Pennsylvania Real Estate Investment Trust (PEI) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Pennsylvania Real Estate Investment Trust third quarter 2004 earnings conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions following today's presentation.

It is now my pleasure to introduce your host, Mr. Evan Smith of KCSA. Sir, you may begin.

Thank you. Good afternoon everyone and welcome to 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 21 E 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 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. Additionally, there can be no assurance that PREIT's actual results will not differ significantly from the forecast and estimates 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 attack, any of which may cause future events, achievements or results to differ materially from those expressed by forward-looking statements.

Specifically, there can be no assurance that the anticipated operating income from Orlando Fashion Square or Cumberland Mall will be realized or that all of the conditions to the closing of each of these transactions will be satisfied, nor can there be any assurance that the Valley View Down will obtain the required licenses for the operation of its planned facilities.

PREIT does not intend to and disclaims any duty or obligation to update or revise any forward-looking statements or industry information set forth in this conference call to reflect new information, future events or otherwise.

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 year ended December 31, 2003.

Financial and supplemental information to be discussed on this call is also available on PREIT's Web site at www.preit.com.

With that said, I would like now turn the call over to Ron Rubin, Chairman and Chief Executive Officer 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 third quarter and our prospects for the remainder of this year and the year ahead.

This month marks the one-year anniversary of the completion of our merger with Crown American Realty Trust. The integration is on track and producing results, as is evident in our solid results for this quarter. Our third quarter and same store results reflect the quality of our properties and our ability to generate profits from within our portfolio.

As evidenced by our recently announced transactions, we continue to make aggressive moves designed to enhance and improve our portfolio, and maximize the return for our shareholders. We will continue to pursue opportunities within our core markets, and targeted locations in the Southeast to provide additional growth potential and utilize the development, re-development, leasing, and general management skills of the company.

Our re-development efforts announced last year are beginning to bear fruit. We are pleased to report that later this week we are having a grand opening for the new Filene's department store at the re-developed Dartmouth Mall in Dartmouth, Massachusetts, and next week we are holding a ribbon-cutting ceremony for the new Target at the Mall at Prince George's in Maryland.

These two events will showcase our ability to revitalize properties by attracting exciting new tenants that will draw customers, and we are working to repeat these successes in the re-developments that we will discuss in further detail.

In the room today, are George Rubin, Vice Chairman of the company, Bruce Goldman, General Counsel, and joining me on the call today are Ed Glickman, President, who will update you on our operating results for this quarter, followed by Bob McCadden, our CFO, who will give you an update on our financial results for the quarter. Following Bob, Joe Coradino will follow with an update on our re-development initiatives.

Jon Weller with conclude the call by giving you some insights into our efforts on the acquisition and development fronts.

The call will then be opened for any questions that you might have. At this time, I would like to turn over the discussion to Ed Glickman.

Thanks, Ron. The company had a strong third quarter, as we continued to actualize on our integration on the Crown and Rouse assets.

FFO for the quarter was 86 cents per share, which was at the midpoint of our guidance. This represents the fourth consecutive quarter since the merger with Crown that the company has either met or exceeded its earnings guidance, demonstrating that we can operate and manage effectively at our new scale.

At the close of Q3, we are pleased to report that we were also on budget and in line with our revised earnings target for the year.

Included in today's announcements are revised FFO guidance for 2004 and new FFO guidance for 2005. FFO per share for 2004 is expected to be 360 to 365. FFO per share for 2005 is estimated at 369 to 381.

In comparing this estimate to the expected results for '04, we remind you of the dilutive nature of the sale of the 5 noncore assets completed in September.

The midpoint of the expected range for 2005 represents an approximate 7% increase over the prior year, excluding a contributions from the 5 noncore assets, approximately 12 cents per share, that were recently sold and are included in the discontinued operations.

Our guidance assumes approximately 3% NOI growth in our existing properties, which after leverage equates to approximately 5% FFO growth with a balance of 2005 NOI growth coming from acquisitions.

Our estimates reflect the continuing solid operating performance of our properties and we're pleased to be able to report another strong quarter in sales growth. During the third quarter, average comp sales in our malls increased to $323 per square foot, up $5 from $318 at the end of the second quarter, showing the impact of the absorption of our new assets into our management programs. Same-store NOI. which now represents 45% of total NOI, was up 10.8% for the third quarter. The increase is the result of improved operating results from the properties acquired from the Rouse Company in 2003.

Illustrating the benefit of our re-development activity, the same store NOI results at Dartmouth and Magnolia were up 13 and 14% respectively this quarter.

We also realized a 1.5 million dollar lease termination fee received from a single big box tenant.

Same-store mall sales were $345, up from $342 and occupancy was down .5% to 89.1, as compared to the third quarter of 2003.

Retail occupancy has remained steady as compared with the second quarter at 91.3%. Overall occupancy in the mall portfolio is a healthy 90.3%, in spite of a number of early year bankruptcies.

Mall in-line occupancy increased 130 basis points, to 86.9%, as compared with 85.6% at the end of the second quarter.

Occupancy in our power center portfolio decreased from 98.0% at the end of the second quarter to 96.8% as a result of a negotiated recapture of the Dick's Sporting Goods store at Northeast Tower Center.

During the third quarter, our leasing team turned in excellent performance by completing 160 transactions for over 669,000 square feet, including 94 renewals and 66 leases for new tenants. We achieved this spread of 20% on leases for new tenants on year-to-date as a result of tenants experiencing positive sales growth for our properties.

We continue to generate momentum with over 200 leasing transactions in process.

As the company is planning for 2005, we are taking a close look at each of our departments to ensure that they are being managed in the most efficient manner in the wake of substantial growth over the past year.

With that, I will turn the call over to Bob McCadden.

Thanks, Ed. My comments will cover overall company performance, including our proportional share of our joint venture properties.

Before I get started I want to make a few overall observations before talking about the operating results in more detail.

First, we are making steady progress against our business plan goals for the year and we continue to track our 2004 planned operating results.

Second, following the sales of noncore assets, we have a strong balance sheet with ample capacity for growth.

Third, for 2005, our focus will be on improving the quality of our cash flows and the profitability of our portfolio to our re-development and repositioning initiatives.

Revenues in the third quarter increased $2.5 million over the second quarter's amount to 111.2 million, while property operating expenses increased by 1.7 million, to 42.3 million. The third quarter includes a full quarter of operating results from Gallery II, which was acquired during the second quarter, and the operating results of five noncore assets to the last week of September when they were sold.

Property net operating income increased to $68.9 million, and our operating margin was 62%, a slight decrease from 62.7% in the second quarter. Margins were negatively impacted by the operating results of the noncore properties during the quarter, and slightly higher operating costs.

Margins on our core properties for the third quarter were 63.6%, as compared to 64% for the second quarter.

For the company as a whole, we recovered 79% of our operating expenses during the third quarter, which was up 60 basis points from our 78.4 recovery rate, in the second quarter.

General and administrative expenses have begun to moderate as expected. The additional merger integration and corporate governance costs are largely behind us. Our G&A expenses decreased by $300,000 in the quarter to 11.5 million. The decrease would have been greater, except that we wrote off certain previously capitalized development costs of approximately 400,000 during the quarter. These costs are not related to the Crown merger.

During the third quarter, we reported 51 cents per share of FAD. This compared to FAD for the second quarter of 65 cents. Our FAD will fluctuate from quarter to quarter, depending upon the timing of our tenant allowances.

Our dividend coverage remains healthy. We've paid out 54 cents per share in dividends, 63% of our 86 cent FFO during the quarter, and our distributions were 88% of our 61-cent FAD.

Turning to the balance sheet, during the third quarter our investment in real estate decreased slightly to $2.5 billion as a result of the sales of noncore assets.

On the right-hand side of the balance sheet, as of September 30, 2004, we had $1.5 billion in total debt comprised of 1.4 billion in mortgages, including the market-to-market premium, and $112 million outstanding on our line of credit.

Less than 10% of our debt is floating, while 90% is fixed, with a weighted average maturity of 4.6 years and a weighted average interest rate of 6.9%.

At quarter end, our debt represented 46.6 of our total market capitalization. At September 30, outstanding borrowings are slightly below the lower end of our targeted leverage range of 50 to 60%. After planned line of credit borrowings, funding upcoming purchase of Orlando Fashion Square and the assumption of mortgage debt in connection with our Cumberland Mall acquisition, we still expect to remain at the lower end of our targeted leverage range.

We will continue to have adequate liquidity to complete our re-development initiatives and to fund suitable acquisitions. We move into the final stages of our bargaining [inaudible] 404 compliance and we expect to complete all of the required testing by the end of the year.

I'm now going to turn the call over to Joe. He will speak on the performance of the properties.

Thanks, Bob. Good afternoon.

The planned re-development and repositionings that we've announced this morning for Capital City and New River Valley are designed to drive long-term growth through the introduction of enhanced entertainment and dining components to increase shopper time and expenditures at the properties. With these projects, we intend to create the platform for future net operating income growth, as in our other successful re-developments, including Dartmouth Mall, Palmer Park, and the Mall at Prince George's.

Capital City Mall, a former Crown asset, is the dominant mall of the Pennsylvania State capital of Harrisburg. The property produces comparable sales of $345 per square foot and has occupancy of 98.4%. We identified an opportunity to retrofit an under utilized theater location that fronted on heavily trafficked Route 15 but had no entrance onto the main mall concourse. The retrofit will transform the 18,000 square foot theater space into a food and restaurant court.

Simultaneously, we will remerchandise the area formally occupied by the food court into a 30,000 square foot area of fashion tenants, designed to meet the needs of Harrisburg's higher income customers. The re-development is intended to continue Capital City Mall's dominance as the area's premiere shopping destination.

As part of the project, the common areas of the interior and the exterior of the property will undergo a complete renovation, including redesigned grand mall entrances, new ceiling treatments, updated interior lighting and decorative accents to the terrazzo flooring.

Construction will commence in the first quarter of 2005, and be complete in the second quarter of 2006. Our total investment in the project is projected to be approximately 11.1 million, with an expected return on this incremental investment of approximately 10.5%.

New River Valley Mall in Christiansburg Virginia, another former Crown American property, is currently producing sales of $256 per square foot, and is 77.5% occupied.

Despite the asset sales performance relative to PREIT's average of 323 per square foot, we believe there is unrealized potential to improve our market share.

We're underway with the development of a new, state of the art, 14-screen Regal Cinema, with stadium-style seating that will have a capacity to accommodate more than 2500 patrons.

We're also creating a junior anchor position and outparcel space to capitalize on the traffic generated by the theater.

We expect that the enhancement of the entertainment component and the restaurant and junior anchor additions will draw more of the 35,000 students and faculty from nearby Virginia Tech and Radford Universities.

The project is scheduled to be completed in the second quarter of 2006. Our investment in the transaction is approximately 8 million, and we estimate a 10.5 return on this incremental investment.

In addition to these two newly announced re-development projects, we continue to move forward on other re-developments and repositionings in the pipeline. At Echelon Mall in addition to the new WalMart, we signed letters of intent with two national retailers to occupy the majority of the vacant former Sears space.

At Patrick Henry Mall, the expansion of Dillard's is underway, and the lease with Dick's Sporting Goods has been signed. We are in the final lease negotiations with a major large format retailer to compliment Dick's at Patrick Henry Mall.

This quarter, we completed an important transaction at Northeast Tower Center that demonstrates the strength of our tenant relationships. Dick's Sporting Goods, one of our strongest big box retailers, had been a tenant of the property since 1998 and was not performing at a level that met their expectations. We were able to negotiate a mutually acceptable termination to Dick's lease and then quickly replace them with Ross Dress For Less. The transaction is an example of our proactive effort to create value by actively managing our assets.

Ross Dress For Less will occupy approximately 30,000 square feet of the former Dick's 45,000 square feet, and we are in negotiations with two other tenants for a portion of the remaining space. When re-leased we expect to earn a return in excess of 11% on our new investment in the space, after accounting for Dick's 1.5 million termination fee.

Other examples of transactions completed in the second quarter include Mexx at Cherry Hill Mall, the first Mexx Store to open in the region; Benneton at Wall Grove Park; Starbucks at Cherry Hill Mall and Plymouth Meeting Mall; Charlotte Russe at Logan Valley; Hot Topic at Valley View, Uniontown, [inaudible] and Chambersburg; Children's Place at Magnolia; CJ Banks at Chambersburg; Verizon at [inaudible], North Hanover, Phillipsburg and [inaudible], and we also executed a lease with Carrabba's, a division of Outback Steak House, for Palmer Park and Chuck E Cheese at Valley Mall. Both were formerly undeveloped outparcels.

We are enthusiastic about the sales production of our centers, the level of tenant interest on our properties, and are looking forward to the holiday shopping season.

Now I would like to turn it over to Jon Weller.

Last month we announced two agreements to acquire new malls; the first for Orlando Fashion Square in Orlando, Florida, for approximately 123.5 million, and the second for Cumberland Mall, in Vineland, New Jersey, for approximately 59.5 million. Both transactions are expected to close in the fourth quarter of this year. These are both strong malls located in growth markets.

With Orlando Fashion Square, we are expanding our property base in the southeast, which is consistent with the previously stated goal. In addition, the acquisition of Cumberland mall enables us to own a property that we have successfully managed and leased since 1997, and further solidifies our position in our core geographic market.

We believe that the strong tenant mix, the opportunity for additional tenants, and the potential for increased rent from these malls will add value to our portfolio.

The company continues to pursue acquisition opportunities which meet our strategic objectives, and which we believe represent attractive returns on investments.

Re-development activities have been another important component in our business. We previously announced our planning for Echelon Mall and Patrick Henry, and today we announced the re-development plans for Capital City Mall and New River Valley Mall.

We have previously discussed with you our estimate for a total three-year re-development spend of between 150 million and 200 million dollars, to occur during 2005, 2006, and 2007. These four properties that I just mentioned represent approximately 55 million of the 65 million we anticipate spending in 2005, on re-development projects. And we expect to earn approximately 10.5% on these investments.

We anticipate realizing the full impact of these investments -- excuse me, of these expenditures, in our operating results beginning in 2006. As other projects are clarified during the year, we will update these amounts in the timing.

On the development front, our Lacey Town Center project is now expected to commence in the first quarter of 2005, with completion in the fourth quarter of 2005.

The company's share of total cost is estimated at approximately 26 million, with the return on completion of approximately 10%.

We continue to pursue a number of other development projects in a challenging environment for entitlements.

We also want to call your attention to the capital expenditures in our model for 2005. In total, we anticipate spending approximately $266 million of new capital during the year. This amount includes 26 million for development, 65 million for re-developments, 20 million for tenant allowances, and 15 million for recurring capital expenditures. In addition, our earnings model for 2005 also reflects investment in currently unidentified acquisitions at the $140 million level.

Lastly, our model does not assume additional asset sales, nor does it assume an equity offering in 2005.

At this time, we are available to take any questions that you may have.

Thank you. The floor is now open for questions. If you do have a question, please press Star, 1 on your telephone keypad at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question to please utilize your handset to provide optimum sound quality.

Once again, that is Star, 1 for any questions at this time.

Our first question is coming from Ian Wiseman of UBS. Please go ahead.

Good afternoon.

Hi, Ian.

How are you? I was wondering if you guys could talk just a little about what sort of inquiries or what has the demand been by nontraditional department store anchors. Comco, Kohl's, Target, or WalMart in your centers.

This is Joe Coradino. We are seeing actually a -- certainly, we're opening up a Target this week at Prince George's Plaza. And we, you know, we have one also in some of our strip centers. So we see a significant demand for that.

We're also working with some of the smaller boxes, nontraditional retailers, to put into our malls as well. So we think there is ample opportunity, particularly in middle markets, to exploit transactions with some of the nontraditional retailers: Targets, Kohl's, Burlington, I mean a whole range of them.

I mean, is this as a result of the sort of consolidation or contraction by the traditional department stores in your markets? Is that -- what is driving the demand to secondary markets for these discounters?

I think certainly it is -- they see that there is significant opportunities to locate in areas where there -- you know, you've got a market-dominant mall, and you draw a circle of 50 miles around it, there is very little retail competition. So you're taking full advantage of that. I think on the heels of that, you also have, certainly, sharply decreased expansion plans for many of the traditional department stores.

If you can answer this question, in the next five years, let's say, I mean what do you think will be the makeup of the secondary market mall with respect to, you know, just look at the anchors, the mix between discounters and traditional department stores?

Obviously, it is hard to predict what's going to take place over the next five years. But clearly, our thrust has always been to try to do business with the tenants who are creating the most excitement and the most productive. So we -- we're in touch with all of these tenants, and the ones that are expanding in our market, we do have the real estate to accommodate them. And so consequently, as new productive retailers begin to expand their -- or continue to expand in our market, you can be sure that they will be talking with us because we -- we do have the dominant portfolio in this market.

Okay. Can you just comment on whether or not you guys are involved in the process for bidding on Wilmerite?

At the present time, we are not a bidder for the Wilmerite company.

Have you -- would you consider them -- you talked about expanding in the Southeast. Have you looked into the Northeast or pushing further into the Northeast in your expansion plans?

We are interested in the Northeast and we're looking at opportunities in the Northeast. But at the present time, we're not in the Wilmerite process.

Okay, looking at your '05 guidance, the growth seems fairly anemic. Can you just talk us through some of your assumptions for driving growth in '05?

Well, if you take out the sale of the noncore assets, which was essentially a significant negative spread against the reinvestment of the proceeds in '05, we're expecting approximately 7% growth. And that doesn't take into account that many of the re-development properties that we've been working on have '06 targeted opening dates.

So I think what has happened is the development or re-development process has expanded across '05, and therefore, we won't see much of the benefit of what we have been working on for the last six to nine months until the beginning of '06.

And what are your refinance assumptions for the 14% debt coming due next year?

Our refinancing assumptions, we are currently -- well, we currently have two major pieces of debt coming due at the end of '05, beginning of '06. And we have been out having discussions with those lenders and other lenders regarding potentially early refinancing of that debt. And so far, we're just in a discussion stage.

Those debts have significant -- some of them, a significant prepayment penalties associated with them, and we've been looking for ways in which we can prefund the debts that's coming due.

So for next year growth, you're looking at 3% NOI growth and then $140 million in acquisitions; is that correct?

Plus the impact of Cumberland and Orlando.

Okay. Just moving to some of the retailers in your portfolio, this year, a lot of the, you know, mall guys experienced I would say a spike in store closings, most notably from KayBee, Gad Zooks!, Just for Feet, Wilson's, just to name a few. Where are you guys -- because I think you had exposure to most of those guys. Where are you in re-leasing those spaces?

Well, with respect to each of the ones you mentioned, without identifying tenants, with Kay-Bee as a for instance, we saw about eight store closings and they're all in various stages, from prospecting to lease negotiations. With Gad Zooks!, we saw about seven. Same situation.

In fact, all of them, if you go to Foot Action, all of the closings that have been announced, and/or implemented, we're currently renegotiating with tenants. Again, at some stage of the prospecting process.

I guess, more generally speaking, in the spaces that you lost this year, where are you in the re-leasing process? I mean, how much of it is accounted for?

Accounted for in terms of signed deals?

Let's say in contract. Maybe not necessarily closed, but the prospects look pretty good for re-leasing that space within the next quarter or so?

We have about two leases signed -- about to be signed for about 8,000 square feet and we're in lease negotiations with a number of others, and again, prospecting thereon.

For all the space losses this year?

Yes.

Okay. And finally, just a question on Crown. It has been about a year since you guys had that portfolio. Can you just talk a little bit about where occupancy was when you first got that portfolio and where you are today?

Hold it a minute. We will be right there.

If you take out the noncore assets, which were significantly underperforming, I don't have back to when we first got the properties, but at the end of the first quarter, we were at 89.6%, and we're currently at 89.1% on Crown.

Okay. Thank you.

Thank you. Our next question is coming from Josh Biederman of J.P. Morgan. Please go ahead.

Hi, guys. Can you talk a little bit about the acquisition pipeline, sort of what you're seeing there, and you know, in terms of volume and everything, cap rates as well?

Josh, it's Jon Weller. Well, first of all, we -- it is clear what we've announced, and the cap rates on those, we've announced in our press releases. We're obviously seeing a highly competitive marketplace where cap rates have been compressed to the middle market, mall cap rates are in the 7 1/2, 8% range now, and the malls have higher quality B-plus to A or between 5 1/2 and 7, depending on their quality, their upside potential, and so on. So we are clearly looking in the middle market range of that cap rate continuum. And we are maintaining our discipline so that, you know, we are only looking for assets where we can apply our re-development and repositioning strategies to add value.

Okay. Great. Thanks. And moving on, you mentioned you have 140 million baked into your numbers for next year in terms of acquisitions. That's on top of Orlando and Cumberland.

Assuming you guys have no equity baked in -- which, I think that's what you mentioned, I mean is that sort of a threshold? I mean beyond that, like where do you get sort of uncomfortable with leverage, basically?

Well, as we said, consistently, we want to run the company between 50 and 60%. We're below the 50% level now, following the sale of the noncore properties and prior to the investment in the new acquisitions. So we think we have more than ample capital available for the re-development activities that we've talked about today, and specificity in terms of dollar amount, dollar amount, as well as this specified acquisitions.

So it will -- it would depend on other acquisitions or an acceleration of the re-development process which would be a result of tenant decisions that would activate a re-development process that would cause us to look at whether or not we need to access the equity markets to complete those incremental activities.

Okay. And then just moving on to G&A here, I think you mentioned on the last call that you were hoping to hit a run rate of about 10 million a quarter.

Yeah, based on where we see --

And the change --

Let Josh finish the question.

Sorry, I just want to see if that's changed. I know there are probably extra costs on Sarbanes-Oxley and stuff.

I think, Josh, looking forward to 2005, we will probably be closer to 10 1/2 a quarter.

Okay. Okay. Perfect. And then have you assumed any lease term income for '05? I mean, how do you guys normally project that stuff?

We have some modest lease termination income in 2005. Joe, do you want to give the --

The only lease termination that is sort of identifiable, it has been a million and a half dollars.

Okay. And last thing -- this is just a little bit of housekeeping. Cherry Hill and Willow Grove, the debts coming due in '05 and '06: can you just give us a little bit more specific timing on that? They're pretty big items and they're just sort of the year there. Can you give us a month or a quarter?

Well, the debt comes due at the end of the third quarter and the beginning of the first quarter of '06. And we have had a number of discussions and are awaiting proposals from the existing lenders of those properties. We have also had discussions with other potential lenders. There is no shortage, quite frankly, of debt capital available for those assets. It is really a question as to finding the economics to proceed now, for our waiting until when, you know, until a date closer. Because the market for pre-financing a year to 15 months in advance is still fairly expensive.

Okay. All right. Thank you.

Thank you. Our next question is coming from David Fick of Legg Mason. Please go ahead.

Good afternoon.

Hi, David.

The '04 5 cent guidance range, is that just a function of the timing on the two mall acquisitions?

That's part of it.

What are the other variables? I understand '05, you did you a nice job of explaining that but --

The other variables would just be nailing down percentage rent, which is -- is a variable that depends on, you know, heavily on the last two months of the year. That would be one other component. And I think those are the two major ones.

Okay. Your occupancy was up 130 BPs this quarter from last quarter. How much of that came out of the sale of noncore assets? Or were those always excluded?

No, they weren't always excluded. That was a substantial part of it.

Okay. Great. What percentage of your properties are in the same store pool?

45%. By NOI.

That should ramp up pretty heavily next year, I would assume.

Yes, substantially.

Okay. Two more questions. If you -- you put out the 8-K on the gaming deal in Pittsburgh, and, you know, made it pretty clear that that was really a fee opportunity as much as anything. You also talked about the Gallery -- you know, potential there. I know these things take a long time and I am sure it is premature to even ask the question, but I was just wondering if there is any update there?

Well, the gaming commission was just appointed. As a matter of fact one of the members is -- there's still a question about, but assuming that they begin to get their act together, the best guesstimates are that it would be probably third quarter of '05 before applications. That's the best case. Before applications are taken. And it probably wouldn't be until the end of '05 when we would know whether or not our applications, or the applications that we're involved in, are successful. So that's about the timing, David, before we will really know anything with real specificity.

Okay. And then lastly, do you have detail on what you've spent externally? I know you've spent a lot, you know, in sort of your internal review after the February issues, but can you carve that out and sort of talk about the SoCs 404 experience, what you've learned separately from that process and what that has cost you?

Yeah, the SoCs internal -- I'm sorry, external costs will be roughly half a million dollars before we're done, split probably two-thirds paid to our existing audit firm, and another third paid to some others who are helping us with that analysis. In terms of -- I'm not sure what you're getting at in terms of what we learned. I think as we talked in the past, in some respects it was pretty fortuitous for us, even though it has been in a pain in the neck to go through the SoCs internal evaluation process, coming on the heals of a major acquisition a year ago, and an even smaller acquisition 15 months ago with Rouse, and it gave us an opportunity to really review the processes across the company, look for opportunities to streamline some things, [inaudible] duplication, strength and controls in a number of different areas. So on balance, I think our view is that while it has been expensive, and disruptive to our day to day operations, we think, you know, coming out of this exercise, you know, we're going to be a better company operationally.

Okay. Great. Thanks.

Thank you. Our next question is coming from Alexander Goldfarb of Lehman Brothers. Please go ahead.

Good afternoon. First, what are the long-term financings for Orlando going to be? Right now, it's going to be on the line. What do you anticipate financing it at?

Our intention is,for the short-term, at least, to leave it on the line. We have a $500 million facility, expandable to 650, of which we're only using 100 at the moment, so I think -- plus we're 90% long-term financed, so our initial feeling is to increase the use of the loan.

Okay. So you would leave it on the line at least till like halfway through next year? Or --

I can't give you a particular date but at the moment, we're financing -- we're focused, most importantly, on the refinancings of Willow Grove and Cherry Hill, which we're spending our time looking at at the the moment, and our vision for the financing in Orlando is to keep it on the line of credit.

Okay. Then moving on, what do you expect for management fee income for next year?

What's the question?

Management fee income.

About $5 million.

5 million for the year?

Right.

Okay. Because just looking at next year, you're -- I mean with the NOI growth that you've given, and not doing any share issuance and leaving Orlando on the line, plus doing another 140 million of acquisitions, I mean, the re-development stuff is very small, relative to your asset base. It just seems like your guidance is very, very conservative. I mean are there other things that we should be aware of?

Well, I think one thing that I would make you aware of is that the kinds of re-developments that we're doing require, in a number of cases, moving a lot of tenants around. And so in a number of these cases, we have reduced the period of some of the renewal leases, and hence, while that facilitates our renovation and repositioning of the properties, it also cuts down the renewal margins from what we've experienced in the past. In fact, it has been a significant number of short-term leases that we've done to facilitate it, in some cases putting boxes in line and doing other sorts of things which figure into our plans for these assets.

So how much -- how much NOI do you anticipate coming off-line throughout '05?

It is not a question of NOI coming offline. It is a question of opportunity costs, which would have, in normal circumstances, pushed the NOI growth up faster.

But, you know, as we mentioned, these -- in the case, for instance, of Echelon, where we're putting in a WalMart, that project, from start to finish, will probably take us over two years. So in that period of time, if that's being fairly typical of the length of time involved in some of the transactions we're doing, there's some short-term dislocation.

So I don't think we're being conservative. I think we're being realistic. And when we went into this proposition with Crown Assets in particular, and some of their assets that needed to be repositioned, we envisioned the fact that that was going to be a major project. And hence, we're, you know, moving along almost exactly on the plan that we set forth when we bought these companies a year ago.

In fact, it is almost uncanny so far, we've been on the mark for four quarters and we completed the sale of five of the six noncore assets and we're proceeding with renovation and re-development plans on almost half of the properties that we purchased.

But it is, you know, -- to talk about the re-development we're doing on some of these assets is whole scale repositioning of the property and it requires us moving people around.

Okay. I guess it was just the level of spend didn't seem that much to warrant taking out that much -- kind of reshuffling.

We're very -- yeah, we're very -- as you know, because you visited Willow Grove and you've seen the kind of renovation work we do, we're extremely efficient with the money we spend and I don't think that you should conclude from the fact that we're not doing $50 million a pop renovations, that we're not doing whole scale re-development of these properties. We're just extremely cautious in the way we apply the capital.

Okay. Going back to the tenant issue, one of the guys earlier asked about it, did you -- are you anticipating any more Kay-Bee Toy closings or none?

I think we have -- we've been made aware recently of four more Kay-Bee Toys closings.

Okay.

To take place in the first quarter of '05.

And my final question is, do you have an estimate of your free cash flow for next year?

Just bear with us. It's in the neighborhood of about $100 million.

And that's pre- or post-debt amortization?

Pre.

Pre. Okay. Thank you.

Thank you. Our next question is coming from Greg Andrews from Green Street Advisors. Please go ahead.

Good afternoon.

Hi, Greg.

Just starting off small, the management company revenue looks like it was up this quarter, versus last year, although generally, it has kind of been down. Anything in particular going on there this quarter?

No, there is nothing unusual that -- of any magnitude that would drive that number.

Okay. And looking at the lease expiration schedule, you have a fair amount of owned anchor space, a couple years, and I'm wondering if you can just kind of comment about that? I mean, is that primarily space that is subject to options where you will most likely renew and there won't be much change in the rent? Or is there upside opportunity? Or is there some downside risk?

Well, the information that we have to date -- this is Joe Coradino, Greg. The information that we have to date, and we, you know, we have met with all of the anchors in the portfolio recently, is that for the most part, through '06, we anecdotally believe that it was -- with one possible exception, which is very small one, that all the anchors plan to renew.

Okay. And again, would that be primarily subject to options?

Correct. Yes, it is.

Okay. So no real -- no real pop or a positive expected from that renewal process?

No, no, not from the renewals, per se.

Okay. And then turning to Orlando, could you just provide a little more color in terms of what you see as the opportunity there. Is it a property where there's a chance to manage it somehow differently? Or is it another re-development candidate? Or what's got you so -- what has you interested in that particular asset?

Well, in the big picture, our interest in the asset was as part of our move to have additional properties in the southern part of the, southeastern part of the U.S. So that was one of our drivers and we've been looking at a number of assets in the Florida market.

I think -- I think there is a couple of things that we like about our Orlando.

One is, it is located in an area where there is what I believe to be significant gentrification occurring. There is about 6,000 new higher income housing -- single family homes being developed within several miles of the property. It is also adjacent, fairly close, several miles away from downtown Orlando, which is also undergoing a revitalization. And we see that, coupled with the fact that we think that there are some opportunities to introduce some tenants to that market, who are not currently there, as really the potential for the property.

So, I know there's a new movie theater going in, but other than that, there is no particular re-development angle here?

Well, not that we've announced at this point. But again, that would be our -- that would be what we anticipate. We're going to take a hard look at that.

I just want to add that the assets that we've acquired generally fall into the same pattern of being assets that we feel we can improve, and add value to, by our -- by our leasing abilities and by our management skills. And so far, we have been able to prove that.

We look at the Orlando asset, as one that is in a market where there is several other regional malls, but we feel that this asset has more upside potential for us than any of the other assets in the market. And so we're clearly driven both from the geography as well as the opportunity to add and create value.

Great. Thank you.

Thank you. Once again, as another reminder, for any further questions, please press Star, 1 on your telephone key pad at this time. Thank you. There appear to be no further questions. I will turn the floor back over to you for any further remarks.

Well, thank you very much for participating with us today. We continue to move the company forward, and we're anxious to communicate with any of you outside of this call if you have other information that you want from us. Again, thank you very much for participating along with us and at this point, I think we will end the conversation.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.