Summary
- Department store repositionings are complete; no remaining unleased anchor spaces in core portfolio (perhaps the only listed mall company to claim such a milestone).
- High-impact redevelopments coming on-line; Fashion District Philadelphia expected to open on 19th September, 2019, Woodland Mall in Q4, and more to come in 2020.
- PEI has now transitioned to an A-mall company; its core mall portfolio sales increased to $525psf; new target: $550psf. Its top 6 properties generated sales $622psf, constituting almost 50% of existing NOI.
- Inflection point just around the corner; company-specific tailwinds (built-in growth) outweigh general retail headwinds (bankruptcies), poised to deliver NOI/NAV growth into the future, leading to earnings growth and, ultimately, multiple expansion.
- Company guidance: "FFO payout ratio expected to be approximately 60% and FAD payout ratio expected to be below 90% in 2020"; dividend maintained whilst also deleveraging via contracted NOI growth and densification (including non-income producing land sales).
Pennsylvania Real Estate Investment Trust, also known as PREIT (PEI), is a misunderstood A-mall company currently being treated by the market as a struggling, low-quality, mall landlord on the verge of collapse. It underwent a significant transformation program led by the current CEO, Joe Coradino, who took over in 2012. This transformation program included asset dispositions and the acquisition of Springfield Town Center aiming to increase overall portfolio quality, anchor improvement program aiming to diversify retail offerings and mitigate department store closure risk, and the next phase (2018 and beyond), which is densification (focus on residential). The result is that PEI is now in a much stronger position, focusing on quality properties and executing leases with tenants in diverse categories: health & wellness, off-price, dining, entertainment, arts & crafts, co-working, etc. As a result, its properties are becoming more and more mixed-use, lifestyle-oriented town centres, as opposed to old-school B&M retail, which primarily focused on apparel. PEI's properties are situated in densely populated areas (there is clearly alternative use potential), and the company has identified significant opportunities to add over 5,000 multifamily units and over 2,000 hotel rooms to its properties.
In essence, PEI is transforming from a traditional pure-play mall company to a sustainable quality retail platform, with the retail/mall element attracting other uses, such as residential, hotel and office (co-working), which in turn brings in more traffic to the mall. Win-win! The market fails to see this healthy and much-needed transition, and instead focuses on negative headlines about B&M retail, looking at the tree and losing sight of the forest. Sure, retail bankruptcies have created major headwinds, but the company has managed to execute the transformation program close to perfection, despite all headwinds (Toys "R" Us, Sears (OTCPK:SHLDQ), Bon-Ton, etc.). To be fair, the era characterized by passive rent collection supported by a copy-paste, one-size-fits-all, cookie-cutter model is over. Mall REITs have transformed into dynamic operating companies. Therefore, one needs to assess the merits of each property on a case-by-case basis. Luckily, PEI has a small portfolio (less than 25 properties) in a handful of states with favorable demographics, making it easy for prospective investors to analyze and even visit their properties.
