Pennsylvania Real Estate Investment Trust (PEI) 2004 Q2 法說會逐字稿

Good day, everyone. And welcome to today's Pennsylvania Real Estate Investment Trust second quarter earning conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Evan Smith. Please go ahead, sir.

Thank you. Good afternoon, everyone. And welcome this afternoon's Pennsylvania Real Estate Investment Trust conference call.

Before we begin, I would like to remind everyone that this conference call will contain certain forward-looking statements within the meaning of Section 21E of the Securities and 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 current 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. Additionally there can be no assurance that PREIT's actual results will not differ significantly from the forecast and estimate set forth. 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 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 forward-looking statements. PREIT does not to 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. Investors are also directed to consider the risks and uncertainties discussed in documents PREIT has filed with the Securities and Exchange Commission, and in particular PREIT's annual report on Form 10-K for the year ended December 31, 2003.

With that said, I'd like now to turn the call over to Ronald Rubin, Chairman and Chief Executive of Pennsylvania Real Estate Investment Trust. Ron?

Thank you very much, Evan. Good afternoon, ladies and gentlemen. And thank you for joining us as we discuss our results for the second quarter, and our prospects for the remainder of this year and the year ahead. Joining me on the call today are Ed Glickman, President and Chief Operating Officer; Jon Weller, Vice-Chairman; Joe Coradino, President of PREIT Services and head of our Retail Division; and Bob McCadden, who recently joined the Company as Executive Vice President and CFO. And in the room are George Rubin, vice-chairman, Dave Bryant, Treasurer, and Bruce Goldman, General Counsel.

The Company had a solid second quarter, which gives us confidence that we are on track with the integration of the assets we acquired in the past year. The positive response we are getting from our key tenant relationships to our redevelopment and repositioning initiatives, both at the ICSC and Las Vegas, and every day in our meetings with retailers, makes us optimistic about the prospects for the remainder of this year and 2005. Our recent announcements about Echelon Mall, where Wal-Mart is a major part of our redevelopment strategy; and Patrick Henry Mall, where our relationships with traditional and non-traditional mall anchors are the key to a new lifestyle addition, reflect our focus on our strategy going forward: adding value to acquired assets. These feelings are reflected in our guidance for 2004, which we revised upward.

We are also looking for ways to continue to grow the Company. We are being very selective as we evaluate acquisition opportunities, making sure that our value-added strategies will be successful. Our power center tenant relationships continue to challenge us to finds quality locations for new ground-up projects in markets that make new development -- that make new development difficult.

Lastly, I want to touch on another area of potential opportunity for the Company. As many of you know, Pennsylvania recently passed gaming legislation. We are now carefully analyzing how the Company might benefit in Philadelphia or elsewhere in the state. This will be a complicated process, as the possibilities are sorted out, and we will keep you informed of any developments involving PREIT.

At this time, I would like to turn the discussion over to Ed Glickman.

Thanks, Ron. As Ron reported, the second quarter was the strong one for the Company as we continued to actualize on our integration of the Crown and Rouse assets. FFO for the quarter was 86 cents a share, a penny over expectation, demonstrating that we can operate efficiency at our new scale. Comp sales are 318, up $6 from 312 at the end of the first quarter, showing the impact of the absorption of the new assets into our trademark management program.

Occupancy in the mall portfolio is a strong 90.2% in spite of a number of early-year bankruptcies. In August we continued to process a backlog of 300 transactions in our legal department, many stemming from the ICSC conference, where the Company's new booth marketing campaign and positioning captured the imagination of retailers has scheduled over 500 appointments with our leasing team. Tenants who know us want to experience the impact we can have on these new assets, and as a result, we are we have experienced releasing spreads over 33% on new leases signed in the second quarter. As you will here in a few moments, these tenants have also demonstrated strong support for our redevelopment efforts, by giving us their commitments to join us in our new properties.

At the close of Q2, we are happy to report that we are on budget, and over the target for the first half of '04 We appreciate your trust, and your confidence. And thank you for the opportunity that you give us by placing your capital in our hands. We hope that we cannot only live to us your expectations, but that we can exceed them during the balance of the year. As the nature of our Company is evolving, we are making a few changes to our conference call that we hope will make them a bit more user-friendly, as we morph into the new PREIT.

First, given our significant increase in the Company's portfolio of shopping centers as a result of our merger with Crown and the acquisitions from The Rouse Company, this report on operations in the second quarter '04 will focus on changes from the first quarter, rather than the second quarter of last year. Until we arrive at the first quarter of next year, when we have a good basis for comparison, we feel that this quarter-by-quarter update will give you greater insight into the progress of our operations. Secondly, Ron, Jon, and I will be joined on this call by our new CFO, Bob McCadden. Bob recently joined our Company from KPMG, where he was an audit partner in a Philadelphia office. Bob is a seasoned professional with a long history in the REIT industry, and is a great addition to our executive team. Bob will give you an update on our results for the quarter.

We'll also be joined on this call by Joe Coradino, who in his new role of President of PREIT Services, is our pointman on retail leasing and redevelopment. Joe will follow Bob to update you on some exciting news regarding our progress with our new assets. Following Joe, Jon Weller will give you some unsight into our assets on acquisition and development front, and expectation for performance during the second half of '04.

Bob?

Thanks, Ed. Good afternoon, everyone. My comments will cover overall Company performance including our joint venture properties.

Revenues in the second quarter are unchanged from the first second quarter at 108.7 million. Expenses fell by 4.2 percent, the result of lower seasonal expenses, primarily snow removal and added security in the post-holiday period, along with lower levels of bad debt. We recovered 77.9% of our operating expenses during the second quarter, which was up 150 basis points from our 76.4% recovery rate in the first quarter. As a result of the lower level of expenses and higher recoveries, net operating income increased by 2.7% to 67.9 million in the second quarter. Same store NOI, which now represents just 23% of our total NOI, increased by 4.3%, as compared to the second quarter of 2003, primarily the result of a 3.9% increase in total revenues. Contributing to this increase were Dartmouth Mall and Magnolia Mall, both of which are benefiting from prior-year redevelopment initiatives.

As previously discussed in the Company's June 17, 2004 press release, general and administrative expenses were expected to increase as a result of additional merger integration costs, and costs for corporate governance matters. Other G&A costs increased by 1.5 million in the second quarter, as compared to the first quarter of 2004. The increase related primarily to costs incurred for the ICSC convention, along with the previously discussed merger integration costs, and corporate, legal and tax consulting services. In addition, we have kept our office at Johnstown, Pennsylvania open past our expected closing date of June 30, 2004, to facilitate accounting for the non-core Crown assets, which we expect to sell this fall. We also expect to close the Johnstown office by September 30th of this year.

The unfavorable effect of these costs was partially mitigated by several other items impacting corporate payroll. During the second quarter we began to charge dividends on unvested restricted stock to retain to earnings to conform with common accounting practices. Previously, we had been recording these dividends payments of compensation expense. In addition during the second quarter, we capitalized the portion of the salaries of our in-house leasing group right into the portion of their time spend negotiating lease agreements and preparing lease documents as initial direct costs, as required by FASB Statement 13. These items reduced G&A by $600 thousand during the quarter, as compared to the first quarter. By the end of the year, we expect to be at a G&A run rate of approximately $10 million per quarter, before considering management revenue and interest income. Even with our higher level of G&A our FFO was 86 cents per share, 1 cent above the midpoint of our guidance for the quarter, and 1 cent above the first quarter of 2004. During the second quarter after 1and a half million dollars for recurring capital expenditures, $1.2 million of straight-line rents, $1 million for tenant allowances, $4.8 million of debt premium, and a positive 203 thousand lease and tangible adjustment, we reported 65 cents per share of FAD. This compares to FAD in the first quarter of 67 cents.

Our dividends coverage remains healthy. We paid out 63% of FFO during the quarter, and our distributions were 83% of our FAD. Turning to the balance sheet, during the second quarter, our investment in real estate increased by $55 million, the $2.6 billion, as a result of our acquisition of the Gallery II at Market East, and the purchase of remaining 27% interest in Cherry Hill Mall. On the right-hand side of the balance sheet, as of June 30, 2004, we had $1.6 million in total debt comprised of 1.4 billion in mortgages, and $219 million outstanding under the Company's line of credit. 16% of our debt is floating, while 84% is fixed, with the weighted-average maturity of 4.8 years, and weighted-average interest rate of 7.3%. At quarter-end, our debt represented 51% of our total market capitalization. Given our previously stated policy of managing our debt position within a age of 50 to 60% of our gross asset value, as determined by our line of credit covenants, the availability of $280 million on our line of credit, and expected net proceeds of approximately 112 million from asset sales in the third quarter, we believe that we have more than adequate liquidity to complete our redevelopment initiatives.

Like everyone else we are well into our Sarbanes-Oxley Section 404 compliance, and expect to complete all testing and review by the end of the year, as required. Our G&A expense budget for the year includes about half a million dollars for outside consulting and increased audit fees in connection with these compliance requirements.

I would like to turn the call over now to Joe, who will speak to the performance of the properties.

Thanks, Bob. We are pleased to announce that the implementation of our value-added strategy on the newly acquired assets is achieving momentum. This is best illustrated by the recent announcements of redevelopment plans at Echelon and Patrick Henry Malls. At Echelon, turning a portion of the mall inside-out through the addition of a Wal-Mart, is a catalyst for a major redevelopment and repositioning of this asset. We are negotiating letters of intent with several national retailers for the former Sears' space, and as discussed in our release, expect to spend 12 to 15 million ,with a return of 10%, rising to 12% upon completion in 2006.

At Patrick Henry as referenced in today's announcement, the consolidation and expansion of Dillard's and the addition of Dick's Sporting Goods is serving as the impetus of creating a lifestyle component, and interior renovation for this premier property. We expect to spend approximately 25 million, with a return of approximately 10% and to complete the project in the fourth quarter of 2005. We anticipate growing occupancy sales and net operating income through executing the redevelopment plans for these recently acquired properties. And we are working to achieve results similar to the results of Prince Georges Plaza in Hyattsville, Maryland, and Dartmouth Mall in Dartmouth, Massachusetts. At Prince Georges Plaza, where Target will open on schedule on October 6, 2004, and the renovated mall will have a grand reopening celebration beginning on November 1st, we exceeded our pro forma returns on this project by securing a new lease, signed this month with Office Depot to replace on under-performing Kids R Us. We spent approximately 9 million of the 18 million in total cost, and and expect to realize a return in excess of 12% on this investment, stabilizing in 2005.

The new Filene's store at Dartmouth Mall in Dartmouth, Mass., will also open on schedule in October of '04, along with 7 thousand square feet of new GLA, which will be leased to Finish Line. As of 12/31/97, our first full quarter of ownership occupancy was 77.3%, as compared to 93.1% as of June 30, 2004. And sales for the same period increased from 237 per square foot to 389 per square foot. We are also pleased with our operating results, having experienced a strong second quarter in sales growth, with average comparable sales in our malls increasing to $318 per square foot. Excluding the non-core malls, average comparable sales volume for the portfolio would be at 324 per square foot.

As a result of the first quarter bankruptcies, and our preparation for redevelopments, we've experienced a slight decline in occupancy in the second quarter. Occupancy in the retail portfolio fell 40 basis points from 91.7 to 91.3. Most of the occupancy change occurred in in-line space in the malls, which is 85.6% occupied at quarter-end, compared with 86.6% at the end of the previous quarter. The drop in occupancy was as a result of store closings from bankruptcies, accounting for 66 thousand square feet, story captures for redevelopment and merchant repositionings were 56 thousand square feet, and 33 thousand square feet of under-performing merchant store closings. As you are aware, we have 5 non-core malls under contract for sale. These assets were 67.5% occupied at the end of the second quarter. Assuming these properties are sold, we are forecasting in-line occupancy at the end of 2004 above 89%, as compared to 90.2% at the end of 2003, when calculated on a comparable basis. The current in-line occupancy level presents an opportunity to drive organic growth in the portfolio through elective investment of capital and creative releasing.

Some examples of transactions completed in the second quarter include [Inaudible] at Cherry Hill Mall, Charlotte Russe of Cherry Hill Mall and Magnolia Mall, Hot Topic at Willow Grove Park and Magnolia Mall. For 2005, we have 21 anchor leases expiring, covering approximately 1.6 million square feet. At regularly scheduled meetings designed to confirm their intent as it relates to these stores, the anchor tenants with '05 expirations have preliminarily indicated their intension to exercise their renewal options. Of the expiring anchor leasings -- leases, 3 are located at non-core properties under agreement of sale.

Some additional examples of the successful value-added integration of the former Crown and Rouse assets into the PREIT portfolio include: securing a 30% reduction in the tax assessment at Echelon Mall, resulting in a $1.5 million annual tax savings; evaluating RFP responses, in an effort to achieve benefits of scale for housekeeping and maintenance services, which involve budgets for approximately $20 million annually; delivering revenue from our specialty leasing program, that exceeds our business plan by over 10 percent; and leasing, during the remainder of 2004, in some cases for multiple transactions, Aeropostale, Abercrombie & Fitch, Hollister, Hot Topic, Benetton, Finish Line, and Old Navy, to name a few.

Finally, we are underway on a redevelopment and repositioning programs for several other properties, and anticipate announcing a comprehensive redevelopment and repositioning plan with estimated costs, return to investment, and timing, as we finalize our 2005 business plan.

With that I would like to turn it over to Jon Weller.

In terms of our expectations for the balance of 2004, we expect to close on the sale of the 5 non-core properties and our interest in Rio Mall in Rio Grande, New Jersey, during the third quarter. The net proceeds of approximately 112 million will initially will be used to pay down the Company's line of credit. The sixth non-core property, Schuylkill Mall in Frackville, Pennsylvania, continues to be held for sale. We continue to pursue acquisition opportunities which meet our value-added objectives, and represent attractive returns on investment. No new agreements have been signed to date.

Ground-up development particularly for power centers, continues to be a Company focus. In the fourth quarter of 2004, we expect to begin construction on Lacey Town Center in Ocean County, New Jersey, a 273 thousand square foot power center anchored by Home Depot. The center is expected to be completed in the third quarter of 2005, at a cost of approximately 25 million, with a return on investment of 10%.

During the fourth quarter,the Company expects to experience continued demand for space, resulting in a net improvement in occupancy by year-end. With strong comp sales, we intend to stay firm on the pricing of new transactions, and maintain a disciplined approach to tenant allowances. As we pursue redevelopment opportunities, I want to call your attention to the importance of our specialty leasing program, which provides short-term tenants for properties in transition, where long-term commitments are not in the best interests of the property strategy. Income from temporary tenants mitigates the impact vacancy created in pursuit of long-term improvement.

As the year progresses, and the merger integration activities come to an end, we expect to approach a constant run-rate on G&A of approximately $10 million per quarter, and achieve greater transparency of our administrative cost structure. While there is a tremendous amount of uncertainty in the economy, which could necessitate our changing course, we currently expect that the second half will reflect our revised guidance. Based on our assessment of the prospects for the Company for the balance of 2004, including the factors discussed on this call, we are raising our 2004 FFO guidance range to $3.57 to $3.65 per share. For the third quarter, we expect FFO to be in the range of 84 cents to 88 cents. We anticipate announcing FFO guidance for 2005 with the third quarter earnings information in November.

At this time Ron, Ed, Joe, Bob and I are prepared to receive your questions.

Thank you. If you would like to ask a question today, please press the star key, followed by the digit 1 on your telephone keypad. Once again, if you do have a question or comment today, please press star, 1 and if you're on a speakerphone, please make sure you press your mute function to allow your signal to reach us. And our first question today comes from Josh Bederman from J.P. Morgan.

Hi, guys. You once said we were going to do an equity offering in February when the stock was about 36 bucks. You're sort of around that right now. You guys said it was opportunistic. What's your appetite for equity at this point?

Josh, certainly when we considered doing the equity offering, the stock was, I think, a couple days before the period, 37. Yeah, 08, that was where we were going to do the deal. And it was 37, 80, some-odd, the day before. And so it's a little bit below that at the moment. However, we're also, at that point in time, we had contemplated selling the non-core assets, we did have a deal on the non-core assets. We now have a certain amount of liquidity coming in, and I think we remain opportunistic, depending upon how the acquisitions work out. And we'll continue to look at the opportunities. But we have no immediate plans as we sit here today.

Okay. In, just moving on here, in Real Estate Alert the other day, they mention that you guys might be buying Tri-County Mall in Cincinnati. Can you comment on that?

Actually, we can't comment on rumors that -- of things that might happen.

Okay. So what about -- can you comment on your appetite for acquisitions and potentially, how you may finance stuff like that, going forward for the remainder of the year and into '05?

In terms of our appetite as I mentioned, and I think Ron mentioned in his opening remarks, we are looking at acquisition opportunities, but only those which meet our objectives of being able to add value and improve returns, consistent with the strategies that we've discussed. To the extent that acquisition opportunities that meet those objectives materialize between now and the end of the year. We think we have adequate liquidity at this time to handle those opportunities. So we don't think that that would necessarily change our strategy with respect to seeking additional capital.

Okay. And you have nothing in your guidance on that?

Our guidance does not assume any acquisitions, nor does it assume any equity offering.

Okay. Great. Thanks, guys.

We go next to David Fick with Legg Mason.

Good afternoon. Can you talk a little bit about rent spreads? Your 178 thousand of leasing, if I calculate correctly, is at 4.1% spread. Are there any specific leases where there's maybe some big boxes, or things that rolled this quarter that held the spread down?

You're talking about the renewal number?

Yeah.

Okay. Approximately half of that number, or maybe slightly over half of that number represents one year renewals in properties that we're in the middle of repositioning.

Okay.

So it's not really a good basis for comparison

All right. That makes sense. Can you comment on what an appropriate run-rate would be for management fee income going forward? It was down quarter-over-quarter and year-over-year. I assume that's in large part due to Christiana?

Well, it's really Cherry Hill, Dave. It's a quarter-to-quarter comparison between --

That's right, I understand, yeah. All right. So this quarter is a good quarter, now?

Our run-rate going forward is about a million and a quarter. That would be a good run-rate to use for us.

Okay. And I know these are all, sort of, detailed modeling question, I apologize, but --

That's okay.

Your expense recoveries were right around 78%. Is this a good run-rate or? I know it will move around as you, sort of, reposition some of these assets, but what should we presume?

The issue with that, David, is that 5 non-core assets have [Inaudible] reimbursement rates.

Yeah. Yeah.

So when we sell those, which will be, where our expectation is at the end of the third quarter, that will take the bottom out of it. It should raise that number slightly. I can't do the weighted-average calculation off the top of my head, but it will rise with.

It will pick up some between now and year-end.

Yeah. It will pick up, yeah, some now between year and end as those 5 are in the bottom of the barrel in terms reimbursement and Schuylkill would be there, as well.

The target occupancy for year-end, do you have one at this point, revised?

We mentioned it, Joe will give it to you.

Near the end of earning's season.

Hold on one second.

We expect it to be above 89 cents, was the answer -- was the statement we made in our presentation.

That takes out the non-core assets.

Held for sale, yes.

Gotcha. Ron, last question. Your comment on the gambling legislation is very intriguing one. I'm wondering if you could, perhaps, share with us some of your vision for where some of this could ends up going? I know you don't want to be too specific about how it could impact you, but where do you see these venues being opened and what character will they take?

Well, there has been some publicity about the slot -- the 2 slot powers that are anticipated for the city of Philadelphia. And one of the properties which is -- which has been mentioned is the Gallery property, principally Gallery II, which was a recent acquisition of the Company.

Yeah.

And so, in any event, PREIT would, if there was any possibility of any gaming that took place in any of the PREIT-owned assets, it would be on a landlord-tenant relationship, because that's really all that a REIT could do.

Yeah. It would be really, seriously bad income.

Right.

Okay, But it could still be quite an opportunity for an asset that needs a breath of fresh air.

And it also could create some opportunities in the asset itself, some other additional retail opportunities, as well as restaurants and other types of entertainment uses.

Completely logical, that Ralph deal's looking better and better. Thanks, a lot.

Okay, David.

We go next to Ian Weissman from UBS.

Yes. Good afternoon. I was wondering if you guys could maybe talk a little bit about how the leasing momentum has changed at Echelon, now that Wal-Mart has agreed to sign on. Are you seeing a different type of traditional tenants interested in spaces at Echelon?

Yeah. This is Joe Coradino. The -- prior to -- prior to announcing Wal-Mart, we were working, obviously with a number of tenants for the mall. But right now, we're getting, you know, significant interest in our letter-of-intent stage for a number of tenants to both fill that Sears' box, as well as to fill 5 out-parcels we're creating, and the newly created mall space. And part of the tenants in the Sears store will front outward, i.e., on to the part of the parking lot that Wal-Mart will occupy, and part will also front on the mall, creating a , sort of, another anchor for the mall, if you will.

Can you just talk a little bit more specifically about the type of tenants? I guess my question really is: Now that Wal-Mart's coming to the mall, are we seeing, you know, call it non-traditional mall tenants interested in space?

Yes. We're talking to a number of power-center-type retailers, or as you call it, non-traditional mall retailers, that we would introduce into a mall environment, which we think is one of our strengths, given the fact that we have a, you know, a significant background in the development of power centers, and have those relationships.

Okay. Ron, just building a little bit on an earlier question related to the gaming, I think you guys own a vacant lot at Eighth and Market Street. Number one, what's your cost basis in that property? And, two, would that be an option for someone for potential slot machines, or redeveloping -- or developing lot machines at that location?

Well, we're not the -- we're not the only owner in that property. But PREIT does have a joint venture interest in the property, which was known as the original DisneyQuest site. Our investment in that property is about $5 million. And the total investment in the property is substantially more than that. It is a site that has been discussed, and before this -- before this whole process sifts its way through, there will be a number of different sites in Philadelphia discussed for this use. We are not, the company, PREIT, is not actively dealing with the Eighth and Market site. Our joint venture partner is the -- is really what will I would call the active operating partner, and he is -- and his company -- are looking at various opportunities for that property.

Okay. And finally, where are -- where will lease termination fees come out for the balance of this year?

Hold on, we're getting it for you.

No. It's -- it's -- it's -- lease termination fees look like they're going to come out around $3 million by year-end.

That's the total number for the year?

That's the total number for the year.

Yes.

Okay. Thank you, very much.

Just getting back for a second to David's question, we just recalculated our reimbursement ratio, taking out the non-core assets, and it would go from 78 to, approximately, 82% without the assets held for sale.

And once again, if you do want to ask a question or have a comment, please press star, 1 now. And we go to Alexander Goldfarb from Lehman Brothers.

Good afternoon. Wal-Mart, have they signed?

No, they have not signed at this point, but we anticipate that occurring shortly.

Okay. So it's just still going through the process, then?

Well, they've given us, they've authorized us to publicly state that they were going there. We were very careful that before we announced this, that we had their approval. So the documents are in the process of being completed, but as far as both Wal-Mart and ourselves, we consider it a fait d'accompli.

Okay. On the G&A, I mean, I appreciate that you guys, up front, discussed that in the discussion, the 10 million a quarter. Given that there have been a few bumps along the way, what's the degree of confidence that we can have this is is the 10 million is the final cost, that there won't be any more increases?

It's our best estimate at the moment, and, obviously, you know, we've spent a lot of time thinking about this number, we've recalculated our budget a number of times between now and the end of the year. So it's our best estimate.

Okay. Moving, Ron, to the slot machines, I think that 3 billion was the total state projection or number thrown around. What would be, how much space do you have available at the Gallery at Market East? And, then, if you were to have slots there, would it just be straight, fixed rent, or would it be with percent rent?

Well, the anticipated number of slots in each one of the land-based facilities in Philadelphia are 3 thousand. The slots require about 3 hundred square feet per machine, that's about 90 thousand square feet. The additional amenities, food, and others, takes it up probably in the 110-thousand-foot range. By shifting around some tenancy, we think we could accommodate that amount of square footage, and so it would require some reshuffling of tenants, but, you know, this is what we do, this is our business. And, so, we feel it is, clearly, a possibility that we could accomplish that, and accomplish it rather quickly, if we were fortunate enough to be chosen for that use. In terms of the lease itself, it's really early to state what the terms and conditions of a lease might be. But clearly we would have to operate within the framework that would maintain our REIT status, and so we would attempt to work within that framework. And, obviously, make the best possible transaction we could for the Company and for the shareholders.

Okay. And on the heels of the Patrick Henry announcement this morning, what do you think the future -- how many centers are you currently looking at in your portfolio that could have potential redevelopment? And what sort of a dollar volume, you know, over the next 12 months that we could think about of things that may come into the works?

We are currently looking at approximately 15 to 18 additional centers that would undergo a redevelopment. In terms of being able to give you the capital plan for those redevelopments, we're not in a position to do that today, but as we said, we do plan on announcing prior to, I think we said, our third quarter earnings call.

2005 business [Inaudible - microphone inaccessible].

2005 business [Inaudible - microphone inaccessible]. But, clearly, the business is tenant driven and as we secure tenants to kick off these redevelopments, we'll be making announcements from time to time.

Okay. But how many -- how many properties do you think you could handle, per year, as redevelopments?

Is that question from a capital perspective?

No, just from a management, just, you know, in terms of total Company having the resources, both from a personnel, as well as from a capital.

It depends on the particular timing of the leases and the tenant transactions. The redevelopments don't come all at once. They -- you know, each one has a particular time schedule. And so they wane in the workload, and they come up in the workload depending upon the timing of individual transactions. Right now we are not constrained in terms of our ability to manage the redevelopment process.

Okay. So you could have, like, 5, 6, 7, 8 going at once?

Well, the scope of the redevelopment varies from property to property.

Right. In some cases it's putting in an anchor tenant. In some cases it's refurbishing. I mean, each one of them is going to vary depending upon the opportunities that presents itself.

Okay. Then, my final question is: Just looking down the list of your occupancy costs, there is not a straight comparison in terms of -- or a relationship, I should say -- between the sales per square foot and the occupancy costs. What are the things that you can do to move -- some of your higher per square foot malls, what can you do to bring up the occupancy costs? Does it necessitate a redevelopment, or is it just getting in there, and just working with the center?

I think it really entails both. One of the things that we're doing, we really classify our assets into three categories: operating properties, repositionings and redevelopments. And in the situation of repositionings, that's really were we are going in and re-merchandising, finding tenants that are more consistent with the demographics to allow to us drive traffic and rent. So the answer to the question is: I don't mean to be over-simplify it, but essentially, to drive rents in the assets, which is what we are beginning to do, subject to, obviously, to rollover timing.

Okay. Thank you.

We go next to Greg Andrews from Green Street Advisor.

Good morning. Or, I guess, good afternoon. Could you -- what is the structure of the Wal-Mart deal at Echelon? Is that a ground lease?

We are just getting it. Yes. It's a, ground lease.

Okay. And does rent commence as soon as they start construction, or when they're finished and the store opens?

When the store opens.

Okay. Thank you. And then on the -- could you just run through this accounting in the G&A line items? The restricted stock dividend issue, I missed what you said there.

Essentially what the Company was doing prior to the second quarter, was charging the dividends that are paid on unvested restricted stock to compensation expense. The general industry practice is to treat all did dividends on restricted stock, irrespective of whether they are vested or not, as -- treating them as charges to retained earnings or dividends, and not treating them as compensation expense.

Okay. So you're just, kind of, conforming more with the industry norms.

Correct.

Great. Thanks. And then, lastly, on this slot machine issue, who is the decision-maker on where those machines go. Is that -- I assume it's some sort of operator casinos throughout the the state. Is that correct?

No. It's the -- it's the gaming commission, which is a 7-man commission, that is appointed politically, of which 2 members have already been announced, and the next 5 are to be announced within, probably, the next 60 days. And they will make the final decisions, in terms of all issues relating to gaming.

Great. Thank you, very much.

You're welcome.

We go next to Josh Bederman for JP Morgan for a follow up.

Hi, guys. Just quickly, can you give me a bit more color on the plans for redevelopment, or for development, at the Christiana Power Center Phase II, and the Pavilion at Market East, that piece of land you have? It's on your schedule, here, I wanted to see if you could give it a little bit more color?

Josh, it's Jon Weller. First of all, the Pavilion at Market East, that's the Eighth and Market project -- Eighth and Market Street project which Ron spoke about in answer to a prior question relating to go gaming. So, other than the possibilities of that site for gaming, there are no other specific plans for that property at this time. We've kept it on our list of development properties, because it is a property in which we have an investment.

Okay.

The Christiana Power Center Project Phase II has been the subject of a -- an extended litigation between the owning partnership, of which we have a 50% interest and the Delaware Department of Transportation. And, essentially, and if you want some more color on this I'll ask Bruce Goldman to comment, but, essentially, we won the litigation. We're now in a damages phase, and there's really a determination being made if we can proceed with the development. I mean, the Department of Transportation appealed and we still prevailed. And there's an extensive discussion of this in the 10-Q, both in the first quarter Q, and the second quarter Q, which we will be filing tomorrow for additional information. But, so we are -- you know, we don't have immediate plans to develop, because the litigation and the damage phase and appeals, et cetera, is still going on.

Okay. Thanks.

And there are no further questions.

Okay. Well, I want to thank you all for participating in this call. I hope that we've been responsive to your questions. And, certainly you all know that you can call the Company directly if there are questions that you may have that have not been asked at this session. Again, thank you very much. And we'll continue to keep you advised as the Company moves forward. Thanks.

And this concludes today's conference. Have a great day.