Pennsylvania Real Estate Investment Trust (PEI) 2005 Q1 法說會逐字稿

Good afternoon and welcome to the Pennsylvania Real Estate Investment Trust first quarter 2005 earnings conference call. It is now my pleasure to turn the floor over to your host, Jeffrey Goldberger with K C S A Worldwide. Sir, you may begin.

Thank you, Melissa. I'd like to remind everyone this conference call will contain certain forward-looking statements within the meaning of section 21 E of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events or trends and other matters that are not historical facts.

These forward-looking statements reflect PREIT's current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause future events, achievements or results to differ materially from those expressed by the forward-looking statements. Additionally, there could be no assurance that PREIT's actual results will not differ significantly from the forecasts or estimates set forth above or that PREIT's returns on its acquisitions will be consistent with estimates outlined in the related press releases .

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, 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.

In particular PREIT may not enter into one or more of these leases referred to under leasing update or enter into agreements for, or consummate, either the mall financings referred to under other events.

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 press release to reflect new information, future events or otherwise. Investors are directed to consider the risks and uncertainties discussed in documents PREIT has filed with the SEC and in particular PREIT's annual report on Form 10-K for the year ended December 31, 2004.

With those remarks completed I'd like to turn the call over to Ron Rubin, Chairman and Chief Executive Officer of Pennsylvania Real Estate Investment Trust.

Thank you very much. Good afternoon, ladies and gentlemen, and thank you for joining us as we discuss our results for the first quarter and our prospects for the year ahead.

Joining me on the call today are Ed Glickman, President, Bob McCadden, CFO, Joe Coradino, head of our retail division, and also in the room are John Weller and George Rubin, Vice Chairman of the Company, Dave Bryant, Treasurer, and Bruce Goldman, our General Counsel. After the remarks have concluded, the call will be open for any questions that you might have.

As anticipated, we had a strong first quarter, which demonstrates the success we've had with our core business strategy. Building on the momentum we have generated over the past couple of years, we continue to take significant steps to enhance our portfolio and maximize shareholder return. During the quarter we acquired Cumberland Mall in Viola, New Jersey and Gadsden Mall in Gadsden, Alabama. We also have several redevelopment projects in progress, and they are moving forward at a good pace. In the months ahead, we will continue to pursue opportunities within our core markets and targeted regions in the southeast to provide additional growth potential and hopefully, to leverage the development, redevelopment, leasing, and general management strengths of the company.

We're looking forward to the upcoming ICSC conference in Las Vegas. Those days are usually very productive ones for the Company. I'm sure that we will see some of you there. And with that, I'll turn the call over to Ed Glickman.

Thanks, Ron. The company's business plan for 2004 was focused on integration. We tripled the size of our business while meeting the financial and operational goals which we set for our first year post merger.

In 2005 we are focused on execution, taking the assets which we have acquired and driving the performance to new levels through intensive management. We are pleased to announce in the first quarter we earned funds from operation of $0.89, an increase of $0.04 over the first quarter 2004. This increase reflects an underlying increase of 2.4% in same store NOI, as well as the benefit of our recent acquisitions, the achievement of stability in our G&A costs following cessation of operations in Johnstown.

Our stated goal is to revitalize our newly acquired assets by repositioning them to better serve our shoppers. Our repositioning strategies combine remerchandising with physical renovation to enhance our customers' experience of our properties. This process can take up to five years from inception to realization.

Overall occupancy in the retail portfolio was 91.2% compared to 91.9% in the first quarter of 2004. Our power and strip assets were 97.6% occupied, compared to 98.4% in the first quarter of 2004. Sales per square foot in our malls ended the first quarter at $329 per square foot, up 2.8% from $320 in the end of the first quarter of '04.

Average mall-based rents as of March 31, 2005 were 23.01, up 2.4%. Our power and strips centers showed slight improvement in minimum rent level. During the initial stages of the repositioning process we aggregate space for new tenants by weeding out existing merchants who are underperforming. In the first quarter we closed approximately 95,000 in-line square feet in advance of releasing such space to new tenants that we have already identified for '05 and '06 openings in these locations. We expect to close over 200,000 additional in-line square feet during the remaining three-quarters of this year and again have identified tenants for these locations.

Space created by repositioning tenants and our existing vacancies give us the inventory into which we can place new tenants that we expect will better serve our customers to. To that end, in the first quarter of 2005 we signed 109 leases for over 327,000 square feet with in-line merchants. At the close of the quarter we have over 740,000 square feet of new in-line leases awaiting execution with over 300 transactions and work in process in our legal department, a number of which we hope to conclude at or prior to the ICSC convention.

On the anchor side, we had 16 anchors expiring for 1.4 million square feet during 2005. By the beginning of the year we had notice from six anchors that they intended to renew their existing leases. By the end of first quarter we had received notice of eight additional renewals for 561,000 square feet. At present we believe that both of the remaining anchors totaling 82,000 square feet, with late year expirations, will also renew.

When all is said and done, while occupancy is slightly down for the first quarter we are optimistic about the balance of the year and we expect to achieve the occupancy levels outlined in our prior guidance. Obviously, our end the year performance will be impacted by the timing of store openings, any additional unexpected closings and enhanced by additional speculative leasing through the end of the year.

Given its sales performance of the assets the anchor renewals and traction being gained in our re-development properties, we are optimistic about the balance of '05 and reaffirm our current FFO guidance. We are looking forward to '06 when we will begin to generate revenues from these new initiatives.

With that, I will turn it over to Joe Coradino, who will give you details on the many new and exciting merchants that we hope to introduce into our market.

Thanks. We continue to make progress on our redevelopment assets and advance our leasing initiatives. Some examples of key leases executed during first quarter include Old Navy, who signed for an 18,400-square-foot location on the second level of the J.C. Penney Promenade at Cherry Hill Mall. Hollister at Nittany Mall Capital City in Willow Grove Park, Aeropostale at Uniontown , American Eagles for an expansion at Francis Scott Key, and a relocation into larger space at Willow Grove Park, Finish Line at Nittany Mall and Abercrombie and Fitch and Abercrombie Kids at Willow Grove Park.

The re-merchandising of two assets in metropolitan Philadelphia, Cherry Hill Mall and Willow Grove Park, are at the forefront of the in-line leasing efforts for the company. We've upgraded the tenancy at Cherry Hill Mall, an asset that has comparable store sales of $428 per square foot, with the likes of Fossil, Ardent B, Charlotte Russe, Torrid and Expanded Victoria's Secret, Aeropostale, Forever 21, Bath and Body Works, and the soon to open Sephora, Old Navy and Ann Taylor Loft. Each of these strategic moves has served to solidify Cherry Hill Mall as the pre-eminent retail destination in South Jersey.

With the opening of the transactions in our leasing pipeline, we expect to achieve in-line occupancy of this asset, of approximately 92%, a 420 basis-point increase over this quarter end. At Willow Grove Park, where comparable sales are 419 per square foot, we've continued to upgrade tenancy with cutting edge and higher price point merchants such as Abercrombie Kids, Hollister, J Jill, Lucky Brand Dungarees, Elizabeth, Abercrombie and Fitch, and American Eagle Outfitters. Other strategic leasing initiatives that were recently completed,including expanding Victoria's Secret and introducing their new PINK concept, adding Benetton in place of an underperforming Wilson's Leather and introducing upscale tenants such as Coach, Solstice, Crabtree and Evelyn and Lillie Rubin. Consequently, these transactions will ensure the continued dominance of this property as a premiere fashion destination in the Philadelphia metro .

With the opening of the transactions in our leasing pipeline, we expect to achieve in-line occupancy at this asset of approximately 93%, a 570-basis-point increase over this quarter end.

At Capitol City Mall construction continues on the new food court and renovation. We have leases, either fully executed or out for signature, for six of the eight new food court bays, and for approximately 80% of the new in-line gross leasable area in the former food court. We're on schedule to complete by March of '06.

At Patrick Henry, the newest Dillard's store is open, and after the close of first quarter we signed a lease with Borders for a 21,000 square foot location in the new open air addition. We're on schedule to open Borders in November 2005 and the previously announced Dick's Sporting Goods in the first quarter of '06. The common area renovation program is underway, which includes a completely upgraded food court with new ceilings, lighting, furniture and fixture and floor tile to compliment the new addition.

We continue to work on our redevelopment plans for Echelon Mall in Voorhees, New Jersey. In April, the Voorhees township committee rendered the redevelopment ordinance under which we submitted our site plans for approval, invalid. Consequently, we are exploring several options with Voorhees township, including revising the redevelopment ordinance, pursuing variances for the approval of the site plan, and other redevelopments alternatives for the property. We continue to pursue other tenants for this project which are not impact by the Wal-Mart addition.

At New River Valley we're pleased to announce we will sign a lease for a 14-screen stadium seating 2500-seat Regal Cinema and Red Robin Restaurant. We are scheduled to grand reopen the property during the fall of '06 and we believe the enhancement of the entertainment components will serve to attract a greater share of the student and faculty population from nearby Virginia Tech. We are also excited to announce that we have secured leasing transactions that will serve as the catalyst for the rejuvenation of Valley View and Francis Scott Key Malls, two former [Crown] assets.

At Valley View Mall we are relocating several merchants and expanding the footprint in the J.C. Penney section of the property, to assemble the space to add a 30,700 square foot Barnes and Noble. We executed the lease with Barnes & Noble who will relocate from an undersized unit. We estimate total project costs of 4.1 million, including their tenant allowance. The project, anticipated to be complete for fall of 2006 opening is forecast to generate a return in excess of 10% on newly-invested capital. At Francis Scott key Mall we expect to execute a lease with Barnes and Noble to add a 27,000 square foot store. We estimate total project cost at 3.1 million, including their tenant allowance.

The project, which is anticipated to be complete for a fall of 2006 opening, is forecast to generate return in excess of 9.5% on the newly invested capital and recognize significant increases in customer traffic and sales volumes throughout the center.

With over 400 appointments scheduled to date for Las Vegas ICSC, we are enthusiastic about the leasing activity within the portfolio and look forward to enhancing the redevelopment pipeline. Now I'd like to turn it over to Bob McCadden.

Since the start of the year, we have made two important announcements related to our balance sheet. The first, with the amendment to our credit facility, which we discussed in our last earnings call. The second was a recent announcement of planned refinancings of existing mortgages at Cherry Hill Mall in Cherry Hill, New Jersey and Willow Grove Park in Willow Grove Park, Pennsylvania. We expect to borrow $200 million in Cherry Hill Mall at an interest rate of 5.42% for seven years. A portion of the proceeds is expected to be used to repay the existing mortgage loan which has a current interest rate of 10.6% and is expected to have a balance of approximately $70 million at closing.

We expect to borrow $160 million in Willow Grove Park at an interest rate of 5.65% for ten years. A portion of these proceeds is expected to be used to repay the existing mortgage loan, which has a current interest rate of 8.39% and is expected to have a balance of approximately $108 million at closing. The Cherry Hill Mall financing is expected to close in October 2005 and the Willow Grove park financing in December 2005, both subject to the negotiation of definitive loan documents and the satisfaction of customary closing conditions.

In the case of both mortgages, the stated interest rates include cost of locking the underlying treasury rate until closing. We anticipate that these financing transactions will generate approximately $182 million of net proceeds, which we expect will be used to repay borrowings under our credit facility.

In addition to lower interest rates, the new mortgage loans are expected to provide us with additional financial flexibility. Under the proposed terms of each loan, PREIT will have the option to convert the mortgage loans to a senior unsecured loan, under prescribed conditions, including achievement of a specified, investment-grade credit rating. Upon closing, we will be able to capture of the benefits of replacing above-market debt with borrowings at current interest rates, while reducing our exposure to future interest rate increases.

We expect to continue to evaluate opportunities to refinance our mortgages or other obligations that carry above-market interest rates. Over the next few years, we expect there will be a number of opportunities for us to make further improvements to our balance sheet. In July 2007, the 11% preferred stock issuance we assumed as part of the Crown merger can be redeemed at a 5% premium, to its face value.

In late 2008, the REMIC that we also assume with the Crown transaction will mature. This instrument bears interest at 7.43% and currently encumbers 15 of our properties. Earlier this year, when we modified our credit facility we negotiated an option which would allow us to extend the maturity date of the credit facility by 14 months beyond the stated November 2007 maturity date, to give us a flexibility to temporarily warehouse the REMIC properties until suitable financing can be arranged, if necessary.

Let me briefly discuss the impact of these debt financings on our FFO and FAD. Under generally accepted accounting principals, we are required to record mortgage debt which we assume in connection with a property acquisition, at its fair value. Fair value is generally determined based on effective prevailing interest rates that are available for debt obligations with similar terms and features. If the loan has an above-market interest rate, we make a mark-to-market adjustment by recording at that premium.

The debt premium is then amortized as reduction to cash interest expense. For GAAP earnings and for FFO purposes, interest expense is recorded at market rates. For FAD purposes, the debt premium amortization is reflected as reduction in FAD.

For purposes of estimating the impact of these three financings on our FFO, you should compare the mark-to- market rate on the old debt to the proposed interest rate on the new debt. For example, the mark-to-market rate on Cherry Hill is 5% versus our refinancing rate of 5.42%, and the mark-to-market rate on Willow Grove is 6.37% versus our refinancing rate of 5.65%.

If you multiply the difference in rates, 42 basis points unfavorable in the case of Cherry Hill and 72 basis points favorable in the case of Willow Grove, by the respective outstanding mortgage balances, you should compute a net reduction in GAAP interest expense of approximately $0.5 million, or $0.01 a share.

For FAD purposes, you should compare the stated rate on the old debt, 10.6% in the case of Cherry Hill, 8.39% in the case of Willow Grove, to the current interest rates on the new debt. If you multiply the difference in rates, 518 basis points in the case of Cherry Hill and 274 basis points in the case of Willow Grove, by the respective outstanding mortgage balances, you should compute a net reduction in cash interest expense of approximately 6.5 million or about $0.16 per share.

You can estimate the FFO and FAD impact of the excess proceeds by comparing the proposed interest rates on the new mortgages to the interest rate on our credit facility. To help you assess the FFO and FAD impact of these and other future refinancings, we've included additional information on the mark-to-market interest rates on page 13 of our supplemental this quarter. We also expect to post revised debt premium amortization schedule on our website to make it easier for you.

Finally, I also want to cover our G&A expenses. G&A expenses in the first quarter totalled $9.2 million as compared to 10.6 million in the same period last year. The difference is largely due to the completion of our integration efforts. Last year's first quarter included costs for integration consultants, professionals fees, and expenses for transition employees while the Johnstown office was still open. On an annual basis, we expect our G&A expenses to be approximately $40 million.

The lower G&A run rate in the first quarter was the primary reason for our operating results exceeding our earlier guidance, and relates to certain timing issues. We expect to incur these additional costs as the year goes on. With that, we will open it up for questions.

The floor is now open for questions. Your first question is coming from Michael Mueller with JPMorgan.

Hey, guys. It's Josh Bederman here. First off, Bob, I want to thank you for pointing out all that debt premium stuff. I wish more companies would do that. But now, kind of, move to the questions. Correct me if I'm wrong. Crown is now in the same store pool?

Yes.

Did I hear you mention that you guys might be thinking about doing some unsecured debt offerings? Looks like you're mostly mortgage debt. Can you walk me through what you're thinking there?

Essentially, at this point, we're not planning to do any unsecured debt offerings. I think we're doing it in anticipation of restructuring our balance sheet over the next couple of years. Being in position to convert the new mortgages that we're planning to enter into later this year, to give us the ability to convert them to an unsecured borrowing, in the event we choose to do so later on. It gives us additional financial flexibility but at the current time there's no present plans for any unsecured debt offerings.

Lastly, looks like New Garden Development there got pushed back a little bit. Can you talk a little bit about that?

Well, the New Garden Development, the ground up development in New Garden is basically symptomatic of the new development ground-ups every place. We have been negotiating -- our development people have been negotiating -- a plan approval with the local bureaucracy, and it's taken us a little bit longer to get through that process, than we originally expected. But that's part of the problem today in the ground-up development business.

All right, thanks.

Thank you. Your next question is coming from Alexander Goldfarb with Lehman Brothers.

Good afternoon. First, Joe, just want to go back to Echelon. Obviously it's been in the headlines.

Can you just give us an update in terms of tenants going into the -- I believe it's the Sears box -- then also, what your thoughts are on the Wal-Mart -- you know, how long you're willing, if it's your decision or their decision, in terms of what happened with that space, in terms of potentially bringing a different tenant in there, if that's easier to get this thing passed?

First of all, with respect to other tenants we're moving forward in discussions with tenants for both the Sears box and outparcels, and intend to do that separate and distinct from Wal-Mart approval. With respect to how long we'll continue to pursue Wal-Mart, we don't have the answer to that question right now.

Our intention is to continue to work with Voorhees Township in a cooperative atmosphere to find a solution to the problem, which was identified in the 11th hour by the township officials.

Moving on next to Lehigh Valley Mall, I believe the competing lifestyle centers now has approval and is going up in Saucon Valley. I know that your JV partner at the Lehigh Valley has mentioned putting in lifestyle components there, but I haven't heard much about it. Can you just give us an update?

The best we can tell you right now is that we know that our partner signed -- has been negotiating with a number of lifestyle tenants -- to locate a lifestyle addition at Lehigh Valley. We're not in a position to announce any specifics at this time, but you can rest assured that that process is very much of a priority for both companies.

Is that something that you think we'd hear a little more on later this year or do you think it won't be until next year?

We can't tell you for sure, but as soon as we're in a position to make that announcement, you can rest assured that we will.

I would just add that the site plan has been approved, and that's a matter of public record for the lifestyle edition in Lehigh.

That would be along MacArthur Road, or on the backside?

It would be in the front of the mall.

Next, I think you mentioned 200,000 square feet that you're planning on bringing out of service, for inventory? What is the NOI associated with that, that we would expect to see drop off, before it comes back in service?

We'll get that for you in a second, Al.

Okay. I'll move on. Just two final questions. First is, you mentioned the redevelopment -- last call, 200 million -- as of last quarter, it was 65 million that was currently underway. What's it now? Or maybe I missed it in the supplemental.

Hold on. We're trying to dig that out for you.

Okay.

It's our expectation that the annualized rent would be about $5 million.

5 million of NOI or rent?

5 million of annualized minimum rent, plus or minus.

Okay. Associated with the 200,000 that would go out of service? Hello?

Can you hear us?

No. Now I can. It went dark.

The expectation for each tenant in our repositioning category is that they'll come out of service and are already slated to be replaced by a known tenant.

OK, so there is minimum down time, then?

Yes.

OK. My final question is on the -- on the dividend policy, you haven't raised it since the Crown acquisition. It looks like your FAD coverage is improving. Just want to know your thoughts about when we can see the next dividend increase.

Alex, this is Bob McCadden. Typically on a quarterly basis, our board evaluates the dividend policy. The next meeting is May 19th and I'm sure the board will, again, reconsider the level of dividend, at that point, and if something were to occur we'll certainly announce it.

This is John Weller. Just to answer Alex's question with respect to the redevelopment budget. Our numbers have not changed since the first quarter, which included 65 million for 2005. However, as we just said, the timing of the Wal-Mart redevelopment can't be estimated at this time, and that was approximately 13 million of the 65 million.

Thank you.

Thank you. Your next question is coming from David Fick with Legg Mason.

Good afternoon. I'm also here with [Nate Isbey]. I'm still a little bit confused about the upside to your guidance, which was $0.83 to $0.87 cents for the quarter. We see where it was to our model, which was in G and A, but what was the upside to your guidance? Why did you do better than your own guidance?

In the first quarter, it was primarily because of the timing of some G&A expenses.

Why wouldn't you have seen that they were going to be reduced year-over-year, knowing that you had the [reorder] costs last year that you wouldn't have this year?

We expect, again, probably closer to your normalized run right about $10 million, and some of these costs were costs that we expect to incur, maybe travel and other types of costs relating to professional fees. Again, the nature of these are such that, you know, obviously, following last year, I think we tried to convey a sense in the organization that we want to watch our G&A costs and I think people were overzealous in their spending in the first quarter, quite frankly. We expect, eventually there's going to have to be a breaking point. We're going to lose a couple of cents later in the year.

That gets to my second question. Your guidance is down sequentially against your actual -- first quarter is usually the lowest quarter for a mall company -- is that G&A? What do you have in the way of increased expenses and reduced revenues to have reduced guidance?

In the second quarter, obviously, a lot of costs are related to the ICSC convention, which was probably the highest quarterly cost in our G&A expense for the year. So that's going to be driving a good chunk of the increase in G&A costs, as well as lower FFO growth as compared to the first quarter.

Are you going to accrue ICSC costs through the year?

No.

Your cost for Cherry Hill and Plymouth projects, so far, and your anticipated budget?

I don't think, Dave -- we're not in a position right now, until we complete our redevelopment plans, which have been very complicated for both of those projects -- to determine exactly what our capital investment are going to be, as we sit here today. That's still very much a work in process.

Okay. Lastly, you're close to your acquisition guidance of 140 million. Where would you now peg the year, for acquisition?

Dave, it's John. I think you saw in our keeping the guidance at the same level -- that we had knots in the previous quarter and expectation that meets that guidance.

You're really not looking to do any significant acquisitions for the balance of the year?

The 140, just to clarify, excluded Cumberland, in our guidance.

Cumberland was part of last year's guidance.

OK, that's helpful. Thank you.

Thank you. There appear to be no further questions. I would like to turn the floor back over to management for any closing comments.

Okay. Well, thank you very much. I guess we've done a reasonably good job in giving you the information, and we will continue to do so. This is a hallmark of our company. As you know, we provide what we think is as good a supplementary information as any company in our industry, and we appreciate the fact that so many people have joined with us today, and you can rest assured as events continue to progress within the company, and they will, we'll keep you advised. I want to thank you again for participating with us today.

Thank you for your participation. This does conclude today's teleconference.