgan. Please go ahead.
Hi, good afternoon. A quick question on — can you guys talk a little bit about the longer term growth trajectory of the company. I know your occupancy is pretty low right now and you’re doing some redevelopments, so all those things combined hopefully will translate into better performance over the years? And also, how does that tie to your February of ‘17 presentation when you put out and you said your 18 to 20-year target plan was 6% to 8% growth and also NOI of 7% at the midpoint. So how do you tie those two things together?
Well, first off as I mentioned on the call, we see ourselves currently at a trough. We’ve been — Q2, we’ve been very focused on anchor replacements both from closings and proactive recoveries. We’ve reaffirmed our NOI growth target from 18 to 20 of 6% to 8%.
We see that as really coming from the anchor replacements taking where our low-rent paying sort of tiered retailers to exciting and many cases first-to-market retailers occupying those boxes, being able to get significantly higher rents from them. And then also their driving additional traffic and sales to the property will allow us to continue to increase our rents within the properties themselves.
So, again, I think the simple answer to your question — and you also raised the occupancy issue; I think the occupancy issue, again, as we continue to repopulate these properties, these boxes, occupancy also continues to move in an upward cycle. We do plan to end the year with same store in-line occupancy between — around 94%. So am I — did that answer your question, Nikida [ph]?
Yes, that’s very helpful. So that also assumes that your same store NOI for ‘18 to ‘20 stays at $275, $300 ex lease term?
That’s correct. Right, that was the assumptions that we laid out back in February.
So all those are still intact. And can you — I know you talked about the changes at Woodland Mall regarding the size and scope of the project, but did you talk about the — why you took returns down? I think they were slightly down.
Well, there was certain infrastructure work that needed to be done as part of that. There were fix costs if you will, but as you continue to — as you look to downsize it, those fix costs became a greater portion of total project cost and had negative impact on the return. But as I mentioned the optionality exist and as the market recovers, as the property is — stabilizes in its new form, we think we have the ability, should we choose to execute on it, to outperform what was the original numbers that we laid out.
And may be one last quick question. I know it may be a little bit too early to — to’18, but have you had any conversations with tenants regarding potential bankruptcies and may be those are not the conversations you’re having some people that – companies that are on your list that you think might not make it in ’18 and if the impact would be as impactful as it was in ’17?
So we are obviously well out – we’re trying to be well out and front of the condition and health of tenants, and are regularly in conversation with most of our national retailers. And we like to think, as I mentioned earlier, with 5,300 stores closing in this country the impact on us was 22 stores.
That’s a pretty good number, less than per mall, but I think on a – I think that really is a result of having pruned the portfolio, selling off the lower-quality assets, from the impact on us both from a anchor closing as well as in-line store bankruptcies and closings was mitigated to an extent because of that. But as we look to the future, we think we’re as well-positioned for any future problems that might occur within the sector.
Got it, thank you.
There are no further questions at this time.
Well, thank you all for being on the call. Remember the comment; if we say we’re going to do it, we do it. And I hope everybody enjoys the rest of their summer. See you all in September.
Thank you. This concludes today’s conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!