Pennsylvania Real Estate Investment Trust (PEI) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Pennsylvania Real Estate Investment Trust fourth-quarter and year-end 2005 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Garth Russell with KCSA. Thank you, Mr. Russell. You may begin.

Thank you, Claudia. I'm just going to read the Safe Harbor, and then I will turn the call over to Ron Rubin. This conference call will include certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the US Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, believes projections, future plans and strategies, anticipated events or trends, and other matters that are not historical facts. These forward-looking statements reflect PREIT's current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause future events, achievements or results to differ materially from those expressed by forward-looking statements.

Additionally, there can be no assurance that PREIT's actual results will not differ significantly from the forecast and estimates set forth in this call or that PREIT's returns on its acquisitions will be consistent with the estimates outlined in the related press releases.

Business is subject to uncertainties regarding the revenues, operating expenses, leasing activities, occupancy rates and other competitive factors relating to PREIT's portfolio and changes in local market conditions as well as general economic, financial and political conditions, including the possibility of outbreak or escalation of war or terrorist attacks; any of which may cause future events, achievements or results to differ materially from those expressed by the 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, PREIT's redevelopment activities may be delayed, anticipated project costs may increase and the Company may not enter into one or more of the leases referred to in its discussion of redevelopment activity. Unanticipated expenses or delays would adversely affect PREIT's investment returns on a redevelopment project.

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 and conference call to reflect new information, future events, or otherwise. Investors are also directed to consider the risks and uncertainties discussed in documents PREIT has filed with the Securities and Exchange Commission and in particular PREIT's interim report on Form 10-K for the year ended December 31, 2004.

Now I'd like to turn the call over to Ron Rubin, Chief Executive Officer of Pennsylvania Real Estate. Ron, the floor is yours.

Thank you very much. Good afternoon, ladies and gentlemen. Thank you all for joining us as we discuss our results for 2005 and some of our plans for the future. Joining me on the call today are Ed Glickman, our President; Bob McCadden, our CFO; and Joe Coradino, the Head of our Retail Division. Among the others in this room are George Rubin, Vice Chairman of the Company, and Bruce Goldman, our General Counsel. After our remarks have concluded, the call will then be opened for any questions that you might have.

Yesterday, we announced the pending retirement of Jon Weller, one of our Vice Chairmen. I would like to take this opportunity to thank Jon and to acknowledge his contributions to the Company. Jon has been instrumental in PREIT's growth and success. I know that all of us will miss him.

We're making meaningful progress at our redevelopment properties and expect to post occupancy and NOI growth increases in the second half of this year. As will be discussed in more detail by Bob, Ed and Joe, we're completing two redevelopments and are under construction at five additional properties. In addition, Joe will discuss the substantial progress we have made with Federated Department Stores, regarding the four Strawbridge & Clothier stores scheduled to close in our portfolio.

We're focused on execution in 2006, and I'm pleased with our progress and believe that we're taking the right approach with our properties. With that, I will now turn the call over to Ed Glickman, who will speak to you about the Company's operating results. Ed?

Thanks, Ron. 2005 was both an exciting and a challenging year for PREIT in the expected sense from our progress and redevelopment of our properties and the operational improvements that we have made in running our business. The year has been challenging in many respects as well. During the first few months of 2005, we experienced a large number of store closings that setback our occupancy.

As was the case with all of our competitors, we face the uncertainty from anchor restructuring. In our case, this layer of uncertainty overlaid the self-induced friction caused by our redevelopment activities. Our team responded admirably to these challenges. By year end, we had recovered from our midyear occupancy issues and made demonstrable progress in the redevelop.

In 2006, we will bring to completion the first examples of our repositioning work, Patrick Henry and Cap City Mall. We believe that you will find our work on these assets to be impressive and indicative of the level of quality that you can expect from our finished product.

In addition to these malls, we will also continue the creative redevelopment of our assets with five new projects breaking ground during this year. The process involved in recreating these assets in their new form is difficult and highly disruptive. The more assets that we have in this process, the greater the Company's future earnings potential but also the greater the immediate dislocation. Until we get to a point where more assets are completed than are in progress, we will continue to bear the frictional costs of this dislocation.

In the long run, we expect that our newly-positioned assets will achieve impressive return on both the marginal redevelopment investment and perhaps more importantly additional NOI growth on the existing asset base as well. Our redevelopment market is more than opportunistic; it's necessary. We are in the midst of fundamental changes in the retail environment. We're looking at a future where retail concepts will be delivered just-in-time and will have a shorter and shorter half-life.

Alternative shopping venues including the Internet will impact our properties. As the world changes, we must change our properties so that we are proactive in our response to the marketplace. We have always stressed that the ultimate value in PREIT's portfolio is its exceptional location. We will continue to position and reposition our assets to improve their productivity and realize their highest and best use. In many cases, this may come to include mixed-use development.

Before I hand it over to Bob, who will discuss the 2005 numbers, I would like to echo Ron's comments regarding Jon Weller. Jon has played a critical role in the development of PREIT and has been exceptional mentor to many of our most talented young people. We wish him all the best. With that, I give you Bob McCadden.

Thanks, Ed. I'm going to cover the Company's fourth-quarter operating results, update our guidance on 2006 and make some comments on the Company's balance sheet and capital plan. Before I get into the details, I wanted to bring to your attention a minor change in our income statement presentation. Previously, certain ancillary income items and associated expenses were included in management Company revenue and G&A expenses. To more accurately portray the operating performance of our properties, we have reclassified these items to the captions "Other Real Estate Revenues" and "Other Property Expenses."

Net income per diluted share for the fourth quarter of 2005 was 19.4 million, a 0.3 million or 1.7% increase over last year. Fourth-quarter results included a $2.4 million gain on the sale of a strip shopping center in Exton, Pennsylvania.

FFO for the fourth quarter of 2005 was 46 million, a 0.7 million or 1.7% increase over the corresponding period last year. On a per diluted share basis, FFO was $1.11 in both quarters. For the full year, FFO was 152.8 million, a 5.2 million or 3.5% increase over 2004. On a per diluted share basis, FFO was $3.70, which was within the range of our previous guidance of 3.67 to 3.75 provided back in October.

During the fourth quarter, we recognized 1.5 million of additional gains from the sale of undeveloped land. Bankruptcies and store closings that were announced in early 2006 also impacted our fourth quarter's results. FFO for the quarter was reduced by approximately 1.2 million or $0.03 per share, as we established reserves for pre-petition tenant receivables and accelerated the amortization of above-market lease intangibles related to these tenants. The non-cash impact of the above-market lease adjustments, which are reflected in our income statement as reductions in base rent, was approximately $0.02 per share.

Turning to our guidance for 2006, we estimate that annual net income per diluted share will be between $0.43 and $0.55. Annual FFO per diluted share will be between $3.53 and $3.65.

For the first quarter, the Company estimates that there will be a net loss per diluted share between $0.06 and $0.02; that's -$0.06 and -$0.02. But FFO per diluted share will be between $0.72 and $0.76 after a $0.09 first-quarter charge relating to Jon Weller's retirement, which was announced yesterday. In connection with Jon's departure, we will record a charge of approximately $3.8 million in the first quarter or about $0.09 per share. In today's earnings release, we disclosed a $0.07 per share annual effect resulting from his retirement. The difference between the two amounts represent the anticipated reduction in G&A expenses that will be realized over the remaining 3 quarters of 2006.

We ended 2006 with our balance sheet in good shape. Near the end of 2005 -- I'm sorry, we ended '05 with our balance sheet in good shape. Near the end of the year, we borrowed 80.5 million to fund a portion of the Woodland Mall, which left $147 million of availability under our credit facility. Recent mortgage financings -- including Willow Grove, which was completed in December; Valley Mall, which closed last month -- and the mortgage financing that we're currently pursuing for Woodland Mall should provide us with adequate capacity to meet the capital requirements contemplated in our 2006 business plan. Capital spending in 2006 is expected to be approximately $250 million with $120 million earmarked for redevelopments, including anchor store repurchases, $97 million for development initiatives including land purchases and $33 million for recurring capital expenditures and tenant allowances.

As a result of the aforementioned financing activity, our weighted average interest rate on mortgage debt was reduced from 7.37% at the end of last year to 6.6% at the end of 2005. We anticipate that the weighted average interest rate on long-term debt will continue to decline as we complete our planned 2006 financings as current interest rates are lower than our portfolio average. In addition, the interest rate hedges completed in 2005 provide us with some comfort on future rates as we look forward to 2007 and 2008 capital events.

At the end of December 2005, debt was approximately 54% of our total market capitalization, up from 46% in the prior year, and 81% of our debt at the end of the year was fixed.

With that, I will turn it over to Joe Coradino.

Thanks, Bob. Good afternoon, everyone. We've begun to see dramatic results from the redevelopment of our portfolio. We began 2005 with 10 assets in redevelopment. We've completed two -- Patrick Henry and Capital City Mall -- and we've begun construction on five -- New River Valley, Lycoming, South, Valley View, and Francis Scott Key Malls. The remaining three -- Cherry Hill, Plymouth Meeting and Echelon -- are expected to begin construction in 2006.

At Patrick Henry Mall in Newport News, Virginia, Borders, Red Robin, American Eagle Outfitters and New York & Company opened during the fourth quarter of '05. Additionally, in January 2006, Bailey's Pub opened for business and the 50,000 square foot Dick's Sporting Goods store is scheduled to open next week.

At Capital City Mall in Harrisburg, Pennsylvania, all eight of the food court bays are open and operating. The Company has signed leases with Hollister, which will open in March of '06; Forever 21, which will open in July of '06; and additionally, Garfield's Restaurant is under construction for an August opening.

At New River Valley Mall in Christiansburg, Virginia, Red Robin Restaurant is scheduled to open on March 20, 2006. Regal Cinema is on schedule to open in December of '06. In December of '05, we signed a lease with Dick's Sporting Goods for an opening in November of '06. A simultaneous renovation of the interior and exterior of the mall will be completed in the third quarter of '06. On a 16-acre site that we acquired adjacent to the asset, we received anchor approvals for the development of 170,000 square foot power center to include two out parcels and seven planned category-dominant retailers.

At Lycoming Mall in Williamsburg, Pennsylvania, we are putting the final brushstrokes on a redevelopment plan that will increase occupancy at the mall to 95% for the first time in the mall's history. Today, we signed a lease with Old Navy for 16,900 square feet. Best Buy's pad was turned over in December with a projected opening in August of '06. The construction of the Dick's, Borders, and Old Navy stores is anticipated to begin early in the second quarter, with Dick's projected to open in August of '06 and Borders and Old Navy projected to open in November of '06. The cosmetic renovation of the mall is slated to be completed concurrent with the opening of these new stores.

In Florence, South Carolina, where we own Magnolia Mall and The Commons at Magnolia, we've broken ground on a new development across Interstate 20 called The Plaza at Magnolia. Olive Garden has erected steel. The Home Depot pad is complete with a June opening anticipated. Also, during the quarter, we signed a lease with Longhorn Steakhouse for an out parcel location.

Last Friday, Best Buy opened their 20,000 square foot store in an out parcel location at the Cumberland Mall in Vineland, New Jersey. Barnes & Noble at Valley View and Francis Scott Key Malls will open in the third quarter of '06.

At The Mall at Prince Georges in Hyattsville, Maryland, an asset where we completed the redevelopment and opened a new Target store in October of '04, we executed a lease with Marshalls for 35,000 square feet of space, and we expect to open the store in the fourth quarter of this year. Also at The Mall of Prince Georges, Olive Garden has obtained their building permits and are preparing to start construction for an August opening this year.

We will commence renovations in the second quarter at two market-dominant Pennsylvania properties -- Wyoming Valley Mall in Wilkes Barre and Viewmont Mall in Scranton. The comparable sales are strong at both Wyoming Valley and Viewmont with performance of 3.30 and 3.42 per square foot respectively. The renovations will be completed for an '06 holiday shopping season.

On the anchor front, all but 2 of the 28 anchors that had expirations during 2005 and 2006 have renewed their leases. Of the two that have not renewed, we're currently in discussions with Stein Mart at South Mall, and we have an agreement with Bon-Ton at North Hanover Mall to remain in operation through August of '06. We are also excited that we will replace the 60,000 square foot Bon-Ton with a Boscov's 180,000 square foot prototype store, which will provide the impetus for a redevelopment of North Hanover Mall.

As you are aware, Federated Department Stores announced their intentions to sell four overlapping Strawbridge and Clothier stores within our portfolio. We have been successful in our efforts with respect to Cherry Hill, Willow Grove and Lehigh Valley Mall Stores. At Springfield Mall, Federated has signed an agreement of sale with Target Corporation. We're currently working with Target to create a plan that will allow us to add an additional anchor store and restaurant uses. For the Lehigh Valley Mall store, Boscov's has assumed the Federated lease, and a holiday '06 opening is planned.

At Willow Grove Park, it's our intention to expand the Strawbridge's building by 60,000 square feet and add Boscov's in the first two levels. On the third level, we have developed plans to add a movie theater and up to four sit-down-themed restaurants.

At Cherry Hill Mall, we are undertaking a major redevelopment that will include the introduction of an outdoor restaurant component, the expansion and renovation of the existing mall, and the addition of a premier fashion anchor. The transformation of this property will secure its position as the dominant shopping destination in South Jersey. The redevelopment progress in 2005 has been substantial.

Looking to the future, we believe that we are in a position to create further value in our redevelopment assets, as we have with properties such as Willow Grove Park, Dartmouth Mall, The Mall at Prince Georges, Patrick Henry Mall, and Capital City. As the redevelopments come online, we expect to capitalize on the momentum created to drive our in-line leasing effort. We look forward to increasing occupancy on par with the 100 basis point gain we expect to deliver in 2006, achieving positive NOI growth starting in the third quarter of 2006 by converting increased traffic into higher sales and rental rates at our newly-redeveloped properties.

Now, Ron, Ed, Bob, and I are ready for questions.

Ready for questions, Claudia.

(Operator Instructions). Nathan Isbee, Stifel Nicolaus.

A couple questions -- can you talk about your target yields for the acquired land? You really built up a nice inventory there, and I'm just wondering if you could talk a little bit about both the yields -- the anticipated costs and the timing of deploying those incremental costs.

This is Ed Glickman. We have a number of parcels of land. One, we have the parcel in Gainesville. We have the parcel at Lacey. We have the land at New Garden, and we've acquired land adjacent to two of the malls that we own -- Magnolia and New River. Magnolia is in process as we speak. On New River, we have plans for an addition of a power center. In New Garden, we're still in the planning process. In Lacey, we have township approval but we're pending an additional (BOT) approval. In Gainesville, I think it's a little too early for us to comment on exactly what our expectations are for the development of that property.

If you go to page 28 in our supplemental, you will see that we've spelled out our projected costs for each of the projects as well as our expectations for yield.

This is just a smaller point, but I'm wondering what's the difference between a Boscov's prototype and a regular Boscov's?

There isn't a difference. There has been some evolution of their concept over the past couple of years, and I'm just referring to the fact that it will be the new prototype, which is their 180 to 190,000 square foot store (multiple speakers) --

You're still going to do full-service, things like photography studio and hairdressing and stuff like that?

Yes, the real point to be made there was that we're going from a 60,000 square foot Bon-Ton at North Hanover Mall, which is a very dynamic growing area to a 180,000 square foot Boscov's, and we really see it as an opportunity.

I was wondering if you could give us a little bit of visibility on your forward pipeline beyond the 10 redevelopment projects you have been talking about for the past year or so. Those are all '06, '07 deliveries I would assume that you will be working on '07, '08 deliveries at this point in addition to that. Is that correct? What would those be?

We have several properties in the redevelopment pipeline at this point. Obviously, our business is tenant driven and we're working with a number of tenants. I would anticipate that when we are ready with the next few properties that we would make a public announcement.

But you do have -- you do have other things in the works that you haven't talked about yet?

Absolutely.

My last question -- same-store guidance for the non-redevelopment properties, what is implied in your numbers at this point -- your guidance numbers, Ed?

Same-store guidance for 2006 overall is about up 1.8% over '05.

I would just like to second some of the comments that you made there. I have really enjoyed working with Jonathan for the past 8 or 9 years, really one of the class acts in the business and we're going to miss you.

Thank you very much.

I think Nate Isbee has a couple of small questions.

Yes, I just want to -- if my math is right, your guidance -- if you exclude the Jon Weller numbers increase about $0.03 on both ends.

Correct.

Last quarter. What was driving that?

Well, there is a number of factors. On the positive side, when we announced our guidance back in October, we hadn't yet acquired Woodland Mall. So, Woodland is in addition to the numbers. We also didn't contemplate the sale of Festival at Oaklands, which has been taken out. We have -- you have the impact of the store closings that I had mentioned previously as a result of the filing -- the bankruptcy by SunTrust and Sam Goody. Casual Corner announced a bunch of store closings -- Rave, G&G. We've actually taken down our revenue forecast a bit for those known events. A couple of cent erosions because of rising short-term interest rates. We get a couple cents back as a result of the share and unit repurchases of the fourth quarter. But, there, the base tightens but there's a lot of moving parts between our initial guidance and where we are today.

One last thing, I don't know if you mentioned this. You had expected the G&A to be a little higher as the last quarter came in about 1.5 million lower?

Well, some of that is -- I had mentioned the moving of ancillary income and expenses out of management Company into property expenses. So I mean I think it's a better representation of the income generation capability of our properties. But they're not really G&A expenses, nor are they management Company revenue. It's ancillary revenue that's generated at the properties. For the quarter and for the year, we moved those revenues and expenses up into the property NOI.

Alexander Goldfarb, Lehman Brothers.

My first question actually just wants to follow up on the management income. With the management income line, where is the expense for that line? Or is that number that's shown a net number net of expense?

Historically, the management expense has been included in our G&A presentation.

Okay but the income line, the management Company revenue (multiple speakers) --

Correct.

Okay, so the expense for that is in--?

It's in G&A.

Can we get a sense for what the margins are like there?

The true third-party management business is relatively small today. We're doing a lot of small properties. We manage two malls and a bunch of smaller properties in and around the Philadelphia market.

Okay. So, that's just a gross number?

Yes, right.

Should we still be forecasting for I guess the tail end of this year about a $5 million gain from possible residential entitlements for Echelon?

Yes.

So that's still on track?

Yes.

In the development/redevelopment, I think I read something about Pavilion at Market East. I'm not sure if you mentioned that originally. Is this contemplation of reworking the Market East Gallery into something else?

At this time, we have not announced the Gallery as a redevelopment asset (multiple speakers). But he mentioned both.

He mentioned both. He mentioned the Gallery; he mentioned the Pavilion.

Pavilion at Market East is not the Gallery. That's the property at 8th and Market, where the Company has a joint venture with the Goldenberg Company. We're looking at possible development opportunities for that property at this time.

Okay, so is this a parking lot right now?

It's a parking lot right now. Correct.

What sort of concept could go there? I assume this is like an urban, multilevel retail type?

That's a possibility. There's possibilities for other types of property use other than retail.

Like, residential or office?

Yes.

To the residential part?

Yes to both.

Hey come on, residential still seems to work these days. Based on your comment, it sounds like you're trying to -- you're looking into doing something about the Gallery at Market East in terms of redeveloping that asset?

We're not prepared to make any announcement or statement at this time.

Bear in mind that Federated has announced that they are going to be closing the Strawbridge store. Where they have closed Strawbridge stores, they generally replace them with Macy's. We don't have an official statement yet from Federated, but we think that's a strong possibility.

So, at the Gallery, they are going to swap the Strawbridge for Macy's.

We think that's a possibility, but obviously we can't speak for Federated.

My next question just because I like the area so much -- is there any update on the Lehigh Valley Mall, the lifestyle component? I see that L.L. Bean is going in nearby.

Yes, the update is that we have approved a plan. It's now been approved by all of the anchors in the center. We are beginning the development phase if you will -- bidding plans, etc. I would anticipate that something would start sometime during the first or second quarter.

My final question is -- and Ron, obviously you've been in the business a long time. In the current environment, we've witnessed a huge acceleration of privatization, a ton of capital coming in, taking a look at companies. Can you just give us your thoughts in terms of where you see -- if you see advantages for public companies or if you think that these companies that are going private, if you think that they have some sort of advantage that public companies don't have.

Well, as you know, there's advantages and disadvantages to being public as well as private. The public companies have much better access to the capital markets. Private companies are really limited to a great extent by their banking relationships to grow the business. Obviously, there's a lot of capital out there, and the capital that's out there is exploring all kinds of opportunities. We have had a number of different in-house discussions about different possibilities for the Company. But, at the present time, you've heard our plan and we're proceeding to execute our plan and we will continue to do so.

The discussions you've had though, those have been with the existing management or with outside (multiple speakers)?

No, our discussions internally about the strategic forward movement of the Company and what's the best way for us to continue to grow the business to the advantage of the shareholders. That's always our focus.

Michael Mueller, JP Morgan.

A few questions here -- first of all, in terms of minimum rents looking sequentially the $7 million pickup, can you give us a sense as to how much of that was driven by just normal fourth-quarter seasonality versus the leasing activity that happened in the second half of the year?

A large part of the minimum rent is seasonality. In this -- you're looking at '03, quarter 3 to quarter 4?

Yes because I know your year-end occupancies were up in the fourth quarter, so I was just trying to get a sense as to --

Yes, it's seasonality. We obviously had an uptick in occupancy during the fourth quarter.

But, the year-over-year increase and basically not -- it's all seasonality driven. It's not necessarily just new leasing driven that's going to--?

No. We had obviously acquisitions during the course of the year that contributed to that Gadsden and Cumberland earlier this year.

A few other things here -- in terms of lease term expectations, can you give us an idea of what you are expecting on a full-year basis and in particular to Q1 if there's anything out of the ordinary?

Yes, we've actually received to date a little under 1.5 million of lease terminations, driven largely from some of the common names you've heard, Casual Corner and others. Based on what we see in our pipeline, we haven't billed any additional lease terminations. We have about 1.5 million expected in the first quarter. But we haven't billed anything more in for the balance of the year.

One other modeling question -- G&A, current expectations on that?

G&A is going to fluctuate, and I think you saw this last year. We have a big spike generally in the second quarter with ICSC. There's a number of Company events that we do with our employees. So, you'll probably see G&A fluctuate between 10 and at times $11 million a quarter.

Then you mentioned a couple of things about land salesmen, just the above market rent. Can you just touch on that again because I (multiple speakers)?

Yes, under the purchase accounting rules that went into effect a couple of years ago, we have to at the time we make any acquisition look at the market rents as compared to the in-place lease values and in effect mark those to market. In some cases that we have -- or any case where we have an above-market lease, we effectively set up an asset and amortize that against rental income over the term of the lease. If a tenant were to exit the lease prior to its scheduled maturity date, we have to in fact write that asset off. So we've had a larger-than-expected write-off if you will in the fourth quarter relating to '06. Information became known to us in '06. So in fact, we had to write those above-market lease intangibles off in the fourth quarter.

Last question as it pertains to -- excuse me, Patrick Henry, and Capital City. The projects started coming online in the fourth quarter, total investment of about 27 million. How much NOI is that currently throwing off? I'm just trying to get a sense as to how that is -- how much of it's cash flowing now versus will continue to phase in over the next 3 quarters for those two projects?

Bear with me; I'm kind of looking at some small print. Patrick Henry this year will contribute about 8.5 million -- I'm sorry in '05, contribute about $8.5 million of NOI. We see that increase north of 20% next year.

So basically, very, very little in the fourth quarter from both of those projects?

In quarter 4 of '05 really no significant contribution.

But the store openings were very late -- late in the year.

If we're looking to Q1, what portion of that would be cash flow? Is it going to be very back-end loaded or is it pretty ratably coming on?

It starts to come on mid second quarter in a measurable way and then starts to ramp up in the third -- second and third quarter.

(Operator Instructions). Gentlemen, it appears there are no further questions at this time.

Thank you very much everyone who participated in this call. We will continue to move along and execute our plan. We will continue to advise you as to the progress that the Company is making. Thanks very much. Bye.

This concludes today's teleconference. We thank you for your participation and you may disconnect your lines at this time.