Pennsylvania Real Estate Investment Trust (PEI) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, my name is Stacy and I will be your conference facilitator today. At this time I would like to remind -- welcome everyone to the Pennsylvania Real Estate Investment Trust second quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Mr. Jeffrey Goldberger. Sir, you may begin your conference.

Thank you, Stacy. And welcome, everyone, to today's call. Before I turn the call over to management for opening remarks, allow me to read the following Safe Harbor statement. This conference call contains certain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.

Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters that are not historical facts. These forward-looking statements reflect PREIT's current views about future events and it's subject to risks and uncertainties, and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by the forward-looking statements.

In particular, the Company's business might be affected by uncertainties affecting real estate businesses generally, as well as the following among other factors: General economic financial and political conditions, including changes in interest rates or the possibility of war or terrorist attacks; changes in market conditions or other competitive or retail industry factors in the regions were the Company's business properties are concentrated; risks relating to development and redevelopment activities, including construction, obtaining entitlements and managing multiple projects simultaneously; and the Company's ability to maintain and increase property occupancy and rental rates.

Investors are also directed to consider the risks and uncertainties discussed in documents previously filed with the SEC, and in particular, PREIT's Annual Report on Form 10-K for the year ended December 31, 2005. PREIT does not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise. With those comments complete, at this time it is my pleasure to turn the call over to Mr. Rob Rubin, Chairman and Chief Executive Officer of PREIT. Ron, it's all yours.

Thank you very much. Good afternoon, ladies and gentlemen, thank you all for joining us as we discuss our results for the second quarter of 2006, 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 conclude the call will be open for any questions that you may have.

We are pleased with our second quarter results, which were in line with our expectations. We are continuing to make substantial progress in our redevelopment projects, as well as adding new properties and projects to our redevelopment and development pipelines, which you will hear more about during this call.

During the quarter, we purchased two former Strawbridge stores in the Philadelphia area. These stores are located at Cherry Hill Mall and Willow Grove Park. We also recently agreed to purchase the former Strawbridge's flagship store at 8th and Market streets in Philadelphia. These three stores are all located in premier locations and will provide PREIT with the opportunity to successfully remerchandise these stores to enhance our contiguous properties. As always, we are continuing to focus on ways to maximize our shareholders' returns. And with that I'll turn the call over to Ed Glickman.

Thanks, Ron. We were on target for the second quarter. FFO was $0.81 per fully diluted share in line with both consensus and within the range of our guidance. NOI for our portfolio was up 4% over Q2 of '05, this increase primarily reflects the positive NOI impact of our acquisition of Woodland Mall, offset by the sixth division of our industrial assets, Laurel Mall and accessible at Exton Strip Center, and a $900,000 or a 1.3% decline in same store NOI. Malls are down to about 2.8% to $348 per sq. ft. Nine of our properties representing 36% of our NOI are now performing above $400 of sales per sq. ft. 50% of our mall NOI is generated by assets with sales over $350 per sq. ft.

Leasing for the quarter was brisk with 204 transactions closed, including 119 renewals and 85 new leases. This result compares favorably with 140 transactions executed, including 91 in-line renewals and 49 new leases in Q2 '05. Leasing spreads were also strong up 16% for new tenants in previously leased spaces and up 8% for in-line renewals. As of 6/30/06 minimum rents were up to 2437 per sq. ft. or at 3.8% over Q2 of 2005. In-line mall occupancy remains flat at 85.5% versus 85.4% last year.

Our redevelopment market continues to move forward. At Patrick Henry Mall we have leased all but two of the stores in the new lifestyle wing. Borders and Dick's are both open. At Cap City Mall we found an interest with Garfield's Restaurants and Forever 21 during this quarter. The new food court is now open. At both redevelopment properties the common area renovations are completed. At Lycoming Mall, which we began this year, renovation continues on schedule with construction under way on Dick's, Borders, Best Buy and Old Navy. We expect that mall to open next month with fall openings for the other retailers. At New River Valley, Red Robin is open and we expect to have a fall opening for Dick's followed soon thereafter by Regal Cinema.

By the holiday season we will have four major redevelopment properties that validate our strategy. While we have been focussed on redevelopmenting our existing assets we have also made significant progress on our ground-up development. Home Depot and Olive Garden are now open in our new Power Center the Plaza at Magnolia. This power center is in addition to our existing mall and shopping center which will further enhance this location as the major regional drawing part of South Carolina.

A New River Valley Power Center development located across the street from our New River Valley Mall, we have just signed a lease with Best Buy for a 30,000 sq. ft. store. This transaction will kick off the development and solidify our New River Valley complex as the regional shopping destination serving the Christiansburg and Blacksburg, Virginia research and education cost.

In Summersville, PA, located 45 miles north of Harrisburg, we have acquired the first nine out of 125 acres that we are planning to purchase. We are planning on building a power center of approximately 700,000 sq. ft. at this location. In summary, in this quarter we have continued to achieve significant milestones in our redevelopment and development programs. Joe Coradino will now give you greater detail on our progress.

Thank you, Ed. The redevelopment of the properties in our portfolio continues to gain momentum as they cycle through the process of claiming entitlements, leasing construction and completion. At New River Valley Mall construction continues on schedule for Regal Cinemas, Dick's Sporting Goods in the mall renovation. The success of the redevelopment of this property provides the impetus for development of the site we own adjacent to the asset, as Ed mentioned. Subsequent to the end of the second quarter we signed a lease with Best Buy for 30,000 sq. ft. to anchor -- to propose a 170,000 sq. ft. power center.

At Lycoming Mall, Best Buy is scheduled to open on August 5th, and Old Navy, Borders, and Dick's Sporting Goods is set to open before the 2006 holiday season. When complete this project is expected to be over 95% occupied. At Beaver Valley Mall we're completing the relocations necessary to accommodate Dick's Sporting Goods for an opening in the third quarter of '07, which is expected to drive in-line occupancy at the mall from 80% to over 90%.

In Florence, South Carolina, in addition to success of the power center, during this quarter we executed leases with Dick's Sporting Goods and Barnes & Noble to occupy a portion of the in-line space at Magnolia Mall. The mall will be expanded by approximately 60,000 sq. ft. and upon their opening in the first quarter of 2007, the mall will be 630,000 sq. ft. and it is expected to increase from 84% to over 92% occupancy. At Echelon Mall we are very excited to announce that last evening we received preliminary and final subdivision approval and preliminary site plan approval for the project. We have begun the relocation of mall tenants and we expect to commence construction on this exciting mixed use town center in the fourth quarter of this year.

The commencement of construction will mark a turning point for this asset by eliminating the same-store NOI contraction of $700,000 for the quarter and $1.6 million for the six months of the year. Upon completion of the project, we will retain ownership of the retail component of the property, consisting of a renovated light-sized mall with 260,000 sq. ft. of in-line GLA anchored by a Macy's and Boscov's, 131,000 sq. ft. of town center retail stores, a 66,000 sq. ft. supermarket, and 26,000 sq. ft. of newly created out parcels, as well as the ground leaves on the multifamily portion of the project.

At Plymouth Meeting Mall, I have met with the township commissioners and we'll be submitting plans next month for preliminary land development approval and plan to start construction this year. We anticipate beginning demolition in the fourth quarter of the year and we're on schedule to open Whole Foods in the spring of '08. We've executed a lease with Dean Vlahos new concept, Redstone Grill, which will anchor the restaurant plaza at Plymouth Meeting Mall. We've also continued to upgrade the merchandising of Cherry Hill Mall with construction under way on an expanded 10,800 sq. ft. Forever 21 and a new Schultz's, both of which we expect to open in the [fourth] quarter of '06.

As we announced last quarter, we've acquired a former 262,000 sq. ft. Strawbridge's store and are working on concept drawings for dramatic reconfiguration of the property. We have submitted for preliminary approval to add two outparcels and a Bistro Row concept along Route 38 for which we anticipate an early 2007 construction start and fourth quarter 2007 occupancy.

At Willow Grove Park we have purchased the 229,000 sq. ft. former Strawbridges and have signed a lease with Boscov's who will utilize the first two levels of the building for the prototypical full-line department store. We are currently under way with township approvals for the addition of an entertainment and restaurant component to the third level of the former department store [box.]

We've also announced that we entered into an agreement at [shadow] to acquire the former Strawbridge store in Center City, Philadelphia. We have developed plans to accommodate traditional and discount department stores and our accompanying the early stages of negotiations. We believe that we can add value to this property by creating additional street-front retail locations with frontage on heavily traffic Market Street and introduce destination retail and entertainment concepts to the property.

We continue to drive value in our operating properties by adding junior major's, incorporating outparcels, and remerchandising in-line space. At The Mall at Prince Georges we completed construction in 2004 with the addition of a Target and mall renovation. We added outparcels for Outback Steak House and are under construction with an Olive Garden, and have signed a lease this quarter with Red Lobster.

We are moving forward on our value-creation initiative, signing deals with Marshalls and Ross, when combined occupy 65,000 sq. ft. for opening this year. We're also adding a 6,000 sq. ft. Victoria's Secret to the tenant mix, all of this will serve as a catalyst that further operates the merchandise mix at [technical difficulty]. This quarter we also signed leases for newly-created outparcel locations, including Commerce Bank of Palmer Park Mall, [technical difficulty] Phillipsburg Mall, and Olive Garden at Valley Mall.

We executed leases during the quarter with key national retailers for in-line mall space, including Finish Line, For the Gallery, Forever 21, Champ's Sporting Goods, Starbucks, Yankee Candle, and Select Comfort at Patrick Henry Mall, [Fortsky] at Willow Grove Park, and Maurice's and PacSun at Gadsden Mall. At this time I'd like to turn it over to Bob McCadden, our CFO who will now discuss with you our financial progress during the quarter.

Thanks, Joe. I'm going to add some additional color to our second quarter and year-to-date earnings, review our capital spending plans, and update our FFO guidance for the balance of 2006. For the second quarter this year we reported net income available to common shareholders of $460,000 or $0.01 per diluted share, as compared to net income of 5.5%, or $0.14 per diluted share in the second quarter of 2005. For the six months ended June 30, 2006, we reported a net loss allocable to shareholders of 2.3 million or $0.08 per diluted share, as compared to income available to common shareholders of 13.5 million or $0.36 in a corresponding period in 2005.

Net income for the quarterly and six month periods was impacted by increased depreciation expense for the 2006 periods due to larger asset base from the 2005 acquisitions and the $2.8 million of additional depreciation expense recorded in the first quarter as a result of the reclassification of Schuylkill Mall from held for sale to continuing operations. The year-to-date operating results also included approximately $4 million of executive separation costs.

This quarter's press release contains same-store NOI information about our portfolio with separate disclosure for the redevelopment and non-redevelopment assets. With four new projects being added to and South Mall being removed from our announced pipeline due to an anchored lease renewal, we will now have 36% of our NOI and 36% of our gross real estate investments under redevelopment. Since a large portion of our portfolio is in redevelopment and since individual properties move in and out of redevelopment at different times, we don't believe that it is meaningful going forward to breakdown same-store NOI between redevelopment and non-redevelopment properties and intend to discontinue providing this breakdown in future releases. We will look for more meaningful ways to communicate the financial impact of our completed redevelopment projects to our investors.

As you have heard from Ed and Joe, we continue to deploy capital in our redevelopment program and grand op development projects. To date, we have invested approximately $150 million in our redevelopment properties and $91 million in new development projects. We expect to spend an additional 100 to $125 million during the second half of this year on previously announced initiatives and new projects. We are carrying approximately $177 million in capitalized development and redevelopment costs on our balance sheet as of June 30, 2006, after giving back to the value of property placed in service during the first half of the year. We anticipate this balance increasing to over 220 million by the end of this year reflecting planned spending net of the amounts expected to be placed in service during this time.

For the balance of the year, we expect to fund these capital requirements with additional borrowings from our $500 million credit facility, which as of June 30th had approximately $178 million of available borrowing capacity. Earlier this month a new $150 million mortgage was placed on Lehigh Valley Mall which we own jointly with Kravco Simon. This loan has an initial term of one year and has three one-year renewal options. Payments are interest-only and float at 56 basis points over one-month LIBOR. Our share of refinancing proceeds of $52 million was used to reduce borrowings under our credit facility which increased our capacity to approximately 230 million.

As a reminder, we also have an accordion feature in our credit facility that allows us to borrow up to an additional $150 million under prescribed conditions. As of June 30, 2006, debt comprised approximately 52% of our total market capitalization and 83% of our debt had fixed interest rates. To fund our investment spending in 2007 and beyond, we intend to utilize various sources to raise capital. We will continue to look for opportunities to place long-term, fixed rate debt on our stabilized properties. We will also explore rate in capital through the selective sale of assets, joint venture opportunities and when warranted, through additional equity issuances.

Turning to guidance for the next quarter and the remainder of 2006, we estimate that in the third quarter FFO per diluted share is expected to be between $0.77 and $0.81. Net income per diluted share is expected to fall between a loss of $0.02 per share and positive $0.02 per share. For the full year we are reaffirming the midpoint of our previously issued guidance with FFO expected to fall within a range between $3.55 and $3.63. Annual net income per diluted share is expected to be between $0.31 and $0.39. As a reminder, our full-year guidance includes approximately $5 million of anticipated gains on sales of land at our Voorhees Town Center project. With that, we'll open it up for questions.

[OPERATOR INSTRUCTIONS]. Our first question is coming from Michael Mueller from JPMorgan.

Hi, guys, actually [Joe Dazio] here. Question about the third quarter guidance. The midpoint -- at the midpoint why would the [inaudible] decline from 2Q to 3Q given that the NOI was not a lease term income in the second quarter results, and typically NOI should pick up when the third quarter kicks in?

We have a couple of timing issues in our second quarter results. Our G&A costs is probably a little bit lower than the annual spend rate. Some of that is due to timing differences in terms of when we expected some costs to be incurred. So those will come in the third quarter. The second thing is typically our CAM expenses start to ramp-up in the third quarter because of higher CAM as well as utility costs, because obviously the summer months which are heavy electric utilization months, as well as we begin to really move heavy into our deferred maintenance projects. And since we're not recovering 100% of our expenses, we typically -- or we expect to see a little bit of leakage in our recoveries in the third quarter.

Okay. And final question is, was there anything specific that kind of caused the tightening of the guidance range? Or was it just kind of more visibility as the year went on?

Yes, I think now that we have two quarters behind us I think we're in a better position to kind of see where we expect to end the year.

Okay. Thanks.

[OPERATOR INSTRUCTIONS]. Sir, there appears we have no further questions.

Well, thank you, I guess that means we gave a good presentation. And under the circumstances I want to thank you all for calling in and participating with us today. As you heard from all three of us, who are on this call, or actually all four of us who are on this call, we are continuing our program of our redevelopment and development projects, and we are hopeful that we can continue to execute and look forward to speaking to you soon. Thank you very much.

Thank you. This concludes today's Pennsylvania Real Estate Investment Trust conference call. You may now disconnect your lines at this time and have a wonderful day.