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Pennsylvania Real Estate Investment Trust  (NYSE:PEI)
Q4 2018 Earnings Conference Call
Feb. 14, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. My name is Jack, and I will be your conference operator for the call today. At this time, I would like to welcome everyone to the PREIT Fourth Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instruction) Thank you.

Heather Crowell, Senior Vice President of Strategy and Communications, you may begin your conference.

Heather Crowell -- Senior Vice President of Strategy and Communications

Thank you, Jack. Good morning, and thank you all for joining us for PREIT's Fourth Quarter 2018 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, February 14, 2019, and PREIT makes no undertaking to update any 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.

Before I turn the call over, I want to point out that we have incorporated new disclosure into our earnings release and supplemental in order to assess the analyst community in better understanding the company and bridging the gap between 2019 consensus FFO and our guidance. We will look to continue to enhance our best-in-class disclosure. Our same-store NOI guidance for 2019 excludes three properties, two of which were previously included in our same-store pool. First, Wyoming Valley with two vacant anchors is expected to transition out of the portfolio as we are currently in discussions with the special servicer. Our guidance assumes this occurs toward the end of the second quarter.

Second, Valley View Mall is an asset with three anchor vacancies and non-recourse debt. We expect this asset will transition out of the portfolio at some point. Third, at Exton Square Mall, we have completed Phase 1 of the redevelopments with the opening of Whole Foods and the sale of the land parcel to a multifamily developer, as part of our densification efforts. We are maintaining flexibility as we seek partners for future redevelopments.

In addition, to specific tenant assumptions we have included a $3 million reserve for bankruptcies at the low-end of our guidance. We are expecting $5 million to $10 million in land sale gains as we continue to harvest value of non-operating parcels in our densification initiatives. We have assumed that lease termination revenue will be in the range of $2 million to $4 million. With Fashion District opening late in the year and building toward stabilization, we expect nominal 2019 FFO contribution after factoring in grand opening charges.

This is forecasted -- prove significantly as tenant openings continue in 2020. Our anchor repositionings are set to deliver $3.9 million in incremental 2019 NOI or approximately $0.05 a share.

Joseph Coradino -- Chairman & Chief Executive Officer

Thank you for outlining our roadmap to a strong 2019 and Happy Valentine's Day everybody.

With Core Mall sales per square foot at $510 per square feet, and Core Mall leased space at 96.9% (sic-96.6%) and anchor repositioning behind us, we have completed the transition to an A mall company. While 2019 is still a transition year from an FFO perspective, looking forward to 2020 and beyond, we expect to deliver significant improvements in FFO and FAD, as we complete the pairing and strengthening of the portfolio.

Last week, following our presentation of a multi-year business plan, our Board approved our 168 consecutive dividend, which we expect to maintain due to our outlook for 2020 and beyond. This factors in the $12 million we already have executed for future openings.

We have Fashion District and Woodland Mall opening this year and marching toward stabilization. In 2020, we will have a full year impact of the repositioned anchor stores at Plymouth Meeting, Moorestown, Magnolia, Capital City, and Valley Malls and we will add mixed used components throughout our portfolio. As you know, the industry has been moving quickly and we believe we have established a first-mover advantage, which has put us in a position to capitalize on the momentum we've created. Our disciplined approach to low-productivity assets sales, proactive department store reposition coupled with our tenant diversification efforts has resulted in a quality portfolio with densification opportunities.

Now, let me point more clearly to what makes us different. We've listened to many of our peer company reports citing 20, 30, even 40 vacant department stores. We have no unleased department stores in our core portfolio. Let me repeat that, we have none. This is because we've already replaced over a dozen stores in our portfolio with revenue coming on in 2019 and 2020. Further to this point, based on our conversations, we don't anticipate a JCPenney closings. We don't anticipate any JCPenney closings. We have among the lowest Sears exposure in this sector. We also have two of Macy's top 50 gross stores, which is no small feat for a portfolio of our size. We have changed the definition of the mall and we're agile enough to stay at the forefront of this evolving landscape. Over 50% of the new leases we signed in 2018 were for diverse uses, not historically located in malls.

Uses like fitness, entertainment, dining, sporting goods, arts and crafts, off-price and co-working in addition to multifamily and hotel units. The results demonstrate the success of our approach and help to differentiate us.

At properties where we had replaced anchors prior to this holiday season, traffic was notably up over 5% on average. Comp sales have grown as well with core portfolio sales at $510 per square foot, a breakthrough achievement. Our core same-store NOI guidance range of 1% to 2% is at the high-end of A Mall peer group. Furthermore, we've identified opportunities to add density to our assets and create mixed-use environment.

We've closed on our first multifamily land sale in Exton, where units will be available for move in this year and we signed an agreement of sale for our first hotel addition at Woodland Mall and are under way incorporating multifamily and hotel uses throughout the portfolio. We are at a key transition point as a company that's navigated through headwinds and is generating increased traffic and sales from redevelopment and anchor repositionings. Without question, there are still challenges in the mall space, the leasing environment is challenging, but with the quality of our portfolio it's manageable and we are up to the task.

Since the beginning of the year, we've seen Gymboree things remembered and Charlotte Russe filed for bankruptcy protection. At the same time, we have a robust pipeline of executed leases coming online.

If we look back into our core portfolio, we have retained and released 93% of the space from tenants that filed for bankruptcy over the past two years. Again, we have retained or released 93% of this space from tenants that filed for bankruptcy over the past two years. This is the power of the portfolio we've created. It's noteworthy that in spite of the power of our portfolio, we've taken a conservative approach and have incorporated reserve in our guidance for potential future bankruptcies.

We'll continue to work tirelessly to deliver new and differentiated uses to our properties, reducing our exposure to mature retailers and in many cases are overburden with debt. But we are looking forward to a milestone mark 2019. The opening of our marquee project, Fashion District in Philadelphia, our hometown, the project is 85% committed, opening on 9/19/19 with some exciting tenants including Round One, Nike, City Winery, AMC, H&M and Ulta to name just a few.

The grand reopening of Woodland Mall is also on the horizon. This project has been under way for two years and we are clearly solidifying our position as the premier destination in Grand Rapids. Along with Von Maur, we'll have Urban Outfitters, REI and BlackRock joining Altar'd State, Apple, North Face, MUSH and many others.

At Plymouth Meeting, we will cement the creation of a truly unique experience with the opening of five exciting tenants in the former Macy's blocks; DICK's Sporting Goods, Burlington, Edge Fitness, Michael's and Miller's Ale House. This lineup really underscores the diversity in Mall tenancy we've been curating and will drive significant traffic and sales to the property.

At Valley Mall, we also have an unbelievable story that really speaks to our strengths. In less than two years, we will open four diverse uses in three former department store spaces. Yes, we've built three former department store spaces. We'd incorporate a one-way Fitness, a full service fitness facility, Tilt, an entertainment destination, and upgraded the department store offerings with Belk's first store in the region. In 2020, we'll add DICK's Sporting Goods to complete the project.

Looking to the future, we are focused on FFO growth, managing liquidity, reducing leverage and having a defined path to get there. We have the liquidity to complete our redevelopment pipeline. We have new tenants coming online with improved credit quality, with mitigated anchor risk and have high quality densification opportunities with a relentless team of professionals focused on the mission. We have turned this company around and we are on the move.

With that, I'll turn it over to Bob.

Robert McCadden -- Executive Vice President and Chief Financial Officer

Thanks, Joe. Looking back on 2018, we've made significant progress in backfilling vacant department stores and managing through retail bankruptcies that impacted our performance during the quarter and for the full year. We are pleased that our fundamental business metrics reflect the portfolio we have created with improving sales growth, traffic, leasing spreads and a strong pipeline of future leases.

Let me touch on our operating results, review our capital plan and provide some additional details on our earnings guidance. We reported FFO as adjusted of $0.52 compared to $0.50 in the prior period, after accounting for the dilution from asset sales.

Same-store NOI growth was down 4.3% in the quarter, reflecting the impact of several factors, including declining performance in the quarter at the two malls that will be removed from our same-store core portfolio in 2019. Excluding these properties, results would have improved by 140 basis points for the quarter and 50 basis points for the full year. We had contributions from anchor replacements of $0.4 million for the quarter, bringing the year-to-date total to $4.2 million.

Total lease space in our Core Malls was 96.6%, a 140 basis sequential improvement since the third quarter. We have over 648,000 square feet of executed leases in our pipeline for future openings in our same-store portfolio with 533,000 square feet opening this year, which will contribute $10.6 million of annualized revenues. Much of this revenue will hit our P&L through the back half of the year and the balance will open in 2020, contributing an incremental (technical difficulty) for the quarter at 10%.

During the quarter, we've recorded the previously announced $8.1 million gain on the sale of the multifamily parcel to Exton Square Mall.

Let me share some updates on our capital plan. During the quarter, we spent $50 million on redevelopment and department store replacements, bringing the total to $153 million for the year. In 2019 and into 2020, we expect to spend approximately $160 million on our announced and pipeline projects. We ended the year with $205 million of available liquidity more than sufficient to fund these projects. Based on completed initiatives and those under way, we will generate an additional $70 million of liquidity in the first half of the year.

During 2018, we completed over $1.2 million of transactions from asset sales and refinancing activities. This includes the recast of our $400 million unsecured credit facility and a $300 million unsecured term loan. Our bank leverage ratio increased marginally to 53 point (technical difficulty) percent as anticipated, as we move closer to the completion of the previously outlined redevelopment spending. Our net debt-to-EBITDA at the end of the year was approximately 8.7 times.

With 87% of our debt either fixed or swapped and no material debt maturities until 2021, we continue to be well positioned to manage through a period of potentially rising interest rates.

On a rolling 12-month basis, our FFO as adjusted payout ratio was 54.1% and our FAD payout ratio was 95.5%. As Joe discussed, we expect our payout ratios to normalize back to 2017 levels as we move through this redevelopment phase to bring the associated revenue online.

Last year -- last night, we furnished detailed guidance and our underlying assumptions for 2019. We expect FFO as adjusted per share to be between $1.20 and $1.34. Same-store NOI, excluding lease termination revenues, is expected to grow between 1% and 1.9%. Wholly owned properties are expected to grow between 1.5% to 2.6% with our joint venture properties declining between 2.7% and 2.4%. We've assumed lease termination fees between $2 million and $4 million with $3 million at the midpoint. The impact of the new lease accounting standard will reduce FFO by $5.3 million or $0.07 per share as we are now require to expense leasing cost that were previously capitalized.

We have assumed land sale gains of $5 million to $10 million from our densification initiatives. We expect corporate revenues to be lower at $1.1 million due to the sale of the Wiregrass note, which we closed on yesterday and the cessation of historic tax credit revenues among other items.

We intend to unencumber Capital City Mall by defeasing the $5.3 million mortgage loan before the end of the first quarter, creating additional borrowing capacity under our credit facility. Capital City Mall had benefited from the 2017 replacement of Sears with DICK's Sporting Goods and the opening of Dave & Buster's in 2018. In connection with this transaction, we'll incur our defeasance cost of $4.6 million.

And, with that, we'll open up for questions.

Questions and Answers:

Operator

Certainly. (Operator instruction) Your first question comes from the line of DJ Busch with Green Street Advisors. Your line is open.

Spenser Allaway -- Green Street Advisors -- Analyst

Thank you. It's Spenser on with DJ. I realized it's hard to peg the timing of the divestments, but can you maybe just provide an update on your aim to execute on the land parcels, obviously, outside of Exton? And then maybe just some commentary on the overall demand for these parcels?

Robert McCadden -- Executive Vice President and Chief Financial Officer

You're referring to the multifamily land or the...

Spenser Allaway -- Green Street Advisors -- Analyst

Yeah. Because you've communicated that you've identified prospects to kind of raise over about $200 million and then a large portion of that, I believe, is kind of pegged for the proceeds from land parcels?

Joseph Coradino -- Chairman & Chief Executive Officer

Yeah. I mean, at this point, we have robust interest in the land parcels. We've sold one already. We're moving to agreement on a second and third one in the near term. We have a hotel under agreement, negotiating an agreement on a second hotel deal. So we see the pace of that to be relatively robust. We're also bringing the closure to two land parcels we have, one in Gainesville, Florida and one in Chester County outside of Pennsylvania, I mean outside of Philadelphia in the near term. So in terms of the land sales, we are expecting that we will deliver about $70 million in the first half of the year.

Spenser Allaway -- Green Street Advisors -- Analyst

Okay. That's helpful. And if I'm understanding you correctly, it sounds like a good portion of the demand is coming from kind of mixed-use kind of buyers/developers?

Joseph Coradino -- Chairman & Chief Executive Officer

Sorry, could you ask that question again?

Spenser Allaway -- Green Street Advisors -- Analyst

Yeah. So as far as like the demand pool is going for those land parcels, it sounds like a good portion of that is coming from either mixed-use developers, like you said hotels, versus traditional retail concepts?

Joseph Coradino -- Chairman & Chief Executive Officer

Yeah, correct, it's primarily multifamily and hotels would be shack into that retail, while not out of the question would be more ancillary to those uses, it might be retail on the ground floor or something of that sort, but clearly would not -- the primary use for that land would not be retail.

Spenser Allaway -- Green Street Advisors -- Analyst

Thank you.

Operator

Your next question comes from the line of Christy McElroy with Citi. Your line is open.

Katy McConnell -- Citi Investment Research -- Analyst

Good morning. This is Katy McConnell on with Christy. I mean if you can just update us on the progress at Fashion District given the way there is stabilization timing? And with the project 85% committed now, where are you expecting occupancy will reach once it opens in the fall?

Joseph Coradino -- Chairman & Chief Executive Officer

Well, we are expecting, well, first of all, as it relates to Fashion District. We're very excited. We have the benefit of being about three blocks away and we've begun to build out tenant spaces, et cetera. So it's very exciting time for the project and there is a great deal of buzz about -- around it. We are expecting that the project will open up on grand opening day 9/19, probably about 65%, and then in -- before the year's out, we'll open up another number of major retailers including the Movie Theater and Round One, the combination of those two approaches a 100,000 square feet in space, in total space that they would take, which would be the entire top level of the project and then it will continue to be occupied until we reach 85%, which should be in the first quarter to second quarter of 2020.

Katy McConnell -- Citi Investment Research -- Analyst

Okay, great. Thanks.

Operator

Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is open.

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Hi. Good morning, guys. Maybe just sticking with Fashion District, since you're just talking about it. Could you give us any color in terms of -- so your plan to open in September, but the NOI will take some time to come online, how capitalized interest impacts that? Does it all go away in September or does it go away over time as NOI comes on over time?

Joseph Coradino -- Chairman & Chief Executive Officer

Thanks for the question, Caitlin. I'm going to ask Bob to respond to that.

Robert McCadden -- Executive Vice President and Chief Financial Officer

Hey, Caitlin. Capitalized interest will come online in a trajectory similar to the way leasing comes online. So the spaces are commissioned, if you will, will stop capitalizing interest based on the percentage of GLA that's actually in use and occupied.

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Got it. Okay. And then I guess in the prepared remarks, you guys talked about how you're focused on long-term FFO growth, reducing leverage, having good liquidity. I guess, is there any further comment on that? Any -- is there anything you plan to do other than kind of natural growth based on the investments you've made so far, I know you've talked about potential joint ventures in the past, or any other kind of path to get there?

Joseph Coradino -- Chairman & Chief Executive Officer

Well, clearly the -- maximizing our liquidity and reducing our leverage are key initiatives for us. The land sales that we've talked about is certainly a piece of that. We think the potential approach is $200 million for that. As we sit here today from a liquidity perspective, we do have capital on hand to pay the remaining $138 million in projects we've announced, we have about $205 million in liquidity and, look, we continue to explore all options, joint ventures on and off the table and any opportunity to improve our balance sheet, both from a liquidity perspective, leverage perspective, debt-to-EBITDA, we are exploring at this time.

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Okay. And then maybe one other. It looks like seasonally lease versus occupied is generally lower in 4Q, but looks like the leasing activity was also relatively low. So just wondering if that's a function of anchor replacements, kind of, being done to one of your points before or should we expect leasing volume to pick back up as we go through 2019?

Robert McCadden -- Executive Vice President and Chief Financial Officer

Caitlin, I think if we look at the -- in Core Malls, we're approaching -- we're not approaching, we're at 96% and our lease base is 96.6%. So to some extent we're almost sold out, if you will. And I think that's really borne out. I think one of the key things that we're looking at is, last year we had about 3.9% of our core occupancy with temporary tenants, that's now down to 2.8%, which I think reflects the fact that we're actually replacing kind of the short-term leases with permanent tenants. So, we'll continue to see I think a strong level of leasing activity. But in the core portfolio, I think we're really approaching the point where we're now looking to improve the tenancy and rollover underperforming tenants and bring in better performing tenants.

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Okay, got it. Thanks.

Operator

Your next question comes from the line of Karin Ford with MUFG Securities. Your line is open.

Karin Ford -- Mitsubishi UFJ Securities -- Analyst

Hi. First, just a question on Sears. Can you talk us through what impact, if any, there was from the bankruptcy on 4Q '18 same-store NOI growth? What have you modeled into guidance for Sears? What type of impact for 2019? And if the bankruptcy reserve all Sears related?

Joseph Coradino -- Chairman & Chief Executive Officer

No, actually, it's not. Sears has really named all of our stores as stores that will remain open. And, again, we have a ESL is basically assumed to all of our stores. We have not a very significant Sears count at this point, as I mentioned. And in a number of cases, we have tenants for those spaces. But, at this point, it is our understanding that Sears will continue to operate those stores.

Karin Ford -- Mitsubishi UFJ Securities -- Analyst

Okay. Got it.

Robert McCadden -- Executive Vice President and Chief Financial Officer

And, Karin, let me just add something to that. We did take a couple of hundred thousand dollars hit related to pre-petition receivables related primarily to unbilled real estate taxes in the fourth quarter, so that did impact our results.

Karin Ford -- Mitsubishi UFJ Securities -- Analyst

Okay. Next question is just on the '18 guidance, you mentioned the two properties that are no longer in same-store that I think you said deteriorated a little more than you expected, was there anything else that was different than your expectations that drove the miss versus the low-end of your guidance? And are you doing anything differently in your guidance forecasting technique for this year?

Robert McCadden -- Executive Vice President and Chief Financial Officer

So one of the big drivers that we -- if we look back at our misses. We had a couple of things. We did have to take a $200,000 charge for post-December '18 bankruptcies, Charlotte Russe, we wrote-off some straight-line rent receivables for some of the stores that they've identified, they're going to be closing in our portfolio. That's one of the items. Obviously, the impact of the Sears unbilled amounts that we also reserved and we also had a miss on our common area revenues and that tends to be -- a lot of decisions are made for those late in the cycle and we had a very strong year in at the end of 2017. We thought we could repeat that, but unfortunately we were not able to close on a couple of big transactions that we had anticipated. So that was basically the key factors for the miss versus the third quarter guidance.

Joseph Coradino -- Chairman & Chief Executive Officer

And as it relates to doing things differently, we've taken a hard look at our common area revenue and actually believe that we can outperform what we had done in previous years based on just approaching it differently in a number of ways. So we've looked at leasing our partnership marketing, our specialty leasing and we've been very deliberate about our -- putting it in our numbers for this year and we have a comfort level that we can deliver the guidance that we've outlined.

Karin Ford -- Mitsubishi UFJ Securities -- Analyst

Okay. Thanks for that, and thanks for the additional disclosure as well. My last question is just on the alternative uses and other uses that you've talked about, multifamily and hotel, do you think there are any opportunities for mall conversion into creative office sale, like Macerich is doing at Westside Pavilion at any of your properties?

Joseph Coradino -- Chairman & Chief Executive Officer

Well, we actually have done a co-working facility at Cherry Hill with 1776 and we are working on several other similar transactions. I don't think there's an opportunity with our portfolio to lease an entire mall to an office tenant or a co-working facility, because as Bob pointed out in our core portfolio we're 96% leased. That's a good thing.

Karin Ford -- Mitsubishi UFJ Securities -- Analyst

Got it. Thanks very much.

Operator

Your next question comes from the line of Michael Mueller with JPMorgan. Your line is open.

Michael Mueller -- JPMorgan Chase & Co. -- Analyst

Yeah. Hi, thanks.

Joseph Coradino -- Chairman & Chief Executive Officer

Hi, Michael.

Michael Mueller -- JPMorgan Chase & Co. -- Analyst

Hey. So, just curious -- I know you have positive same-store NOI outlook and there are some one-time items in the numbers, like the defeasance cost which are smaller and stuff, but if you strip the gain out, I mean the number is within high one teens, the $1.20 (ph) or so and I know you talked about leasing momentum and everything else. I mean, when do you think FFO bottom line earnings growth for decelerations to stops and flattens out. I know, you're talking about up drawing up the balance sheet, delevering a little bit more, should we think of that as that this one teens number ex-gains may not be the bottom or just how are you thinking about bottom line earnings big picture over the next few years?

Robert McCadden -- Executive Vice President and Chief Financial Officer

Yeah. Michael, based on our expectations, we feel very strong as Joe mentioned that we have most of the disruption from the anchor replacement behind us and given the pipeline of commitments that we have in terms of signed leases, so we did provide some additional disclosure in our supplemental, which is basically a percentage of revenue for each of the redevelopments that we have that's actually committed as of the end of this year. So we expect 2019 to really be the trough and really to build on that as the openings of Fashion District and all the anchor replacements in the third and fourth quarter of this year really providing the springboard for growth in 2020 and further growth in 2021.

Michael Mueller -- JPMorgan Chase & Co. -- Analyst

(multiple speakers)

Robert McCadden -- Executive Vice President and Chief Financial Officer

Go ahead, Michael, I'm sorry.

Michael Mueller -- JPMorgan Chase & Co. -- Analyst

No, I was just going say with that reflective -- the comment reflects the idea of delevering a little bit more as well, so is it -- you are naturally delevering as NOI comes on or you're thinking about a little bit more in the asset sale side, which could be dilutive and kind of weighing on numbers. I mean how should we take that delevering comment?

Robert McCadden -- Executive Vice President and Chief Financial Officer

Well, the delevering comment, the major thing I spoke about was land sales, which are not income generating, which will not have a dilutive effect. And, again, we think we have a significant amount of value in that -- in those properties that are -- where you could build residential or hotel at our properties. I think also one of the things that you -- in terms of this bottoming out and moving forward from here, I think when you hear things in terms of the sales growth we've experienced when you hear things like the renewal spreads that we're achieving and when you hear the kind of 93% of bankrupt tenants we either retain or release in our portfolio. I think it speaks to the quality we've created.

I mean, look, we've taken a lot of hits as a result of needing to get lower quality assets out of our portfolio and what remains save a couple of assets and we've talked about the disposition plan for those, what remains is properties that were as a high degree of interest that are located in dense trade areas and we are securing tenants that are pretty impressive, better credit, better sales, drive better traffic, et cetera, all of that I think makes up the fact that we are headed north from here.

Michael Mueller -- JPMorgan Chase & Co. -- Analyst

Yeah. I mean it just seems like there is -- I see the positive same-store NOI guide, it just seems like there is a lot of leakage outside of that, which is taking numbers down from the -- whatever it was 150 down to pick a number of minus some noise in it this year. Does it feel like that, putting the same-store aside, those headwinds -- financing store headwinds, does it feel like those will subside as well you feel pretty good about that after 2019?

Joseph Coradino -- Chairman & Chief Executive Officer

Yeah. I mean, what we feel very good about everything going forward. I mean, we will deliver $12 million in sort of secure leases that will move into our properties, plus FDP, plus FDP, and that's going to make a huge difference in terms of our company both the quality of it and the scale of it. When we stabilize FDP, it will be about the size from an NOI perspective that we were before we sold our first asset, our first property of the 17 that we sold. So, we are optimistic as we look forward, highly optimistic and we think we have the ability to grow from here.

Michael Mueller -- JPMorgan Chase & Co. -- Analyst

Okay. That was it. Thank you.

Operator

Your next question comes from the line of Ki Bin Kim with SunTrust. Your line is open.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Thanks. So you guys did a good job of outlining the moving parts from '18 to '19 guidance. There's about $20 million of FFO delta, what portion of this do you think is temporary or that we can expect a reversal as we get into 2020?

Robert McCadden -- Executive Vice President and Chief Financial Officer

So keep in the few -- kind of look at the way we kind of laid some of this out, 2018 was a special year in terms of the size of some of the lease terminations that we had, that was about -- if you return back to the state of normalcy, we think we're probably in the kind of $2 million to $4 million range based on kind of historical level, so that would account for about $0.13 of the change from $1.54 at the midpoint with $1.27 (ph), which is probably the biggest driver, right. So I think when we look at what we're guiding to in 2019 is probably more reflective of our ongoing run rate. Obviously, the change in lease accounting is a one-timer, that is, we've always pay those leasing salaries, it's just a matter of how it's reported. So it's about $0.07 of the change. Again, that will be permanent, but it's only an accounting change, it doesn't reflect our cash flow or ability to in effect use that cash flow to generate additional incremental revenues.

The corporate revenue piece, it's -- we burned off the historic tax credits, we sold the mortgage note that we took back in conjunction with one of the property sales. So those, again, are getting us back to a more normalized level of operations. I mean, to some extent, what you're really seeing here is kind of the cleaning up and simplifying of the business. We're selling off land parcels that were acquired within decade ago, so we're really going to reestablish, I think, in 2019 the PREIT that you'll see going forward with not a lot of noise, a lot cleaner presentation of our operating performance and fewer of the kind of non-core business distractions that we may have had over the last decade or so.

Joseph Coradino -- Chairman & Chief Executive Officer

I sort of look at it as we've been working out all these years, now we're fit and ready to go.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

All right. And maybe I missed this, but what was the drag at Exton Square Mall, and why was that removed from the same-store pool?

Joseph Coradino -- Chairman & Chief Executive Officer

At Exton Square, it's a property that we've always -- it's a phenomenal piece of real estate, sits at the intersection of Route 100 and Route 30 in Exton, in Chester County, the fastest growing county in the state and it's been impacted over the years by King of Prussia and other competitive assets. We did the Whole Foods deal, we think that's an important addition, that's something that we've brought to the market for sale as great deal of interest in, I believe 27 people submitted a bid. We also did the sale of the multifamily parcel to Hanover. And I think, going forward, it's a property that, in the longer term, probably doesn't want to be a mall and we're trying to sort through our options at this point, which could include moving the asset out of the company, you could include a joint venture, so we'll get a number of options with that and it didn't seem like a property low to be sitting in our core assets.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. And just an accounting question. Wyoming Mall and Valley View, I understand those are probably going back to the lenders, but is the interest payments currently being covered? The reason I ask that is that to kind of see if there is a benefit once you actually give it back to the lender on the interest expense savings versus the FFO here, maybe booking or non-booking?

Robert McCadden -- Executive Vice President and Chief Financial Officer

Both of these assets are currently generating cash flow to service their interest payments.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. And one more question on the expense reimbursements, it fell to 73.5% from 79% a year ago. I'm just curious, is -- are we resetting the expectations for reimbursement levels for a Pen REIT or is there something temporary in nature where we should just basically model a recovery in that expense recovery ratio?

Robert McCadden -- Executive Vice President and Chief Financial Officer

A couple of things impacting our fourth quarter of 2018. One is that, including the reimbursements are reimbursements for utilities that are tenants pay and we effectively purchase a certain of our properties where we have kind of a central distribution system. In fact we buy electricity and resell it to our tenants that kind of publish rates. And we saw a compression of margins of about $0.5 million this year in the fourth quarter now with a combination of both overall less consumption by our tenants as well as rates not keeping up with the cost. This tends to be a lag when energy cost increase and by the time they get those rates get pass through from the Public Utility Commission, so that's part of where you see the decrease.

The second thing is, in 2017, in the fourth quarter, we completed a successful real estate tax appeal at Springfield Town Center, effectively it was only for the 2018 period. So you saw a lot of that benefit roll through in the prior year and, again, when you are comping '18 to '17, we're experienced a negative impact of that. So, you're probably somewhere between those two numbers in terms of an ongoing run rate once you factor in those kind of one-time items.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

So you're saying it's a little bit more of one-time in nature, the decrease in the 4Q is not really a statement about lease negotiations and the tenants willingness to kind of bear that reimbursement rates?

Joseph Coradino -- Chairman & Chief Executive Officer

That's correct. Not at all a reflection of the new world of negotiating, the world doesn't change that much.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. All right. Thank you.

Joseph Coradino -- Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Merrill Ross with Boenning incorporated. Your line is open.

Merrill Ross -- Boenning & Scattergood, Inc. -- Analyst

Thank you. I have two questions. One is relatively minor. In Ascena's retails, last -- most recent quarter conference call, they indicated that they're looking for $60 million in lease concessions by July of 2019, they're relatively minor tenant of 1.4%, but are you conceding rent to them or to any other tenant?

Joseph Coradino -- Chairman & Chief Executive Officer

I'm sorry, could you repeat that, who is the tenant?

Merrill Ross -- Boenning & Scattergood, Inc. -- Analyst

Ascena and its Ann Taylor.

Joseph Coradino -- Chairman & Chief Executive Officer

Okay, sure. I mean our transaction with Ascena is complete and we won't have -- and we did it through '19 and we won't have any negotiations discussion with Ascena until the '20 rollovers.

Merrill Ross -- Boenning & Scattergood, Inc. -- Analyst

Excellent. The other question. It's great that JCPenney says it is not closings in your footprint, but does it make sense to you to be proactive as you were with Sears, in case they are repositioning and eliminating appliances, et cetera, fails?

Joseph Coradino -- Chairman & Chief Executive Officer

Well, I'm not convinced that -- but I am convinced that there is room for a department store like JCPenney in the mall environment. I think that I'm pleased that there's someone at the helm, who has apparel experience. I'm pleased that they're actually questioning the appliance/furniture inclusion in the store and I'm not suggesting I know the outcome, but we were down talking to them week before last. And so, I don't think given the performance of JCPenney in our properties, given the fact that they seem to have gotten their customer back, right, and I don't think I feel it's time to begin being proactive and replacing JCPenney's.

Merrill Ross -- Boenning & Scattergood, Inc. -- Analyst

Okay. Thank you. That makes sense. I hope it works to a pretty large exposure, so that the stores are productive, certainly they will have a higher and better use.

Operator

Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is open.

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Hi, again. I just had a few follow-ups. First, I was just wondering if you could talk again on Capital City. I think you said you're planning to unencumber that, so just wondering what the sources and well, I guess, I know the use, what the sources there?

Robert McCadden -- Executive Vice President and Chief Financial Officer

Basically the source will be borrowings under our credit facility by unencumbering Capital City and paying off the existing mortgage will create roughly $40 million of additional borrowing capacity above the debt balance that we're paying off, because we -- effectively Capital City has a debt -- current debt yield much higher than the 11% that we have under our credit facility. So effectively by unencumbering it, we will create additional borrowing capacity more than enough to repay the loan and provide additional -- again additional borrowing capacity to us.

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Got it. Okay. And then before you mentioned that at year-end, you are at 8.7 times debt-to-EBITDA. I was just wondering if you could clarify what EBITDA that was on, was it calendar year 2018 last 12 months or next 12 months?

Robert McCadden -- Executive Vice President and Chief Financial Officer

Last 12 months.

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Got it. And then just the last one. Wanted to ask on the dividend and the coverage ratio, the supplement shows the FAD payout ratio of 95.5% as of 2018, so just with the good guided earnings decline for 2019 it seems like it will go above 100%, so just wondering how do you plan to bridge that gap and is it the land sales?

Robert McCadden -- Executive Vice President and Chief Financial Officer

Yeah, I think. It goes modestly above 100% in 2019, but we expect in 2020 and 2021 to get back to levels that are comparable to where we were in 2017, probably in the high 80% range.

Joseph Coradino -- Chairman & Chief Executive Officer

Yeah. So we have a comfort level with the dividend .

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Okay, got it. Thank you.

Katy McConnell -- Citi Investment Research -- Analyst

Your next question comes from the line of Christy McElroy with Citi. Your line is open.

Michael Bilerman -- Citi Investment Research -- Analyst

Hey. It's Bilerman speaking. I mean, you're FFO has gone from $1.90 in 2016, you are calling mid-20s $1.20 this year, which means your AFFO is probably going from a $1.25 to somewhere in the $0.60 to $0.70 range. Why do you have comfort with the dividend? Why wouldn't you right-size the dividend to your actual cash flow, to a payout ratio that back in 2016 made sense? Your leverage is too high, you have other issues that may come about and I understand your optimism, but why bleed cash at all, cut the dividend at a level that makes sense relative to cash flows so that you can retain it or pay that dividend in stock. I mean, literally you're FFO has gone from a $1.90 to mid $1.20 in three years and let alone what could happen, whether this guidance is conservative enough for the retail environment that's happening.

Joseph Coradino -- Chairman & Chief Executive Officer

So, is there a question in there?

Michael Bilerman -- Citi Investment Research -- Analyst

Yeah. I mean, if I go back to our conversations in '15 and '16, the payout ratio was lower, right. You had some free cash flow that was there. You are going to be way over paying a dividend this year. Why not take the opportunity today, you're not getting credit in your stock, conserve cash, it's still a highly uncertain retail environment, why wouldn't you right-size the dividend to your cash flow that has gone down by like... (multiple speakers)

Joseph Coradino -- Chairman & Chief Executive Officer

(multiple speakers) Tell me when you're done the question.

Michael Bilerman -- Citi Investment Research -- Analyst

I'm done. I'm done.

Joseph Coradino -- Chairman & Chief Executive Officer

Okay. We think the dividend is naturally going to right-size in the near term. So that's the answer why we don't want to do it right now and I think in -- I think it's something that we feel comfortable with.

Michael Bilerman -- Citi Investment Research -- Analyst

But Joe your dividend is $0.84, OK. Your FAD this year is probably going to be in that $0.65 $0.70 at go, right. You would need FFO in 2020 to go up by $0.20 just to get to a 100% payout ratio. I mean those are pretty elevated expectations, so unless you can help us understand the run rate maybe coming out of where your quarterly run rate is going to be at the end of the year or were 2020 FFO is going to be, this is going to be a hangover either over funding the dividend or just meeting it for an extended period of time.

Joseph Coradino -- Chairman & Chief Executive Officer

Mike, I think the question was raised by someone else. I think that some of that will be bridge through proceeds from land sales.

Michael Bilerman -- Citi Investment Research -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Ki Bin Kim with SunTrust. Your line is open.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Thanks. Just a couple of quick ones. Do you see your BK Reserve, Bankruptcy Reserve, was $2 million or $3 million?

Robert McCadden -- Executive Vice President and Chief Financial Officer

$2 million is supplemental, but that might just be the delta year-over-year.

Joseph Coradino -- Chairman & Chief Executive Officer

Yeah. It's $2 million, $2 million and $4 million at the midpoint and $3 million at the low-end.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. Just curious, how did you come up with that number? I mean, I look at your top 10 tenants, there's -- it's not abnormal, but number of tenants, like, what we consider at risk all over 100 basis points of AVR. I'm just curious if that reserve is enough?

Joseph Coradino -- Chairman & Chief Executive Officer

Well, I mean we come up with that, we look at as an ongoing part of our tenant relationship management. We're always looking at occupancy costs as it relates to tenant sales performance at individual properties and typically unrelated to the BK Reserve process as I -- we set forth in our upcoming budget cycle are -- we usually make assumptions relative that we have expirations or sales kick-outs or any other factor make adjustments to appropriately bring those occupancy costs down or adjust them to an appropriate level.

So we feel pretty good about where we are with the portfolio management and the BK Reserve is really for things that are outside of our control, a tenant decides irrespective of how they're performing in our portfolio that they need to restructure and ultimately that BK Reserve really covers -- it's really for almost liquidations, right, if you think about. So we've already incorporated some of that potential downside in our leasing assumptions, then the only risk that we have to that is the tenant basically liquidates his portfolio and we lose that revenue until we can reboot (ph) the space.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. And Joe, when you said you have no exposure, downside risk exposure, to JCPenney closing stores, is that just based on your conversation with them about their immediate store closure plans or is that based on looking at the operating fundamentals of the existing stores and knowing that their NPV positive to JCPenney?

Joseph Coradino -- Chairman & Chief Executive Officer

Both

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. All right. Thank you.

Joseph Coradino -- Chairman & Chief Executive Officer

You're welcome.

Operator

There are no further questions at this time. I would now like to turn the call back over to Joe Coradino for closing remarks.

Joseph Coradino -- Chairman & Chief Executive Officer

Well, thank you for being on our call today. Before we go, we said on these calls and we've discussed small handful of troubled tenants out there, but I'd like to read you another list of tenants that populate our expanding A Mall portfolio: Apple, Nordstrom, Bloomingdale's, Von Maur, Belk, Capital Grille, Yard House, Dave & Buster's, City Winery, HomeGoods, HomeSense, Cheesecake Factory, REI, Altar'd State, Peloton, Sephora and Urban Outfitters. The point is, we have new tenants coming online with improved credit quality, we have mitigated our anchor risk and we have a high quality densification opportunity and we've turned this company around and are going to move. Thank you very much. We'll see some of you in a couple of weeks.

Operator

This concludes today's conference call. We thank you for your participation. You may now disconnect.

Duration: 56 minutes

Call participants:

Heather Crowell -- Senior Vice President of Strategy and Communications

Joseph Coradino -- Chairman & Chief Executive Officer

Robert McCadden -- Executive Vice President and Chief Financial Officer

Spenser Allaway -- Green Street Advisors -- Analyst

Katy McConnell -- Citi Investment Research -- Analyst

Caitlin Burrows -- Goldman Sachs & Co. -- Analyst

Karin Ford -- Mitsubishi UFJ Securities -- Analyst

Michael Mueller -- JPMorgan Chase & Co. -- Analyst

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Merrill Ross -- Boenning & Scattergood, Inc. -- Analyst

Michael Bilerman -- Citi Investment Research -- Analyst

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