Pennsylvania Real Estate Investment Trust (PEI) 2006 Q3 法說會逐字稿

Good afternoon. My name is Melissa and I'll be your conference operator today. At this time I would like to welcome everyone to the Pennsylvania REIT third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Garth Russell with KCSA Worldwide. Sir, you may begin your conference.

Thank you. I'm going to begin the call by reading the forward-looking statement and then I'll pass over the call over to management. This conference call will contain certain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27-A of the securities act of 1933 and second 21-E 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 forward future events and are subject to risks, uncertainties and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by forward-looking statements.

More specifically, PREIT's business might be affected by uncertainties affecting real estate business generally, as well as following, among the other factors: General economic, financial, and political conditions including changes in interest rate or possibility of war or terrorists attacks; changes in local markets, conditions or other competitive or retail industry factors in the regions where our properties are concentrated; PREIT's ability to maintain and increase occupancy and rental rates; and risks relating to development or redevelopment activities, including construction, obtaining entitlement and managing multiple properties simultaneously. In particular, the successful development or redevelopment of any property is subject to a number of risks including, among others, that PREIT's development or redevelopment plans might change. This development or redevelopment activities might be delayed and anticipated project costs might increase. Unanticipated expenses or delays would also adversely effect PREIT's estimate returns on a development or redevelopment project.

Additionally there can be no assurance PREIT's actual results will not differ significantly from the estimates set forth in this call, or that PREIT's returns on its developments, redevelopments or acquisitions will be consistent with the estimates outlined in the related press release or other disclosures. Investors are also directed to consider the risks and uncertainties discussed in documents PREIT has filed with the Securities and Exchange Commission, 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.

I'd now like to turn the call over to Ron Rubin, Chairman and Chief Executive Officer of Pennsylvania REIT.

Thank you very much. Good afternoon, ladies and gentlemen. Thank you all for joining us as we discuss our results for the third quarter of 2006 and some of our plans for the future. Joining me on the call today are Ed Glickman, the President, Bob McCadden, the CFO, and Joe Coradino, Executive Vice President and President of our management companies. 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 might have. Our third quarter results were generally in line with our expectations and we are making solid progress with our current redevelopment projects. As many of you know, the Company was joined recently by elected officials and community representatives in the announcement of three of our exciting projects. The introduction of Nordstroms to the redevelopment of Cherry Hill Mall and approximately a 110,000 square foot lifestyle expansion at Lehigh Valley Mall that we own jointly with Simon Property group, and our mixed use transformation of Echelon Mall, which will become Voorhees Town Center. These projects and the acquisition of the former Strawbridge's store at the Galler yat Market East during the quarter are intended to further broaden and enhance tenant demand and shopper experiences in our core markets. We will continue to keep you posted with our progress at these and at our other redevelopment projects. As always, we are continuing to focus on maximizing shareholder returns.

And with that, I'll turn the call over to Ed Glickman.

Thanks, Ron. The Company was on target with FFO at $0.80, in line with consensus and within the range of our guidance. NOI to the portfolio is up 5.5% over Q3 '05, primarily due to the net pick up from the acquisitions of [Willow] and Springfield mall, against the sale of our Festival at [inaudible] south landing strip centers and a 0.5% decline in same-store NOI. Our properties performed well during the quarter. Mall sales were up 3.8% to $351 per square foot. Compared with Q3 of '05 our renewals are up in number and at a hefty spread of $3.26 or 14% versus last year. While new leases were down from 1.22 to 64, spreads were $5.27 or 19% up, excluding our releasing to Sam goody and Suncoast post-bankruptcy. As of 9-30-2006, minimum rents were up to $24.18 a foot or 3.9% over Q3 of '05. Mall occupancy was, however, down from 91.8% to 89.8%, primarily as a result of our purchase of three vacant Strawbridge anchor stores, two of which is already been spoken for by new tenants.

Our redevelopment plans are progressing with New River Valley and Lycoming moving towards completion. Overall we are very happy with the results that we will ultimately be able to achieve with our projects, but there have been timing delays and those delays have impacted holiday '06 store openings. This in turn will impact both Q4 '06 and Q1 '07 earnings. Bob McCadden will discuss this in more detail in his presentation.

During '07 we will be embarking on additional major development projects at a number of our major Philadelphia properties. Joe Coradino will discuss these in more detail. To execute these transactions we have made a number of organizational improvements that we believe will help us to more efficiently process leases and move tenants into stores on time. Leasing progress is critical to our achievement of our objectives and to maximizing NOI production from our newly upgraded properties, and this has become our key corporate focus. We look forward to seeing many of you next week at NAREIT and hope that all of you will have the opportunity during the coming year to see some of our new redeveloped assets.

With that I will hand the call off to Joe Coradino.

Thank you, Ed. Today, we're reaffirming our committment to our redevelopment strategy. With a robust pipeline, we are completing projects and moving towards stabilized occupancy levels. Our assets are being transformed with best-of-breed tenants such as Nordstroms, Whole Foods, Crate & Barrel, P.F. Chang's, Red Stone Grill and California Pizza Kitchen. Our current queue of ten transactions suggests that we are providing a compelling platform, upon which retailers can thrive, to create sustainable growth and long term value in our portfolio.

We're particularly excited that we've launched the redevelopment of Cherry Hill Mall, with Nordstrom, Crate &Barrel, Container Store, Maggiano's and Jones and El Vez from Star Restaurant Group, who were named 2007 Zagat restaurant tour of the year in New York City. This will serve as the catalyst for a world-class redevelopment to be designed by James P Ryan & Associates, architects responsible for the Mall at Millenia in Orlando and the Somerset Collection in Detroit. We believe the property, which currently generates sales of $475 per square foot, will take its place as one of the country's trophy shopping environments. We've obtained final land development approval for Crate & Barrel and the Container Store for holiday '07 openings and are proceeding with approvals for the Nordstrom addition, and expect to begin construction 144,000 square foot store store and 160,000 square feet of additional retail space for delivery in the spring of '09.

At Plymouth Meeting Mall, we are cementing our tenant roster to compliment the previously announced 70,000 square foot Whole Food,s with 90,000 square feet of lifestyle, retail and restaurants. We've signed leases from Red Stone Grill, California Pizza Kitchen and CitiBank for newly created parcels. We expect to receive final site plan approval and commence demolition on the former Ikea building this year. We expect a lifestyle component in the new restaurants to open during the fourth quarter of '07, with Whole Foods to follow in spring of '08. We're also in negotiations with P.F. Chang's, Benihana and several key lifestyle tenants.

At Echelon Mall, we're poised to execute on a mixed use development to include a right-sized mall, a town center including 425 residential units, 200,000 square feet of street retail, restaurants and a grocery store. We're fully entitled and are finalizing the transaction with Dewey Commercial for a land sale prior to year-end and construction is set to commence in early '07. We're exceptionally proud of this project, as it was the most distressed asset in our portfolio, with over 50% in line vacancy and two vacant anchors. The plan represents a comprehensive turnaround of the property and brings to bear all of our redevelopment expertise.

Moving away from the Philadelphia metropolitan market, we're nearing completion of New River Valley and Lycoming malls, which when coupled with Capital City and Patrick Henry , validates the repositioning strategy for our middle market properties. At Lycoming Mall, we have opened Best Buy, Dick's Sporting Goods and Old Navy, with Borders expected to open later this month. As a result of these openings, we've seen occupancy increase at the Mall to 88.4% as of September 30, 2006 from 78.9% the prior year. With the opening of Borders, occupancy will stabilize for the first time in the mall's 30 year history at over 95%.

At New River Valley Mall, where Dick's Sporting Goods opened on the site of the former People's department store, the renovation will be complete by Thanksgiving, and Regal Cinemas is on schedule for opening in the first quarter of 2007. Regal will vacate their current mall location and make way for a new food court court and 22,000 square foot community college, both expected to open by the end of next year. The renovation of Viewmont and Wyoming malls is also progressing towards substantial completion in time for this year's holiday shopping season. At Valley View Mall, Hollister opened their 6,600 square foot store on July 20 of '06 and Barnes & Noble opened their 30,000 square foot store on October 24 of '06. At the Mall of Prince Georges, we opened Olive Garden on an out parcel and Marshalls and Ross, who combined occupy in excess 65,000 square feet.

Looking forward to our projects slated to come on line during '07, we are continuing the transformation at key properties. Construction is commenced for Dick's Sporting Goods and Barnes & Noble at Magnolia Mall. At Beaver Valley Mall, relocations are complete, and we are on track to start construction of Dick's Sporting Goods for an opening in September of '07. In 2007, 15 big box retailer transactulons -- transactions, totaling 419,000 square feet in our leasing pipeline, are expected to open during the year. We are successfully executing our redevelopment strategy and believe that partnerships we forge with prominent national impact tenants will continue to drive sale volumes and enhance our merchandise mix. The repositioned Philadelphia portfolio will serve as the cornerstone of the Company's retail brand, creating leasing leverage with our middle market assets and establishing a solid foundation upon which we can continue to attract key retailers.

At this time I'd like to turn it over to Bob McCadden.

Thanks, Joe. For the next few minutes I will cover our third quarter and year-to-date earnings, review our capital spending plans, and update our FFO guidance for the balance of 2006. In the third quarter of this year, we reported net income available to common shareholders of $1.1 million or $0.02 per diluted share, as compared to net income of $14.5 million or $0.39 per diluted share in the third quarter of 2005. For the nine months ended September 30, 2006, we reported a net loss applicable to common shareholders of $1.1 million or $0.5 per diluted share, as compared to net income available to common shareholders of approximately $28 million or $0.74 per share in the corresponding period of 2005.

Net income for the quarterly and nine month periods was impacted by several factors. In the three and nine month period to 2005, we recognized gains on sales of real estate of $11.8 million as compared to only $1.6 million in the current period. In addition, depreciation expense for the 2006 period was higher due to a larger asset base from the 2005 acquisitions, recurring capital expenditures and redevelopment assets already placed in service. Finally, the nine month period ended September 30, 2006, includes $4 million of executive separation expenses recorded in this year's first quarter and $2.8 million of additional depreciation expense,s also recorded in the first quarter, due to the reclassification of Schuylkill Mall from held for sale to continuing operations.

FFO for the quarter was $0.80 as compared to $0.88 in the same period last year. Last year's third quarter FFO results included $3 million or $0.075 per share of land sale gain. Total NOI increased, as Ed mentioned, by 5.5% or $3.8 million to $72.5 million. Same-store NOI for the quarter was approximately $300,000 lower than in the prior year, reflecting lower in-mall occupancy levels and expense recovery rates. At the end of September 2006, our in line occupancy for same-store properties was down 20 basis-points to 87.3%. We expect our total in line occupancy to increase to 87.5% by the end of this year. Contributions from our 2005 acquisitions largely offset higher interest expenses and G&A costs.

We are seeing lower expense recovery rates at many of our malls. While this trend is not limited to the redevelopment, the recovery rate of these properties are approximately 400 basis-points lower than at our other malls. Our properties are experiencing a trend towards more growth leases, leases that pay percentage of sales in lieu of minimum rent and rental concessions made to tenants impacted by the redevelopment activities. We expect the lower recovery rate at the redevelopment assets to improve, as construction is completed, our tenants take occupancy, and our leasing leverage improves.

Turning to our balance sheet. During the first nine months of 2006 we invested invested $155 million in our redevelopment assets and new projects. We expect to spend an additional $74 million during the last quarter of the year on previously announced initiatives and new projects. Since the start of our current redevelopment program we have invested a total of $171 million in our existing malls. We start the year with approximately $58 million of capitalized development and redevelopment costs on our balance sheet. As of September 30, 2006, this total has grown to $195 million after getting effect to the value of properties placed in service. 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 September 30 had approximately approximately $199 million of available borrowing capacity. Our credit facility also contains an accordion feature that allows us to borrow up to an additional $150 million under prescribed conditions.

During the quarter, the mortgage at our Lehigh Valley Mall joint venture was refinanced, providing us with $52 million of net proceeds. Also, during this past week, we completed a modification of our mortgage loan to Schuylkill Mall, which lowered the interest rate in this financing by 275 basis-points to 4.5%. As of September 30, 2006, debt comprised approximately 52.7% of our total market capitalization and 81% of our debt at fixed interest rates. We remain focused on raising capital to fund our redevelopment and development programs to 2007 and beyond. Consistent with our stated strategy, we will continue to finance current spending, utilizing our credit facility and other short-term borrowings. We expect to finance stabilized properties using fixed rate long term debt. In light of our current spending plans, we will also explore raising capital through the selective [inaudible] of assets, joint venture opportunities, and when warranted, through additional equity raises. Looking forward to 2007, we anticipate redeeming our 11% preferred stock in the third quarter of next year. In the second half of the following year, 2008, we expect to refinance [REMEC], which currently encovers 15 of our properties. Upon completion of this refinancing, we will have additional flexibility with regards to those properties.

Turning to guidance for the remainder of 2006, we estimate that FFO per diluted share will be between $3.55 and $3.60. Annual net income per share is expected to be between $0.31 and $0.36. As a reminder, our full year guidance includes approximately $0.12 per diluted share of the anticipated gain on the sale of land for the condominium tract at our Voorhees Town Center project. We also expect to recognize merchant building gains of approximately $0.04 per diluted share from the sale of portions of Plaza at Magnolia, which is currently under development and several other projects.

With that, we'll open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is coming from Jeff Spector with UBS.

Good afternoon. Considering the importance of Cherry Hill redevelopment, is there an opportunity to open the Nordstrom sooner than spring of '09, considering the first phase is supposed to open in the fourth quarter of '07?

We certainly -- Jeff, this is Joe Coradino. We certainly explored that with Nordstrom, but given their store opening schedule, the earliest we could get them in was March of '09, but that is something we explored. And we are looking, at right, now the possibility of opening up the Nordstrom wing in the mall for holiday '08, but we have not made that final determination. That would be prior to the Nordstrom opening.

Okay, and since the announcement in September, can you add any color if you've been able to sign any lease contracts with any upscale or fashion brands to join the Cherry Hill Mall?

At this time, we're not prepared to make any announcement but we're -- we feel very good about the response we're getting from retailers and the tenants that we're currently working with that are what I would consider luxury/fashion tenants for both the expansion of Cherry Hill, as well as well as the area that we're relocating the food court from. So we do have an addition to the Nordstrom expansion area, the former food court, to be able to introduce more upscale tenants to, we think, meet the needs of the upscale Cherry Hill customer.

Okay, and my last question, just regarding the guidance and the reduction and the higher end of $0.03 related to delay in store openings, I'm not sure, did you comment on did that occur at one center or did that occur at several redevelopment projects?

This is Bob McCadden, Jeff. I think the delaying store openings was probably a more general -- yes, it was really across-the-board. It wasn't confined to any specific redevelopment. In fact, some cases may have also happened at some of our non-redevelopment assets.

Can you explain if there was a particular reason or --?

I'm not sure if there's any -- I mean, there's probably a whole host of reasons for some of these. In some cases where we had a situation with minor construction delay, which caused the tenant to, in effect, choose to delay its opening from holiday '06 to the spring of '07. In other cases, it was a matter of -- entitlements and permitting.

Okay, thank you.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from Mike Mueller with JPMorgan.

Hi. A couple of questions. First, with respect to the $0.12 residential gain and the $0.04 gain from Magnolia, just wanted to confirm all of this is expected to hit in the fourth quarter? I don't believe you booked any of it, but I may be wrong here.

Yes, none of that has been booked. It's all fourth quarter expected transactions.

Okay, fourth quarter. And then is -- the Magnolia gain, is that new? Is that something new or has that been in the guidance all along?

That is a relatively new expectation.

Okay. And then shifting gears a little bit and looking forward to '07. I know you don't have guidance out, but just from bigger picture perspective, when you think of same-store growth and the amount of disruption that you've had to the portfolio, this year as you've walked -- you've worked through the process and you move forward to '07, do you expect a similar amount of disruption with a couple bigger properties online? Do you expect it to be not as bad or similar I guess?

Well, let me comment and Joe can add some additional thoughts. Obviously we're going to have a number of projects that have been completed in 2006 and we expect to complete in the first part of 2007, so to a large degree, the disruption we experienced at those projects will be largely behind us. We're obviously undertaking more significant projects at Plymouth Meeting and Cherry Hill, in particular, that will have the same type of effect on our operations. We're hoping that the positive benefit from the completed redevelopments will more than mitigate the impact from developments that are yet to be put into spaces of construction.

Okay that's all I have. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from David Fick with Stifel.

Good afternoon.

Hi, David.

What percentage of your redevelopment now is leased or do you aggregate that or just have it asset by asset?

Yes, it's in the supplemental, Dave, we published it asset by asset.

Okay, and that's the only -- alright, so we can aggregate it ourselves. What is the timeline for the recovery rate improvements? I realize they're compressed because of the redevelopment activity. Is it just as the new space comes online or goes back online ?

David, if you think about it, there's a couple factors taking place. One, the lower occupancy has a natural impact on lowering our recovery rate. And anything else we talk about for, probably at least four or five quarters is the fact that, in order to keep tenants happy during the redevelopment, we're generally cutting more favorable deals to keep them in place while we complete the redevelopment. So I'm hoping that, as we complete each redevelopment, we'll start to see incremental improvement at those individual assets.

And on my first question, your schedule -- your redevelopment schedule doesn't actually show leasing progress. It shows percent of spending completed so far.

Are you talking --

The supplemental.

Yes, well I was talking about -- Yes, well, Dave, what I was referring to was the supplemental schedule that shows the occupancy at each property.

Oh, okay. So we know what is leased but the question is, of the incremental space or the space taken off line for replacement tenants, how much of that space is leased, I guess is the question? What should we expect the pick up at occupancy to be compared to where your disclosed leasing is today on these assets?

Well, obviously that will vary by each property as we fill up, that we've either constructed it, taken off line or put back. We're not disclosing on a space by space basis that schedule.

I understand, okay. Are you considering selling anymore malls at this stage? I know it would be dilutive, but wouldn't it make sense to call out some of the lower performing Crown American assets, for example?

Well, Dave, this is Ron. We're always looking at the portfolio and we're looking at the market and we're seeing how these assets are priced, assets similar to, let's call it, the lower performing assets in our portfolio. And we always are looking at those opportunities. But at the present time, it appears to us that the lower performing assets are really not selling at a price that's attractive, and as you said, it would be dilutive to the Company. So we prefer to look at the redevelopment possibilities of even those lower performing assets and determine whether there's an opportunity to make them better.

Another factor, David, this is part of the matter, which I eluded to in my comments, is that many of the properties that you may be referring to are tied up in REMEC and if we want to try sell them we're somewhat challenged between now and the date that we can refinance that mortgage.

And that's an '08 event?

That's an '08 event. .

Yes Any progress or anything to talk to us about on Gainesville at this stage?

We're proceeding with the entitlement process. It seems to be moving in a positive fashion. Hopefully in early '07, we think we should be finished with the entitlement process and then ready to make a more specific announcement with regard to how that property is going to be developed.

Okay and then lastly, we've seen a little bit of buzz in some of the local papers about progress on both the Western Pennsylvania Racetrack that you guys had some development rights on and gambling in City Center. I'm just wondering, Ron, if you might want to comment on both of those.

Well the Western Pennsylvania situation, as far as we know, is in litigation. It's before the State Supreme Court, and we haven't heard that any decision has been handed down, as we speak today. So we don't really have anything to talk about until that's determined.

How about a downtown casino?

Well, the downtown casino as it relates to PREIT has pretty much been declared -- the downtown itself has been pretty much declared as a non-casino event. And the sites that are being considered are sites that are either located on the waterfront, the four, the five, and one site, the Trump site is in an industrial area in the northwest section of the city.

Okay, great. We won't ask about those again. Thanks.

Thank you. Your next question is a follow-up coming from Mike Mueller with JPMorgan.

Yes, hi. Just going back to the land sale gains -- the Merchant Building gains again, so $0.16 this year. How do you feel about your ability to replicate that going forward, specifically as you move into '07?

Mike, this is Bob McCadden again. I think we're going to continue to look at a number of the properties that we have, including properties like Gainesville and others where there's mixed use components, for those core opportunities. We're not going to be developing all product types. Whether or not we can replicate that $0.16, I don't want to speculate on that until we complete our business plan for next year. But I think, given the nature of our business and the fact that we are involved in both ground up and ground development, we will find opportunities to maximize the return on our investment by harvesting some of the gains earlier, as opposed to holding some of those assets in our portfolio.

Okay, thanks.

Thank you. [OPERATOR INSTRUCTIONS] Gentlemen, there appear to be no further questions.

Okay, thank you very much, ladies and gentlemen, for joining with us today. I just have one last comment and that is, as we continue to accelerate our redevelopment program, we are confident of our strategy going forward. So thank you very much, again, and we'll speak to you at the next quarter.

Thank you. This concludes today's Pennsylvania REIT conference call. You may now disconnect.