Pennsylvania Real Estate Investment Trust (PEI) 2006 Q4 法說會逐字稿

Good afternoon. My name is Lynn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pennsylvania Real Estate Investment Trust fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

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

Thank you, Lynn. Before I start on the call today, I'm going to read the forward-looking statements. This conference call will contain certain forward-looking statements within the meaning of US Private Securities Litigation Reform Act of 1995, section 27A of the Securities Act of 1933, and section 21E of the Securities Act of 1934. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters and are not historical facts. These forward-looking statements reflect PREIT's current views about 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 the forward-looking statements.

More specifically, PREIT's business might be affected -- affecting real estate businesses generally, as well as 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 local market conditions or other competitive or retail industry focus in regions where our properties are concentrated. PREIT's ability to maintain and increase property occupancy and rental rates and risks relating to development or redevelopment activities including construction, obtaining entitlements and managing multiple projects simultaneously. In particular, there can be no assurance of PREIT or buyers of Schuylkill Mall will consummate the proposed transaction on terms of the current agreement or at all, including satisfaction of conditions to closing.

In addition the successful development or redevelopment of any property is subject to to a number of risks including, among other things, of PREIT's developments or redevelopment plans might change, its development or redevelopment activity may be delayed and anticipated projects might -- costs might increase. Unanticipated expenses or delays would also adversely affect PREIT's investment returns on a development or redevelopment project. Additionally, there can be no assurance that PREIT's actual results will not differ significantly from the estimated -- estimates provided 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 31st, 2005. PREIT does not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.

It's now my pressure to turn the call over to Ron Rubin, Chief Executive Officer and Chairman of Pennsylvania Real Estate Investment Trust. Mr. Rubin, 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 the fourth quarter and the full year 2006 and some of our plans for the future. Joining me on the call today are Ed Glickman, our President, Bob McCadden, CFO and Joe Coradino, Executive Vice President and head of our Retail Operations. Among the others in this room are George Rubin, Vice Chairman of the Company, and Bruce Goldman, our General Counsel. After we conclude our remarks, the call will be open for your questions.

The Company accomplished a great deal in 2006, and we continue to believe that our company and our portfolio are filled with many opportunities. As we announced this morning, we have received final approvals and have begun site work for our redevelopments at Cherry Hill Mall, Plymouth Meeting Mall and the Voorhees Town Center. Three exciting projects we will discuss further on this call.

During the year, we substantially completed 8 renovations and redevelopments, which Joe Coradino will discuss in more detail. We continue to be convinced that our redevelopment and development strategy is the right strategy at this time in the market cycle. We are confident in the direction we are taking and are focused on maximizing long-term returns for our shareholders.

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

Thanks, Ron. FFO for the fourth quarter was $1.25 per diluted share compared to $1.11 for the fourth quarter of 2005, an increase of 12.6%. For the year, FFO was $3.62 per diluted share, which was above our guidance range of $3.55 to $3.60 provided in November. The positive variance was a result of higher than expected percentage rents, specialty leasing and lower debt deal cost.

Total NOI for the portfolio for 2006 was $306 million, up 6.1% over 2005. For the quarter, NOI was up 7.4% to 85 million, compared to 79 million in the fourth quarter of 2005. The increase in fourth quarter NOI was due to contributions from properties acquired in the fourth quarter of 2005. Net of dispositions, along with a $1.4 million or 1.8% increase in same store NOI. Same store NOI increased 0.5% and 1.8% for the year and quarter respectively. NOI at the 8 properties where redevelopments were substantially completed during 2006 grew by 3.2% over the prior year and by 7.5% over the fourth quarter in 2005. NOI as the remaining redevelopment properties partially offset these improvements.

Our properties continue to perform well. With sales per square foot up to $354. A 4.4% increase over last year. We now have 16 of 39 mall properties performing above $350 per square foot, compared to 13 properties a year ago. During 2006, we executed 684 non anchor leases for 2.5 million square feet. This is against 624 leases with 2 million square feet for the same period 2005. Overall, average minimum rent for the mall portfolio was $29.75, up 2.4% from $29.06 in 2005. As a result of bankruptcies and store closings, in 2006 non anchor occupancy for the mall portfolio decreased to 86% at year-end against 87% at the end of 2005. Anchor occupancy also declined primarily due to our 2006 acquisition of three vacant former Strawbridge stores, as well as Willow Groves Mall, the Gallery at Market East and Cherry Hill Mall.

We believe that the key to improving our overall occupancy is to demonstrate the performance of our newly redeveloped assets, and the benefits that have been experienced by our merchants including increased traffic and higher sales. During the next year, we expect to grow our investment in real estate by over $350 million by renovating, expanding and constructing new retail space. While new construction is critically important for our future, improving occupancy of our in service inventory is the key to enhanced profitability for PREIT. Over the next few years, as we fully exploit our newly redeveloped assets, we hope to leverage our in place capital investment and improve overall ROA.

In addition to our redevelopment work, during 2006 we made substantial progress with our ground up development project, increasing our investment by over $72 million. We expect to invest over $100 million in our development projects during 2007. As reported earlier in this year, we acquired $58 million of property for new mixed use developments in Gainesville, Florida and New Garden PA. We also acquired the first 9 acres of what will be a 125 acre power center site in Selinsgrove, PA.

On our existing power center projects we have substantially completed the Plaza at Magnolia in Florence, South Carolina, where we have sold parcels to Home Depot, Longhorn Steakhouse, Olive Garden and Chili's, we are anticipating completing the sale of our [inaudible] parcel in 2007. In our New River Valley power center, adjacent to our mall in Christiansburg, Virginia, we have executed leases with Best Buy, Bed Bath and Beyond, [Watch Out for Less], PetSmart, Olive Garden and Panera Bread. These new developments, whether sold or held in portfolio, compliment our adjacent existing malls and confirm these locations as the retail hubs for their markets. We are very excited about our achievements during 2006 and to continuing the momentum that we have created at our properties.

Now Joe Coradino will provide you with detailed information on each of our redevelopment project.

Thank you, Ed. We've demonstrated during 2006 that our redevelopment strategies transforming our portfolio and driving positive results. For the 8 properties completed during this year, in line occupancy is up 310 basis points to 92%, and comp sales have risen to an impressive $373 per square foot, eclipsing our portfolio weighted average of 354 per square foot by over 5%. NOI at these projects has improved 3.2% compared to '05 and is expected to register high single digit increase for '07. We believe the momentum created by the completion of these projects serves as a validation of our strategy, reinforcing our confidence that the 10 projects currently in redevelopment will produce positive results.

We began '06 with 11 assets stated for redevelopment and renovation. During the course of the year we added 7 projects for a total of 18. Of those 18 we completed eight projects, Capital City, Cumberland, Lycoming, Mall at Prince Georges, Patrick Henry, Valley View, Viewmont and Wyoming Valley and we've begun construction on 9 additional projects, Cherry Hill, Echelon, Plymouth Meeting, Beaver Valley, New River Valley, Magnolia, Francis Scott Key, Lehigh Valley and Morristown malls. We expect to begin construction on one project, Willow Grove Park, in the near future. We also expect to complete 5 projects in 2007, New River Valley, Magnolia, Francis Scott Key, Beaver Valley and Lehigh Valley Malls.

Some highlights of the results of our completed redevelopments.

We have reconfigured renovated and remerchandised Patrick Henry Mall, where sales for the month of December were up 8.6% over last December. To supplement the high performing junior's category, we executed a lease with Charlotte Rouse, who will open in the expansion area in June. Net operating income growth for 2005 and 2006 was in double digits and occupancy ended the year at 91.5%, a substantial increase from 2005 year-end occupancy of 83%.

At Capital City Mall in Harrisburg, comp sales were up over 8% at 360 per square foot. Victoria Secret sales increased over 30% in their new expansion space, and Express sales have increased an impressive 20% since expanding into their dual gender concept in '05. At the throat of the new Food Court, Sun Glass Hut experienced a 28% increase in sales in their new location. New retail offerings for the holiday season include a Wet Seal and Forever 21. Tenants under construction for openings this year include Build a Bear, and the Grass Emerald Grill, an Irish pub themed restaurant.

At Lycombing mall in Williamsport, Pennsylvania, Best Buy, Dick's Sporting Goods, Old Navy and Borders were all open for the holiday season and reported very strong sales volumes. December sales for the properties were up 8% over last December. Occupancy ended the year at 93.6%, a substantial increase from 2005 year-end occupancy of 78.1%.

The last 90 days have been highly productive for our company. Achieving critical milestones with respect to lease signings, approvals and construction starts. All an indication that we are at the tipping point in the transformation of our portfolio. We are particularly enthusiastic to announce yesterday's execution of the Nordstrom lease for 138,000 square foot store at our flagship asset Cherry Hill Mall. The transaction allows us to redevelop, renovate and remerchandise Cherry Hill to a level consistent with customer demographics and drive sales which are currently at 477 per square foot to new heights. Leases have been executed, approvals have been obtained, and construction is under way for Crate & Barrel and Container Store, for openings to coincide with the holiday '07 shopping season.

Preliminary and final approval is obtained for the next phase to include Nordstrom, Beastro Row, new retail GLA, and the renovation earlier this month with construction commencement anticipated in the second quarter. Upon completion, the property will secure its position as South Jersey's premier shopping destination and provide additional leasing leverage for the transforming PREIT portfolio.

At Voorhees Town Center, formerly Echelon Mall, all permits and regulatory approvals have been obtained and we successfully closed with Dewey Commercial, our joint venture partner, for the residential portion of the project in December of '06. Construction is under way with the ground breaking ceremony having taking place on January 30th. The mall renovation will be complete for holiday '07 and the Town Center Boulevard, the first phase of the residential component, are expected to be complete in the summer of '08. The project, which involves demolishing two vacant department stores, and approximately half of the mall in line GLA, allows us to recycle the land and put it to its highest and best use as a mixed use development and increases occupancy in the remaining mall from 47.4% to approximately 75%.

Final approval was received from Town Council on February 12th, 2007, for the redevelopment of Plymouth Meeting Mall. This project including a 65,000 square foot Whole Foods, a new lifestyle wing connecting Whole Foods to the mall and five new outparcel is now fully entitled with demolition of the former Ikea store under way. In addition to Whole Foods, leases have been executed with P.F. Chang's, Benny Hannah, California Pizza Kitchen and Red Stone Grill and City Bank for the new outparcel locations.

A lease has been executed with [inaudible] at Willow Grove Park and we have a letter of intent with the theater and are in discussions with additional restaurants and fashion retailers. Our 2008 opening is planned for [Boshkovs] and a signature restaurant with a balance of the third level of the former Stroh Bridges box expected to be complete later in 2008.

At New River Valley Mall, in Christiansburg, Virginia, Dick's Sporting Goods opened in September of '06, the mall renovation is now 95% complete and is expected to be completed in March, coinciding with the opening of a new 58,000 square foot Regal Cinema. Additionally, we have executed a lease with the New River Community College which is set to commence construction in March for a third quarter '07 opening. The food court construction will also start in March with a fourth quarter opening. The holiday season was strong with 8% sales growth for both the months of November and December.

Construction is under way for the Dick's Sporting Goods and Barnes & Noble additions at Magnolia Mall in Florence, South Carolina. The anticipated opening dates are April for Dick's Sporting Goods and August for Barnes & Noble. Occupancy is expected to increase to over 91% upon the completion of this project.

Construction is complete at Francis Scott Key and the store has been turned over to Barnes & Noble who is expected to open in April.

At Beaver Valley Mall all relocations have been completed and construction has begun. Dick's sPorting Goods is expected to open in the third quarter of this year.

At Moorestown Mall, we're excited to announce that we've executed a lease and construction is under way for a 16,000 square foot Lane Furniture. Fronting one heavily traveled Route 38. Opening is expected during the fourth quarter. We're also negotiating leases for new outparcel additions expected to open this year.

As evidenced by the number of projects in the pipeline, we continue to evaluate and execute redevelopment plans throughout our portfolio. Our portfolio comprises a PREIT legacy assets, the 6 former Rouse properties in the greater Philadelphia area, and the 26 former Crown properties, primarily located in secondary and tertiary markets, is a diverse portfolio, with an asset base spanning a variety of markets and conditions, requiring us to employ multiple strategies. We've built a tremendous amount of momentum and continue to focus on enhancing the shopping experience in these markets.

To that end, since 2004 we've completed 16 deals with big box retailers and 17 restaurant transactions and are focused on improving the physical environment through the renovations of our properties. The positive results are demonstrable and we are pleased to report that our redevelopment strategy is producing increased sales, occupancy and net operating income, and we look forward to sharing our continued success with you.

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

Thanks, Joe. For the next few minutes I will cover our fourth quarter and full year earnings, review our capital spending and financing plans and provide our initial FFO guidance for 2007.

In the fourth quarter of this year we reported net income available to common shareholders of $15.6 million or $0.42 per diluted share as compared to $16 million or $0.44 per share in the same period last year. For the year, we reported a net income available to common shareholders of $14.4 million or $0.37 per share in 2006, as compared to $44 million or $1.19 per share in 2005.

Sales of land and recently developed outparcels impacted our operating results favorably for the fourth quarter and full year. In accordance with [inaudible] guidelines and consistent with our prior disclosures we include gains on sales on non-operating real estate in FFO. In the last quarter of 2006, we recognized gains on sales of non operating real estate at $5.1 million or $0.12 per share as compared to only $1.5 million or $0.04 per share in the comparable 2005 period. For the full year 2006, we recognized such gains of 5.5 million or $0.13 per share, while in 2005 we had 4.5 million or $0.11 per share from such gains. We will continue to look for opportunities to realize the value created through our development activity by selling outparcels at certain properties or by disposing of surplus land around our properties that don't meet our strategic objectives.

As I discussed in our third quarter conference call, we continue to see pressure on our expense recovery rates. Our recovery rate on same store properties fell from 90.8% in 2005, to 89% this year. We may see further erosion in 2007 but expect to see an upturn in 2008 as more of our redevelopment properties reach stabilization. During 2006, we invested approximately $251 million. Of this amount, $139 million was directed to our redevelopment assets, $72 million was invested in new projects and the balance spent on tenant allowances, recurring capital expenditures, and the mall renovations at Wyoming Valley and Viewmont Malls.

During 2007, assuming we've received timely approvals for all of our new developments, we expect to spend up to an additional $250 million on mall redevelopments. We have earmarked an additional $100 million to fund new ground up project. We expect that our construction progress balance will peak in the second half of this year and begin to decline on a quarter by quarter basis throughout 2008 as more of our redevelopment assets are placed into service and begin to generate NOI.

We expect to fund these capital requirements with additional borrowings from our $500 million credit facility, which as of December 31st, 2006 had approximately $143 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. In addition, we anticipate a refinancing of the mortgage of the mall at Prince Georges which has a 2007 maturity date. We expect to use the excess refinancing proceeds from this mortgage to supplement our credit facility borrowings.

Additionally, we have several properties that are currently unencumbered that are potential candidates for long term mortgage financing. In light of our current spending plans we will also explore raising capital through potential asset sales, joint venture opportunities, additional unsecured borrowings, and when warranted, through additional equity raises.

As we have discussed over the past year, our 2007 capital requirement anticipate redemption of the 11% preferred stock issuance that we assumed as part of the Crown merger -- as part of the merger with Crown American Realty Trust. The preferred stock can be called any time after July 31st, 2007 at a 5% premium to face value or $52.50 per share. We have currently -- currently have a signed agreement to sell Schuylkill Mall, based on the current contract price, the sale of this property would provide us with approximately $1 million of sales proceeds, after satisfaction of the existing mortgage.

In 2008, the 15 property cross collateralized [remick] which was also assumed as part of the Crown Merger, will be prepayable without penalty. The refinancing of this $400 million loan will provide us with additional opportunities to finance recently redeveloped properties such as Patrick Henry Mall, New River Valley Mall, and Lycoming Mall, among others. They will also provide us with more [flexibility] the [inaudible] that's in the portfolio that don't meet our long-term strategic objectives.

As of December 31st, 2006, debt comprised approximately 55% of our total market capitalization and 79% of our debt had fixed interest rates. In the near term, our floating rate debt exposure will vary depending upon the timing of certain capital spending. As redevelopment projects are completed we intend to finance these properties with long-term fixed rate debt. The average interest rate on our long-term fixed rate debt at December 31st 2006 is 6.38%, a decline of 22 basis points from last year as we continue to execute our previously announced capital plan.

Consistent with the practice of most of our peers, the Company will no longer provide separate guidance for each of its fiscal quarters. Rather, we plan to update our annual guidance on a quarterly basis.

Turning to guidance for 2007, we estimate that FFO per share will be between $3.71 and $3.81 and our net income per share is expected to be between $0.51 and $0.71. This guidance assumes the disposition of Schuylkill Mall in March of this year. The company anticipates that it will record a $6.5 million gain or $0.16 in net income per share as a result of the disposition of this property. The gain on sale of this property will not be included in FFO.

2007 guidance also contemplates the redemption of the Company's 11% preferred shares on or about July 31st, 2007. The $13.4 million excess of a carried amount of the preferred stock over the redemption price will be added to net income to arrive at net income available to common shareholders and FFO. As a result of the redemption, net income is expected to increase by $0.36 per share, and FFO is expected to increase by $0.32 per share.

Other key assumptions underlying our guidance include, no other acquisitions or dispositions of operating properties, an increase in same store NOI of between 1.5 and 1.7%, with same store NOI from the completed redevelopments increasing in the high single digits, partially offset by lower NOI and some properties in earlier stages of redevelopment. Lower lease terminations, in 2006, we recognized $3.2 million of termination income, we expect that number to be lower by about $1 million this year. Lower merchant building gain and land sale gains of approximately $0.10 of FFO per share. Again, in 2006 we recognized 5.5 million of such gain. Our guidance for 2007 includes approximately 1.5 million of such gains including the sale of [Khol's] to the Plaza at Magnolia which is currently under construction. We also assume a G&A run rate of between 10 and $10.5 million per quarter.

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

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is coming from Jeffrey Spector of UBS.

Good afternoon. Can you please -- I'm sorry, I missed what you said about your guidance on lower merchant building gains for '07.

Right. We had 5.5 million in 2006. And we're including in our forecast that $1.5 million of such gains, so $4 million or about $0.10 per share decrease.

Can you give guidance on -- you mentioned same store NOI on the different, I guess for redevelopments, stabilized. Do you have anything sort of on a blended basis, any guidance?

Yes, blended basis is about 1.5 to 1.7% increase in same store NOI.

Okay. And did you -- can you give guidance on the Cap rate on the disposition?

It's a little bit north of 10%.

Great. Thank you.

Thank you. Our next question comes from Matt Ostrower of Morgan Stanley.

Good afternoon. I just wanted to make sure we flush out the -- it appears, if you take out the 32 or -- I'm sorry, the $0.32 from the preferred redemption out of your guidance, you're using a midpoint, you're talking about like a 344 number, and we're at 3 -- what you reported, 360 something this quarter, 362 for this year. You're saying that basically, the entirety of that decline is the decline in land sales gain, the lease term fees and that would be offset by the same store NOI growth of 1.5 to 1.7%?

Yes. They're the major components of the difference.

Okay. Fine. And then, you talked about the remick, which you've talked about in the past. Is there going to be -- it sounds like there's not going to be any kind of specific one time item associated with that either?

There should not be.

Okay. The recovery ratio decline that you discussed, is that purely a product of vacancy and redevelopment associated with or -- vacancy associated with redevelopment? Or is there some other -- something else going on there>

It's more the vacancy decline is more pronounced in the redevelopment assets but there has been general declines in occupancy in some of the other assets in the portfolio. But what compounds the recovery rate impact is in connection with some of the redevelopments we may enter into, the short term leases with some of the tenants to keep them in place, and typically the form of those leases would include percentage of sales on [inaudible] rent or gross leases.

Okay. So back filling some previous vacancies has hurt your recovery ratio differently?

Right.

Last question on Casual Corner and some of those vacancy, can you update us, as you did now already, can you update us on progress refilling some of that space?

We have 11 Casual Corners that closed. We have 8 of those locations re-leased. About 67% of the total space and of 17 stores that vacated as a result of Musicland bankruptcy we have re-leased 8 of those or about 45% of the GLA.

And in terms of characterizing that occupancy, are those some of the gross [owned] releases, the gross sale leases that you talked about or are they national tenants that you've refilled?

It's kind of a mix. Some of them are national tenants. Some of them are regionals.

Okay. Thank you very much. I appreciate it.

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

Hi, it's [Nate Hisbee] here with Dave. Just a quick question. On last quarter's call you projected $0.16, 12 per Echelon and 4 for Magnolia and seems like you only came in about $0.12, unless I'm missing something in there.

The $0.04 in Magnolia was a close transaction that we were trying to sell. While the property was still being constructed. Because of the complex at this of trying to deal with all the uncertainties that transaction moved into 2007. That's part of our 1.5 million or roughly $0.04 in the '07 guidance.

That's basically all [inaudible] assuming next year.

Right.

And I don't know if you mentioned this, you seem to have outperformed your own guidance by about $0.02. What was the surprise to you guys?

I think the surprise was -- and I think Joe touched on this. I think we were pretty cautious in terms of holiday expectations in terms of sales. So we had strong performance and increases in the percentage rents. I mean, I think the three major pieces would be percentage rents, we also had stronger seasonal temporary tenant leasing, and our percentage sales increased as well for tenants who were on percentage sales better than expected.

Okay. Great. Thank you so much.

Thank you. Our next question is coming from Michael Mueller of JPMorgan Securities.

I was wondering if you could go back to Matt's question and talk about the guidance again. Maybe a little more detail. I know it's mid 340s. We're talking about positive same store growth year-over-year, and I know you mentioned lower land sale gains are going to be a contributor. But, also, I mean, your '06 number was pulled down, I believe $0.10, from [John Weller] costs, which would not be non recurring. Can you kind of walk us through where the erosion is on the NOI? And I guess more importantly, particularly as you move toward the Cherry Hill redevelopment, really getting into full swing, it looks like that project is of equal size to pretty much everything else that's been on the redevelopment pipeline. As we move into '08 should we expect things to get better? Worse? Or kind of stay the same? I guess, when does the drag begin to wear off based on what you're seeing?

Okay, Mike, it's Ed. If you look at our projection for '07 versus '06, we're actually predicting that we'll be up on NOI. Some of this is mitigated by the fact that we're selling [inaudible] malls, which is actually a small [property] but it does impact NOI. It was a small troubled property that we've been trying to sell for a while, and essentially when we take that out, it does mitigate what we would have had as a more positive change in NOI by about $0.025. If you look at our total G&A burden, it's up from period to period, but the NOI -- our expectation that is the NOI is going to up in excess of the G&A. So if you want to say potential gross margin before land sales, we're expecting that to be up as well for '07 and about -- depending upon whether you use off the [6 to 8 '07] number of shares or '06 number of shares, it accounts for about $0.10 of the change in FFO.

What's the weighted average share count that you think for '07?

41.2 million shares.

Which is just up slightly from where we are now which is about 40.9.

Okay.

So, essentially we land up at the pre gain on sale number with a net positive year to year. And again, on a preferred stock, that impacts our model, because obviously we're going to be paying less dividends this year than last year, but we do have to refinance the preferred with -- we're going to finance that at least intermittently with short term debt and then hopefully through the long-term financing of one of our malls, and so we'll have a savings on interest, but not as large as one would expect by just saying we're not going to pay the preferred dividend in a half a year.

Yes. I mean, but that's still accretive, though, right?

It definitely is accretive and it will be much more accretive in '08 where we'll have the full year benefit of not having the 11% preferred out.

I mean, am I just thinking about this the right way. You're 362, if you strip out the land sale gains of $0.13, add back the John Weller charges, you're at 359, that comps to the 345 and stripping out the gains, et cetera, I mean, is it safe to assume that the vast majority of that, you had a couple cents coming from [inaudible] and the rest is just --

you've got a couple other things going on in there, which I'll point out to you. One is the fact that we're also had a substantial expenditure on our new redevelopment project, some of which came into service and led the higher interest expense in our predicted 2007, as well as the fact that we do have some floating rate debt outstanding which we are predicting in our model to be out at a higher interest rate during the course of the year. So we had both the price and volume change in the interest expense number. And we did have -- we are putting back into our model some debt deal costs of which we had none in 2006, which is unusual for us, so we're modeling those into '07 although we don't obviously have any prediction there, we have historically had that deal cost in our models. So you're seeing some of that. And we did have a one-time interest benefit of about $1 million of interest income on a joint venture property last year that won't be repeated in '07 as well.

Okay. Well, one last question. Moving to '08, I know you don't have guidance on it, and I appreciate that, but just thinking about how the earnings are trending, I mean, Cherry Hill is pretty sizable, Plymouth Meeting is pretty sizeable. Should we expect -- and you're coming off a year where, granted there are a lot of factors, but the growth year-over-year on a clean basis is kind of down, should we expect the growth to reaccelerate heading into '08 with Cherry Hill coming on line? Can you help us --

it's not so much Cherry Hill because that's going to have a longer time frame than '07 to '08. But what really is going to happen in '07 is that we're going to start, as we get into the end of the year, to have fully year run rates on a lot of the redevelopment projects that we put into service at the beginning of '07. So the 8 projects that we mentioned will be in their full year run rate by the end of '07 and that will generate additional income into '08.

So you don't think Cherry Hill will wash that out? I mean, you should be rebounding in '08. It shouldn't be washed out by Cherry Hill?

That's our expectation at the moment.

Okay. And I think that's it for now, thanks.

Thank you our next question comes from Stephanie [Law] of Lehman Brothers.

I just want to have a little bit more clarity on your preferred redemption. Can you reconcile the difference between 11% of the nominal and the 13.4 excess of the carrying amount? Just to give a little bit more color, is there a charge or how does that impact your interest income? I know you walked through that earlier. If you could just give us a little bit clarity on that. And the second question is related to your remaining purchase in interest in the 11% of the Crown American partnership. I assume now you have gained full ownership over those assets. What do you intend to do with them? Is there an overall plan that you can brief us on? I'd appreciate that thank you.

I'd like to take the last question first and then work backwards. The 11% interest that we acquired was really just converting operating partnership units -- I'm sorry, operating partnership interest and the underlying properties into operating partnership units. So effectively our -- we always had a 99% economic interest in those assets so substantively nothing has really changed. What was really done as part of the original structuring of the transaction, and pursuant to the original structure, there was a [foot] call feature that was largely unwound. So from all practical purposes it really had no substantive impact on our ownership of those assets.

Let me just -- really couple pieces related to preferred, just so everyone understands. The first is the redemption, $13.4 million and how that's derived. When we acquired or merged with Crown America, the value of the preferred stock on a per share basis was about $57.90. We're going to be able to redeem the preferred stock for the premium over its face value worth $52.50. The difference between those two were $5.40 times the 2,475,000 shares outstanding, and that gives rise to a, for one of a better term, a redemption at discount if you will, because we're redeeming the preferred stock for less than we have it on our balance sheet. That would be kind of a one time only impact.

In addition, we will have dividend savings beginning with the redemption date after July 31st, but in order to finance the redemption we have to go out and borrow money on that, and effectively the redemption price is about 129.9 million, assume that you borrow money in the mid 5s, that would give rise to an offsetting interest cost, so for the year, that number is roughly 2.6 million and on an annual basis, in years, 2008 beyond, it's about 6 million -- little over $6 million, 6.3 million. So we're only getting part of the benefit of that redemption in 2007. We'll get a larger part of it, more than twice the amount in next year's numbers. So 2008 has in effect built in another $3 million of growth built into it based on just redeeming the preferred stock.

Okay. And there are no -- any charges related to the redemption?

That's a net number.

Okay.

We had no -- because we acquired, this was something we assumed as part of an acquisition, we didn't have any issuance costs that we would have to write off.

Great. Just for clarification. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. We have a follow-up question coming from Michael Mueller of JPMorgan Securities.

Just one other question. You mentioned the 8 projects that are substantially completed in terms of redevelopments. Can you give us a sense as of to how much of the NOI -- how much NOI they throw off in '06 versus what the expectation is for '07 just to see how that is trending?

Sure. Our expectation is that the NOI will go up between '06 and '07 in the high single digits. The total budgeted costs of those projects is approximately $84 million.

The '06 NOI was -- 61 -- call it $61.7 million.

Okay.

And then up high single digits off of that this year?

Right.

Okay.

And it's our expectation that we'll also have growth between '07 and '08 on that number.

Okay. That's helpful. Thank you.

Thank you. We have a follow-up question coming from David Fick of Stifel.

Good afternoon. I was wondering if you could comment on two things. First, you really haven't talked a lot about acquisitions and you had a couple last year but basically your focus has been on development and redevelopment. Do you see anything out there in terms of opportunity to be in the market this year? That's the first question. The second question is, given your below peer growth that comes from the nature of a large focus on redevelopment, do you have any questions or observations that will be useful to us about public versus private and any overtures that you might receive or entertain from others who might pay more for your real estate than the public markets today? I think most of us have you in an NAV discount is what I'm trying to get at.

Dave, this is Ron. I'll try to answer both questions. Question number one is, in terms of buying assets in this market with the pricing where it is, it's not exciting, and so consequently, we have looked at a lot of things and we haven't seen opportunities to create the kind of growth that we can find in doing that with our own assets. So until the market loosens up a little bit, if it does, because it appears that a lot of the assets in our sector have really been re-priced. We don't see opportunities, a lot of opportunities to buy assets in this marketplace. Obviously we continue to look. We see just about everything that comes down the pipe, and in the bidding of assets, we just think the prices are just not where we would be an interested player.

With regard to your second question, look, there's no question with the amount of capital that's available in the marketplace that every company, every REIT with assets is being approached, and clearly we've had many approaches. But the value creation, which is part of our redevelopment and development program, is really what we're focused on because, as you stated, the Company is selling at a discount to its NAV and we are, to a great extent, being focused on with regard to our present earnings. We think that once the redevelopments continue to kick in, that our earnings will improve, and that the price of our shares will be closer to really where they belong. And so that is really our program for now and that is to complete these redevelopments. Our strategy seems to be working the way we expected. The return on investment has been good and we're going to continue at that program, and as you know, a great percentage of the assets in our total portfolio will be going through some phase of redevelopment.

Okay. Great. Thanks for the answer.

Thank you. Our next question comes from Jonathan Miniman of ING Clarion.

Hey, guys, how are you.

Hi, John.

Can you help me reconcile a little bit your balance sheet over the next 12 months? Leverage right now at a debt to market cap basis, 55%. You went through and kind of talked about some of the re-fies and levering up some other assets. But most of that is on the debt side. To Dave Fick's question, I don't think we as shareholders or you seeing where the stock is trading really would feel comfortable issuing equity. How do you delever this company? You're now running at as high leverage as some of your -- one of your peers that swallowed another large company. So how do you guys reconcile that? Where are you looking to fund some of that equity? Is it asset sales that you haven't talked about? Are you exploring JV opportunities? How do you think about that?

Well, one of the ways that we're creating our own in essence equity is through the yields that's we're earning on these projects in excess of the cost to debt. And so, as we complete the renovation projects and we complete the redevelopment projects and we go through lease-up, we're going to be exceeding our marginal cost to debt and that in essence creates equity under our credit agreements. So that's one source of equity. And the other sources is we're obviously always looking at our existing properties to see whether or not there's ones that we want to harvest.

And when you look at the portfolio, what -- do have you a specific number? What do you think you guys could potentially sell. You're seeing some of your peers ramping up kind of at the lower end of the asset pool. Do you have assets in mind or are you actively marketing anything?

No, we're not actively marketing assets at the moment except for ones that we've already commented on. There's an asset in Western Pennsylvania we've been looking at for a while. We have been in the market with [inaudible], which we're hopefully going to close on, and we're looking at assets where we don't feel that they'll have the future growth that the rest of the portfolio might have as a potential source of capital. But our harvest strategy is to bring them up to full potential or to decide that we don't think we can get there with the particular asset and bring it to market. But clearly, where our stock is trading now, that would be our number one choice as opposed to going out and issuing additional equity.

Okay. Thanks.

Thank you. [OPERATOR INSTRUCTIONS]. There appear to be no further questions. I would like to turn the floor back over to management for any closing remarks.

We would like to thank you for the participation in this call. We think it's been a good free exchange, and we look forward to continuing to keep the market apprised of our progress. As I said, our strategy appears to us to be the right strategy and I hope you agree. And we'll talk to you again soon. Thank you very much.

Thank you. This does conclude today's Pennsylvania Real Estate Investment Trust conference call. You may now disconnect your lines. Have a wonderful day.