Pennsylvania Real Estate Investment Trust (PEI) 2003 Q2 法說會逐字稿

Welcome to today's Pennsylvania Real Estate Investment Trust second quarter earnings conference call. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Todd Fromer.

Thank you, and thank you all for joining us for PREIT's second quarter 2003 earnings conference call. 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 and uncertainties, assumptions in changes and 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 able to consummate the sale of its remaining joint venture multifamily properties on favorable terms if at all, and may not be able to consummate the merger with Crown, or if such transactions are consummated, PREIT's actual results may differ significantly from those expressed in any forward-looking statement. Certain factors that could cause PREIT not to consummate such transactions, include, without limitation, the satisfaction of closing conditions applicable to such transactions, some of which are beyond PREIT'S control.

In addition, PREIT'S business subject to uncertainties regarding their revenues, operating expenses, leasing activities, occupancy rates and other competitive factors relating to PREIT'S portfolio, and the 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 in this conference call, to reflect new information, future events or otherwise. In connection with the proposed merger between PREIT and Crown American Realty Trust referenced in this conference call, PREIT and Crown American Realty Trust intend to file a joint proxy statement prospectus on Form S4 and other materials with the Securities and Exchange Commission. Security holders are urged to read these materials when they become available because they will contain important information. Investors and security holders may obtain a free copy of these materials when they become available, as well as other materials filed with the Securities and Exchange Commission concerning PREIT and Crown American Realty Trust at the Securities and Exchange Commission's website at www.SEC.gov.

In addition, these materials and other documents filed by PREIT may be obtained for free by directing a request to Pennsylvania Real Estate Investment Trust at the Bellview (ph) 200 South Broad Street, Philadelphia, PA 19102, attention, Investor Relations. These materials and other documents filed by Crown American Realty Trust may be obtained for free by directing a request to Crown American Realty, at Pascerilla (ph) Plaza, Johnstown, Pennsylvania, 15901, attention, Investor Relations. PREIT and Crown American Realty Trust and their respective trustees and executive officers and other members of their management and employees may be deemed to be participants in the solicitation of proxies from the shareholders of PREIT and Crown American Realty Trust in connection with the merger. Information about the trustees and executive officers of PREIT and their ownership of PREIT shares is set forth in the proxy statement for PREIT'S 2003 annual meeting of shareholders, which was filed with the Securities and Exchange Commission on April 30th, 2003.

Information about the trustees and executive officers of Crown American Realty Trust in their ownership of Crown American Realty Trust stock is set forth in the Crown American Realty Trust annual report our Form 10-K and the amendment to its Form 10-K filed with the Securities and Exchange Commission on March 31st, 2003, and April 22nd, 2003, respectively. Investors may obtain additional information regarding the interests of such participants by reading the joint proxy statements' prospectuses when they become available.

With nothing further, I'd like to turn the call over to PREIT President, Mr. Jonathan Weller.

Thanks, Todd, and good afternoon, everyone, and thank you for joining us today for our second quarter, 2003 conference call. With me today is our Chief Financial Officer, Ed Glickman, along with George Rubin, President of PREIT Services LLC, Bruce Goldman, Executive Vice President and General Counsel, and Dave Bryant, Senior Vice President of Finance and Treasurer.

During the second quarter, the Company completed two major and exciting transactions, and announced its pending merger with Crown American Realty Trust. The Company acquired six (indiscernible) from the Rouse (ph) Company in the Philadelphia market, and divested 15 of its 19 multi-family properties. We have now completed the first phase of the transformation of the Company to a focused retail REIT. Currently, the Company owns 28 retail properties with 17.5 million square feet, a 47 percent increase from the end of the first quarter. Assuming the closing of the Crown merger in the fourth quarter, the Company will own 54 retail properties with 33.7 million square feet.

In the second quarter of 2003, net income increased to 144.6 million compared to 4.4 million in the second quarter of 2002. Results for the second quarter 2003 included the $154.5 million gain on the sale of 15 multi-family properties. On a per-share basis, net income rose to $8.70, from 27 cents, reflecting the substantial gain in the multi-family sales.

FFO for the second quarter of 2003 increased by 17.1 percent to 14.8 million, over 12.7 million, in the comparable period in 2002. On a per-share basis, FFO increased by 14.3 percent to 80 cents per share from 70 cents per share in 2002. Second quarter 2003 NOI increased by 34.2 percent to 27.4 million from 20.5 million. Considering the timing of the Rouse (ph) acquisition and multi-family disposition, the increase in revenues and FFO were in line with our expectations.

Revenues for the retail portfolio were converted to net operating income at a 66 percent margin for the second quarter of 2003 compared with a 72.5 percent margin for the second quarter of 2002. The principal reason for the decrease in margin is higher operating expenses in the newly acquired mall portfolio, including significantly higher real estate taxes in New Jersey. These factors were considered in the underwriting process.

Same-store NOI growth for the retail portfolio decreased 2.4 percent, or $277,000 in the 2003 second quarter. There were no lease termination payments in same-store NOI in the second quarter of 2003 -- compared with $464,000 of lease termination payments for the second quarter of 2002. On a same-store basis, including anchors, our mall portfolio occupancy decreased to 90.4 percent at the end of the first quarter, from 93.8 percent, mainly due to the closing of Aims (ph) a Dartmouth (ph) Mall.

The Company purchased the Aims lease, and has executed a non-binding letter of intent for the sale of a pad (ph) site to the May Company for the addition of a 140,000 square foot Feline's (ph) department store. Same-store occupancy for the in-line mall space increased to 88.7 percent from 87.4 percent in the second quarter of 2002. At Northeast Tower Center, Wal-Mart opened during the second quarter of 2003, making that center 100 percent occupied.

To summarize the information on our recent transactions, PREIT acquired four of the six Rouse properties, Cherry Hill Mall, Moorestown (ph) Mall, Edison Square Mall and the Gallery at Market East, in late April. and the remaining two Rouse properties, Echelon (ph) Mall, and Plymouth Meeting mall in early June, for a total price of approximately $550 million. Fifteen of the 19 multi-family assets were sold in April and May. The remaining two wholly-owned multi-family properties were sold after the close of the quarter, in late July.

The remaining two multi-family joint ventures are under agreement to be sold to the Company's joint venture partners, and are expected to close later in the third quarter. The total price of the multi-family portfolio will be approximately 417 million.

We are proceeding with the documentation to complete the Crown merger process, and have adjusted the expected closing date to the midpoint of the fourth quarter. Since announcing the merger in May, we have been spending a significant amount of time preparing for the integration of the staffs and operating platforms of the companies.

I would now like to turn the presentation over to Ed Glickman.

Thanks, John. The company ended the second quarter of '03 with investments in real estate of 1.239 billion, an increase of 302.9 million or 32.3 percent over 2002's comparable balance of 936.6 million. Specifically in the retail sector investment in real estate was up 521.9 million to 1.15 billion, representing an 82.9 percent increase in retail investment over last year's balance of 629.4 million. This 521.9 million of total retail increase was comprised of 526.5 million of new investment, plus 12.2 million of completed projects that were previously classified as developed (indiscernible) 16.8 million from the sale of Mandarin Corners in Jacksonville, Florida.

The bulk of the new investment is clearly attributed to the previously discussed acquisition of six regional malls from the Rouse Company. The remainder of new investment consists of spending on a number of smaller projects, primarily at Magnolia mall in the Commons at Magnolia. At the end of the second quarter of '03, the Company's investment in development projects had fallen to 13.2 million from 19.1 million at the end of the second quarter of '02. The $5.9 million decrease of development was the net of $9.2 million of new investment at Crest Plaza in Magnolia Mall, the sale of a parcel at Crest Plaza for 2.9 million, and the previously mentioned 12.2 million of completed retail properties that were placed into service.

The substantial completion of PREIT's multi-family disposition strategy has caused a reduction in multi-family investment of 231.3 million. This reduction, coupled with a 16.6 million increase from the purchase of the full interest in Regency Lakeside Apartments in Omaha, Nebraska has left the Company at the close of the quarter with 72.4 million invested in multi-family assets. This amount is attributed to the four remaining multi-family assets, each of which has either been sold or is under contract to be sold at this time. As a result of the above changes on a cost basis, the Company's portfolio is now approximately 92.9 percent retail; 5.9 percent multi-family; 1 percent retail development; and .2 percent industrial.

On the right side of the balance sheet, the Company has finished the second quarter with (indiscernible) capital of 837.1 million, up from 606.2 million at the end of last year's second quarter. The increase is largely attributed to the difference between the increase in debt required for the acquisition of the Rouse Company assets, which was 175 million of bridge (ph) and 277 million of (indiscernible) mortgages; the net debt increased on the refinancing of Dartmouth Mall and Moorestown (ph) Mall of 93 million; and the reductions thereafter that came from the proceeds of the multi-family disposition -- 151 million of wholly-owned mortgage payoffs and 10 million of JV mortgage payoffs, 161 million pay down of the bridge.

With interest rates at historical lows and ample credit availability for retail asset purchases, the company is biased (ph) towards long-term fixed-rate financing. Of the 837.1 million of total debt at the end of the second quarter, 699 million or 84 percent was long-term fixed-rate mortgage debt. The remaining 138.1 million or 16 percent, was drawn against the Company's secured line of credit, the acquisition term loan and the unsecured revolver. After accounting for $175 million in swaps, 93 percent of the outstanding debt was fixed at a weighted average cost of 7.07 percent and a weighted average maturity of 5.3 years. The remaining 63 million or 7 percent of the Company's debt was floating at 225 basis points over LIBOR.

Since the second quarter of 2002, PREIT's equity market cap increased by 15.5 percent to 565.9 million from the year ago figure of 489.9 million. The rise in equity cap was primarily the result of stock price depreciation of $27.11 to 29.95 per share during the year, and the issuance of 822,000 new shares and units. The debt equity changes during the year have caused our debt-to-market cap to increase from 55.3 percent at the end of the second quarter 2002 to 59.7 percent at the end of the second quarter 2003.

That being said, subsequent to the close of the second quarter, the Company completed the sale of its remaining two wholly-owned multi-family properties, Emerald Point in Virginia, Lakes (ph) and Regency Lakeside in Omaha; and these sales resulted in 33.8 million reduction in mortgages; and the balance of the sale of proceeds will be used to pay (indiscernible) the acquisition term loan down fully, and the unsecured revolver to a zero balance. The remaining $24 million was used to pay down pre-secured credit facility, returning the Company's leverage to its target levels.

It is important to note that the actual closing dates for the Rouse property acquisitions and the multi-family dispositions are identified in today's press release. The timing of these transactions may have an effect on analysts' earnings models of the company for both the second quarter and the full year '03. Furthermore, for modeling purposes, (indiscernible) exchange its estimated closing date of the Crown American merger to November 17, 2003. This change called for a downward revision of the Company's '03 FFO per share estimate to a range of 3.18 to 3.30. The decrease can be partly attributed to the shortened time during 2003 in which PREIT will benefit from the companies' combined operations, which we expect to be accretive. Additional dilution is created by the onetime charge of 6.75 million, which is an expense that is spread over a decreasing number of weighted average shares at the closing is pushed closer to the end of the year .

At this time, we're still assuming that we will begin 2004 as a merged company, and we're maintaining our current earnings guidance for next year.

At this time, John and I will answer any questions that you may have.

Alexander Goldfarb with Lehman Brothers.

Good afternoon. First, in light of just the changes in interest rates, has anything gone on with marked to market of debt or any of the interest rate adjustments that were in the pro forma for either the Crown or Rouse transactions?

Actually, we keep looking at our model and have changed our view of interest rates to more than one cents since we first started modeling the transaction. The marked to market is set on the Rouse properties, but won't be set on the Crown properties until closing. So, obviously, depending upon where interest rates end up at that point in time, it may have come impact on the company.

Okay. So the guidance's predicated on the interest sort of add back that reduces interest, that will change them.

Yeah, the marked to market adjustment is taken at closing. So since we can't know what those rates will be, we are estimating it now; but obviously, it won't be set until close to the end of the year.

Okay. With the Willow Grove (ph), there's an option to buy in in your JV partner. Have you reached a decision on that, or what's the timing of the decision?

This is Jonathan Weller. The option is available to us -- a period (indiscernible) two years following the opening of the Macy's store at Willow Grove; that would be this coming November. It is something that we are discussing. But, a decision has not been reached.

Okay. And, I noticed the straight line rents went up a lot from this year versus last. Is that all attributed to the Rouse? Or are there other things going on there?

It is attributable to the new properties.

Okay. And then going to your G&A, it seemed to have been up about 1.4 million. Was there a dramatic increase in G&A? Or, was there a perhaps a onetime charge in that number?

The G&A increase is composed of about 20 different items. But, a significant number of them on the list relate to the transactions that we're in the middle of, either directly or indirectly.

Okay. So, you'd expect that to sort of go back down?

We expect some of them to go away. For instance, we expect a significant amount of money at this year's ITFE (ph) Convention, for instance on additional publicity and other things that were obviously related to the transactions that we were announcing at the time. And so, those things will probably be a onetime event.

Okay. And then, final question is on -- hold on... Can you just talk -- in the press release it said that substantially all of the gain from the apartment sale would be used in 1031 (ph) on the mall purchase. What portion will not be? And, what's the tax implication?

The second quarter results in the paragraph on the second page of the press release talk to a gain of $150 million on the 13 wholly-owned properties. Obviously, the number that relates to the sale of the additional properties (indiscernible) is going to increase the amount of that gain. And so far on a percentage basis, we're about 90 percent sheltered. One cannot shelter JV properties, and there were a couple of properties where the gains were small enough. But it didn't (ph) make sense to go through the process of trying to find exchanges. And, we don't foresee that there will be a significant overall impact from the residual amount of gain.

Okay. So not much tax to the shareholders.

Right. We will have to go through that when the last two properties are sold, though.

David Fick with Legg Mason.

Good afternoon. Can you just comment on where you stand right now in assessing the -- particularly the Crown portfolio but I guess also the Rouse portfolio -- CapEx requirements? And the forward leasing program now that you've had another quarter to look at those assets?

Hi, Dave. It's John. We have continued to update on our model on the both the Rouse assets and the Crown assets. The Rouse assets, we're in the middle of -- budgeting season -- or the beginning of budgeting season now.

We don't have anything that we're prepared to announce to the marketplace, in terms of our estimated CapEx requirements for either the Rouse assets or the Crown assets, going forward. We're not ready to do that at this time. But, we feel very confident that we've got our arms around the leasing requirements and the Rouse assets. And, we are refining our estimates and plans on the Crown assets, as we speak.

Would you say you see more upside in your first year cap rate assumptions, or less, or the same, versus your original projections for them?

I would, you know, I would say the same. I don't think we're prepared to add any different color to that.

Greg Andrews with Green Street Advisors.

Good afternoon. Could you just remind us what the $6.75 million charge is for this year?

Greg, it's for some of our consulting costs, that (indiscernible) we have hired to assist us in the integration process. And, it's also for anticipated payments to members of the PREIT staff.

I'm sorry -- and that's for?

These are transition workers, bonus payments and (multiple speakers) --

Consulting fees.

Consulting that I mentioned.

Okay. So it's basically -- it's non-recurring.

That's right.

It's just related to the transactions this year.

But these are not expenses -- these are not costs that are -- that we're able to capitalize. These are costs that we are required to expense.

Right. Okay. In the quarter, do the results include the couple of million dollars -- essentially, kind of brokerage fee, related to the sale of Christiana Mall?

Yes, they do, Greg.

Okay. And then lastly, in terms of the mall portfolio, do you have the comp store sales for the tenants for the quarter and maybe year-to-date?

For the individual tenants?

Well, no, in aggregate, for your portfolio.

In aggregate, yes we do. I have that in front of me. The aggregate number for the portfolio, including the centers that were recently acquired is 3.43 (ph) per square foot. Okay? On a same-store basis, it was 380. By same-store, I mean that, you know, compared to the properties that were in the portfolio a year ago.

How is that changed? Is there a percentage change there that you can highlight?

Greg, first of all, I will highlight it, but these numbers are in the -- are in the supplemental. But, the 3.80 on the same-store basis, which I think is the only meaningful comparison, really, because otherwise you're comparing a completely different sample -- it's actually unchanged. It was 380 in the same period one year ago.

Okay. Thank you.

Jonathan Miniman (ph) with I&G Clarion (ph).

It's Tim Campbell. Can you just refresh my memory on the major capital elements that you take over from the Crown? My memory is, there's a Preth (ph) and a Remeck (ph ), and how you deal with those, and any other debt, and ultimately, how you plan to reduce the cost of capital from that portfolio.

This is Ed, Tim, and I will go through those with you. There's an outstanding preferred stock issue which cannot be altered, and PREIT will be issuing its preferred stock to the holders of the Crown preferred stock, so that will actually stay in place. It is redeemable at a slight premium. I think that is approximately in four or five years from now. And that premium declines thereafter for the next couple of years; I think it's (indiscernible) in seven or eight years.

There is a Remeck outstanding with GECC. And that, we will assume as well. It allows for some amount of substitution. And, we made move certain assets into or out of it, as we can. We are intending to put fixed assets into a special financing, and, we are working out the details of that as we speak. And it's our intention to liquidate those assets over the next few years. There are a few assets with individual mortgages on them that -- those mortgages will stay in place.

The Remeck, obviously, since it was put in place a number of years ago, is at rates that are above the rates that one would need to pay. We are going to try to do that financing today. But, you know, it has yield maintenance and other things that will keep the cost of capital there relatively steady over time.

It's our general intention to reduce the level of leverage at the Company by going out into the equity market when that becomes feasible and prudent. And, I think we would all be happier with the Company with slightly less leverage than it will have pro forma before the transaction.

And the six assets are going to go in this special financing vehicle. Have you identified them, or could it be seven or could it be five, or is it six, ironclad?

It's not six ironclad, as that will depend on our ability to move some assets into and out of the Remeck. It also -- and that's a pretty difficult process that we're going to be going into. So, it will depend on how that works out. And, you know, this was based on an analysis of the assets that we did a number of months ago. And obviously, that is fluid as we learn more about the individual properties. But, what I'm telling you is what our plans are at the moment.

Is there any way to put a dollar value on that six?

Well, it will obviously depend on which six it is, and that is, you know, going to depend again on the holders of the Remeck and the special servicer (ph) and a whole bunch of circumstances. But, I think, in general, we're talking about a group of assets that are probably worth somewhere less than 10 percent of the overall capitalization of the company. (multiple speakers) -- by Company, I mean Crown.

I'm just trying to get an -- you know, for modeling purposes, some idea of how this thing plays out -- that's all.

Right. Well, it's complex to model it, and there's a lot of variables up in the air. Hopefully, that will become more transparent as we move along in the process. But it is complex because we are trying to deal with a number of factors at once.

Do those have to be settled before you file a proxy?

No, I don't think so. We're going to file a proxy with the information as we know it at the moment. Obviously, this is a process that we've started and will take us some months before we finish. So the proxy will be, you know, our understanding of the transaction as it is when we file it.

Alexander Goldfarb with Lehman Brothers.

Just some follow-up questions. Your swap that matures in December of '03 -- what are your plans for that? Are you going to renew? Are you going to try and fix?

Well, again, there's a number of variables that are up in the air, one of which is how much debt we have outstanding and what form that debt is. It's unlikely that we're going to deal with debt that has significant yield maintenance requirements. So if you think about it, the debt that's available to work with is the floating rate and similar debt. And that's the debt that is currently swapped. So, I think what we do with the swap, and the reason we haven't addressed it as of yet is because it will depend on what we do with equity over the coming months.

Okay. Okay. And, on the percent rent, just comparing this year to last, while the Rouse contributed to revenue, it looks like the percentage rent actually declined.

Well, there was a slight decline in the percentage. But it was, I think, a minimal amount. And some of it represents the conversion of percentage rents of fixed minimum rents through stipulating increases in the leases.

Okay. Is that -- that's an annual occurrence?

Yes, that is generally an annual occurrence. But it has to do with which leases come due at -- you know, renew at which points in time.

Okay. And then just a final question. Your expense recovery on the Rouse assets -- is that pretty close to what you pro forma-ed and to the existing portfolio. Or is there any difference?

I think we're going to have to get back to you with an answer to that question as we get more in-depth familiarity as to how those properties are performing.

Liz Watson with Legg Mason.

Not that you haven't done an enormous amount of acquisitions and dispositions -- are there any other acquisition projects or development projects that you're working on this fall? Or working on that could also be acquired this fall?

Hi, it's John. The question that we received about Willow Grove (ph) is obviously something that we're addressing actively because of the time frame. But, we don't expect to have any other announcements, based on what's going on right now.

Can you just comment on your development comments -- if they're on-track? And will there be any new development projects coming online?

We have a very active development pipeline that we have not disclosed the details of, because the projects are not far enough along in the process in order to do so. The ones that, you know, we have talked about -- the Christiana Tower Center in New Garden (ph) Township, have experienced some delay. But we've talked at length about the Christiana project, which is the subject of some litigation between the company and the Delaware Department of Transportation. So, that's really affected the timing of that project. And, we -- to the extent that other produce mature to the point where their timing can be estimated and the costs can be reasonably estimated, we will, you know -- we will let you know.

The dates in the supplemental -- where they're pushed back to 2005 are good dates?

Well, again, the Christiana project, by way of example, Liz, is subject to some unresolved litigation. So, it's really, I mean, that's our best guesstimate.

Okay. So there's no development projects coming on for 2004?

I'm sorry, Liz, I just got distracted there.

There's no development projects coming online in 2004?

No.

Okay.

Liz, let me just say, the general point that we are always looking at acquisition opportunities and disposition opportunities within the portfolio. But, there's nothing that is sufficiently advanced or material for us to discuss at this time, other than what I've said.

Okay. Just trying to get a sense if I -- for modeling purpose.

Right.

Okay. Thanks, very much.

There are no further questions in queue at this time, so I will turn the conference back over to our speakers for any additional or closing remarks.

This is John Weller. Thank you for calling in, and thank you for those of you who asked questions. We will be happy to talk to you further off-line. And we look forward to speaking with you again soon. Have a good day.

This does conclude today's conference call. You may now disconnect. We do appreciate your participation.