Pennsylvania Real Estate Investment Trust (PEI) 2007 Q1 法說會逐字稿

I would like to welcome everyone to the Pennsylvania Real Estate Investment Trust first quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Mr. Garth Russell. Sir, you may begin your conference.

Thank you. Before turning the call over to management, I would like to start with the forward-looking statements. This conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation 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 our 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 are subject to risks and uncertainties and changes in circumstances that might cause future event, 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 businesses in general as well as the following among other factor--general economic, financial and political conditions, including changes in interest rate, or the possibility of war or terrorist attacks, changes in local market conditions or other competitive or retail industry factors in a region where our properties are concentrated. PREIT's ability to maintain and increase property occupancy and rental rates and risks relating to development activities, including construction, entitlements and management, entering multiple projects simultaneously. 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, it's development or redevelopment activities might be delayed and anticipated project costs might increase. Unanticipated expenses or delays would also adversely affect PREIT's investment returns on development or redevelopment projects.

Additionally, there can be no assurance that PREIT's actual results will not differ significantly from the estimates provided on 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 in documents PREIT has filed with the Securities and Exchange Commission and in particular PREIT's annual report on Form 10-K for the year ended December 31, 2006. PREIT does not intend to update or revise any forward-looking statements to reflect new information, future events, or otherwise. It is now my honor to turn the call over to Ron Rubin, CEO and Chairman of Pennsylvania Real Estate Investment Trust. Ron, the floor is yours.

Thank you. Before we begin our discussion today, as many of you know, our New River Valley properties are just two miles from Virginia Tech's campus. We are a part of that community and the entire company along with everyone else was deeply saddened by the events of April 16. Our hearts go out to the Virginia Tech's students and faculty, their families and friends, and everyone else affected by this tragedy. Now I would like to introduce those joining me on the call today. Ed Glickman, the President; Bob McCadden, the 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. We will discuss our results for the first quarter of 2007 and some of our plans for the future. After we conclude our remarks, the call will be open for your questions.

Our redevelopment strategy continues to be successful. Our completed projects, as expected, are generating improved occupancy in sales. We expect the same with the current projects underway. Significant progress was made during the quarter at many of our properties, specifically Morristown Mall and at our retail hubs around Magnolia Mall and the New River Valley Mall. We are also excited about the recent announcement of our Jacksonville and North Hanover Mall redevelopments. These and other projects will be discussed further on this call.

We are looking forward to the ICSC spring convention later this month. We are pleased with the improvements we are making to our portfolio and look forward to discussing the opportunities available for prospective tenants. Those of you who are interested should stop by our exhibit and see the possibilities our portfolio offers. As evidenced by our accomplishments, our progress, and our plans, we are always focused on maximizing returns for our shareholders. With that I'll turn the call over to Ed Glickman.

Thanks, Ron. We had a very good quarter., in-line occupancy rents and sales productivity were all up. Funds from operation for the first quarter was $0.81 per diluted share, a 5.2% increase from $0.77 for the first quarter of '06 and above the First Call consensus estimate. Total NOI for the portfolio for the quarter was 73.5 million compared to $75.4 million in the first quarter of '06. The decrease in NOI is primarily due to higher lease termination revenue in the first quarter of last year. Same-store NOI without lease terms was up 160,000 to $72.7 million. NOI is the eight properties where redevelopment and renovations were substantially completed last year grew by 8% over the first quarter in '06, without lease terminations, the increase would have been 9%.

Our properties continue to perform well with sales productivity up to $361 a square foot, a 4.3% increase over last year. We now have 18 properties performing above $350 per square foot compared to 15 a year ago. Our over $350 property represents 65% of this quarter's NOI compared to 53% a year ago. During the quarter, we executed 149 nonanchor leases for 680,000 square feet. 61,000 square feet of previously leased space was re-leased at a new average base rate of 32.15, an increase of. 77%. 387,000 square feet of renewals were completed at new base rents averaging 21.02 a foot, an increase of 14.1%. 235,000 square feet of previously vacant space was leased at $23.54 a foot.

This quarter, average base rent for the mall portfolio was up to $30.03, 1.8% rise from $29.50 a year ago. Nonanchor occupancy for mall portfolio was also up 20 basis points to 86.0% from 85.8% at the end of the first quarter of '06. At the eight properties where redevelopment and renovations were substantially completed during last year, nonanchor occupancy increased to 91% for the first quarter of '07 from 87.5% last year. Anchor occupancies declined versus a year ago, primarily due to our acquisition of three vacant anchor stores at Willow Grove, the gallery at Market East, and Cherry Hill. We believe that the key to improving our overall occupancy is to demonstrate the performance of our newly redeveloped assets and the benefits that our continuing merchants have been experiencing, including increased traffic and higher sales. We're excited about these results, we're getting the job done, and now Joe Coradino will provide you with detailed information on each of our redevelopment properties.

Thanks, Ed. We continue to make progress on our redevelopment properties and advance our leasing initiatives. Some examples of key leases executed during the first quarter include Dicks Sporting Goods for North Hanover Mall, Eastern Mountain Sports, and Pei Wei Asian Diner at Morristown Mall, and David's Bridal at the Commons in Magnolia.

We continue to deliver on our promises to our customers, tenants, and investors. For the eight properties completed in '06, in-line occupancy registered a healthy 350-basis point increase over the first quarter of '06 to 91%. The leasing progress continues on these assets with McGrass, Annual Grille, Build a Bear, and Starbucks underway for near-term openings at Capital City Mall and a 7,000 square foot Charlotte Rouse will open a new wing in Patrick Henry Mall in the second quarter. Our five Philadelphia metro projects are continuing towards completion with construction underway at Cherry Hill Mall, Plymouth Meeting Mall, Vorhees Town Center, Willow Grove Park, and Moorestown Mall. At Cherry Hill Mall, construction is underway on the container store and steel is being erected for the Crate and Barrel store. Both stores are set to up for the '07 holiday season.

Tenant relocations are progressing for the demolition of the former Starbucks building to make way for Nordstroms and the construction of the new food court. Both of which are expected to commence in the third quarter. At Vorhees Town Center the demolition of Sears in the malls inline space has been completed. (Inaudible - audio difficulties) --We are also adding 6,000 square feet of new restaurant outparcels as part of this redevelopment.

It is worth noting that the focus of our redevelopment efforts transcends the Philadelphia market. We are delivering on our promise beyond the Philadelphia region, with a goal of completing seven key projects. The progress is substantial. At New River Valley Mall, Dicks Sporting Goods opened in September of '06. The mall renovation was completed in March and a new 58,000 square foot Regal Cinema is expected to open during the first week of May. Construction is now underway on New River Community College and we are on track for a third quarter '07 opening. . Construction of the 100% leased food court has also commenced and we are expecting a fourth quarter '07 opening.

At our ground up development of New River Valley retail center, adjacent to the mall, we executed leases during the quarter with Staples and Old Navy totaling 36,000 square feet. They will join nationally-recognized merchants Best Buy, Bed Bath & Beyond, Ross, Petsmart, Olive Garden, and Panera Bread. Including the final transactions currently under negotiation we will be 100% leased for this 163,000 square feet power center with expected initial occupancy in the fourth quarter of this year. At Francis Scott Key, the 27,000 square foot Barnes and Noble opened on April 5. At Magnolia Mall, Dicks Sporting Goods opened April ,1 and construction is underway for Barnes and Noble, which is on schedule to open in August of '07. We're planning the mall renovation for completion by holiday this year.

At Beaver Valley Mall, all relocations have been completed and construction is progressing, with Dicks Sporting Goods expected to open in the third quarter of this year. At Lycoming Mall, where we opened Best Buy, Dicks Sporting Goods, Old Navy, and Borders last year, we're in the final stages of planning a renovation that will include a new entrance. These upgrades will continue the momentum at this asset, where sales have increased by 13% over the first quarter of last year and in-line occupancy increased from 75.9 to 94% for the same comparative period.

Last week we announced a new redevelopment plan for two former Crown assets, North Hanover Mall in Hanover, Pennsylvania, and Jacksonville Mall, in Jacksonville, North Carolina. The new two-level 170,000 square foot mall construction is underway on Bob Scotts and Dicks Sporting Goods. The new two level 170,000 square foot Bob Scott stores, in ninth at a PREIT mall, will complement Sears and JCPenney as the malls anchors. Demolition of the former (inaudible) store we vacated late last year is complete to make way fro Bob Scott's Spring '08 opening. A 50,000 square feet Dicks Sporting Goods is also under construction and is scheduled to open for holiday '07. The redevelopment includes enhancements to the mall's common areas with new flooring, seating, mall entrances, and lighting upgrades. Redevelopment plans are also underway at Jacksonville Mall, where Barnes and Noble have signed a lease for a 28,000 square foot store to be located in the south wing of the center. The new store is expected to open in Spring of '08.

A second phase of this redevelopment calling for an additional 14,000 square foot mall expansion will include the addition of two restaurants with outdoor seating. We're also planning an interior renovation that is scheduled for completion by holiday of '08. We approach Las Vegas ICSC with optimistic anticipation that our redevelopment successes, projects under construction, and rich development pipeline will provide a compelling reason for expanding retailers to join our portfolio. We expect that this will translate into further value creation opportunities for the Company and look forward to sharing new redevelopment plans with you on future calls. At this time I'd like to turn it over to Bob McCadden.

Thanks, Joe. For the next few minutes, I will cover our first quarter GAAP earnings, review our capital spending and finance plans, and touch on our FFO guidance for the balance of 2007. In the first quarter of this year, we reported net income available to common shareholders of $5.7 million or $0.15 per diluted share as compared to a net loss allocable to common shareholders of $2.8 million or $0.08 per diluted shared in same period last year. Net income for the first quarter of '07 includes a $6.7 million gain on the sale of Suco Mall and $800,000 in net combination proceeds associated with highway improvements adjacent to Capital City Mall.

The Capital City amount is included in the interest and other income caption in our income statement. As I discussed on our fourth quarter conference call, we continue to see pressure on our expense recovery rates. Our recovery rate on same-store properties fell from 91.7% in last year's first quarter to 90.6% this year. We may see further erosion through the balance of 2007, but expect to see an upturn in 2008 as more of our redevelopment properties reach stabilization. As of March 31, 2007, we had $2.1 billion of debt outstanding, which represented approximately 52% of our total market capitalization and 75% of this debt consisting primarily of mortgage notes payable was fixed at an average rate of 6.34%. In the near term, our floating debt rate exposure will vary depending upon the timing of the placement of long-term debt and our capital expenditures. As redevelopment projects are completed, we intend to finance these properties with long-term fixed rate debt.

As an example of that in March, we paid off the $40 million mortgage on the Mall at Prince Georges that an 8.7% cash interest rate using borrowings from our credit facility. As of March 31 of this year, the interest rate on the credit facility was 6.37%. We currently have a commitment for $150 million mortgage on the Mall of Prince Georges property and we expect to close this financing during the second quarter. The proceeds from this mortgage are expected to be used to pay down our credit facility. During the quarter, we also settled $120 million of swap agreements that we put in place during 2005 to hedge the financing. The settlement resulted in a $4.1 million payment to us and the gain will be amortized as a reduction of interest expense over the ten-year term of the loan representing about a 27-basis point savings over the contracted amount.

During the first quarter, we invested approximately $44 million in our properties. Of this amount, approximately $28 million was directed to our redevelopment assets, $11 million was invested in new development projects, and the balance spent on tentative allowances, recurring CapEx, and mall renovations. For the balance of 2007, we expect to spend up to $200 million on our mall redevelopment and project an additional $70 million in spending on ground up developments. As we have discussed over the past year, our 2007 capital requirements anticipate the redemption of the 11% preferred stock issuance that we assumed as part of the merger with Crown American Realty Trust. The preferred stock can be called on or after July 31, 2007, at a 5% premium to face value or approximately $130 million. We expect to fund these capital requirements with additional borrowings from our $500 million credit facility, which as of March 31, 2007 had approximately $66 million of available borrowing capacity.

The proceeds from the Mall of Prince Georges refinancings are expected to replenish our borrowing capacity by $150 million. Our credit facility also contains an accordion feature that allows us to borrow up to an additional $150 million under prescribed conditions. As we have discussed on prior calls, 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, and additional unsecured borrowings, and when warranted through additional equity raises.

Turning to earnings guidance, we are reaffirming our guidance for 2007. FFO per diluted share is estimated to be between $3.71 and $3.81 and our net income per share is expected to be between $0.61 and $0.71. In establishing our guidance range, we consider a range of possible outcomes as a result of executing our business plan in our markets. These variables include customer sentiment, which drives sales, tenant interest in our properties, tenant sales performance, interest rates among other factors. Our initial guidance range assumes $2.2 million of lease termination income for 2007. Based on our current outlook, we estimate that lease terminations will be closer to the 1.2 to $1.5 million range. There may be additional upside as a result of higher-than-originally-anticipated at parcel sale gains to mitigate this reduction. Otherwise, our basic guidance assumptions remain unchanged at this time. With that we'll open it up to questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Matt Ostrower from Morgan Stanley. Please go ahead.

Good afternoon. I didn't hear you address the in-line occupancy number, which looks like it's inflecting a little bit. Is that just noise or are we getting to the point now on the redevelopment pipeline where you could start to see that number consistently increase? Did you address that already?

No, we haven't addressed it already. Our expectation is that number will continue to increase.

Okay. Just in terms of fundamentals overall, obviously you're bringing down your lease termination expectations, which I would assume is a statement about ongoing retailer health. Any other trends you can discuss in terms of demand for space at this point?

Other than the fact that between -- the fact that we are undergoing major redevelopments, which are really generating excitement among the retailers and the general retail climate which is one very positive expansion, we're optimistic about the future.

And just as a follow-up to that, negotiating with tenants, for example, if you want to move them or whatever a year or two ago as a part of one of these renovations versus negotiating today, has there been any change in the dynamic between you and the retailers as a result of the space markets overall?

I think what we're seeing is given the fact that we have completed a number of successful redevelopments, we're seeing more cooperation among the tenants to buy into the redevelopment and to work with us in creating our vision.

Okay, great. Thank you.

Thank you. Our next question comes from Philip Landis, who is a private investor. Sir, please go ahead.

Thank you for taking the call. I'm inherited Pennsylvania Realty as a former Crown Realty investor and just I want to thank you for delivering on most of the promises you made at that time. I will also say I'm glad to hear on the update of the refi activity and I applaud you on keeping the majority of the rates around the lower 6% area. I'm calling right now because I've heard that some of the redevelopment activity is causing income growth and my question is, are you prepared to forecast any types of increases in the dividend down the road?

Well, we've had a pretty conservative view towards the dividend given how much capital we're spending on the renovations and improvements to the properties. So we're being fairly cautious with the dividend at the moment.

So in other words you're not prepared to make any type of forecast for an increase in 2008?

Well, we don't make forecast about future dividends payments in general. We just talk about our dividend policy, and our dividend policy has been to be fairly conservative given the amount of capital we're spending on redevelopments and renovations.

Fair enough. Thank you.

Thank you. Our next question comes from Michael Mueller from JPMorgan. Sir, please go ahead.

Hi. A couple of questions. You previously talked about the redevelopment drag being or peaking out at the end of '07, maybe beginning of '08. Any changes in that expectation at this point?

No, I think we're still saying, if you listened to Joe's comments, we have a lot of store openings slated for the fourth quarter of this year, including some of the key tenants at Cherry Hill Mall, and we have a bunch of stuff coming on stream in the first half of next year, including Plymouth meeting and the Echelon Mall. Including the Town Center by GoodYear 2008. So we really see that as the -- we don't see any change in the inflection point.

Okay. Then in terms of looking at the debt here, you mentioned Prince Georges and then you mentioned some other mortgages, some other assets where you can essentially raise excess proceeds from them will that be an '07 event or a '08 event for the other properties?

Well, we would likely, including what we have committed in terms of capital we would likely be out in the debt market again to raise some additional capital in 2007 and possibly into '08 as well. The '08 is going to be largely driven from the refinancing that's available to us in the third quarter.

Okay. If you've got 150 this year from Prince Georges, how much extra money could you be looking at from the other assets in '07?

I think it's going to be driven what our needs are. We have a number of properties that are currently unencumbered, so we'll pick and choose among them to try to match as efficiently as we can, our capital needs with financing. So we're not going to over financial properties at this stage in the game.

Last question. I just want to double check. The condemnation of $0.02, that was in original guidance; correct?

Actually, one of the comments I made earlier is that obviously when we set our guidance range, we had anticipated receiving something from Pendot, we had a range of outcomes around the dollar value there, but it was within our range that we had established at the start of the year.

Okay, great. Thanks.

Thank you. Our next question comes from [Stephanie Lau] of Lehman Brothers. Ma'am, please go ahead.

Hi, I just wanted an update on the land sales figure that you gave on previous quarter. You said it would approximately be $1.5 million. If you can reconfirm that number, if it's going to be back end loaded, just give us a little bit of color on that?

We actually have a outparcel teed up for closing in the second quarter of this year that might be, call it somewhere in the $0.03, $0.035 range. I think our original guidance was about $1.5 million for the full year, so we see about 75% of that occurring in the second quarter and the balance -- we think there may be a little bit of upside, probably third or fourth quarter.

Okay, thank you.

Thank you. Our next question comes from Jeffrey Spector of UBS. Sir, please go ahead.

Good afternoon. I just wanted to ask if you could flush out a little bit more the 8% NOI increase at the redevelopment projects?

In what way would you like us to answer that question? What we have done is we have taken a cut of the properties that have been redeveloped and that we had mentioned in context of 2006 completion dates and looked at the NOI change on those assets as a way of illustrating our ability to complete the turnaround.

Right. I guess what I would like just to clarify, anything, if it's particular tenants or was it that you filled space that was vacant, or just a little bit more color on the turnaround at those projects.

I think it's all of the above. Obviously, at a property like Lycoming Mall where we're filling vacancy with boxes that's driving our NOI. In other cases, a place like Cap City Mal it's actually filling in some of the space that was created by moving the food court and creating some higher value retail in the front of the property. Patrick Henry is a combination of serene merchandising as well as new GLA coming on stream for the full year.

I think the results are really coming from enhancing the shopping experience. That's really what we've been up to and we're beginning to see the results from it. It's a combination of things. It's creative leasing, it's redevelopment, in some cases turning the centers inside out. It tends to be on a case-by-case basis. What we're seeing is that the creativity on these assets is delivering results.

Were there any new tenants to the portfolio fashion or luxury that now you're talking to they're interested in some of the other projects you're working on, like Cherry Hill?

Cherry Hill's a great case in point. Almost everyone we're talking to at Cherry Hill is first to the market and first to our portfolio. Two great examples -- three great examples are Nordstroms, Crate & Barrel, and Container Store, which we've announced. They were not part of our portfolio. We also made a couple of other announcement this is quarter with Pei Wei Asian diner, with Eastern Mountain Sports, with Lane furniture, the list goes on and on. The excitement that really we're generating around these redevelopments is not a secret in the retail community. We're generating significant first-to-the market, first-to-the portfolio retail interest.

Okay. Then final question, are there any key take aways from the redevelopment that you are applying to the new redevelopments to keep them on budget on time?

Certainly one of the things that we're focusing on earlier on right now than we did, say in the case of Patrick Henry or Cap City is the value engineering process and being very careful in the initial design to focus on both steel and concrete from a design perspective, so that what we end up creating can really be purchased for our budgeted costs.

Great. Thanks, guys.

Thank you. Our next question comes from David Fick of Stifel Nicolaus. Sir, please go ahead.

I'm here with [Nate Hisbee] also. Going back to the same-store NOI number, the redeveloped properties obviously was up 8%. Overall same-store was essentially flat. Can you parse out the nondevelopment or core comp properties from the redevelopment properties? We've asked this question before, I know it's hard to do, but it's something that, for example. Rouse used to do when they owned some of these assets,GGP does it.

Yes, maybe easier to talk about what's driving the flat -- similar to we experienced for the projects that we completed last year, we're seeing the same type of downturn in the balance of the portfolio driven largely -- the balance being the other redevelopment assets, places like Plymouth Meeting Mall, Echelon Mall, all are seeing significant disruption as a result of the redevelopment. We're -- in the case of Echelon Mall, ripping down half the in-line space creates some disruption and a decrease in NOI. Moorestown Mall, where Joe talked about a number of new tenants, there our NOI is down largely as a result of moving tenants around to facilitate the new tenants moving in. We have probably more than offset, if you look at on a comparable, if I look at all the assets that we would characterize as currently in redevelopment is listed in our supplemental, either down probably close to 10% from last year. So that's--.

Then just stepping back for a moment. I know this is hard to do, because every project is different, but what would you say your target -- I see the 8% numbers, but that's not a stabilized number yet. I'm presuming that you're going to have even more return on your incremental investment at stabilization. What are your thresholds for targeted returns for this kind of investment.

Each property is different and we've been putting them out in the supplemental, but we're seeing anywhere, depending on -- and it seems to be proportionate to the sales level and complexity of the project, but we're seeing anything from the 6s to 8, 9.

Okay.

But we're typically looking for a spread over the trading cap rate of the property, with the assumption that the deployment of capital is going to drive the cap rate down by 25, 50, 75, even 100 basis points.

Okay. Then a modeling question, TI's referring CapEx, you had a combined 2.4 million in the first quarter. Maybe that's just timing, but is well below last year's quarter and your immediate prior quarters.

Yes. Timing is -- most of the recurring CapEx is going to occur over the summer months as we do our roof replacements and paving working. Tenant allowance is really just a show of disbursing the amount to the tenants. I think we talked about somewhere between the two of those, about $30 million a year and we still think those numbers are good for '07. It shouldn't be much different than what we ran last year.

What percent are you leased right now for your '07 expiry's excluding redevelopments?

That's a good question, I'll have to get back to you on that.

Okay. I'd be interested in having that.

Yes.

Just to sort of gauge what the CapEx load is going to be for the rest of the year. Thanks.

Thank you. There appears to be no questions at this time. I would like to turn the floor back to Mr. Rubin for any closing comments.

Okay. Thank you, very much, for your participation. As in the past, as events unfold, we'll continue to keep you informed. Thanks again.

This concludes today's Pennsylvania Real Estate Investment conference call. You may now disconnect.