Pennsylvania Real Estate Investment Trust (PEI) 2004 Q1 法說會逐字稿

Good day, everyone and welcome to today's Pennsylvania Real Estate Investment Trust first quarter earnings conference call. Just as a reminder today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to your host today, Mr. Evan Smith.

Thank you, operator and thank you everyone for joining us for PREIT's first quarter 2004 earnings conference call.

Before I begin I would like everyone to know that this conference contains certain forward-looking statements within the meaning of Section 21A of the Securities and Exchange Act of 1934 and the US Private Securities Litigation Reform Act of 1995.

Forward-looking statements relate to expectations, belief, projections, future plans and strategies, anticipated events or trends and other matters that are not historical facts.

These 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 forward-looking statements.

In addition, PREIT's business is subject to uncertainties regarding the revenues, operating expenses,leasing activities, occupants rate and other competitive factors relating to PREIT's portfolio and the properties in the 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.

I would like now to turn the call over to Mr. Jonathan Weller, President and Chief Operating Officer of Pennsylvania Real Estate Investment Trust, Jon.

Thanks, Evan and good morning, everyone. Ron Rubin is not able to participate today as he is attending a funeral of a close friend.

Participating in the call with me today is Ed Glickman Executive Vice President and Chief Financial Officer in addition in the room and available for your questions are Joe Coradino, Executive Vice President for Retail Operations, George Rubin, President of PREIT Services, Dave Bryant, Treasurer and Bruce Goldman, General Counsel.

Since the closing of several major transactions in 2003, we are successfully integrating 32 additional retail properties into our portfolio. We have moved aggressively to deploy our re-tenanting and redevelopment experience to these properties to enhance our overall performance.

Our focus continues to be on improving the overall tenant mix and occupancy to maximum our FFO and build greater value for our shareholders. We are very pleased with the financial results for the first quarter which met our expectations.

We are proud of this achievement in light of the enormous task of integrating the new properties and the almost 900 people who joined PREIT at the end of 2003. The former Crown properties are off to a good start in the first quarter.

Occupancy was virtually unchanged while sales increased by 1.9% to $285 per square foot. They assets accounted for approximately 75% of the leasing activity in the first quarter.

Funds from operations for the first quarter were 85 cents per share at the mid-point of the company's guidance, specifically from operations. There were positive variances to budget in base rents, 3 cents a share, specialty leasing 1 cent, percentage rents also 1 cent, and lower than expected property insurance costs, primarily on the Crown portfolio, also 1 cent.

These positives were offset by greater than expected bad debt expenses of 6 cents per share which included those related to the bankruptcies of KB Toys, Gadzooks and Foot Action of 3 cents per share which I'll discuss later in more detail.

There were positive corporate related variances in the first quarter from non real estate revenues of 1 cent a share and interest expense savings also 1 cent a share, reduced by larger than expected G&A costs of 2 cents per share primarily from legal and tax advisory services and various merger related expenses.

The first quarter's bad debt variance included the impact of reserving prepetition bankruptcy amounts some of which were outstanding prior to the beginning of the quarter at 3 cents per share. Barring any additional bankruptcies, only amounts relating to current quarter billings will be reserved going forward, thus limiting the negative impact and future periods to the scheduled charges.

Additionally we expect negative G&A variances in the second quarter from merger-related costs and from legal and tax advisory services.

We do, however, expect these amounts to decrease in later quarters. Barring any additional bankruptcies, the impact to PREIT in future quarters will be limited to the loss of rent and other charges from these first quarter bankruptcies until they are re-leased to new tenants.

We are also reaffirming our FFO guidance of $3.62 to $3.82 per share for the year 2004 in the second quarter our guidance will be - is between 81 cents and 89 cents per share reflecting the previously discussed variances.

As disclosed previously, at 12/31 the company had 41 KB Toy locations with a total of 163,000 square feet. Total annual charges related to these locations were approximately 4.7 million.

As of today seven stores with 25,000 square feet in annual charges of approximately $640,000 have closed. An additional seven locations with 27,000 square feet, have been granted rent relief and will operate under percentage of gross sales leases. The reduction to annual charges is indeterminate at this time.

We expect that the remaining 27 locations with 111,000 square feet and approximately 3.3 million of annual charges, to continue to operate under existing leases. At 12/31/03, the company had 20 Gadzooks locations with a total of 52,000 square feet.

Total annual charges related to the locations were approximately $1.7 million. Of these 20 locations, 6 stores with 15,000 square feet and annual charges of approximately $420,000 have closed.

We expect that the remaining 14 locations with 37,000 square feet and approximately 1.3 million of annual charges to continue to operate under existing leases.

At 12/31, the company had nine Foot Action locations with a total of 46,000 square feet. Total annual charges related to the locations were approximately 1.6 million. Of the two stores with 9,000 square feet and annual charges of approximately $282,000 have closed.

We expect the remaining seven locations with 37,000 square feet and approximately $1.4 million of rent, to continue to operate under existing leases.

In the first quarter of 2004 we continue to expand our portfolio through strategic transactions with our announcement of an agreement to purchase The Gallery at Market east II, which is expected to close in the second quarter.

The consolidation of the ownership of this well located asset, will lead to efficiencies and operations in leasing.

As the largest retail mall owner in the Philadelphia region, the fourth largest retail market in the United States, we believe this segment of our portfolio continues to be the core of our holdings. We are making progress on the sale of the six noncore assets and are now engaged in negotiating an agreement of sale.

Should a definitive agreement be executed, we will announce transaction details and timing. On the redevelopment front, we are making good progress at a number of properties.

At Prince Georges Plaza, Target is under construction for a fourth quarter 2004 opening and we are working on leases for the remaining GLA created by the renovation. To date, we have expended 6 million of the $17 million total cost on which we expect to earn a 12% return.

At Echelon Mall, which some of you visited in March, we are working on agreements with a major tenant which we hope will be a catalyst for the renovation and repositioning into this asset. Should an agreement be executed, we expect associated costs to be in the range of $12-15 million and will provide greater details when definitive agreements have been signed with a major tenant. Ed Glickman will now continue our presentation.

Thank you, Jon. The completion of several significant transactions has brought substantial changes to PREIT's balance sheet as compared to the first quarter of 2003 many of which have already been discussed.

The company ended the first quarter 2004 with investment in real estate at 2.57 billion, an increase of 1.62 billion or 170% over 2003's first quarter balance of 954 million.

Specifically in the retail sector, investment in real estate was up 1.9 billion to 2.5 billion representing a 306% increase over last year's balance of 624 million.

A dramatic rise in book investment that comes primarily from acquisitions including Crown American, six regional malls in The Rouse Company, and our partners' interest in the Willow Grove Mall, all of which have been disclosed. The remainder consists of spending on a number of smaller projects and $10.6 million of completed development projects that were previously classified as developments.

At the end of the first quarter of 2004, the company's investment in development projects had risen to 23.4 million from 20.8 million at the end of the first quarter of '03.

The $2.6 million increase was a net of 13.2 million of new investment and as previously mentioned 10.6 million which moved into service.

Additionally, this quarter PREIT has classified 59.4 million as plans held for development on the balance sheet pertaining to properties acquired in the merger with Crown American at Viewmont by culminating Chambersburg Mall and the recent $3.8 million acquisition of the 25 acre parcel of land across from Magnolia Mall in Florence, South Carolina.

On the right side of the balance sheet, the company finished the first quarter with net capital of 1.57 billion inclusive of 70.6 million of mortgage debt premium up from 625 million at the end of the first quarter of '03. The jump is primarily attributed to the mortgages assumed from Rouse and Crown, on the Rouse and Crown portfolio.

Also contributing to the change however, is the net debt increase from the refinancing of Dartmouth Mall and Morristown Mall as well as reductions occuring from the sales of multifamily portfolio.

With the continuation of favorable interest rates and ample credit availability for retail asset purposes, the company remains flattish toward long-term fixed rate financing, net of debt premium adjustments to 1.5 billion of debt outstanding at the end of the first quarter included 1.29 billion or 86% long-term fixed rate mortgage debt with a weighted average interest rate of 7.3% and an average maturity of 5.08 years.

The remaining 212 million or 14% is attributable to a $30 million floating rate loan and $182 million growing at the companies line.

Since the end of the first quarter '03, PREIT's equity market cap including preferred, has increased by 205% from 531 million to 1.62 billion, the rise in equity cap is a result of the issuance of 21.1 million new shares in LP units from the Crown merger and $184 million equity offering completed in August of '03, adding to the increase of 31.4% appreciation in stock price from 28.65 to 37.66 that the company achieved over the last four quarters.

In addition, we continue to be proud of our record of delivering 109 consecutive dividends with the declaration of our quarter, lead dividends of 54 cents on April 14th for common shareholders of record on June 1, 2004. On an annualized basis, we are currently paying $2.16 per share.

We are pleased at the state of PREIT's balance sheet at the end of the first quarter. Notwithstanding this past year's substantial growth, the company was able to reduce its debt to market cap to 49.3% from 54.1%.

This historically low leverage, combined with foreign capacity, that our $500 million unsecured line of credit allows us to position the company to pursue strategic opportunities such as the expected acquisition of Gallery at Market east II.

We are confident that the company has situated itself with sufficient liquidity to meet focused operational and investment goals for the remainder of the year and has the ability to obtain capital should we require it.

It's with great pleasure that I would like to announce that on April 27th, we appointed Robert F. McCadden, commonly known as Bob McCadden, as my successor in the role of Chief Financial Officer. Bob joins our team from KPMG where he is currently in the audit department.

Bob has a wealth of experience in accounting and compliance and has worked with a number of REIT clients. More specifically he was PREIT's outside auditor when he had worked for Arthur Andersen in the period from 1996-2001 and we are very much looking forward to having Bob join our team.

At this time Jon and I will answer any questions that you may have. Operator.

For our telephone audience, if you would like to ask a question, you may do so by pressing the star key followed by the digit 1. We will proceed in the order that you signal us and take as many questions as time permits.

If you are using a speaker phone, please make sure your mute button is turned off to allow your signal to return clearly.

We'll take our first question from David Fick from Legg Mason.

Yes, good morning. I was wondering if you could comment on the same-store sales trends and perhaps provide more detail as to what is included in those numbers and why you're seeing a decline here?

David, it's Jon. Good morning. There was not a decline. The same store results were up 1.8%, just to clarify that and maybe I'm not understanding your question. Let me point out, also --

I'm sorry. If you look at the numbers, you've got $334 for March 31, 2003.

I thought you were referring to NOI.

No.

I'm sorry. You're correct. The sales are down in that portfolio which represents a very small portion of the portfolio because at same store we don't have any of the Rouse assets or the Crown assets.

I think it reflects some of the assets, some of the ongoing activity that is taking place. For example, at Prince Georges Plaza where we have in a Target under construction at one end of the center and that end of the center pretty well torn up.

So that's impacting the tenant sales. I'm a little confused. Some of the acquisitions and mergers in the past, the same stores - as long as there's not redevelopment going on, the same store numbers would be adjusted to reflect as though the merger had included -- had been in place for the past two years so we would have something to compare. Can you then give us some color on the performance of the Rouse and Crown portfolios since they are apparently not in this number?

First of all, they're not in that number and I just want to point out one of the other same store assets that is undergoing some changes. Dartmouth Mall, where there was an Aims store and it's now being replaced with Filene's which is under construction and again, that impacts that end of the center.

We don't have in front of us, David, year over year numbers on the Crown assets, but we do have numbers to compare to where they were at the end of the year, the end of the fourth quarter of 2003 versus where they are right now.

Let me give you a few statistics in that. In the Rouse portfolio, the sales of those assets are flat over that sequential quarter period so at the end of the fourth quarter of '03, they were $334 a square foot and today at the end of the first quarter they were also 334 and that's with including the Echelon property which is undergoing a lot of change pending our renovation strategy for that portfolio.

With respect to the, I think we cited, I cited in my comments the sales of the Crown portfolio were up 1.9% fourth quarter to first quarter and I'm just looking for that number in my conference call notes. I believe that was, they went from $279 to $285 per square foot.

So that's some color but that again, I want to emphasize that that is not the change in the past year. We have not incorporated that into our results and I guess we need to think about whether we can provide you but that information to give you a better idea.

I would only just comment and others have in the past and it might be useful, to think about what belongs in the same store pool and what doesn't. If these are already stabilized assets, it would seem to me that it would just make sense to not have to wait two years to start seeing comps on the whole company but that's -- I understand you're still thinking about it. Thank you.

Dave, this is Ed. Just one remark, we have changed the methodology for our sales reporting since we've taken over these portfolios. So that would impact the comparison.

Because you would have to recalculate the prior year numbers that Crown and Rouse would have had for those malls?

Yeah. Exactly. And given that, we've moved everything to a new system, we're not sure how we would do that but effectively we have changed our occupancy standards particularly with respect to Crown.

Let me try one last approach then. What are your total sales per square foot?

That's reported in the supplemental.

$307.

Page 26.

Right about where your historical levels have been. Okay, thanks.

As a reminder that is star 1 to ask a question. We will now hear from Alexander Goldfarb from Lehman Brothers.

Good morning. In light of another REIT that's done a sizable equity issuance, are you guys still considering coming back to the market with an equity issuance?

At the moment we are not contemplating an equity offering.

Okay. So your current leverage of 55%, you're comfortable with that or are there steps that you may take to reduce that?

Well, as you know we're in the process of marketing six of our assets, and it's our expectation, I think Jon mentioned -- did you talk about? We have been in the process of marketing six former Crown assets and it's our expectation -- it's our expectation they will sell sometime later this year.

Those assets only have a small amount of debt directly related to them so those proceeds will be utilized to paydown the line of credit. Or, at least it's our expectation at the moment that that's what they will do with the proceeds.

So basically the 55 is sort of where it's going to stay?

Yes. If you are asking the equity question again, it's not our plan at the moment to issue additional equity; however, that depends where the market goes and response to the market as we see.

Okay. On the Florence land that you purchased, are there any retailers that you have in mind or any, what are you planning to do with those 32 acres?

It's land that is just across the street from the properties.

From Common to Magnolia.

Yes, from the Commons to Magnolia. We've had a lot of tenant interest bring tenants to the Florence market for the first time.

We brought Target and Bed, Bath & Beyond into the strip center and really turned it into a power center and we brought Best Buy into the mall just to name three.

When the land came on the market and it was so well located in relation to the mall and the strip center and we just felt that it was an ideal location for a future tenant that we couldn't accommodate on the existing land that we have at the mall which does have some modest expansion potential remaining but might not have sufficient land for a larger tenant.

So could be a Home Depot type a Dick's Sporting, something like that?

The common is leased at 97.6% occupancy at the moment and it's been a very successful redevelopment so we thought it was best to control as much of the land around the center as possible.

Okay. The next is on the Christiana phase II, I see the legal proceedings continue, how tight are the pre-leasing deals that you've signed with tenants for that project? Are they able to get out or they'll all continue as long as the legal issues continue?

The leases in the tentative agreements have expired. We have not leased phase II now.

So phase II is not leased at all?

Correct.

Okay, so all the tenants are gone?

Correct.

Okay. And just the final question, is do you have - 'cause I saw that depreciation jumped, do you have an estimate for what you think REIT taxable income for '04 will be?

We don't have an estimate yet for REIT taxable income for '04.

Alex, we are finalizing the tax basis numbers as a result of the Crown and Rouse acquisitions and we're working closely with KPMG to get that worked on. We're probably in a better position to know what that tax basis is going to be in a month or so.

And you'll disclose that?

Yes.

Thank you.

We'll now hear from Mike Mueller with JPMorgan.

Hey, guys. It's actually Josh Bederman here. First thing, just looking at your interest expense and looking at your debt schedule on page 15, the calculated run rates - its a lot higher than what you report. You guys mentioned that there's not much debt on the assets held for sale and you don't have that much outstanding on development to capitalize.

Here's one thing that's probably at work in your calculation. I don't know if you've adjusted the calculation down for the debt premium?

Yeah I have, I mean walking through it, the fixed and floating, there's about 25.1 million of quarterly expense, take out the 4.9 million of the debt pre-amortization you're at about 20.2 million, you guys reported 17.8.

It's almost a $2.5 million discrepancy, that's like $10 million a year. Just trying to figure out where that's coming from considering there wasn't that much activity on the right-hand side of the balance sheet in the first quarter ?

Okay, why don't we get back to you off-line and we will reconcile that number for you.

Okay, thanks. Moving on just the percentage rents, is that a good run rate? Sort of non4 Q run rate?

I think it would be our expectation for the percentage rents that number would vary during the course of the year.

Okay. And last thing, the lost KB Toys and Gadzooks and Foot Action during the quarter, what kind of timing impact did that have?

During the first quarter, the situation with KB, Gadzooks and Foot Action was that we had to take into reserve the full amount of the accounts receivable at that moment which we did, and then, I think Jon gave you, but I can repeat for you, the amounts tributable to the charges on each group of the property.

I got that. I just wanted to see if that was 100% impact in the first quarter or if there was any adjustment I had to make going forward.

We wrote the whole amount off at the time of the bankruptcy but on a going forward basis, so you're going to have whatever was sitting in AR plus the first quarter. Then for the going forward basis, 641,326.

Obviously, that's an estimate for the seven KB Toys, for the six Gadzooks it's 417,846 and for the two Foot Actions, 281,551. Those would be the annual numbers for those three groups of properties.

Now there was - since we moved from six payments to variable percentage of sales leases on the seven additional KB Toys, obviously we don't know what sales is going to be so we can't tell you exactly what the impact will be.

However, in general we did a back of the envelope kind of estimate for this and our estimation will be the annual, in fact, it will be somewhere between 100-150,000.

Okay.

Take those and divide them by four and that would be the second quarter impact. The first quarter was a combination of the AR. And I can give you the amounts that were written off.

Basically we have our policy of every month looking at the latency of all the companies receivable and create bad debt reserve based on a rolling review of the receivable so it depends on what was attributed to amounts that might have been outstanding for the stores various charges.

But we reserved 420 for KB Toys. We reserved 192 against Foot Action and 409 against Gadzooks in the first quarter.

Okay. Thanks.

As a reminder that is star 1 to ask a question. We'll hear from (ph) Todd Boyd.

Yes, hi. I was just wondering about the increase in other real estate revenues from 334,000 to 2.7 million.

Well, part of that increase in -- I'm sorry, real estate revenues?

Other, yes.

Other real estate revenues. Okay. The big preponderance of that increase would be the result of transactions and the reimbursables from the tenants. So as the cam expenses would fluctuate or real estate taxes would fluctuate, those reimbursables would also fluctuate into -

Then why doesn't that go through your expense reimbursement revenue line item?

Well, I'm sorry. I may have -- hold on a second. You're right, it should go through the expense reimbursement line item.

I don't have the combination of what makes up other real estate revenues in front of me. So I'm going to have to have to answer that question off line.

Okay. That's fine.

We do have a follow-up from Alexander Goldfarb with Lehman Brothers.

Just quickly, you had mentioned that G&A in the second quarter would still be a bit higher. What's the increase and what do you expect it to eventually settle down to?

The variance in G&A was made up of, I can run through G&A.

It was a bunch of merger in legal, but just in aggregate.

In aggregate between 2-3 cents and let me just give you a sense as to why we feel that's going to diminish.

We kept the downtown office open longer than we expected. On the other hand, we hired less people in Philadelphia so those things are going to run their cost core and ultimately the variance associated with being in two places at once which is an additional office and overhead, et cetera, will diminish.

We kept our merger consultants on a little longer than we expected and that again, we expect to diminished over the summer when they were locating in one place and under one roof. We had marketing expenses to introduce our brand that the Crown properties in the first quarter and that's a onetime project that will diminish going forward.

Again we had a bunch of miscellaneous expenses of people commuting back and forth across the state with two offices we expect to go down.

Those are some of the reasons why we expect the variance to diminish as we operate in one location.

Thank you.

As a final reminder that is star 1 to ask a question. We will now hear from Greg Andrews with Green Street Advisors.

Good morning.

Good morning.

You mentioned the impact on sales from some of the anchor projects like the Target at PG Plaza and Filene's at Dartmouth. As I look at the anchor expiration schedule, I see quite a few expirations in the next couple of years, '05 and '06, and I'm wondering if you could just address what your expectations are with regard to those expirations.

Joe Coradino will take that question.

Greg, we've met with all our major anchors that are listed with expirations in '05 and 06. And while, certainly, we're not in a position to confirm the decision they're going to make, the indication is there aren't any situations where the intention today is that they're going to exercise those options.

Okay. And I think you mentioned that you were changing or had changed the method for sales reporting.

Not for occupancy reporting.

For sales. For calculating sales per square foot?

No, just for occupancy.

Oh, just for occupancy?

Right. We don't treat temp leasing as occupancy. That's the big difference.

There's only one instance in which it's treated in our portfolio as occupancy and that's in a case where we have a joint venture partner who provides us with financial statements and has his own methodology but our methodology is, if a tenant doesn't have a lease that's longer than a year, we don't include that. So that's a more conservative approach let's say than was being taken.

Okay.

With the portfolio to start with. So we had mentioned in prior conference calls that once we started reporting there was going to be some diminishment of occupancy due to when we took these properties under our wings and we changed the standard.

It was going to knock down occupancy. So it would be, we would have to actually go into the numbers, recreate the rules that we have now applied them to start data, try to recreate what Crown was doing in prior periods and on the list of things we are trying to do right now is not at the top of the list. So our goal was to try to start with the fourth quarter where we presented the numbers and go quarter by quarter building from a common view of what occupancy is as stated across our portfolio.

For those of you who follow Crown historically, their numbers were given out and their occupancy were presented. We're trying to use a different standard.

Fair enough. Thank you.

No further questions at this time, Mr. Smith. Do you have additional or closing comments?

Jon? Did you want to make a comment?

One comment. The gentleman who asked the question before about the rise in other real estate revenues. The other real estate revenues is basically a number which includes ancillary income specialty leasing, other kinds of things and it rose at 153% if you look at it year to year.

The total revenues for the portfolio rose at 164% thus it's in line with the other changes in the size of the portfolio.

If anything the fact that this number rose faster than base rents which rose at 114% is reflective of the fact that there was a heavier reliance on specialty leasing as some of the former Crown assets than there was in a larger fraction of the dollars of revenue.

Joe Coradino has another comment on the other.

That practice of partnership marketing across the (ph) Pre-Legacy portfolio and the Rouse portfolio which would account for the percentage increase greater than base rents.

Any further questions?

There are no questions at this time.

Thank you. Since there are no further questions, my colleagues and I would like to thank you for attending today's conference call and we welcome your calls for any further information or clarification.

We look forward to speaking with you and presenting information in the quarters ahead during the rest of the year. Have a good day. Thank you, operator.

That does conclude today's conference. We thank you for your participation. You may now disconnect.