Pennsylvania Real Estate Investment Trust (PEI) 2005 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Pennsylvania Real Estate Investment Trust conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the call over to your host, Garth Russell. Garth, you may begin.

Good morning, everybody. I'm just going to read the forward-looking statements and then I'll turn the call over to management. This call will include certain forward-looking statements within the meanings of Section 21E of the Securities and Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1955. Forward-looking statements related to the expectations, beliefs, projections, and 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 certain events, achievements, or results to differ materially from those expressed by forward-looking statements. Including, but not limited to management's determinations from the -- from time to time, whether to purchase any shares under the announced repurchase program, limitations on shares repurchased and future borrowing arrangements and changes in market conditions.

Additionally, there PREIT's actual results will not differ materially from the forecast and estimates set forth in this call. Or that PREIT's returns on its acquisitions will be consistent with the estimates outlined in the related press releases. PREIT's business is subject to uncertainties regarding revenues, operating expenses, leasing activities, occupancy rates and other competitive factors relating to PREIT's portfolio and changes in the local market conditions as well as general economic, financial and political conditions, including the possibility of outbreak or escalation of war or terrorist attacks. Any of which may cause future events, achievements or results to differ materially from those expressed by forward-looking statements. In particular, the successful redevelopment of any property is subject to a number of risks, including, among others, that PREIT's redevelopment plans might change and its redevelopment activities may be delayed. Anticipated project costs may increase and the Company might not enter into one or more of the lease agreements referred to in the discussion of the redevelopment activity.

Unanticipated expenses or delays would adversely affect PREIT's investment returns on a redevelopment project. In addition, PREIT might not enter into an agreement for or consummate the mall financing for which it has received a commitment letter. 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 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 10K for this year's ended December 31, 2004. I'm now going to turn the call over to Chairman and Chief Executive Officer, Ron Rubin. Ron?

Thank you very much and good afternoon, ladies and gentlemen. Thank you for joining us as we discuss our results for the third quarter and our plans for the future. Joining me on the call today are Ed Glickman, our President; Bob McCadden, our CFO; Joe Coradino, the head of our Retail Division; and also in the room are John Weller and George Rubin, Vice Chairmen of the Company, Dave Bryant, our Treasurer; Bruce Goldman our General Counsel; And Mario Ventresca. After the remarks have concluded, the call will then be open for any questions that you might have.

During the third quarter, we continued to execute on our previously-announced redevelopment initiatives. We are satisfied that we are making real progress with our redevelopment strategy and recognize the pressure that the program is placing on our earnings. We are accelerating this program to the best of our ability, confident that it is the correct approach to the building of shareholder value. We are also continuing to examine our portfolio for other mixed use and other opportunities. The Company provided today its 2005 and 2006 guidance. The guidance will be discussed during this call. With that, I will now turn the call over to Bob McCadden.

Thanks, Ron. I'm going to briefly review the Company's third quarter operating results, review guidance for the balance of 2005 and 2006 and make some comments on the Company's balance sheet. Beginning this quarter, the Company is presenting FFO per diluted share in addition to FFO per basic share. Previously, the Company reported historical operating results and provided earnings guidance only in terms of FFO per basic share as the difference between the two measures has historically been immaterial for about $0.01 per share in most fiscal quarters.

We have included an attachment to our press release that includes comparative FFO per-share amounts for all of 2004 and the first three quarters of 2005. Following this transition quarter, we expect to report operating results and provide guidance with FFO per diluted share as the principle non-GAAP reporting measure to be consistent with our industry peers. FFO for the third quarter of 2005 was $36.2 million, a $1.6 million or 4.6% increase over the corresponding period last year. FFO per diluted share was $0.88 in the third quarter of 2005 or $0.03 per share higher than last year. FFO per basic share was $0.89, also $0.03 higher than last year. FFO in the quarter included a $3 million gain from the sale of undeveloped land. Excluding the $3 million gain, FFO per basic share for the quarter would have been $0.82, which was within the range of previous guidance of $0.80 to $0.83, provided in August of this year. For calendar 2005, the Company estimates that net income per diluted share will be between $1.12 and $1.20. FFO per basic share will be between $3.72 and $3.80 and FFO per diluted share will be between $3.67 and $3.75.

Turning to 2006, the Company estimates that net income per diluted share will be between $0.59 and $0.71. FFO per basic share will be between $3.62 and $3.74 and FFO per diluted share will be between $3.57 and $3.69. Following my comments, Ed Glickman will provide additional color on our 2006 guidance. We feel that our balance sheet will provide us with adequate capacity to meet the capital requirements contemplated in our 2006 business plan. At the end of September, we had $211 million of availability under our credit facility. Debt was approximately 48% of our total market capitalization and 84% of our debt was fixed. Our exposure to floating rate debt has been reduced from the 25% at June 30, as a result of applying over $175 million of excess proceeds from the new Cherry Hill and Magnolia Mall mortgage loans, which closed this quarter to pay down the lines.

As a result of these financings, our weighted average interest rate on mortgage debt has been reduced from 7.37% at the end of 2004 to 6.83% at the end of September, of 2005. With the real growth part mortgage financing scheduled to close in December, we expect to end 2005 with over $426 million of new long-term fixed rate financings in place, together with the $370 million of forward starting interest rate swap agreements entered into the second quarter, we have taken steps to mitigate the risk of interest rate increases on our future operating results. On the ratings front, Fitch recently updated its credit review of the company. They reaffirmed a B-plus rating on our preferred stock, established a BB rating for the Company and revised their outlook on the Company to positive from stable. With that, I will turn it over to Ed Glickman.

Thank you, Bob. Mall operating performance in the third quarter continues to reflect a significant amount of dislocation from the simultaneous redevelopment of a number of PREIT properties. Our same-store portfolio experienced an NOI drop of approximately 3 million or 4.5% year-to-year. Of this amount, 1.1 million reflects a reduction in lease termination income and 1.9 million results primarily from a $0.6 million reduction in percentage in straight line rents and a $1.4 million drop in net tenant expense reimbursements. Of the 1.9 million in same store decline, 1.1 million comes from Echelon mall. $0.3 million comes from Patrick Henry and Cap City's, both of which are in the later stages of redevelopment. After adjusting for lease termination income, same store performance at our properties not involved in redevelopment activities is slightly down.

In the fourth quarter of this year, we forecast the opening of the first phases of Patrick Henry and Cap City as well as a seasonal pickup in occupancy. These events have been programmed into our forecast and are present in our guidance. In 2006 we expect a pickup in NOI as Patrick Henry and Cap City come online. By the third quarter, we expect that our investment of approximately $38 million will be generating incremental NOI at over a 10% run rate. Next year, however, Echelon will continue to have a major negative impact on earnings. Year-to-year, we expect a $2 million drop in NOI from this single asset, pending its reconfiguration as a Town Center. This property will absorb 2/3 of the combined growth from the Patrick Henry and Cap City projects.

Even after the impact of Echelon, we expect 2006 same-store NOI to improve by about 2% year-over-year. This same-store NOI will be supplemented by an NOI contribution from a full year of the assets which we acquired in 2005. We do not expect any contribution from ground-up development activity in 2006. A portion of this total NOI gain will be absorbed by an increased interest cost resulting from a higher level of borrowings and higher average rates. We expect the balance of this gain to cover an increase in G&A costs. G&A in 2004 was 44.7 million. In 2005, we expect a reduction to approximately 39 million, reflecting delayed hiring, lower dead deal costs, and diminished incentive compensation. In 2006, we project that we will return to a run rate of approximately 42 million, assuming no dead deal costs and our success at hiring for some critical open positions.

By the end of 2005, the Company expects to have invested 60 million in its assets undergoing redevelopment. This number will increase by an additional 58 million during 2006. As I mentioned, by mid-year '06, we expect to see an NOI run rate of 10% plus on our 38 million Patrick Henry and Cap City investments. We do not, however, expect any substantial additional contribution from the other REIT development projects until late in the fourth quarter of next year. In addition to funds spent on REIT development, we expect to invest $96 million in ground-up developments, tenant improvements, and returning capital expenditures during 2006.

Lastly, we budgeted $100 million for acquisition in 2006 with the mid-year target date. In our model, we assumed that these acquisitions would be made at our marginal cost of capital and that they would not be accretive. Therefore, there is no budgeted FFO contribution from this activity in our 2006 number. While we do not expect to see the fruits of our labor reflected in 2006 earnings growth, we believe that we are in a position to create significant value in our portfolio in the coming years. We do not believe that this value is currently reflected in our stock price and we have decided to institute a share buyback plan. At the moment, we believe that our stock at its current price and representing the potential embedded in its underlying portfolio is a better investment than the majority of the properties we have seen recently in the market at their current prices.

This is not to say that there are not any acquisitions we would view as being strategically important to the Company or that would prevent significant opportunity, that wouldn't redirect our thinking. It is, however, to say that looking forward, it is our expectation that in '07 and '08, we will start to see accelerated same-store NOI growth from our repositioning work and future earnings momentum from new ground-up developments and that we do not believe that this potential is currently reflected in our stock price. It is our intention to fund our capital requirements in 2006 from our line of credit, supplemented by additional long-term mortgage issuance and a residual cash flow from operations in excess of dividend payments. As Bob mentioned, we believe that we have sufficient liquidity to meet all of our needs during the current year.

In summary, we have spent 2005 laying the groundwork for redeveloping assets that are critical to the future success of our company. Our renovation of Cap City's and Patrick Henry are continuing to demonstrate the quality of our work. We believe that the success of these properties will demonstrate to our retailers and shoppers the difference that our talents and our focus can ultimately bring to our properties. In the interim, we intend to speed up the process. We intend to mitigate the dislocation caused by our renovation work. We appreciate your ongoing investment in PREIT and we want you to know that our central focus is long-term value creation for our shareholders. On that note I will turn it over to Joseph Coradino who will comment on our redevelopment activities. Joe?

Thanks, Ed. We continue to make steady progress on our redevelopment properties by using our proven experience that will add large format and lifestyle retailers to our enclosed malls. Today, we're announcing a new project at Magnolia Mall in Florence, South Carolina. We signed a letter of intent with Barnes & Noble for the inline addition of a 28,000 square foot store alongside the Best Buy that we added to the property in 2002. The budget for this project is $4 million, including expanding the building, tenant allowance and relocation costs. We expect to generate a return of 9% on the marginal capital committed to this project and expect to increase occupancy from 86.6% at the quarter-end to 92% at the end of 2007. At Lycoming mall in Williamsport, PA, where last quarter we announced a major redevelopment program that included adding Best Buy, Dick's Sporting Goods, and Borders to the property, we have signed a letter of intent with Old Navy for a 16,900 square foot store that's scheduled to open in the fourth quarter of '06. Including these transactions, we expect to increase inline occupancy at Lycoming mall from 78.9% at quarter-end to 98.1% at the end of 2006.

At New River Valley, where we're under way with a major redevelopment that includes adding a 14-screen stadium-style Regal Cinema and Red Robin on outparcels, we've also executed a letter of intent with Dick's Sporting Goods for a 45,000 square foot store that will replace the former Peebles Department Store and we expect to increase occupancy from 85% at quarter-end to approximately 95% at the end of '07. Construction is progressing as we delivered a completed pad to Red Robin on October 14, for an opening during the first quarter of 2006. We anticipate starting site work for the Regal Cinema during the first quarter with pad deliveries scheduled for April, 2006. And the cinema's opening is currently planned for December of '06.

At the mall of Prince George's, we're excited to announce a Marshalls and Ross Dress for Less in 65,000 square feet of newly-created space beneath the new Target store. We've executed LOIs with both retailers and are currently negotiating leases. We've also signed a letter of intent with Red Lobster for an additional outparcel, next to the Olive Garden, another Darden Restaurant concept.

Our redevelopments that are under construction are nearing completion. At Patrick Henry Mall, the expanded Dillard’s store is open with the Borders and Red Robin on schedule for openings in November of this year. The shell of Dick's Sporting Goods building is constructed with their opening slated for the first quarter of 2006.

At Capital City Mall, construction has been completed on the new food court with tenants completing the build-out of their spaces in anticipation of November openings. Phase II of the project is underway with demolition of the former food court and entrance for a spring 2006 grand opening. At Cherry Hill, Plymouth Meeting Mall and Echelon malls, we have begun the entitlement process and expect to announce a number of exciting transactions in the coming quarters. We anticipate beginning construction on these properties in the latter part of 2006. We began 2005 with five properties under redevelopment. In 2006, we expect to have 12 properties under redevelopment and -- 12 properties under redevelopment and 9 that will be under construction during the year. Since 2004, we've developed strong ties with expanding large format retailers, securing three transactions with Dick's Sporting Goods, three transactions with Ross Dress for Less, three with Barnes & Noble, two with Best Buy, and two with Old Navy.

We've used these relationships to drive the occupancy at our centers. In fact we've done 15 deals with these 6 retailers totaling approximately 450,000 square feet. Of this total, approximately 50,000 square feet have opened, leaving 400,000 square feet to open in the future. This represents 290 basis points of occupancy. With the redevelopment projects coming online, we expect to improve inline occupancy within the portfolio to approximately 88% by year-end 2005, an improvement of 60 basis points versus the third quarter ending 87.4% occupancy. Looking forward to 2006, we expect to finish the year with inline occupancy improvement of approximately 150 basis points over 2005 to 89.5%.

Looking beyond 2006, as the redevelopment properties stabilize, we expect to drive sales, increase our leasing leverage, and deliver property level NOI growth in the mid-single digits, consistent with our peer group companies. During the third quarter, we made significant progress toward these goals, having signed leases with nationally-recognized retailers such as Lucky Brand jeans, Justice, Jimmy Z., Le Gourmet Chef, American Eagle Outfitters, Hot Topic, Finish Line, Champ's, Bath & Body Works, Express, Victoria's Secret, Yankee Candle, and Johnny Rocket's. On the anchor front, all 16 anchors that had expirations during 2005 have renewed their leases, and for 2006 there were 12 anchor leases set to expire. By the end of the third quarter, we received notice of five renewals. Of the remaining seven, we expect that six will renew. We have received notice from Bon-Ton of their decision to vacate their premises at North Hanover Mall and we've reached a preliminary agreement with them to remain in operation through August of '06. We have commenced discussions with several potential replacement tenants and believe the vacancy left by Bon-Ton presents an opportunity to upgrade the tenancy and redevelop North Hanover Mall. We are excited by the improvements that we've made to enhance our customer shopping experience, encouraged by the progress we're making on our previously-announced redevelopments, and we welcome the challenge of executing our business plan to create growth in our portfolio. I thank you and now I'd like to open it up for questions.

[OPERATOR INSTRUCTIONS] Our first question is coming from Alex Goldfarb of Lehman Brothers.

Just a quick -- first just some P&L questions. I noticed that you guys redid your expense lines, you consolidated real estate expenses in cam and then you sort of broke out utilities separately. Are you -- is this the new format going forward? What was the reason for this?

Alex, it's Bob McCadden. This is probably the first stage of a two-stage process that will be either completed the end of this year or early part -- or the first quarter of '06. I think what was driving it principally in the second -- or the third quarter was our outsourcing arrangement with SMS to do housekeeping and maintenance. Essentially replacing a lot of our salaried employees with outsourcing vendor and, therefore, was making the line item comparisons very challenging. So rather than look at it in terms of what the source of the expense is, we aggregated all of those expenses into cam, utilities, and other, to make it more meaningful to people like you to be able to look at our recovery rates and again make the period to period comparisons more meaningful.

Okay, then further getting into the line items. It -- the run rate seemed to go up by about $2 million. Is that just related to timing of recoveries or is this a new level that we should anticipate going forward?

Run rate in what sense?

On the expense line.

Some of that is seasonal, we tend to have --.

It was about 2 points of margin on the NOI. I'm just wondering if that's seasonal -- if that's just one-time or if that's near level?

Yes, I think it's more seasonal. We don't expect any significant change in our overall recovery rates or in level of expenses.

Okay, so it should go back to like the 62, 63% level?

You mean on an operating margin?

Yes, on the NOI.

I think our -- we ended last year I think at 62.7. We're going to be slightly below that, I think primarily as the result of lower than planned occupancy for 2005. Our plans for '06 had that moving back up above 62%.

Okay. Okay. And then on the Christiania Phase II, there was the $3 million gain. That's fine. There was discussed the $4.8 million recovery; is that something in Q4, or that's next year?

The $4.8 million recovery, effectively -- if I can maybe characterize it a different way, the partnership received $17 million of proceeds from the sale of the land. The first claim against that $17 million would be the recovery of our expenses that we had into the project. So effectively that's not an income statement item, it's rather a recovery of our existing investment.

Okay.

I mean it's kind of big picture, there was $17 million of proceeds, rounding to make it easy, $5 million of cost in the project. So there's $12 million of proceeds to allocate lease recorded in the third quarter, $3 million, which we believe is the low end of a range of possible settlements.

Okay.

There may be an additional amount that we received or recorded in the fourth quarter. At this point we really can't give you a better estimate than what we've provided to date.

Okay, so it could be another -- another few million?

Al, this is Bruce. We're not going to speculate on the outcome of our negotiations with our partners.

Okay. And what about this $5 million nonoperating gain? I'm assuming that's FFO for '06, what's that relate to?

Well, as we look at redevelopment opportunities at some of our properties, we envision that there will likely be scenarios where it's more advantageous for us to sell parcels of land to potential mixed use partners, if you will, from a tax standpoint versus taking an active role in the build-out of some of those mixed use expansions of the property. So again, with the number of properties that are currently contemplated, including the one announced at Echelon, we believe that there is a reasonable basis that we would sell some parcels either as redevelopment properties or otherwise, to generate that income next year.

Okay, that's fine. So they're outparcel sales. Then my final question just has to go back to the redevelopments. Obviously you guys have laid out your guidance for next year. There's certainly plenty of detail on the redevelopment timing, but a lot of this stuff seems to hit more into '07. Which I know obviously you're not giving '07 guidance. But some of the bigger projects seem to not hit until either late '06 or into '07. As we -- as we think out into the next year or two, are there any other sort of major either development items or projects -- malls that are coming offline to be rehabbed? Or things that are coming online that you haven't talked about that we should be aware of?

Alex, this is Ed. Is that a question for '06 or a question for --?

More towards '07. Because in your prior conference call in the second quarter, you guys talked about another eight projects that could potentially come offline and be rehabbed as this current round of I guess rehabbing comes back online. So I'm just trying to get a handle on where we should think of NOI coming in and out of the portfolio over the next, call it 18 to 24 months.

As Joe mentioned in his comments, by the middle of next year we should be involved in almost a dozen redevelopment properties, of which the majority will be in construction. However, as I said in my comments, it's unlikely that there will be an NOI -- a significant NOI impact from any other properties but Cap City and Patrick Henry until the end of '06, when a number of big boxes come online, or '07.

Okay. And then the eight properties in shadow redevelopment, you're still on track to go through with that, correct?

Yes, in fact, we will be starting construction on a number of them next year. It's just they picked their time and they will be under construction next year and coming online either at the very end of the year or in '07.

Okay. And then we will see a similar effect on the -- on the -- on the P&L, as those properties come offline and then go through the rehab phase. Correct?

That's right. However, as I mentioned, some of that will be mitigated by the presence of the income coming from Patrick Henry and Cap City, parts of which are opening up this quarter and the remainder of which will open up in the next two quarters.

Okay.

So that will -- in effect, we'll have $38 million that are invested in those two assets and our expectation is we will be earning slightly over 10% on those properties, that contribution will be somewhat mitigated by the impact of beginning construction on the other eight assets.

Okay. Thank you.

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

Good afternoon. I understand I think a lot of the before and after on the redevelopment dilution. Your same-store NOI numbers really are troubling. After you adjust out the one-time items, you're essentially flat in a market that every other mall company that we cover is showing very good strength. Where are the biggest challenges in your portfolio in terms of sort of maintaining or growing your same-store numbers? Is it the old Henry portfolio? Is it Crown? Is it the Ralph's assets, which I assume are mostly not same-store because of the redevelopment.

If you exclude the properties -- David, this is Joe Coradino. If you exclude the properties under redevelopment and the lease termination fees, you have got a 0.36% increase for the quarter. It's a result of the decline in occupancy we've seen as we remerchandise the center. It's -- it seems to be coming mostly from the Ralph's and to a lesser extent from the Crown portfolio, primarily driven by our proactively taking back spaces from underperforming merchants and remerchandising opportunities.

Aren't most of the Ralph's assets in the redevelopment portfolio?

Only Plymouth Meeting and Cherry Hill are in the redevelopment.

Right and you say you've got --.

Echelon is not in that?

Echelon is too, but Morristown isn't, and Exton is not.

And what is -- sort of -- I mean you talk about the fact that you're taking space offline or you're taking tenants out that you expect to replace. Do you have -- guidance isn't showing an awful lot of benefit from that. Do you have tenants lined up for these vacancies? Or is this something you feel like you're going to be fighting for a long time?

Well, in the case of -- in the case of the redevelopment assets, we obviously have tenants lined up. We are -- we have a strategy in place with respect to Morristown at this point and we're working towards the strategy at Exton, but if you look at some significant closings that have impacted our same-store numbers, you've got the closing of Clements market at Festival at Exton, Joanne Fabrics, the parent-teacher store there, all at Festival, sale of the Home Depot parcel at Northeast Tower, the closing of the Gap at Beaver Valley Mall, and of course the Gadzooks and Westfield throughout the portfolio.

Okay, your redevelopment move-outs, do you have a sense of how many square feet are being taken out of service during this process? Or is this just something you're working through space by space?

We have -- we have an answer, sort of on an asset by asset basis, but to give you a precise number right now, I don't think I could. Because, again, it's very much a moving target, if you will, as we go through these redevelopments.

Okay. Can you comment on the redevelopment at Echelon? The Wal-Mart chains -- we understand that there was community opposition. The -- would you say that the before and after picture is better without the Wal-Mart and with the lifestyle approach you're taking now? Was this a response to, or did it sort of present as a better alternative?

Actually, it's -- it's not really a response. We began our planning of the mixed use development at Echelon prior to the community opposition sort of galvanizing, because we saw it as the right thing to do there. If you understand the South Jersey market with the number of competitive facilities there -- and given the location of Echelon which is a very difficult mall location -- we really began to rethink our strategy there and move in a direction of a mixed use facility. We think the outcome certainly -- the -- the response from the community has been very positive. In fact, our most ardent opposition showed up at the public hearing and expressed support for the project. So we see it as a positive, and we also see the comparison between the retail returns we anticipate getting at Echelon and the multi-family returns being better as well.

Okay, that's my second question on that. The residential side, you said you were going to sell that to a third party developer. You guys do have experience as a multi-family manager. Would it make sense to perhaps retain some of that in a joint venture structure, number one? And number two, is that entitled already for residential? And number three, what do you think the sale proceeds could be, assuming it all goes third party?

Well, let me -- Dave, it's Ron. Let me just give you -- try to answer your questions as best as I can. Number one is we absolutely are confident that the project will be approved. We have both local political support, and as Joe outlined to you, the -- we believe we have community support for this plan. We are exploring different structures with a developer which could possibly involve the Company retaining some kind of an interest or an option to participate in the equity of the projects. It is really at this point undecided, but clearly that is a possibility. Yes, you remember, David, as part of our purchase with the Ralph's Company, we -- we acquired this entire property for $18 million.

Right.

And the opportunities here that we see today are going to be a substantial return on that investment in addition to retaining a good portion of the retail property when it's redeveloped.

While you're -- can you comment on the gambling initiatives in the state and where you see them headed, particularly in downtown Philadelphia?

It would be very subjective. I -- as you know, the act permits two, what they call category 2, of casinos in downtown Philadelphia -- or in Philadelphia proper, not necessarily downtown. At the present time, the -- the whole licensing procedure is still up in the air. I don't think there's -- it's still kind of amorphous at this point. So it would be hard to prognosticate exactly what's going to happen.

Okay. I have a couple of other things I will do offline, I will call you guys later. Thanks.

Okay.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is coming from Michael Mueller of JP Morgan.

Hi, guys, can you hear me?

Yes.

Great. Real quick, the 13 -- the $5 million, $0.13 gain next year that's in guidance, is that in FFO and net income?

Yes.

Okay. Did you say -- I may have missed this -- that same-store growth going forward in '06 versus '05, do you think you will be back up to a positive 2%? Is that correct?

Yes.

Okay, having said that and just looking at the mid-point of guidance as you put it out this year is 364 (ph), it's -- if you strip out the $0.07 nonrecurring gain this year, or settlement this year, it takes you to about 364. If you take the mid-point of guidance next year and you strip out that $0.13, you get down to 351. If you're going to have positive same-store growth next year, you're acquiring a pretty sizeable property in the fourth quarter, you don't have anything in the numbers for acquisitions or dispositions. How does the clean growth go down 4% then? Can you just walk us through that in a little more detail if you could?

Mike, one of the big drivers is interest expense next year.

Okay.

While I think we feel comfortable with the actions that we've taken with respect to short-term rates, our anticipated cost of short-term financing next year is going to be up roughly 130 basis points over where it was in 2005. So we have higher outstanding debt as we finance our acquisitions as well as some of our redevelopment and end development through additional borrowings. Naturally the interest costs associated with active development is capitalized, but nonetheless, what we would ascribe to operating needs is going to go up.

And is that purely just from rates going up? You're saying all these --?

The rate environment -- I think our mortgage interest expense is going to go up by, roughly, $6 million next year.

Okay.

Although we do get the benefit of the debt premium amortization burning off. And we also have -- our bank loan interest is primarily -- we'll probably have lower outstanding borrowings, but it's more than offset by the 130 basis point increase in rates that we would anticipate next year over 2005.

Okay. So some of that is a modeling assumption in terms of what you're expecting short-term rates to do.

Correct.

Can you give us an idea of what you've assumed, just generically?

We're just basically using the LIBOR curve. So whenever we did our budget a few weeks back, if you look quarterly interest rates in LIBOR plus our line of credit spread.

Okay. Can you comment -- if you're looking to the redevelopment pipeline here, can you just talk about what your capitalization policy is for these major redevelopments? What's capitalized, what’s expensed, and just how you see that working?

Our capitalization policy is essentially take what is described as the project cost in the accounting literature. So it's any fees that we pay -- obviously to outsiders -- for design, construction, services. We also would capitalize interest on expenditures in accordance with GAAP, and we do capitalize portions of our internal development staff who are working on active development projects.

So you don't essentially take part of a project out of service if you know you're taking back a lot of space.

No, we're not doing anything with respect to existing space. It's really just on an incremental basis. We're not allocating a portion of -- if we take 20% of the mall out of service, we don't take 20% of the investment in that mall and capitalize interest on that. It's really on a purely incremental basis.

Okay. Okay. So it seems like it's equally, if not maybe a little bit more, in terms of financing assumptions as some of the short term dilution from taking space back. Is that fair?

That's fair.

Okay. And last question, I missed the very beginning of the call. I'm sure you've probably talked about it, but I apologize for this. Can you talk about what triggered going from basic to fully diluted earnings in guidance?

Yes, I will try to kind of handle that one. I think, quite honestly, as we've gotten calls from analysts who are looking to build their models and trying to take the information that we provided in our supplemental and reconcile it to their own share counts, I think it dawned on us that people were making different assumptions about the number of shares to be used for both the earnings guidance or earnings projections, as well as NAV computations. So I think this is one of these things that was kind of a creeping change over time that, probably up until the end of 2003 there was really no discernible difference between basic and diluted, and when we went back and looked at it we saw that it was creeping to roughly $0.01 a quarter, $0.05 annual impact. So our view was rather than add to the confusion, why not put it out there, get in locks-step with the rest of the industry, so again we just get that -- any concerns about computations behind and just move forward on that basis.

Okay. And auditors never said anything before about just running with basic?

No, because the auditors really don't have any affiliation with the non-GAAP presentation.

Okay. Okay. Thank you.

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

Just a quick follow-up on the stock buyback. What do you see really happening there in terms of your availability of free cash? Clearly we agree with your conclusion that your stock is probably your best buy right now, but what would you predict assuming your share price holds in at these low levels would be the reality? In terms of volume?

I can't predict for you exactly when or if stock will get repurchased, David. But suffice it to say that when we look at the market at the moment and compare the implicit growth in our own assets against what we see in the properties that have been offered to us recently, we've decided it's clearly in our best interest to redirect our focus of our acquisition capital on our own -- on our own stocks. That's not to say that opportunities won't come about. In fact the changes change our thinking. However, at the moment, we're fairly convinced of our own ability to rework our assets, although it's taking a little longer than we expected. We're pretty firm in our feelings that at the end of the day we're going to create a significant amount of value here, and a number of the properties that we've looked at recently, we don't feel they had either the same level of potential or the same advantageous pricing.

So again, we have resources both -- we have a provision in our line of credit that provides us up to $50 million to buy back stock. We also, in the refinancing of Cherry Hill and Willow Grove, provided a fair amount of capital to repay our line of credit. Another reason why the interest costs changed was because we pushed up the amount of fixed rate financing, taking advantage of a long-term market, utilized those proceeds to pay down the line of credit, and that will give us the ability to finance significant amount of our capital growth next year, as well as the fact that we're looking at a couple of assets that are coming to fruition for more long-term debts. So we think we have plenty of liquidity. We know fairly well what we're going to be spending on redevelopment next year and we have been actively looking at properties but when we looked at our own stock we liked our stock better.

One follow-up to that. Is there a chance that you guys are going to be able to put out a sort of before and after picture, in terms of the amount of NOI that you're going to be generating through the redevelopment activities over the next couple of years? A couple of your peer group companies have done that. It's been very helpful.

Well, we'd like -- if you can offer us that disclosure, we will take at a look at it see what we can do. We always try to put out a very detailed disclosure and we'd be happy to consider a presentation for that, that you’d find effective.

Thank you.

[OPERATOR INSTRUCTIONS] There appear to be no further questions.

Okay. This is Ron Rubin. I just wanted to sum up by saying if -- again, we know that our program as we outlined it today will continue to put pressure on our earnings. However, we believe that the REIT development program we have outlined not only is the right way, but the only way to go. As people who believe we understand what is best for these assets, it is our opinion that in order to maximize the value and the productivity of what we believe are these irreplaceable properties, that we must take all of the measures possible to enhance these assets and move them into the 21st Century. I thank you for your attention today and we'll see you soon. Goodbye.

Thank you. This concludes today's conference. You may disconnect all lines at this time and have a great day.