Pennsylvania Real Estate Investment Trust (PEI) 2002 Q4 法說會逐字稿

Good morning, and welcome to the Pennsylvania Real Estate Investment Trust Fourth Quarter 2002 Conference Call. At this time all participants have been placed on a listen only mode. And the floor will be open for questions and comments following the presentation. At this time I would like to turn the floor over to your host, Mr. Todd Fromer. Sir, you may begin.

Thank you. And thank you all for joining us today for the fourth quarter and year-end 2002 conference call from Pennsylvania Real Estate Investment Trust. Before we begin, I would like everyone to know that this conference call contains certain forward-looking statements within the meaning of Section 21e of the Securities & Exchange Act of 1934, and the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and other matters that are not historical facts. These forward-looking statements reflect PREIT’s current views about future events, and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause future events, achievements or results to differ materially from those expressed by the forward-looking statements.

In particular, PREIT may not be able to consummate the proposed transactions on previously announced terms, favorable terms to PREIT, or at all. Or, if such transactions are consummated, PREIT’s actual results may differ significantly from those expressed in any forward-looking statements.

Certain factors that could cause PREIT not to consummate such transactions or could cause PREIT’s actual results to differ materially from expected results include, without limitation, PREIT’s ability to raise capital through public and private offerings of debt and/or equity securities, the availability of adequate financing at reasonable cost, or at all, PREIT’s ability to negotiate and enter into definitive agreements with respect to the transactions and the satisfaction of closing conditions applicable to such transactions, some of which are beyond PREIT’s control.

In addition, PREIT’s business is subject to uncertainties regarding the revenues, operating expenses, leasing activities, occupancy rates, and other competitive factors relating to PREIT’s portfolio and of properties proposed to be acquired, and changes in local market conditions, as well as general economic, financial and political conditions, including the possibility of outbreak or escalation of war or terrorist attacks, any of which may cause future events, achievements or results to differ materially from those expressed by the forward-looking statements.

PREIT does not intend to, and disclaims any duty or obligation to, update or revise any forward-looking statements or industry information set forth on this conference call to reflect new information, future events, or otherwise. With that said, I’d like to now turn the call over to your host, Mr. Ron Rubin, Chairman and CEO of Pennsylvania Real Estate Investment Trust.

Thank you very much. Good morning. I will be introducing John Weller, President and COO, and Ed Glickman, the CFO of the company, who will be participating in this call. And in addition to them, we have a number of our officers of the company in the room, including George Rubin, who is in charge of acquisitions for the company, and was very much personally involved in the Rouse transaction; Joe Coradino, who really runs all of the retail operations of the company; and Bruce Goldman, General Counsel.

Let me just start off by saying that the fourth quarter of 2002 was highlighted by 14.1% FFO growth and 11.5% increase in FFO per share, and a 16.2% increase in combined net operating income. These results were driven by strong performance by our retail portfolio, where our management team continues to demonstrate its ability to improve occupancy levels and increase base rents.

We are very excited by our recently announced acquisition of six Philadelphia area shopping malls from the Rouse Company. As our strategy shifts more to the retail sector, we are focused on delivering long-term growth for our shareholders. We are confident that through our expertise operational wise, market knowledge, and tenant relationships, we will maximize the performance of our existing properties, as well as the new acquisitions. I am now going to turn it over to John Weller.

Thank you and good morning. Fourth quarter 2002 revenues increased by 17.7%, to $43.3m from $36.8m. The increase in revenues was in line with our expectations, and came from the Beaver Valley Mall acquisition, from the increase of the company’s ownership interest in Willow Grove Park to 30%, completed development projects, as well as internal growth in the company’s retail portfolio.

The increase in FFO exceeded our expectations, and came from the same sources as revenue increases, and also from the capitalization of approximately $600,000 for internal costs related to development activities.

Same store NOI growth for the retail portfolio was 2.9% in the 2002 fourth quarter, and 6.6% for the full year. Growth in the retail portfolio was the result of a 190 basis point increase in occupancy to 94.4% in the fourth quarter, and increase rent from new and renewal leases.

During the fourth quarter the company completed 40 leases, for 102,860 square feet, at an average rent of $27.70. Rents increased by nearly $6.40 per square foot for new leases and previously leased space, and by $4.60 per square foot on renewals.

On a same store basis, occupancy in our Power Center portfolio increased to 99.4%. Our mall portfolio occupancy decreased to 90.8% at the end of the fourth quarter from 93.1%, mainly due to the closing of Ames at Gardens Mall. The company purchased the Ames lease, and is negotiating with prospective higher sales volume tenants to lease the space.

The company’s multi-family portfolio had a flat quarter, in light of weaker demand generally caused by the strength of the single-family home market. Same store NOI increased by 0.1% for the 2002 fourth quarter, and by 1% for the calendar year.

Revenues were up by 2.9% in the fourth quarter, but were partially offset by higher vacancies in concessions, resulting in a 2.2% increase in total same store revenues. The revenue increase was offset by a 5.3% rise in operating expenses, due to increases in insurance costs, in real estate taxes, and real estate taxes for the Florida portfolio. Occupancy in the multi-family portfolio fell by 30 basis points, finishing the fourth quarter of 2002 at 94.4%.

Redevelopment activities continued to play an important role in 2002 growth. The Best Buy Magnolia Mall opened in November. And at the Northeast Power Center, construction commenced for Wal-Mart, with an anticipated opening in the second quarter of 2003.

Our greater emphasis on acquisition and redevelopment in 2002 is due in part to the slower pace of development activity brought on by conditions in the economy and difficulties in the entitlement process. We are continuing to actively pursue two projects of 800,000 square feet, in Newark, Delaware and New Garden, Pennsylvania, as well as a pipeline of tenant-driven projects in our core Delaware Valley markets. In the fourth quarter, the company wrote off its South Brunswick, New Jersey project, as a result of entitlement and tentanting issues.

In 2003 we expect to continue with our redevelopment and development plans. These activities will be a key driver for future performance, as PREIT transforms its strategic focus to the retail market. In 2003 we will complete the redevelopment of Magnolia Mall, with renovated common areas and a new food court. The redevelopment of Prince George’s Plaza will commence in the second quarter, with occupancy of a new target slated for the third quarter of 2004.

With regard to the acquisition of the six properties from the Rouse Company, and the sale of our multi-family portfolio announced on March 6, there is updated information contained in our 10K, which will be filed later today.

To summarize the new information on the Rouse acquisition, agreements with Rouse were entered into on March 7. The Cherry Hill Mall will be acquired by New Castle Associates in exchange for Christiana Mall. The sale of Echelon Mall and in the leasehold, interests including Meeting Mall, require lender consent, which has not yet been obtained. PREIT will acquire the fee interests in Plymouth Meeting Mall, and assume leasing responsibility for the property if the leasehold cannot be transferred until the mortgage is paid off.

And lastly, the New Castle Associates contribution agreement is still under negotiation. The closing of the Rouse mall acquisitions is expected to occur no later than the first week of May. The multi-family transaction is expected to close by July 31. I would now like to turn the presentation over to Ed Glickman.

Thanks John. I would like to start off by first apologizing for the late date of this conference call. Many of you know that we recently changed audit firms from Andersen to KPMG. As a result of our sale last year of Mandarin Corners we had a requirement to set forth our discontinued operations. Without Anderson’s work papers to rely on, KPMG had to complete a three year audit, which took a lot of time. And we appreciate all of their hard work, and our people’s hard work in getting this done.

The company ended the calendar year 2002 with investment in real estate of $953m, which represented an increase of $118.6m or 14.2% over 2001’s year-end balance of $834m. Specifically in the retail sector, investment was up $109m, to $620.3m. That represents a 21.5% increase in retail investment over last year’s balance of $510.5m.

Our investment was comprised of $105m in new investments, up $21.4m of completed projects that were previously classified as development, less 16.6 from the sale of Mandarin Corners, which I just mentioned. $97.9m of the new investment can be attributed to the $61m of acquisition of Beaver Valley, $76.7m increase in the company’s interest in Willow Grove Park, and $7.1m of new investment in many small projects, including Magnolia Mall, and The Commons at Magnolia.

It is important to add that, if you look at our financial statements, $14.1m of investment in Willow Grove Park was reclassified from the development category to re-cal as of 12/31/01, to request that retroactive it [may show] our admission into the Willow Grove Partnership, and will change previously reported asset balances to that effect.

As of the year-end 2002, our investment in development projects had fallen to $24.8m from $38.3 at the end of 2001. This decrease was net of $11.3m of new investments, primarily in Crest Plaza and Northeast Power Center, the previously mentioned $21.4m of completed properties that were placed in [the service], and a reclassification of certain development balances into other assets on the balance sheet.

Multi-family investment increased $22.3m last calendar year. $16.6m of this is attributable to our Regency Lakeside Apartments in Omaha, Nebraska. And $5.7m was on [cruising to our] portfolio assets. As a result of the above changes, on a cost basis the company’s portfolio is 65.1% retail, 32.0% multi-family, 2.6% development, and .3% industrial as of 12/31/02.

On the right side of the balance sheet, the company [unintelligible] 2002 [unintelligible] $617.3m, up from $506.2m at the end of 2001. The increase is largely associated with mortgages from Beaver Valley and Willow Grove, and the company’s net borrowings under the line of credit.

With interest rates at historical levels, and ample credit availability for retail asset purchases, we are currently biased towards long-term fixed rate financing. Of $617.3m of total debt, $486m or 79% was long-term fixed rate mortgages. The remaining $130m was drawn against the line of credit. After accounting for $75m of swap in place, 91% of our outstanding debt was fixed at a weighted average cost of 7.24%, and a weighted average maturity of 6.8 years. The remaining $55.8m or 9% of the debt was floating at 165 over LIBOR.

I am happy to report that in calendar year 2002, PREIT’s equity market cap increased by 17.4% to $480m from the year ago figure of $409m. The rise in equity cap was primarily the result of stock price appreciation - our stock price rose from $23.20 to $26.00 during the year ended 2002 – and the issuance of 831,000 new shares.

The debt and equity changes during the year [as well as?] our debt to market cap resulted in 55.3% at the end of 2001 to 56.3% at the end of last quarter. And that is completely in line with our leverage target. The planning of our recently announced transaction will require the company to borrow funds to acquire the Rouse [outside funds?] with an acquisition term loan. And that will result in a short-term increase in the company’s leverage.

We intend, however, to apply the proceeds from the sale of our multi-family portfolio to repay that term loan, and to reduce the leverage to historic levels. Once that is done, we are confident that the company has the ability to obtain capital, and has positioned itself with sufficient liquidity to meet both its operational and investment goals for the coming year.

At this point in time, Ron, John and I would be happy to answer any questions which you may have.

Questions?

Thank you. The floor is now open for questions. (Caller Instructions.) Our first question is coming from Alexander Goldfarb with Lehman Brothers.

Good morning. First I just wanted to touch base on the enclosed mall occupancy. It was the Ames closure that resulted in the drop? Or were there other things going on?

That was the main contributor to the decrease Al.

Okay. And then in the – and perhaps it’s related – in the P&L, there was a -- it looked like a negative lease term fee. So it looks like you may have paid to close out a lease early.

It was the Ames. It was the - it wasn’t paying to close out the lease early. It was acquiring the lease from the bankruptcy proceeding.

Okay. On the development, the $600,000 roughly that was reclassified and capitalized, just – because I didn’t see the, in the fourth Q supplement. But in the third Q supplement the costs to date on the South Brunswick project were about $730,000. And the write-off was $540,000. I am wondering if you can just walk through this. And then should we expect any of these type reclassifications in ’03?

Okay. Well let’s take it in two parts. As far as, we will speak to the $600,000 reclassification, that reclassification came as a result of KPMG’s reviewing our policies for fact finding, development expenses, and projecting the output. We should take a position that is more the norm that is of the industry, which we did, and capitalize that cost. Secondly, with respect to South Brunswick, part of that was a refundable deposit.

Okay. So going forward in ’03, would we expect any of these? Or this was sort of a one-time?

No. Well going forward we have changed our policy, as suggested by KPMG, suggesting that we compare our worth. And we will be reporting on that basis going forward.

Okay. And can you just discuss the share count? What is the share count as of today, March 31, ’03? And what do you expect for year-end ’03? I noticed that there had been some share count, it looked like accounting adjustment down, and then potentially some share repurchase, which had affected the end of the year FFO number.

Hang on one second Al.

Yeah. Hang on Al.

Okay. All right. There were a number of things happening with the share counts during the year. And obviously every year we issue some shares under different programs. But I think what changed the numbers was a change in the way we reflected restricted stock. Again, this is a suggestion that KPMG made. We had been overly conservative in reflecting the restricted stock that we hadn’t issued prior to when it was [tested?]. So we cut the share count down.

Okay. And so that restated some of the previous quarters then over ’02?

Yes. But obviously every quarter we are doing - we are issuing shares under various employee programs, given reinvestment. And so those things were also working at the same time. We have occasionally used a [super drift?] to issue small amounts of stock as well.

Okay.

So those things are happening in the background also.

Okay. So the share count as of today is what?

It will be –

It’s not in the 10K, because [inaudible] last year’s share count.

So PREIT – okay. We will give you the count as of 12/31. Okay. Actually we will give you at March 6. March 26, 2003, the number of shares is 16,378,195.

Fifteen?

Sixteen. This is shares, by the way. 16,378,195.

And then the OPs?

The OPs we can give you as of the end of the year.

Okay.

And just give me one second. The OP units at the end of the year were 1,763,318.

Okay. And then what do you expect the share count to be at the end of ’03?

I can’t give you any hypothesis as to what our share count is going to be at the end of ’03.

Okay. Thank you.

Thank you. Your next question is coming from Liz Watson with Legg Mason.

Good morning. Or I should say good afternoon. The question I have – or can you share with us yet what you plan to do with the Rouse malls that you are buying, in terms of any repositioning, leasing out? Particularly Echelon, which I know has two dark anchors.

Well let me just say that we have looked at that entire portfolio with a great deal of confidence. The Echelon property, as you say, as you have stated, is probably the most challenging asset in the portfolio. But our – you know, obviously we don’t yet own these properties. And we cannot really go to the marketplace.

So a lot of our – and a lot of my comments will be instinctive, and just based on the discussions that were held in the company. We are very positive about the possibilities for that property. And without going into specifics, we have a very strong retail leasing operation. And before this acquisition was made, we discussed in detail a lot of concepts for those assets. And rather than go any further, I will just say keep tuned.

We will. You all had an exciting year recently. What was the average occupancy of the Rouse – of those six centers that you will be acquiring?

Hold on one second, and we will find that for you.

Okay.

Ninety percent.

Ninety. Okay. All right. Thank you very much. That’s it.

Thank you. (Caller Instructions). Our next question is coming from [Martin Roher] with [MSR] Capital Management.

Thank you Operator. And thank you for the call. It is a little bit delayed, as you pointed out. I had a question about your general philosophy on your dividend payouts going forward. You have done a wonderful job in growing the FFO. And given the forecasts you have for 2003, obviously it’s well above what the industry average is doing. How do you look at dividend payout versus repositioning the balance sheet, with using that cash flow for debt payback?

We have always been very conservative in paying out dividends, because we want to preserve as much of the capital as we can for the company, while within such a heavy growth model. Obviously we are limited by the [re-tax rules], and are constantly keeping that in mind in determining our policy. But we’re currently comfortable with the dividend where it is. We think we’re in compliance.

So in other words, you’re just going to raise it as your net income requires it to be dividended out under the REIT rules. Is that what I am hearing? Or - ?

Well currently we’re in a pretty heavy investment mode, as you can see from all we’ve been doing lately.

Right.

And so we are taking a relatively conservative path, trying to preserve as much capital as we can in the company. To the extent that would change in the future, our strategy would change, or events would occur that would have us reconsider, we would do so. But we have a model of the company, and a tax position that we’re constantly checking to make sure that we’re performing.

And our goal is to maintain as much of the capital as we can in the company. And while we have such good growth opportunities, should the growth slow down, we’d consider expanding the dividend.

Okay. Thank you very much.

Thank you. Your next question is coming from David Shulman with Lehman Brothers.

Good morning. Could you discuss what’s holding up the lender consent on several of the malls?

David, there is nothing necessarily holding up the lender’s consent. It’s not within our direct control. And the loans are in a [remick?] or facet that requires trustee approval. And so that has to be completed.

Okay. And you expect that to be completed on closing?

At this time we don’t know for certain. But we have terms in the transaction with Rouse that allow us to go ahead, as I mentioned in my comments, with the purchase of a fee interest in Plymouth Meeting Mall, under any circumstance, if the conveyance of the leasehold interest is delayed. And we have a provision, which you will see in more detail in the 10K, in Echelon Mall, which calls for a price credit over a six month period if there is any delay in conveying Echelon Mall to the company.

Okay. The issue here, if anything, is more technical than real, right?

That’s correct.

Okay. Thank you.

Thank you. Your next question is coming from [Hall Jones] with [AEW] Capital Management.

Yes. I missed the first couple minutes. So if this is a repeat, I apologize. But I was wondering if there was any update or any comment you could make on the sizeable portfolio that is in – was in negotiate as of the last press release, for the Rouse transaction.

Yeah. I think it’s premature for us to comment any further beyond what was said in our press release on March 6 at this time.

Okay. Thanks.

Thank you. Your next question is coming from Alexander Goldfarb with Lehman Brothers.

Hi. Just a quick follow-up. What are your current plans on staffing? Do you plan to increase staffing with the pending Rouse deal? And if you can just comment on that.

Al, we have done an extensive analysis of staffing. Of course the property level personnel, which is the majority of the incremental staff, will change. But some vast – to [unintelligible] for the majority of those people we’ve already announced to meet with all of them, and have begun the integration process.

We do expect to bring some additional staff into the PREIT home office in the form of additional leasing personnel, asset management and finance in particular. And there may be a few other categories that I’ve missed. And if you recall, in our press release from March 6, we had an estimate of the incremental G&A for the company as a result of those additional hires.

Okay. And if you were to do the other potential transaction, you would have to increase SG&A more than that? Or this increase will allow you to go forward.

Yeah. We have no comment on that.

Okay. Thank you.

Thank you. (Caller Instructions). Gentlemen, we are showing no further questions in queue at this time.

Okay. We just want to thank you all for listening in on this call. And we’re certainly available to respond to your questions beyond this call, if you want to contact either John, Ed, or myself. We’re excited about the company’s prospects moving forward. And we thank you for your interest.