Pennsylvania Real Estate Investment Trust (PEI) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Pennsylvania Real Estate Investment Trust third-quarter earning results conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Mr. Todd Fromer. Sir, you may begin.

Thank you, and thank you everyone for joining us for PREIT's third 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 21 E 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 merger with Crown, or if such transaction is 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 the transaction include, without limitation, the satisfaction of closing conditions applicable to the transaction, 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 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.

Some, or all, of such factors may also affect anticipated operating income for 2004 from Willow Grove Park and the forecast issued today. Such forecast may also be impacted by the ability of the Trust to integrate the Crown properties efficiently and successfully following the anticipated merger.

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 of future events or otherwise.

In connection with proposed merger between PREIT and Crown American Realty Trust referenced in today's press release, PREIT and Crown American Realty Trust have filed 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 because they contain important information. Investors and security holders may obtain a free copy of these materials, 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 web site 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 Bellevue, 200 South Broad Street, Philadelphia, Pennsylvania 19102, attn: 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 Trust at Pasteurella Plaza, Johnstown, Pennsylvania 15901, attn: Investor Relations.

With nothing more, I would like to now turn the floor over to Mr. Ron Rubin, Chairman and Chief Executive Officer of Pennsylvania Real Estate Investment Trust. Ron, the floor is yours.

Thank you, very much. Good morning everyone. I appreciate the fact that you are joining us today for our third quarter conference call. Participating in the call with me today with me today are Jon Weller, President and Chief Operating Officer of the Company and Ed Glickman, Executive VP and Chief Financial Officer of the Company. And in the room, although not participating in the call, but may be available for your questions, are George Rubin, President of PREIT Services; Dave Bryant, Treasurer of the Company; and Bruce Goldman, General Counsel.

First I'm pleased to report that our merger with Crown American Realty Trust is on track. The special meeting of shareholders to consider and vote on the approval of the merger agreement is scheduled for next Tuesday, November 11th, at 11:00, with the Crown shareholder meeting to be held at the same time. We anticipate closing the merger several days following the meeting.

In August, the Company completed an equity offering of approximately 185 million. Part of the proceeds were invested in acquisitions of our partnership share at Willow Grove Park, and approximately a 6 point acre parcel adjacent to Plymouth Meeting Mall, a former IKEA store.

In addition, we were happy to declare a 5.9 percent increase in our quarterly dividends effective December the 15th from 51 cents per share to 54 cents per share, which is consistent with the increase provided for under the merger agreement with Crown. On an annualized basis, our dividend will increase from $2.04 to $2.16 per common share.

Currently we are in the final stages to replace our $200 million secured line of credit facility with a $500 million unsecured revolving line of credit with Wells Fargo as a lead agent. The new facility will enable PREIT to pursue future opportunities.

For now we look forward to the completion of the Crown transaction, which will position the Company as a major mall owner with strong prospects for future growth as a result of our larger platform.

And now I would like to turn the call over to Jon Weller.

Thanks, Ron, and good morning everyone. In the third quarter of 2003 net income increased to 34.9 million compared to 8.2 million in the third quarter of 2002. Results for the third quarter of 2003 included the $34 million gain on the sale of our final four multifamily properties. On a per-share basis, net income rose to $1.79 from 49 cents, reflecting the substantial gain from the multifamily sale.

FFO for the third quarter of 2003 increased by 17.9 percent to 14.5 million, over 12.3 million in the comparable period in 2002, reflecting the impact of the Rouse Malls acquisition, and acquisition of the remaining 70 percent of Willow Grove Park. FFO per share is unchanged at 67 cents, reflecting the dilutive effect of the equity offering completed in the third quarter, the termination of interest rate swaps to the line of credit, and nonrecurring costs primarily related to integration.

Third quarter 2003 NOI increased by 65.1 percent, 31.7 million from 19.2 million in the third quarter of 2002. Same-store NOI for the retail portfolio decreased 2.2 percent, or $312,000, in the 2003 third quarter. There was $15,000 in lease termination payments in the same-store NOI in the third quarter of 2003 compared with $341,000 of lease termination payments for the third quarter of 2002.

On a same-store basis, including anchors, our mall portfolio occupancy decreased to 91.1 percent at the end of the third quarter from 95.3 percent, mainly due to the closing of Ames at Dartmouth Mall, and at Lehigh Valley Mall the closing of General Cinema, and the accumulation of space to accommodate the opening of Hollister in the fourth quarter.

The Company purchased the Ames lease, and has executed a executed a non-binding letter of intent for the sale of a pad site to the May Company for the addition of a 140,000 square foot Filene's Department Store, which is expected to open in the fall of 2004. Same-store NOI is impacted by both the loss of income from May, and the amortization of the purchase price of the Ames lease over its remaining life.

On the completion of Filene's, revenues will be generated from new small shops' GLA and kiosks, recovery of real estate taxes from Filene's, as well as expected rent growth due to the presence of a fashion anchor.

In the third quarter the Company completed the acquisition of the 70 percent of Willow Grove Park owned by Pennsylvania State Employee Retirement System for $122 million, including debt of $77 million, bringing the Company's ownership to 100 percent. Controlling this asset is central to the Company's strategy of utilizing its dominant mall position in the greater Philadelphia market through leasing leverage throughout the portfolio. The purchase price equated to 9 percent cap rate on forecasted NOI.

The Company also acquired for approximately 16 million the vacant former IKEA store at Plymouth Meeting Mall. This parcel was important to the Company's plan to add one or more new anchors to this well located asset.

In anticipation of the completion of the merger with Crown American Realty Trust in November, the Company has spent considerable time and money on the integration of the organizations. With about two weeks to go before closing, we're substantially complete in the reorganization of our retail operating group to accommodate the expanded portfolio.

In addition, we have added talent to our leasing and asset management groups, some from the Crown American organization and some from the outside. The effort to integrate the organizations has resulted in some incremental expenses, including a substantial portion of the $500,000 in extraordinary expenses incurred in the third quarter, which are not expected to recur in 2004.

We're optimistic that our integration efforts will result in a smooth transition, and will allow us to effectively manage and lease the expanded portfolio.

I will now turn over the presentation to Ed Glickman.

Thanks, John. The Company ended the third quarter of 2003 with investment in real estate of $1.31 billion, an increase of 383.6 million, or 41.4 percent over 2002's comparable balance of 926.4 million.

Specifically in the retail sector, investment in real estate was up 675.3 million to 1.29 billion, representing a 109.9 percent increase in retail investments over last year's balance of 614.6 million. The 675.3 million of total retail increase was comprised of 663.4 million of new investments, plus 11.9 million from completed projects that were previously classified as developed.

The bulk of the new investment is due to the previously announced acquisitions of six regional malls from Rouse, and the more recent purchases of the 6 acre parcel adjacent to Plymouth Meeing Mall, and our partner's 70 percent interest in Willow Grove Mall. The remainder of new investments consists of spending on a number of smaller projects, including Magnolia Mall in Florence, South Carolina.

The completion of PREIT's multifamily disposition strategy has caused a reduction in multifamily investment of 287.4 million over last year's balance. This figure represents the full amount of the prior year multifamily investment on the balance sheet, which has at this point been reduced to zero. As a result of the above changes, the Company's portfolio is now substantially concentrated in operating assets in the retail sector.

On the right side of the balance sheet, the Company finished its third quarter with spare capital of $739.1 million, up from 599.4 million at the end of the third quarter of 2002. The jump is largely attributed to the differences between the increase in debt required for the acquisition of the Rouse Company assets, the net debt increase from the refinancing of Dartmouth Mall and Watertown Mall, the reductions occurring from the assumption of the multifamily debt by the purchasers, and the application of cash out proceeds to reduce short-term borrowing. Additionally, the bulk of the proceeds from the Company's 6.3 million share offering was used to reduce the line of credit balance reserve.

At the end of the third quarter the full amount of the Company's $739.1 million total debt was, therefore, long-term, fixed-rate mortgage debt at a weighted average price of 7.33 percent and a weighted average maturity of five years.

Since the third quarter of 2002, PREIT's equity market cap has increased by 82.1 percent from 469 million to 854 million. The rise in equity cap is the result of the issuance of 7.3 million new shares in units, as well as stock price depreciation from $25.76 to $33.45 during this period. These net equity changes have caused our debt to market cap to decrease from 56.1 percent at the end of the third quarter '02 to 46.4 percent at the end of the third quarter '03, a figure which is well below the Company's historical leverage level.

Presently the Company has received commitments from a lender group led by Wells Fargo to replace our $200 million secured line of credit facility with a $500 million unsecured line of credit, subject to documentation of PREIT's intention to close the new line of credit concurrently with the impending merger with Crown. Additional borrowings will be used to fund transaction expenses and debt restructuring costs. We believe that the balance sheet will be adequately positioned to handle our investments in operational capital needs going forward.

For modeling purposes we have assumed that the merger with Crown closes midway through the fourth quarter, and that our proposed debt restructurings will occur simultaneously. It is important to note that the actual closing dates of the merger and restructuring will have a significant impact on funds from operations per share for '03, as these new properties represent a significant portion of PREIT's pro forma portfolios.

Additional variation may be created by the timing and magnitude of the onetime charge of $6.75 million, which is an expense that is spread over a decreasing number of a weighted average shares if the closing is pushed closer to the end of the year.

After considering the additional shares outstanding from our public offering, the third quarter actual results we are revising our 2003 earnings guidance to a range of 284 to 296 per share the year. You should know that this estimate is derived by dividing the full year FFO by the weighted average shares for the year, and is not simply the sum of the individual four quarters FFO per share number.

At this time, we are still assuming that we will begin 2004 as a merged company in our earnings guidance, giving way to the additional shares between 362 and 382 per share for the full year '04. We're happy to speak with you off-line to clarify any issues that you may need for your own forecasting assumptions.

John and I will answer any questions -- and Ron will answer any questions that you may have at this time.

(OPERATOR INSTRUCTIONS) Josh Beiterman (ph) from J.P. Morgan.

A couple of things here. First, I know you guys commented that you would talked about guidance off-line. I was wondering maybe you could do it online. Maybe a little bit of the assumptions in 2004, specifically internal growth, sort of scope and timing of Crown sales and debt for your amortization.

Okay. Debt amortization is taken ratably over the life of the individual pieces of debt.

Can you quantify that for '04?

Sure, we have already released that number. And it is our expectation that it is not going to change significantly from the assumptions that we used when we first put it out.

So does that mean there is none associated with Willow Grove, or is that inclusive of Willow Grove, the previous guidance?

There is a small (indiscernible) Willow Grove, but nothing like the amount of debt amortization.

So substantially nothing? And what are the assumptions on internal growth?

We didn't use one underlying assumption on the whole Company. We actually went through every phase at every mall and put together a debt analysis in the form of RS runs (ph) on every property that we used to build our model.

So each space was looked at individually and its prospects for next year. And it was built into a going forward model of the Company. So it is a front end number of 3 percent or 4 percent, or whatever. We essentially took an incremental look at each particular space. And it wasn't my intention not to discuss this online, it was my intention if anybody had an issue with the weighted average shares calculations (indiscernible) this is your last time to take those questions.

And then last thing on that, have you modeled in any sales with respect to Crown assets? And if so, what is the scope and timing?

There's nothing in the model for sales of Crown assets, acquisitions or any extraordinary items. What we did to do put this out of the (indiscernible) is round the Company forward based on the summation of the RS runs. And the capital structure, as we now know, is for the Company. We didn't put any speculative acquisitions, dispositions into the model. So that is a base kick (ph).

David Shulman from Lehman Brothers.

First question is, it looks like Simon is buying and is going to take control over Craftco. And Craftco is the managing partner at Lehigh Mall. What do you think the implication of that is going to be going forward?

We don't know, David. This is Ron. At this point we really -- anything we say would be speculation. We agree with you that the Simon deal, from everything we hear, looks like it is going to happen. But we don't know how much of Craftco Simon is going to own, and we don't know how it is going to affect our interest in Lehigh Valley at this point.

Do you think it is for better or for worse?

I think it is hard to say. I don't think it is worse. I don't think it is worse having Simon in there. But it is hard to say at this point until the smoke clears exactly what it is going to mean to the company.

Alexander Goldfarb from Lehman Brothers.

I just want to go back to the debt amortization. I believe you had said that you expect it to be very similar to what was announced back in May. But seeing that the treasury has moved pretty significantly from mid-3s to mid-4s, is that is still a fair statement?

It is because when we modeled it originally we left a little room, and not knowing -- knowing that we have six months to go. So we didn't want to crank (ph) all those assets at the bottom of the market -- what most people thought was the bottom of the market.

That's fair. And can you just go -- I think you had mentioned it or touched on it. What are your assumptions for the weighted average share count for the fourth quarter? Because I think next year it looks like it is just going to be about 39 using round numbers. But for the fourth quarter, what is your expectation, what is your guidance predicated on?

I would rather go out through the weighted average shares off-line.

Okay then I will follow-up off-line. And with the difference in the credit lines going from secured to unsecured, two things. One is what is the rate difference between those. And two is, what is the status with the rating agencies?

Okay. There is no status yet with the rating agencies because we have not received formal notification from them of the outcome of their review of the Company. However, I can tell you that we have met with them on a number of different occasions. We have had actually Fairchef (ph) and PM (ph) Moody's in looking at the Company, but have not received yet any formal indications. I'm sorry, what was the first part of your --?

Just the rate difference between the old unsecured -- I mean secured and the new unsecured line?

At this point we have completed the line of credit process. The only thing that we have permission from our lender to release was the fact that we have reached the $500 million mark in commitments. But we're not in a position yet to release any of the details on the transaction. That has not closed. The lenders have not agreed to the documentation yet, so it is too early.

And the Filene's, the pad sale, you'll be including that in FFO, I'm presuming?

Alex, this is Jon. I don't think the sale -- our policy generally is for sales of pads, counterparts, etc., cannot include those in that income FFO. In other words, it is treated like a sale of apartment property, a shopping center whatever. So, no, that income will not be in there, but what will be included in FFO as a result of the Filene's transaction is any recovery that we obtain from Filene's from CAM, from real estate taxes and otherwise. Any additional rent from a newly created GLA, there may be additional CAM recoveries related to the costs associated with creating or expanding the mall.

And of course, we think that Filene's will give us much better negotiating leverage with our tenants to increase rents as leases come up, because they are going to generate a lot more sales than Ames generated.

Just a final question. The 2.5 million incentive plan, can you just walk us through this, and just explain? Because it seems rather large, but maybe it is consistent with other companies. If you could say what sort of the peer group was and how it works?

Your question is, how did we arrive at that number?

Right. It just seems like a large number based on the share count, but maybe it is vested over a number of years, so it doesn't seem --.

We looked at, and I don't have the detailed numbers in front of me, I would be happy to go over with you in detail later. But we looked at -- obviously we looked at whatever was outstanding. We looked at the new share count of the Company, which I think you correctly stated was -- I think the share count is about 35 million, and there is the balance up to 39 million (indiscernible). And we looked at it as a general rule of thumb based on advice we had gotten from outside consultants that a plan of up 10 percent of the outstanding shares was common in the industry. So if approximately 1 million shares are outstanding through unexercised options or restricted shares and so on -- the difference was 2.5 million. That is where we came up with that number.

It is obviously not our intention to issue all of that, if the plan is approved, but to have a number of shares for incentive compensation over a multiyear period available for allocation to members of the Company and the trustees. I would also point out to you that I believe -- Bruce, help me here, how many shares are subject to Crown options -- about 1,400,000, which equates to approximately 500,000 PREIT shares -- that the options that are currently held by Crown's management will go against that figure when they are reissued as PREIT options at the closing.

(OPERATOR INSTRUCTIONS) Josh Beiterman, J.P. Morgan.

Just a quick follow-up question. You mentioned a couple of things with respect to restructuring, higher sort staff and stuff. It looks like G&A in this quarter, exclusive of the swap charge, was about $7 million. Is that right? Is that a good run rate or should we expect it to go up?

It is our expectation that G&A will go up, and it will go up more in a transitional period, as we are operating in two sites for the next six months, let's say -- at some level of operations. And I think that you should expect us to hit a run rate that would be level probably in the third quarter of next year.

What would that be?

We're in the middle of budgeting it at the time, as we speak. I'm not prepared to give you a number on that at the moment.

David Shulman, Lehman Brothers.

I have a follow-up. Ed, could you answer my question? If there has been no real change in debt amortization premium, it looks like your guidance is a little bit lower than what you gave when you announced the merger. Am I right on that? And going over all the books and doing the argus runs -- is you're a little bit lower than where you were last spring for '04?

Yes, we are a little bit lower than we were.

And what caused that?

Well, it was a couple of things. One is we got a little tighter guidance on how we were going to handle some of amortization of -- not so much the debt premium, but the cost surrounding some of the debt. And instead of capitalizing it into the merger, it would be associated with the individual pieces of that.

And we also had some transitional G&A expenses, let's say with more people operating in Johnstown and less people coming over to PREIT for a period of time. So I think that with a merger as large as this, and coming to grips with some of the interim issues, and related to putting the companies together. What is not in the -- as John mentioned, the fees related to the new line of credit may increase the size of the line of credit substantially from where we thought we were going to originally take it.

Primarily that was a function of the fact that our transaction was received successfully. We were presented with the opportunity and a lot of demand out there on the line credit than we thought, given where we were in the market cycle. But this was a good time to get that availability. But it comes at a cost in terms of paying for it.

It is still a potential to expense, right, the fee for the line? Right?

Yes, the fees for the line are an expense. But we thought it was worth it because who knows what the credit market is going to be like next year? And at the moment we were met with a very positive reception to our credit proposal, which it is really a major evolutionary change for the Company to become an unsecured borrower without a pool of properties.

Did anything come from like -- just the way you did the space by space analysis with argus on the operating side, did any numbers come down because of that as well?

No, to tell you --.

Your numbers when up because of that?

No, it wasn't -- the driver that changed the numbers had very little to do with the core operation for the Company. We are probably three or four months from being in a position where we will redo all the August numbers, have some more definitive prospects for different spaces etc., etc. We are in the very early phases of that, and we have not rebudget, recalculated all the argus work we did over the summer.

So as I said, this is a base case. The changes that have occurred has mostly been the structural changes of ironing out how the merger was going to occur, timing, etc., and did not reflect a fundamental reappraisal of the operations of the Company.

Okay, gentlemen, there appear to be no further questions at this time.

If there are no further questions at this time, I want to thank everyone who participated on this call. We're obviously very excited, and many people here are very tired. There's been a lot of activity in the Company over the past few months. 2003 has been a very significant year for this Company. And we're looking forward to the closing of the Crown transaction some time in the next week to ten days.

And so we are available for your questions. Even though you're not on the call, you can feel free to call us directly with any questions that you may have. And I want to thank you all again for your participation.

This does conclude this morning's presentation. Please disconnect your lines, and have a great day.