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PREIT Has Filled All Of Its Big-Box Vacancies, CEO Says

In its second-quarter earnings call on Friday, PREIT shared some big news about its portfolio.

PREIT CEO Joe Coradino and InvenTrust Properties Corp. CEO Thomas McGuinness at Bisnow National Retail Series East Coast, April 4, 2017

"Today, we're proud to report that we have filled all of our anchor boxes that we had available," PREIT CEO Joe Coradino said during the call. "[We] continue to reduce our Sears [store] count with plans underway to replace two additional stores, which will take us down to only five Sears stores."

PREIT Chief Financial Officer Bob McCadden told analysts that he does not expect any further anchor closures to be announced this year, signaling that, at least for its valuable stable of malls, the downturn might finally be over.

The trust reported a 300-basis-point increase in operating results from the first quarter, which Coradino credited to the one-time cash infusions of lease termination fees from tenants closing their stores. While there will be a dip in rent payments between those closures and their replacements, Coradino said that PREIT had signed leases or is in negotiations to backfill 90% of those closures.

"When you have a quality portfolio, the decision to take a termination fee is a positive," Coradino said.

Short-term revenue growth projections were down from the first-quarter report, which PREIT chalked up to those lease terminations and the delayed opening of Fashion District Philadelphia, its joint venture with Macerich. Once estimated to launch later this summer, PREIT now anticipates it to be completed in September 2019. 

A rendering of Fashion District Philadelphia, including the office condo on floors three through five

A day before the earnings call, PREIT held a press conference at Fashion District to announce the delayed opening, as well as a slew of new leases. The highest-profile of those tenants is City Winery, a combination wine bar and music venue that will open out onto Filbert Street.

Coradino told analysts that the delay, as well as the increase in estimated cost from $325M to $420M, was due to a change in plans surrounding the signing of AMC to open a movie theater. PREIT had to boost the height of the building in order to accommodate the theater's stadium seats. At least 85% of that money has already been spent or budgeted on the project, "so we have very little cost exposure going forward," Coradino said.

The delay also is due to PREIT's desire to open the mall all at once, rather than let customers in before all tenants are ready for business. Over 80% of the retail space is either leased or in late stages of negotiations, Coradino said. With more of the tenants in place for opening, he expects the property to stabilize by the second half of 2020.

Coradino credited PREIT's success in leasing to its ability to take tenants that were not previously in its portfolio, as well as find new uses for its space. The conversion of a former JC Penney at the Willow Grove Mall into a Studio Movie Grill and the deal to turn a former retail space in the Cherry Hill Mall into an incubator for 1776 were some chief examples of PREIT's more diverse strategy.

Even as PREIT anticipates the rest of 2018 to be tough on its bottom line as recently announced closures come to pass, same-store net operating income grew 10.7% in the second quarter, McCadden said. Occupancy increased across PREIT's portfolio in the quarter, and same-store rents have increased by 7.5% over previous tenants and leases.