Pennsylvania Real Estate Investment Trust (PEI) 2001 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pennsylvania Real Estate Investment Trust conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone.

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Georganne Palffy of FRB Weber Shandwick. Ms. Palfy, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining us for Pennsylvania Real Estate Investment Trust's fourth quarter conference call.

This morning we distributed a copy of the press release and if you did not receive a copy, you may access it online at the company's Web site at www.preit.com. Also, I would like to remind everyone that we are hosting a live Webcast of the call and that may be accessed at www.ccbn.com, the company Web site preit.com or vcall.com.

At this time, management would like me to inform you that certain statements made during this conference call and in the press release, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Pennsylvania Real Estate Investment Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions.

It can give no assurance that its expectations will be obtained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time with the company's filings with the SEC.

I would now like to introduce Mr. Ron Rubin, Chairman and Chief Executive Officer, and turn the call over to Mr. Rubin, please go ahead sir.

Good morning. Thank you very much.

Before we start, I just wanted to mention that there are several senior officers of the company in the room who will not be participating in the call. George Rubin, who's the President of our PREIT Group and subsidiary. Bruce Goldman, General Counsel of the Company. And then Jeff Coradino, Senior Officer of the company in charge of all of the retail operations of the company.

Participating with me in this call will be Jon Weller, President and Chief Operating Officer of the company. And Ed Glickman, the Chief Financial Officer of the company.

Before we start, I just want to thank those of you who are on the phone, for your support. As many of you know, I've had recent surgery. I'm recovering. I think I'm getting there and feeling fine. But I have been out of the office for about almost four weeks. Last week was my first week back and I'm very pleased to be participating with you this morning. And again, I want to thank those of you for your letters of support and your cards. And some of you even sent books. I thank you.

I'm not going to take up a lot of time in this call, but I do want to mention specifically what I think is a highlight for the company. And I'm very excited over the fact that this coming dividend, which is being paid on March the 15th, to the shareholders and union holders of record, of February 28th is the 40th anniversary of the company's first dividend payment. And it represents PREIT's 100th consecutive distribution since it's original dividend paid in.

Throughout the history of this company, which as many of you know, was one of the original REIT's established back in 1960. The company has never omitted or reduced the shareholder dividend. And to commemorate the company's 100th dividend payment, the officials of the company and some guests and some of our board members will participate in a closing bell ringing ceremony at the New York Stock Exchange, this coming Thursday, March 14th at four p.m. And if any of you happen to be in the neighborhood and want to join with us, we'd love to have you.

OK, now, I'll turn it over to Jon.

Good morning everyone. Thank you, Ron.

FFO for the fourth quarter of 2001 increased by 18.9 percent to $13.6 million over the comparable period in 2000. On a per share basis, FFO increased by 2.7 percent to 77 cents per share from 75 cents per share in 2000. For calendar year 2001, FFO was $2.70 per share compared with $3.06 per share in 2000.

The per share figures for the fourth quarter and calendar year were impacted by a 17.2 percent and 10.3 percent, respectively, increase in weighted average shares and OP units outstanding as a result of the company's two million share offering in July 2001. from the offerings were used to repay a floating rate debt. Also, FFO for calendar year 2000 included $6 million, or 40 cents per share, of lease termination revenues, all as previously reported.

The fourth quarter 2001 revenues increased by 6.6 percent to $37.3 million. For calendar year 2001, revenues increased by 5.1 percent, the result of a four percent portfolio-wide increase in same store revenues and a placement in service of completed development and redevelopment projects. Revenues were converted to net operating income at 67.2 percent margins for the fourth quarters and at 66.8 percent margin for calendar year 2001. NOI growth was 9.3 percent for the fourth quarter and 3.9 percent for calendar year 2001. Eliminating lease termination revenues, NOI growth was 10.5 percent in the fourth quarter and also 10.5 percent for the year.

Same store NOI growth for the retail portfolio, again eliminating lease termination revenues, was .8 percent in the 2001 fourth quarter and 4.9 percent for the year. Growth for the shopping center portfolio was a result of an 80 basis point increase in occupancy to 92 percent at year end 2001 and 5.5 percent sales growth in the mall portfolio to $391 per square foot at year end 2001.

Within the mall portfolio, sales that started in the mall in Massachusetts increased by 19.3 percent, following a renovation in 2000. And sales of trend stores in plaza and Maryland increased by 9.2 percent, following significant remerchandising of in line stores.

The company's retail portfolio has not been impacted by bankruptcies and store closings announced in 2002. Portfolio-wise, only three small stores have been effected by bankruptcy or restructuring in 2002.

With regard to K-Mart, the company has only two K-Marts located in Rio Grande, New Jersey and Hazleton, Pennsylvania. Both stores have strong sales volumes and reasonable occupancy costs in the percentage of sales and were not effected by last Friday's announcement.

The company's multi-family portfolio had an excellent quarter in the fourth quarter of 2001.

Same store NOI growth was 7.2 percent and 3.7 percent for the year. That was 7.2 percent for the fourth quarter and 3.7 percent for the year.

Revenues were up by 2.8 percent in the -- in the quarter and 4.0 percent for the year while operating expenses declined by 2.8 percent in the quarter but increased by four-and-a-half percent for the year.

Utility costs fell in the fourth quarter -- a result of lower unit costs, warmer weather and the effects of the utility sub-metering program completed in 2001.

Insurance costs continue to escalate as previously reported and moving growth of 2002.

Occupancy in the multi-family portfolio fell by 140 basis points -- finishing 2001 at 94.7 percent.

Maintaining occupancy and rent growth will be the challenge for early 2002 as traffic has slowed across the portfolio, while competition from the single family housing market remains strong.

In the fourth quarter of 2001 and early in the first quarter of 2002, we continued the development of Creekview Shopping Center in Warrenton, Pennsylvania with the opening of Bed Bath & Beyond and LA Fitness. And Town Center in Harrisburg, Pennsylvania with the opening of Babies-R-Us.

The renovation and expansion of Willow Grove Park in suburban Philadelphia was completed with a new Macy's supporting other new tenants like J. Crew, Banana Republic and Casual Corner and the center reaching 96.2 percent of mall store occupancy.

For 2002, we expect to build on the results of 2001. Same store growth in the retail and multi-family portfolio is projected -- is projected at approximately four percent.

Redevelopment activities will play an important role in 2002 growth. We are spending approximately $10 million on the redevelopment of March Commons in Florence, South Carolina adjoining our Magnolia Mall.

Target is under construction and the center is expected to reopen early in the third quarter close to 100 percent occupied.

The pace of development has slowed -- impacted by the economy and entitlement issues. We continue to work with some of the strong -- strongest retailers like Target, Home Depot, Kohl's, and Bed, Bath and Beyond. We expect them to respond to the strong sales growth, and signs of an improving economy with a step up in expansion.

Our pipeline of development opportunities and our tenant relationships remain strong.

On the acquisition front, the company is focusing on middle market mall acquisitions, building on our success in growing NOI at properties like Dartmouth Mall and Prince George's Plaza. These properties generally available as free and clear returns with 10 percent and require significant due diligence to determine the potential benefit of renovation and remerchandising.

With all of the company's external growth initiatives the completion of the share offering in 2001 has strengthened the balance sheet to enable the company's to capital on these opportunities.

With those remarks, let me now turn it over to Ed Glickman to continue our prepared remarks.

Thanks, Jon.

The company ended the fourth quarter 2001 with investment in real estate of 834.4 million and increase of 30.8 million or 3.8 percent over 2000's level of 803.6 million. The 30.8 million increase in our investment account represents the net of 46.9 million in new investments, against the sale of properties with the basis of 16.1 million.

In the retail sector we made investments totaling 43.3 million in sold assets with the basis of 11.6 million, for a net increase in retail investment of 31.7 million. The 43.3 million is compromised of 13.5 million in new investments, plus 29.8 million of completed development projects that were previously classified as development in process.

Thirty-one point eight million as a total resale investment can be attributed to major investments in center, Power Centers. The remainder consists of spending on a number of projects, including 3.6 million on phase one of Power Center.

At the end of the year 2001, our investment and development projects had fallen to 52.5 million from 58.2 million at the end of 2000's fourth quarter. The $5.7 million decrease in development investment was the net of 28.6 million of new investments, again, primarily in Power Center at 11.4 million. And will projects 10.7 million. Land sales were the basis of 4.5 million, and the previously mentioned 29.8 million of completed retail properties which were placed in the service.

During the last 12 months, 4.8 million was divested in multi family properties focused towards improvements to existing portfolio assets.

As a result of the above changes on a cost basis, the company's portfolio is now approximately 33.9 percent multi-family, 59.5 percent retail, 6.3 percent retail development and .3 percent industrial.

On the right side of the balance sheet, the company ended the year with debt capital of $506.2 million, down from $524.8 million at the end of December 2000. The decrease in debt comes as a result of the company applying a portion of the proceeds from the summer equity offering to the repayment of construction debt and borrowings under this line of credit.

At the close of 2001, PREIT had $403.7 million of mortgage debt, up from $358.9 million at the end of the year 2000, $98.5 million outstanding against its line of credit, down from $110.3 million at the end of 2000, and $4 million of construction debt, down substantially from $55.6 million at the close of 2000. PREIT's debt is 94.6 percent fixed, including swaps, at a rated average cost of debt of 7.46 percent and a weighted average mortgage maturity at 7.5 years.

During 2001, PREIT's equity market cap rose to $409 million from $287.7 million at the end of 2000. The rise in equity capital plus both our July stock offering of new shares as well as the increase in our stock price, which last year, went from 19.125 to 23.20. As a result of the reduction in debt and the increase in the equity cap, our debt to market cap fell from 64.6 percent at the end of the year 2000 down to 55.3 percent at the end of the year 2001.

From a liquidity standpoint, PREIT ended 2001 with $16.2 million in cash on hand as well as $74.8 million of unused capacity under our bank line. During the coming year, we intend to utilize our balance sheet to provide continued growth for the company through our ongoing development and acquisition programs.

Focusing for a minute on the income statement, PREIT's operating performance, as discussed by Jon, remain remarkably solid during a very difficult year. The company's portfolio wasn't to recession, energy cost, in and driven insurance hikes, delivering up improved operating performance in the face of these many challenges.

In addition to the operating challenges, the company also faced dilution caused by our interim application of the newly issued equity capital to the repayment of what, for us, was very inexpensive debt. In 2002, we will begin to see the positive effect of our increased financial capacity as we bring new assets into the company.

At this time, we are estimating our 2002 funds from operation at $2.73 to $2.77 and our first quarter FFO is between 57 and 59 cents per share.

In 2001, PREIT paid out 75.4 percent of its FFO and 83.1 percent of its funds available to distribution in the form of dividends. This is up from 62.7 percent and 71.7 percent respectively in 2000.

This increase was largely due to the newly issues shares and the decreased in 2001 lease termination income against the remarkably high 2000 level.

Given our expectation for increased FFO in 2002 we hope to see these pay-out ratios again fall as we celebrate the the company's 100th consecutive dividend.

At this time Ron, Jon and I are happy to answer any questions which you may have. Thank you.

Thank you. Ladies and gentlemen, if you have a question at this time please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue please press the pound key.

Again, if you have a question at this time, please press the one key on your touch-tone telephone. One moment, please, for the first question.

The first question comes from Jessica Tully of REMS Group. Please proceed with you question.

Good morning. I was wondering if you could talk about your expectations for the multi-family side? I think you said in the prepared remarks, you expected a four percent gain in same store NOI in multi-family. And I just wondered how you expect -- what -- how that's going to be spread throughout the year because I know probably earlier this -- earlier in the year it's probably tough if you mention the traffic is down and occupancy's been down. If you could talk a little bit about that?

This is Jon Weller. Yes -- I did mention that portfolio-wise, including our retail and our multi-family properties that we expected same store growth in the range of four percent.

We are working extremely hard to keep occupancy at high levels we have traditionally experienced in this portfolio. Occupancy is above 95 percent.

As I mentioned, we slipped slightly below that level at the end of 2001. So keeping occupancy high. Tenant retention is the key to maintaining growth opportunities for 2002.

Also expense management. We referred in the press release to the fact that our utility costs were lower in the fourth quarter of 2001. That is in part because of better conditions both in terms of the unit costs of the utilities as well as the weather.

But it's also a result of our efforts to sub meter as many of the utility costs and pass them on to tenants where those costs were previously being paid by us the donor. So that's a process that goes on for the better part of the year as the tenants -- the spaces are rolled over.

In addition, just either the -- during 2001, our rents -- effective rents increased, you know, by about three percent, two-and-a-half to three percent. And again, you know, maintaining, you know, occupancy costs, not losing rent to vacancies is a critical factor in maintaining the results for the year.

So you know, we know it's going to be a difficult year. We know we're going to be looking at higher insurance costs during the year as we've, you know, previously estimated. So in spite of that, you know, we're still cautiously optimistic that we can maintain growth in the range that we've indicated.

What do you expect your occupancy to be at, at the end of March? Because I guess you probably have a pretty good feel for that right now, what with this the end of February?

We expect it to be, you know, probably a few basis points lower than where we ended up 2001.

Thanks.

Thank you. The next question comes from Melissa Sefl of Lehman Brothers. Please proceed with your question.

Hi, good morning. And just glad to hear that Ron, you're doing well. And just a few questions. First, just following on from the previous question in terms of the same store NOI four percent. Does that mean -- is there, -- you said that's a blended rate. Is there a -- a difference between the two? Retail and multi family? Or are they both expected to be four percent?

They're in the same range. So, you know, within 50 basis points or so of one another.

OK. Great. And on the development side, in your press release you noted that two of the developments on in and one in you decided to not proceed with those. With the development can you give a little detail around that? Because just looking at this third quarter supplemental it looked like it was all ready 67 percent pre leased. Did you sell the development?

What happened in that situation is Home Depot acquired a portion of the property ...

OK.

... in, I'm going to say, early 2001 and they developed their store. We had the ability to go forward and develop the balance of the square footage at that location, which would have allowed us to develop approximately 100,000 square feet more. That's just -- I don't have that number in front of me. It's just an approximate one.

We concluded that the tenant demand for that space was not sufficiently strong and the local had been -- had some issues with some traffic mitigation. And as a result, we determined that the best thing to do was to not to proceed with the balance of that development.

OK.

So, that -- I hope that explains why it went from 67 percent ...

Right.

... to 10.

OK. And do you know what you have -- do you have budgeted for acquisitions in any new developments for this year?

Well, as we've indicated in the supplemental, we have, in the acquisition front -- excuse me, in the development front, we're expecting to start development work at both our northeast tower center property, which is an operating property but does have one vacancy where a Bradley store was going to be developed. That's number one. And number two a project that in South Brunswick, New Jersey. Those are the ones that we have budgeted to start for 2002, which have a total cost of about $32 million.

In terms of the -- of acquisitions, we have forecast, for our internal purposes, an acquisition during 2002 and -- but obviously we have nothing to say specifically in terms of that activity at this time.

OK. Great. Thank you.

Thank you. Again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. One moment, please.

We have a follow-up question from Jessica Tully of REMS Group. Please proceed with your question.

Hi. I just had a follow-up question about the Home Depot property that you decided not to add the small shop space I guess.

Right.

How did you treat the predevelopment costs and what you had already invested in that? Did you expense that in G&A or what did you ?

We wrote the costs off at the end of the year.

Thanks.

Thank you. At this time, Mr. Rubin, we're showing no further questions. I'd like to now turn the program back to you, sir.

OK -- well, I want to thank those of you on the call for your interest in the company and appreciate your participating with us. Again, we have our 100th dividend celebration on Thursday. We look forward to seeing those of you who can be with us at that celebration. And thank you, again, for your interest and we'll see you soon. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Good day.