Pennsylvania Real Estate Investment Trust (PEI) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Mia, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Pennsylvania Real Estate Investment Trust first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. Thank you. It is now my pleasure to turn the call over to your host. Jeff Goldberger. Sir, you may begin your call.

Thank you very much, and welcome to today's call. Before I turn the call over for opening remarks, let me read the following Safe Harbor statement: This conference call will include certain forward-looking statements within the meaning of the Section 21-E of the Securities and Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995.

These forward looking statements relate to expectations, beliefs, projections, future product strategies, anticipated events, trends and other matters that are not historical facts. These forward looking statements refect current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstance that may cause future events, achievements or results to differ materially from those expressed by the 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.

PREIT's business is subject to uncertainties regarding the revenues, operating expenses, leasing activities, occupancy rates and other competitive factors related 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 the 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, its redevelopment activities might be delayed. anticipated project costs may increase, and PREIT might not enter into one or more of the leases we referred to in the 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 conference call to reflect new information, future events or otherwise. Investors are also directed to consider the risks and uncertainties in disclosed documents PREIT has filed with the SEC and in particular, PREIT's Annual Report on Form 10-K for the year ended December 31, 2005. With those comments complete, at this time it's my pleasure to return the call over to Ron Rubin, Chairman and CEO of PREIT. Ron, the floor is yours.

Thank you very much. And good afternoon, ladies and gentlemen. Thank you all for joining us as we discuss our results for the first quarter of 2006 and some our plans for the future. Joining me on the call today are Ed Glickman, our President, Bob McCadden, CFO, and Joe Coradino, Head of our Retail Division, and incidentally, a new trustee of the Company. Among the others in this room are George Rubin, Vice Chairman of the Company, and Bruce Goldman, our General Council. After our remarks have concluded, the call will then be open for any questions that you may have.

As you are going to hear during this call, we are making substantial progress in our redevelopment projects. The construction and other physical renovations at Patrick Henry Mall and Capital City Mall are essentially complete and are projected to lead to positive contributions to NIO this year for those two properties. We continue to execute our plans for a number of other properties under redevelopment, some of which you will hear about during this call. We are looking forward to another successful ICSC convention in a few weeks, and I'm sure that we'll see many of you during these most productive days. As always, we are continuing to look at different ways to maximize returns to our shareholders. And with that, I'll turn the call over to Ed Glickman.

Thanks, Ron. And I'm happy to report that we had a good first quarter. FFO was $0.77 per fully diluted share, $0.01 over the high end our range, which had been previously adjusted for expenses associated with the the departure of John Weller. Same store NIO for our portfolio is up 1.4 % over Q1 of 2005. This revenue reflects the positive impact of a $1 million increase in revenues, a $1 million increase in lease termination fees and a negative affect of decline of 25 million in straightline caused primarily by the aging of our leases and $.5 million increase in operating expenses. Mall sales per square foot were up 1.1 % to $343 and minimum rents were up 3.6 % to $24.13. Leasing progress for the quarter was brisk, with 197 transactions closed, including 139 renewals and 78 new leases.

This compares favorably with 73 renewals and 36 new leases in 2005. Spreads were also strong at $2.14 and were up 12 % for new tenant in previously leased spaces. In line renewals were up $0.91 or 4.2 %. Our performance speaks to both the progress that we have made with our development and redevelopment activities and challenges that we continue to face as we move forward with our plans. As Joe Coradino will report in depth, we have made great progress at Patrick Henry and Cap City, where we have leased over 90 % of the renovation space. We have also moved from planning to construction on our projects at New River Valley and Lycoming Mall. All Valley View, Francis Scott Key, Jacksonville and Magnolia Malls, our bookstore additions are under construction.

We have established start dates this summer for our Viewmont and Wyoming Valley renovation projects and we have important news to share about Echelon mall. With our first projects nearing completion, we offer proof of concept and a level of momentum that has created excitement among our shoppers and retailers. On the [INAUDIBLE] development front, we have also made significant progress. We have broken ground on an [INAUDIBLE] power center and we expect to deliver pads over the summer. This project, adjacent of our existing mall and shopping center, will further enhance this location as the major regional draw in this part of South Carolina.

During the quarter, we also made two significant land acquisitions that had been in the works for a number of years. In New Garden, PA, located in the fastest growing county of suburban Philadelphia, we acquired 155 additional acres to add to our existing 33 acre holdings for use in a mixed use development. The major acquisition of the quarter, however, was the $21 million purchase of 540 acres along I-75 in Gainesville, Florida for the future creation of a mixed use project which we expect will include over 1.5 million feet of commercial space and over 2,000 residential units. Planning is on the way to maximize the long term value from this huge asset lead desirable property. At the close of the quarter, we had $58 million invested in these two projects and 86 million in total development expenditures.

These projects, along with Echelon, represent the next phase of breach maturity, where we bring to bed the many talents that we have used over the years to create value across every market in the property space. Over the coming months, we will continue to commit significant funds to our development and redevelopment efforts. With this in mind, we have examined the Company' capital structure and we have executed hedging and refinancing transactions to ensure our financial flexibility and to mitigate the impact of rising interest rates. These transactions, on which we have and will replace the existing [INAUDIBLE] liabilities, have locked in substantial benefits for the Company. In Bob's McCadden's remarks, he will address both our capital resources and our liquidities and review these transactions in greater detail.

[INAUDIBLE] look forward, we have achieved significant milestones in our redevelopment, development and financing programs. We are excited by our successes and continue to be optimistic about our prospects. In all we do, we continue to exercise the judgment, diligence and caution that has engendered your trust over the past 45 years. Bob?

Thanks Ben. For the next several minutes, I will review or first quarter operating results, discuss earnings and FFO guidance for the balance of 2006, and lastly, provide an update on significant changes to our balance sheet. In the first quarter of this year, we reported a net [INAUDIBLE] to shareholders of 2.8 million or $0.08 per diluted share. In the first quarter of last year, we reported net income of $8 million or $0.21 per diluted share. As Ed mentioned, FFO for the quarter was $0.77 per share or 31.7 million. Last year, we reported FFO of 36.4 million or $0.88 per share.

Our first quarter operating results were significantly impacted by several items. First, our results included a full quarter of the 2005 acquisitions of Cumberland, [INAUDIBLE], Springfield and Woodland malls. Next, we recorded approximately a $4 million charge related to John Weller's separation from the Company. Additionally, we reported a $2.8 million increase to depreciation and amortization expense as a result of reclassifying Schuylkill Mall from discontinued operations to continuing operations. As previously reported, we had this property under agreement of sale. However, the fire terminated the sales agreement last month. As a result, this property no longer meets conditions for an [INAUDIBLE], the maximum one year holding period under FAS-B Statement 144, which sets fort the accounting requirements for discontinued operations.

This accounting classification will not change our plans for this property, as we intend to continue to actively market this property for sale. First quarter operating results also included roughly $2 million of lease termination revenue. Turning to guidance for next quarter and the balance of 2006, we estimate that for the second quarter FFO per diluted share is expected to be between $0.78 and $0.82. Net income per diluted share is expected to fall between a breaking of level and $0.04. For the full year, we are reaffirming our previously issued guidance, with FFO expected to fall within a range between $3.53 and 3.55. Annual net income per diluted share is expected to be between $0.32 and $0.44.

In the first quarter of 2006, we continued to execute our long term capital plan. In February, we placed a new$40 million mortgage loan on Valley Mall in Hagerstown, Maryland. In early March, we completed an amendment to our credit facility. The new terms provide us with lower interest rates and [INAUDIBLE] average points. In addition, the [INAUDIBLE] coverage and [INAUDIBLE] were modified and the maturity date was extended through January of 2009. We also secured permanent financing for our recently acquired Woodland Mall in Grand Rapids, Michigan. The $156.5 million of loan proceeds represented approximately 88 % of our purchase price for this property.

Finally, we entered into a $150 million [INAUDIBLE] amount of additional forward starting interest rate swap agreement. With these new swaps in place, we have 120 million in forward starting swaps designated to hedge forecasted interest payments designated to planned 2007 financing, and 400 million designated for planned 2008 financing. At the end of March, these swaps had [INAUDIBLE] value of approximately $18 million. Today they have a value of approximately 30 million. As a result of these first quarter financings, our weighted average interest rate on our fixed rate mortgage debt is reduced by 70 basis points to 6.43 at the end of the quarter. A year-ago, the average interest rate on all of our fixed rate debt was 7.37 %.

We anticipate that this average rate will continue to decline as additional above market interest rate financing matures over the next few years and we refinance these obligations at lower rates. At the end of the quarter, we had approximately $240 million of available borrowing capacity under our credit facility, which is available to fund our redevelopment and development spending needs. As of March 31, 2006, debt was approximately 51% of our total market capitalization, and 86 % of our debt had fixed interest rates. Finally, a housekeeping point: We made some changes to our [INAUDIBLE] reporting package this quarter. One change that I wanted to highlight is the change of method used to report comparable store sales. We are now reporting comp store sales for tenants occupying spaces of 10,000 square feet and below.

We believe that this method is used by most of our mall company peers and we wanted to make our numbers more comparable to others. Our intent is to provide information that is both transparent and relevant to investors. We will continue to look for opportunities to provide you with information to better understand PREIT. As always, we welcome any comments and suggestions that you have on the quality of [INAUDIBLE] information that we provide to you. With that, I'll turn it over to Joe Coradino.

Thanks, Bob. The transformation of our properties through redevelopment, renovation and remerchandising continues to enhance property performance. At the close of 2005, we had ten assets in redevelopment. We've completed construction on 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 -- which we expect to complete this year. The remaining three -- Cherry Hill, Plymouth Meeting and Echelon, are expected to begin construction in late 2006. Today, we are announcing two new redevelopments at Beaver Valley Mall and Magnolia Mall, and providing you with an update on the transformation on what is now Echelon Mall in the Voorhees Town Center. Our redevelopment pipeline continues to be robust, and projects are progressing along to continuum from redevelopment to completion, for a total of 12 properties in redevelopment.

At Capital City Mall, the new food court is 100 % leased. [INAUDIBLE] and Select Comfort both opened in April of 2006, while Forever 21 will open in September 2006. Additionally, Garfield's Restaurant is under construction for an August opening. The common area renovation is complete. And we expect to exceed our proforma rental projections by over $2 per square foot. At Patrick Henry Mall in Newport News, Virginia, we are beginning to experience upside from our redevelopment. In the new additions, Borders, Red Robin, American Eagle Outfitters and New York & Company were joined by Bailey-s Pub and Dick's Sporting Goods. The expanded Bath & Body Works is also open and the expanded [INAUDIBLE] is under construction.

We signed leases with Champs, Game Stop, Forever 21, Select Comfort and Starbucks. We anticipate opening Quizno's, [INAUDIBLE] Motorsports and [INAUDIBLE] during the second quarter of this year. Comp store sales on these increased an impressive $453 per square foot. At New River Valley Mall in Christiansburg, Virginia, the Red Robin Restaurant opened as scheduled on March 20, 2006. Construction is underway in the Regal Cinema, which is scheduled to open in February of '07. In December '05, we signed a lease with Dick Sporting Goods, which is under construction for an opening in November of 2006. We will commence construction on the renovation of the mall on June 1 for completion in the third quarter of '06.

On our development site, adjacent to New River Valley Mall, we are proceeding with predevopment of 170,000 square foot power center and have secured Virginia Department of Transportation approvals with the alliance of entitlements currently underway. We anticipate that the concentration of new retail and entertainment offerings at these properties will capture the students and faculty from nearby Virginia Tech and Bradford University. At the Lycoming Mall in Williamsport, Pennsylvania, Best Buy's [INAUDIBLE] was turned over in December and is under construction for projected open July of '06. As you may know, we signed a lease with Old Navy for a 16,900 square foot store which is under construction for a third quarter 2006 opening.

The construction of Dick's Sporting Goods is underway with an anticipated October 2006 opening. Construction of Borders is anticipated to begin early in the second quarter, with an opening in November 2006. The renovation of the mall interior and entrances is slated to be completed concurrent with the opening of the new stores in November of '06. At the Mall of 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 Marshall's for 35,000 square feet of space and expect to open the store in the fourth quarter of this year. We also executed a lease with Ross Dress For Less for a 31,000 square store at the property for a first quarter 2007 opening.

Olive Garden has obtained their building permits and are preparing to start construction for an August '06 opening. All of the 28 anchors except one that had expirations during 2005 and 2006 have renewed their leases. For the one exception, Bon-Ton at North Hanover, we have a letter of intent with [INAUDIBLE] for a spring 2008 opening. We are scheduled to close on the acquisition of the Cherry Hill and [Willow Grove Park] with Federated Department Stores during the second quarter, and we have comprehensive redevelopment plans underway for these properties. We expect the Target Corporation will acquire the former [INAUDIBLE] location at the Springfield mall and we continue to work with them to incorporate a more extensive redevelopment program.

Upon the acquisition of the [INAUDIBLE] Company's Philadelphia portfolio, we recognize Echelon Mall as both a significant challenge and great opportunity. We are particularly happy today to announce that we have taken major steps in the transformation of the Echelon Mall into Voorhees Town Center. We have received approval from the planning board of redevelopment ordinance for Voorhees Town Center and have executed a letter of intent with our development partner, [Dewey Commercial] to develop a multifamily portion of the property. We will submit our final site plans for approval in early June in anticipation of closing with Dewey and commencing construction in the fourth quarter of this year. We intend to transform the existing mall into a [INAUDIBLE] development consisting of 300 apartments, 125 condominiums, 120,000 square feet of street-front retail and a life size mall with the 260,000 square feet of small shops anchored by Boscov's and Mason's.

Yesterday, we executed a lease with Dick Sporting Goods for a new store at Beaver Valley Mall in Monica, Pennsylvania, a suburb of Pittsburgh. The scope is this redevelopment is the creation of a 45,000 square foot location for Dick's Sporting Goods with an anticipated opening in the third quarter of '07. We expect that in line occupancy will increase from just under 80% to over 90% as a result of this transaction. At Magnolia Mall, we've signed a lease with Barnes and Noble in April for a 20,000 square foot store in the south wing of the [INAUDIBLE] that will compliment the Best Buy that was added to the property in 2003. Barnes and Noble is forecast to open in the first quarter of '07.

Construction on the project Magnolia, also in Florence, South Carolina, is progressing on schedule, with Home Depot, Olive Garden and Longhorn Steakhouse underway for a fourth quarter 2006 opening. We are enthusiastic about the upcoming ICSC convention, driven by the retailer response we have been receiving to our redevelopment program. At this time, we'd like to open it up for your questions.

[OPERATOR INSTRUCTIONS]. We'll pause for a moment to come pause the roster. Your first question is coming from David Fick.

Hi. Nice quarter. I don't usually say that, but this is the best quarter you guys have had in a long time. I'm just wondering if given this quarter's results, why would would not raise the lower end of your guidance range here? You have a pretty large range, you're a full quarter in, it looks like you are a little bit better than planned.

David, this is Bob. We are pretty comfortable with where we expect to be for the balance of the year. But again, I think we've decided to take maybe a cautious view to guidance given some of the comments we had gotten back from the analyst community over the past year or so, and we obviously perhaps then set the bar level in underpromise and overdeliver. I think that's the philosophy I think we are trying to take with our guidance.

Analysts are telling you to stand back. Well, G&A is up even if you take out the water charges. Is this a new good run rate?

Yes, I think the run rate -- I we mentioned on the year-end call -- is going to clear between 10 and $11 million. The second quarter will probably be higher because of our ICSC convention costs. That will trend down toward the second half of the year in the third and fourth quarters.

Speaking of the former guidance, you would guide flat non-development same store NIO growth for the year. You were up 2 %. This is what I was referring to a minute ago. Excluding lease term fee,s you were up over the quarter about 2 %. So are you still saying you think you'll be flat for the year?

I think at the year end call we talked about expect our total portfolio NIO same store to be between 1 1/2-2 % up.

That included a redevelopment, though, on your non-redevelopment it was flat, I thought. Okay. Last question -- same store sales, under your new method were up 1 %, if I read it right. How does this compare to the previous method? I'm not going to keep asking you to do this, but I'm just kind of wondering --

It is roughly a $10 increase by taking out the larger format stores. Averaged at about that $10.

Okay. The peer group was over 3% this quarter. I think the lowest other than you guys was about 2.8. I was just wondering if you might comment on when you think you guys will sort of begin to accelerate to the norm, if you will, in terms of the same store sales numbers?

The reality is what it is. This is Joe Coradino. We think of course that we'll begin to see the portfolio start to compare to our peer groups more favorably in the third and fourth quarters of this year, and then grow even more significantly in '07.

And that will be as a part of redevelopment efforts as far as the [INAUDIBLE]?

It's really driven by the redevelopments beginning to come online -- be completed and come online.

Okay. Great. Thank you.

Thank you. Your next question is coming from Mike Mueller.

Yes, hi. Just a couple things here. First of all with respect to second quarter guidance, is there anything that's one time or lumpy that we should know about in the quarter?

I don't think so. I mean, if you've got a big picture to start with, where we ended the first quarter, you know, you'll add back the $0.10 roughly a quarter [INAUDIBLE] separation charge, take out the unusually large lease terminations. Then you get basically within the range of our guidance for the second quarter.

Okay. And for Capital City and Patrick Henry, how long do you think until you get to a stabilized run rate from all the cash flow coming on after these things? Because I know they are opening up over a period of time, but how far down the road do we look to your stabilization?

You're going to see a ramping up in the second half of this year and probably stabilize NIO in the first quarter of 2007.

Okay. With respect to the upside that you had relative to prior guidance of 72-76, what do you attribute the upside to?

The upside was -- I think it was [INAUDIBLE] the year-end earnings call about million and a half of lease termination fees. That it came in a little bit stronger than we expected. Some of it coming from our joint venture investments.

Okay, so a little bit more lease term. Okay. And last question. I know you shifted the supplemental around; but one thing that was in there before, and I didn't see it -- I may be missing it though -- was occupancy cost. Could you talk about occupancy cost? I was just wondering if you can comment on where it stands on the malls for the portfolio? And then maybe compare that to where you are signing your leases? What does it look like in place versus proforma occupancy cost when you are signing new leases?

I think it's on page ten.

It is there, okay.

But occupancy cost ratios are on page ten.

Okay. Okay. Great. Thanks.

And if you go back a couple pages you will see the spreads on the leases. So that's on page eight.

Thank you. Once again, if you do have a question please press star then the number one on your key pad at this time. Mr. Goldberg, there appears to be no further questions.

I will turn it over to management for final comments, if any.

Okay. Again, thank you very much. We prepared for you questions. And so, I guess we should be happy that you don't have too many questions. But in any event, we want to thank you, all of you, for participating in this call. And we'll look forward to speaking with you again next quarter. Thank you very much.

Thank you. This concludes today's Pennsylvania Real Estate Investment Trust first quarter 2006 earnings conference call. You may now disconnect.