Pennsylvania Real Estate Investment Trust (PEI) 2004 Q4 法說會逐字稿

Good afternoon and welcome to the Pennsylvania Real Estate Investment Trust's fourth-quarter and 2004 year-end conference call. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the call will be opened to your questions. It is now my pleasure to introduce your host, Mr. Jeff Corbin of KCSA. Sir, the floor is yours.

Thanks very much, Marissa (ph). Good afternoon, everyone, and welcome to this afternoon's Pennsylvania Real Estate Investment Trust Conference Call.

Before we begin, I'd like to remind everyone that this conference call will contain forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934, Section 27-A of the Securities Act of 1933 and the U.S. Private Securities Litigation Reform Act of 1995, forward-looking statements related 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 view about future events are subject to (sic) 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 actually results will not differ significantly from the forecast and estimates that the Company is saying (indiscernible) or that PREIT's returns on its acquisitions will be consistent with the estimates set forth in related press releases or other statements.

PREIT's 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 the forward-looking statements.

PREIT does not intend to and disclaims any duty or obligation to update or revise any forward-looking statements or industry information set forth in this conference call to reflect new information, future events, or otherwise. Investors are also directed to consider the risks and uncertainties discussed in documents previously filed with the Securities and Exchange Commission and in particular PREIT's annual report and Form 10-K for the year ended December 31, 2003. Financial and supplemental information (indiscernible) of the call is also available on PREIT's Web site at www.preit.com.

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

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us as we discuss our results for the fourth quarter and our prospects for the year ahead. We have completed our first full year as a retail focused REIT and the former Rouse and former Crown malls have completed their first full year under PREIT management. The success of these strategic maneuvers is apparent in the Company's strong results, these discussed here today. As evidenced by our recently announced transactions, we continue to make aggressive moves designed to enhance our portfolio and maximize the return for our shareholders. We will continue to pursue opportunities within our core markets and other targeted regions, such as the Southeast, to provide additional growth potential and leverage the development, redevelopment, leasing and general management strengths of the Company.

2004 was a transitional year for the Company. A great deal of our energy was focused on the successful integration of Crown into PREIT, but we continued to enhance our portfolio even more. We added 2 new malls to our portfolio and announced 4 new redevelopment projects. Additionally, our earlier redevelopment efforts began to bear fruit. We had grand opening for the new Filene's in the redeveloped Dartmouth Mall in Dartmouth, Massachusetts, in which sales have grown substantially, and for the new Target in the completely revamped Mall in Bridge (indiscernible) in Hydesville (ph), Maryland. These events showcased our ability to revitalize properties by attracting new, exciting new tenants that will draw customers and we are working to repeat these successes in the redevelopments that we will discuss in further detail.

Joining me on the call today are Ed Glickman, our President, Bob McCadden, CFO, Joe Coradino, the Head of our Retail division, and Jon Weller, Vice Chairman. After the remarks have completed, the call will then be open for any questions that you might have. At this time, I would like to turn over the discussion to Ed Glickman.

Thank you, Ron.

During 2004, we successfully completed the integration of our newly acquired portfolio while maintaining our operational and financial performance. Funds From Operations for the year was $3.70 above the Company's guidance. These favorable results were due to higher-than-expected increases in specialty leasing revenues and percentage rents. Other contributing factors included lease termination fees, third-party leasing commissions and other fees earned during the last quarter of the year. Additionally, the purchase of Orlando Fashion Square closed earlier than anticipated.

Underlying the FFO number are sound operating statistics. First, overall occupancy in the retail portfolio was a healthy 91.6 percent. This compares to 91.8 percent at the year end 2003, in spite of the number of early-year bankruptcies and a substantial amount of repositioning work, which Joe Coradino will discuss with you in a few minutes. Second, mall sales ended the year at $324 per square foot, up 2.8 percent. Third, average mall-based rents at the end of '04 were $23.28, up 4.1 percent. Fourth, our power and strip assets remain stable with over 95 percent occupancy and showed a slight improvement in minimum rent levels. Lastly, NOI on same-store assets rose by 0.4 percent in a year when half of our total NOI was derived from new or redevelopment property.

In summary, we have demonstrated that we've been able to successfully manage and operate at the new scale that we achieved as the results of our recent acquisition.

During 2004, our leasing team turned in an excellent performance by completing 493 transactions or slightly over 2 million square feet. At the end of '04, we had over 250 transactions in process. Joe will give you some leasing highlights in his remarks.

Looking forward to '05, we intend to move from integration to execution as we focus on improving the market position of our assets. To achieve this, we will seek to reposition a number of our assets by adding new merchants and renovating the existing physical plant. Regardless of their repositioning status, all assets will be the focus of intensified management programs intended to create a fundamental change in our shoppers' experience. As we create new ideas and concepts around the redevelopment properties, we intend to move these concepts into our stabilized assets. Joe Coradino and his team have reached out to many industry thought leaders in an attempt to bring state-of-the-art concepts to the design and operation of our properties.

In today's announcements, we've set forth out FFO guidance for the first quarter of '05. FFO per share for the first quarter of 2005 is expected to be between 83 and 87 cents per share. We have also set forth our FFO guidance for the year. For the year, we expect to be between $3.72 and $3.84. In considering the results for '05, we are reminded of the dilutive nature of the sale of the noncore assets completed in September of '04. These properties were underperforming and traded at a high cap rate. We had expected this when planning our acquisition of Crown. Had these assets been sold on January 1 of '04, our FFO for the year would've been $3.58. The midpoint of the expected range for '05, $3.78, represents an approximate 5.6 percent increase over '04 results, net of the 12 cents per share contribution from the recently sold noncore assets. Our estimates reflect our expectations of a continuing solid operating performance of our properties in '05. They do not, however, reflect the future contribution that we expect to receive from our redevelopment initiative, which will not begin to come into service until 2006.

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

Thanks, Ed.

The previously announced modification to our credit facility represents an important step in achieving a capital structure that will facilitate our development and acquisition plan. By refinancing the higher interest rate mortgage loans assumed as part of the 2003 acquisitions as they mature, we expect to convert a portion of the debt premium to FAD.

As a reminder, our new credit facility includes a reduction in our pricing grade, lower capitalization rates for our ratio computations, and a 1-year extension to November 2007 with an option to extend the term for an additional 14 months.

Based on our current leverage ratio, our borrowing margin has decreased from 1.75 over LIBOR to 1.05 over. Last week, we borrowed 55 million under the credit facility to repay a 59 million, 5 percent second mortgage on Cherry Hill Mall. The 70 million, 10.6 percent first mortgage matures in October of this year. We anticipate refinancing this loan at a significantly lower interest rate.

Turning briefly to Sarbanes-Oxley, we're winding down our current year SOX 404 initiatives as we complete the preparation of our 10-K, which will be filed shortly. No material weaknesses in our internal controls over financial reporting have been identified.

Joe is now going to cover some of the more exciting things that are happening at some of our properties.

Thanks, Bob.

We have continued to gain momentum on the leasing, operations and redevelopment fronts. In fact, all signs point to a robust 2005 leasing program, as we look forward to Las Vegas ICS (indiscernible). As Ed referenced, we've utilized our long-standing relationships with national tenants to introduce them to multiple locations in our portfolio. Some examples of key 2004 leases include Aeropostale, who signed for Cherry Hill, Francis Scott Key; Bally's at Jacksonville Uniontown at Crossroads, Hot Topic at Magnolia, Willow Grove, Valley View, Uniontown, Wire Ridge (ph) and Chambersburg; Hollister at Dartmouth, Francis Scott Key and (indiscernible); and Finish Line at Cherry Hill, Dartmouth, (indiscernible), Valley View and Wire Ridge (ph).

We continue to focus on initiatives that leverage our new scale of operations. In February, we introduced CORE, a program which stands for creating outstanding retail experiences. The program represents the application of a new standard for mall operations, housekeeping, marketing and specialty leasing at our properties with the goal of ensuring that we enhance the customer appeal of (indiscernible) malls. As part of the program, we've developed a mall standards booklet and incorporated it in centers for mall employees. Operations orders will begin in the first quarter and each mall will be evaluated 3 times in 2005. CORE will become the premium mall-branding platform.

Also on the operations front, we are negotiating the contract to outsource housekeeping, foodcourt housekeeping and maintenance services for our enclosed regional mall portfolio. In addition to significant cost savings, this initiative is designed to enhance customer appeal, consistent with the CORE program. In addition, we are diligently working with several revenue-generating initiatives, many of which will be implemented during 2005. We've executed an application with the Pennsylvania Lottery for lottery ticket distribution machines at 6 of our properties. We are evaluating the expansion of this program to the balance of our Pennsylvania properties. Other programs include parking lot standard advertising, a standardized mall barricade program to provide us with an opportunity to share in advertising revenues, introducing wireless providers to our common areas and the expansion of mall extras, where we sell convenience items at the customer service locations.

On the redevelopment fronts we continue to make progress. In November, 2004, we celebrated the opening of a 140,000 square foot Filene's department store at Dartmouth mall. Filene's registered their most successful charity day event for the company with over 1.2 million in sales for the day. Holiday season sales were positively impacted by the Filene's opening as well with December comp-store sales at 407 per square foot, an increase of 4.6 percent since the beginning of the year. Gift certificate sales also benefited with December sales up 30.3 percent and sales for the year up 11 percent.

We continue to move forward with our redevelopment projects that were previously announced. At Capital City Mall in Harrisburg, construction has commenced on the new foodcourt with the renovation and remerchandising to be completed by March, 2006. At Patrick Henry, construction is underway on the Dillard's expansion and the construction contract for the mall renovation is out for bid. Dick's Sporting Goods will open in March, 2006 while the new small shop GLA is scheduled to be delivered by 2005. At New River Valley, we are in negotiations with Regal Cinemas and Red Robin restaurant, which are scheduled to open in March, 2006.

We continue to actively identify opportunities to create value with our portfolio. Today, we would like to present 2 exciting redevelopment projects, Cherry Hill and Plymouth Meeting malls. The Cherry partnership was retained to create master renovation plans for these 2 premier assets. The cherry Partnership has designed such well-known retail experiences as Mall of America, the River, Gordon (ph) Plaza and Universal City Walk. Jerry's (ph) plan for Cherry Hill Mall includes the addition of Bistro Row, a Main Street promenade and new leasable area. The property produces annual sales volume in excess of 325 million, including market-leading performance from Macy's, Stonebridge (ph) and J.C. Penney. Since we acquired the asset in April of last year, we've operated the tenancy to include Liz Claiborne's men's store, R&V (ph), Charlotte Rouse and Torrid (ph). We also will add new retailers Sephora, Fossil, Ann Taylor Loft and an 18,000 square foot Old Navy store. We are realizing the success of this remerchandising program through our comparable sales, which increased since acquisition $43 per square foot or 11 percent to $434 a square foot. The Old Navy is slated for an August, 2005 opening with Bistro Row slated for completion in holiday, '06.

Plymouth Meeting mall, anchored by Boscov's and Stonebridge (ph), is located at the intersection of the heavily traveled Pennsylvania Turnpike, Northeast Expansion and Interstate 476. In order to differentiate this asset, our current plan is that a national (indiscernible) of several lifestyle tenants as well as 6 restaurant adds. We've executed NOIs with California Pizza Kitchen and Chance (ph) with proposals out to On The Border and Fleming's, a division of Outback. We currently estimate the total investment in redevelopment activity to be approximately 200 million, including the 61.75 million allocated to our projects that are currently underway. While the timing and -- (technical difficulty) -- is contingent upon tenant open to buys, we believe that this capital will be spent for 2007.

We are enthusiastic about the leasing pipeline, excited about the redevelopment prospects we've identified in Cherry Hill and Plymouth Meeting malls, encouraged by the progress we are making on our previously announced redevelopment and believe that we can deliver on both revenue-enhancing and cost-shaving initiatives that will expand our property level operating margins.

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

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Mike Mueller, JP Morgan.

Maybe a question for Ed -- just looking at the fourth-quarter outperformance, -- or a question for Bob, too, maybe -- looking at the fourth quarter outperformance, can you kind of walk us through and break down how much of it was better -- was due to better-then-expected real estate operations versus, say, the lease term, which I think was an extra lease term, which was a couple of cents, and the extra third-party fees that you were talking about?

It's probably about 3 or 4 cents of property operations improvements, again focused on specialty leasing, as well as percentage sales increases over original expectations. It was probably about 2 cents of lease termination fees that we had originally anticipated recording in 2005 when we provided the earlier guidance in November, which came through in the month of December of this year. Then we also had probably about a cent or 2, a cent and a half of third-party leasing commissions and refinancing fees.

Okay. It's Josh Peterman (ph). Do you still have -- do (indiscernible) still include 140 million of acquisitions for '05?

Yes, Our guidance for '05 includes 140 million of acquisitions midyear.

That's net, or like net of dispositions, or that's gross acquisitions?

That's gross acquisitions.

Okay. It sounds like you just said the 2 cents of lease term slipped, I guess came sooner than you expected, so that's '04 instead of '05, so that's sort of 2 cents down but your guidance is going up. Can you walk us through how you get that extra nickel in '05?

Yes, a couple things -- from the guidance -- between the time we had released our earlier guidance and today, we've completed the execution of our 2005 business plan. A couple of things that we talked about today -- one, we picked up about 4 cents a share from the revised terms of our line of credit. We also picked up about a penny a share in the payoff on the Cherry Hill second mortgage. Offsetting that is Cumberland Mall, which we had originally built in or expected to close on January 1 -- didn't close until the 1st of February, and the sale of Laurel Mall will have a 1 cent negative impact on our 2005 guidance from our previous number. So it's -- (technical difficulty) -- interest and then 2, 1 from the sale and 1 from the lease closing on the Cumberland acquisition.

Okay, great. Then one last thing -- can you just give an update on what's happening with Schuylkill Mall?

Schuylkill Mall continues to be held-for-sale. We are actively marketing it to third-party prospective buyers. You know, we are involved with some discussions and we hope to have some progress on that sale sometime in 2005.

David Fick of Legg Mason.

Good afternoon. I was wondering if you could comment a little bit on the one-time fees and the fee line (indiscernible) general, including how much pure third-party property management is in this year's guidance.

David, are you looking more on prospectively or --?

Well, I'm looking at what were the elements of sort of the larger fees last quarter, and then looking forward, what is the -- sort of 2 separate questions.

Yet, we had -- in the fourth quarter, we received a fee from -- the refinancing fee from the Bellevue where we our (indiscernible) manage the property, and that was about a penny a share. We also had some third-party leasing commissions that were earned on third-party managed properties or previously-managed properties, including almost -- about three-quarters of a cent for Bass Pro at property in Harrisburg. We also had probably another half a cent of commissions again from other third party managed properties in the fourth quarter.

Just to note for '05 comparative purposes, we've received about $600,000 of fees this past year from Cumberland Mall, both in terms of the base management fees as well as their various leasing commissions. That obviously goes away next year with the addition of that property into our portfolio. We are currently managing now 2 other properties, 2 malls for third parties, and the total fees there are probably less than a couple of cents per share.

Those are the old Zale assets still?

No, these are the Susquehanna Mall and Hudson Mall.

Okay, great. This is probably for Ed or maybe you. The equity in unconsolidated income was down, while depreciation and amortization from unconsolidated investments was way up. What were the dynamics there?

One of our equity (indiscernible) investees in effect recorded a catch-up adjustment in depreciation in the fourth quarter. I guess, in their closing of the books for 2004, they realized that they had under-depreciated one of the assets that goes back several years where there was effectively a 4-year catch-up recorded in the fourth quarter. The effect through the fourth quarter was about $1.1 million, and that's effectively accounting for the change that you see in that line.

It wasn't material enough to require a restatement?

No.

Okay. Then I guess the last question is for Ron. Can you talk a little bit more about the slots progress, which you know appears from a public prospective to have slowed a bit in Pennsylvania? Any comments on that?

Well, as you know, David, we've entered into a transaction in Beaver County which is a development program for the Company and in which we will hopefully -- if we are granted a license, we have it competing -- we have competing enterprise there but we are, I'll say, guardedly optimistic that we will be awarded, or our group will be awarded this racetrack license. If that does happen, we automatically get a slots license with it. The Company will be the landlord of the new developed property, and we will receive a good rental stream.

We are expecting that the hearing should take place sometime before the end of April, and that's what we've been told but there have been delays because the competing group has gone back to the court and asked for more time to put their proposal together. The court originally had turned them down and then they appealed and were granted more time. But in the long run, we think we are still a much stronger group and we feel optimistic. That's that one.

It's really in the hands of the politicians and the groups that are going to be granting the license right now, and so we don't have anything further to report other than what I've just told you.

How about in downtown Philly?

In downtown Philly, there is a process that's taking place where the mayor has appointed a committee to give the City guidance in terms of potential locations, even though the Gaming Commission itself has complete control over the location of these various entities. The City really does not have any authority to grant or advise or even consent to the locations. However, practically, they can be an impediment, so they will probably be part of the equation going forward. But from everything we hear, the Commission won't be ready to take applications until at least the earliest the fourth quarter of '05, which means that they will probably be granted sometime in '06. It's just -- you know, there's discussions continuing and there's a lot of good water under the bridge before this is going to be done.

You guys still see the Galleria as a potential site there, though?

Well we see -- obviously, we see it is a possibility although the political leaders have come out publicly and stated that they don't see East Market Street having the infrastructure to be able to handle the increased auto traffic and the increased bus traffic. So, I don't know how that's going to end up playing out but at the present time, there hasn't been anyone in favor of East Market Street slots at this point.

Okay, thanks a lot, guys.

Alexander Goldfarb of Lehman Brothers.

Good afternoon. First -- and perhaps you covered it off in your initial remarks -- can you just refresh us what the same-store pool is composed of? Are all the -- where we stand in terms of the quarter and the full year?

Can you repeat the question? Are you asking what is included in the same-store pool or -- (multiple speakers)?

Right. From your opening comments, it sounded like half the NOI was not, so I just want to get a sense of, you know, timing, because there's been a number of things that have gone, especially on the redevelopment side.

Almost exactly 50 percent of the NOI for the year was from new properties, so properties under redevelopment.

So looking out into '05 and based on the timing of your redevelopments, when they came online, when can we expect more like something in the 80 percent?

Beginning next quarter, the Crown properties will come into the same-store numbers, Alex.

Okay, so end of Q1. Okay.

If you look on -- when you go to our supplementals, if you look on Page 38, you'll see this broken out (inaudible).

Okay, I will take a look. Next, there was a newspaper item commenting that you're maybe a bidder on the golf course in Haverford. Can you just comment on that?

Yes, I think, as we sit right now, I think the golf club has publicly withdrawn the option of taking bids on the property, so I think, at least right at this moment, there is no activity on that front.

Okay. Then moving to Echelon, there seems to be some local opposition, not necessarily targeted at Wal-Mart but a big box in general. Do you see any delays in that project?

We're moving forward with that, and our hearing is in April, and we are anticipating moving forward with that on schedule.

What is the hearing?

It's for approval of an overlay District 4 for Wal-Mart at Echelon and the other out parcels, etc. (multiple speakers). It's part (indiscernible) of the process.

Okay, so you need that approval?

That's correct.

Okay. Finally, you mentioned Plymouth Meeting and you mentioned bringing National Grocer. Who were you thinking about bringing there?

Well, I can't say that but I do want to clarify one thing. I didn't say -- I'm not sure. Did you say National?

Yes, that's what I was asking -- (multiple speakers).

The word I was using was "natural."

Oh, natural, so something like a Whole Foods, Trader Joe's, in that realm of thinking?

Exactly.

(OPERATOR INSTRUCTIONS). Greg Andrews of Green Street Advisors.

Good afternoon. Could you just comment on the outlook for G&A expense into '05?

Sure, I'll take care of that (ph). We have done a serious amount of work on creating business-process improvements within the Company and focus our efforts on picking through the G&A of the Company at our renewed (ph) scale, and it's our expectation that our G&A in '05 will be equal to or less than the G&A in '04. That's our expectation. So, we have been diligently working on making whatever changes we need to make in order to slow the rate of growth that we experienced last year.

Okay, so for modeling purposes, using '04 would be at the conservative end of the model?

Yes, I think we should be able to do better than that.

Okay. Then I think, you know, you mentioned the total cost of redevelopments that you anticipate over the next few years at 200 million, and then you said I think 61.7 is products currently underway. Is that the total cost of those projects, or the cost you've already spent?

That's the total cost of those projects.

Right.

Okay. Do you have some rough budget or guidance in terms of how much you anticipate will be spent at Cherry Hill and at Plymouth Meeting?

Not at this time. We're working on hard numbers at this point, but it's not something we are prepared to announce.

Okay, thank you.

(OPERATOR INSTRUCTIONS). There appear to be no further phone questions. I will now turn the call back over to management for closing remarks.

Okay, thank you very much for your participation in this call. As always, we are prepared to be very responsive to your questions and if you don't care to here them on this call, you can certainly feel free to contact any of the management people who are on the phone here now privately; we will be happy to respond and answer your questions. With that, I will just say thanks again for joining with us. We are optimistic that the Company can continue to improve. With that, I will just say goodbye and speak to you soon. Thank you.

Thank you. This does conclude this afternoon's teleconference. You may disconnect your lines, and enjoy your day.