Pennsylvania Real Estate Investment Trust (PEI) 2007 Q3 法說會逐字稿

Good afternoon. My name is Stacy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pennsylvania Real Estate Investment Trust's third quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. ([OPERATOR INSTRUCTIONS) Thank you.

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

Thank you. Before we begin this call I have to read the forward-looking statements. This conference call will contain certain forward-looking statements within the meaning of Federal Securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters that are not historical facts. These forward-looking statements reflect PREIT's current views about future events and 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. PREIT's business might be affected by uncertainties affecting real estate businesses generally, as well as specific factors discussed in documents PREIT has filed with the Securities and Exchange Commission and in particular PREIT's annual report on forms 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, Chief Executive Officer of Pennsylvania Real Estate Investment Trust. Ron, the floor is yours.

Thank you very much. Welcome to the Pennsylvania Real Estate Investment Trust's third quarter 2007 investor conference call. Joining me on the call today are Ed Glickman, our President, Bob McCadden our CFO and Joe Coradino, Executive Vice President and head of our Retail Operations. Also in the room is General Counsel, Bruce Goldman and with me is George Rubin, Vice Chairman of the Company. Today, we will discuss our third quarter 2007 results, the status of our current projects and some of our plans for the future. After we conclude our remarks, the call will be open for your questions.

As we discussed on previous calls, we completed eight redevelopment projects in '06. By the end of this year, we will have substantially completed another five and achieved significant milestones at the seven remaining active projects slated for completion in '08 and '09. Meanwhile, we have several ground-up developments under way. Ed, Joe, and Bob will discuss the status, progress and the results of our projects. Our property improvements and portfolio enhancements continue to be approved by retailers and shoppers alike. As always, we remain -- we continue to remain focused on maximizing long-term returns for our shareholders.

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

Thanks, Ron. We had a very good quarter. All of the Company's key operating metrics, sales productivity, portfolio occupancy, base rents and NOIs improved. This improvement reflects the progress we have made in executing our redevelopment strategy. Joe Coradino will give you a number of the details in a few minutes. Before that, however, let me start with the key financials and property methods.

FFO for the third quarter was $1.16 per diluted share, including $0.32 from the July 31st redemption of the preferred shares. This represents a 45% increase from $0.80 in the third quarter of 2006. Excluding the redemption benefit, FFO for the quarter would have been $0.84, representing a 5% increase over last year. FFO for the first nine months was $2.79 per diluted share, a 17.7% increase for the first nine months of 2006. Excluding the redemption FFO for the first nine months was $2.47 per diluted share, or 4.2% over last year.

Retail same store NOI for the portfolio this quarter was $72.3 million, an increase of 0.4 million or 0.5% over the comp quarter. Including lease terminations, year-to-date same store $218.3 million, essentially flat compared to last year. However, excluding lease terminations, same store NOI was $216.9 million this year, up 1.1 million or 0.6% compared to last year. For the eight redevelopment projects completed in 2006, NOI for the quarter grew 8.3% over a year ago and increased 9.8% for the first nine months compared to last year.

Non anchor occupancy for the mall portfolio was up 90 basis points to 87.3%, from 86.4% a year ago. At the eight properties where redevelopment was substantially completed last year, non anchor occupancy increased 320 basis points to 92.6% at September 30th, 2007 from 89.4% a year ago. Sales productivity for our mall portfolio was up to, $362 per square foot, 2.1% increase from last year. In fact, we now have 18 properties generating over $350 per square foot representing almost 65% of our total NOIs. Average base rent from our small shops mall portfolio was $30.32 per square foot, a 1.5% increase from a year ago.

We had a good leasing quarter. During the quarter we executed 137 non anchor leases for approximately 450,000 square feet. 87,000 square feet of previously leased space was released at an average new base rent of 39.09 per square foot, an increase of 7.8%. 230,000 square feet of renewals were completed at new base rents averaging $20.52 per square foot, an increase of 2%. 134,000 square feet of previously vacant space was leased at $24.71 per square foot.

The Company currently has investments in ground-up developments totaling $140.4 million, approximately $23 million of which was added during this quarter. In August, we broke ground for Monroe Marketplace in Selinsgrove, Pennsylvania. In two weeks we plan to celebrate the grand opening of the New River Valley center in Christianburg, Virginia, adjacent to the New River Valley Mall. While we are excited about our progress to date we continue to look forward to 2008 as a [bell weather] year for the Company, and we appreciate your continued interest in PREIT.

And now Joe Coradino will provide you with detailed information on our redevelopment properties. Joe?

Thank you, Ed. Our redevelopment focus continues to create value in our portfolio and provides a platform for continued growth. Most notably, we have reached several milestones in the redevelopment of the five major Philadelphia area properties. At Cherry Hill Mall, the demolition of the former [Strawbridge] is 80% complete as we move toward [pad delivered] in Nordstrom in March of '08. We are anxiously looking forward to the openings next week of the first Crate & Barrel and Container Store in our portfolio. The Container Store received a certificate of occupancy and both stores are stocking their shelves in anticipation of grant opening events. Construction is preceding as planned at the food court beginning in early November and the mall renovations beginning at the start of 2008. We continue to make progress on the leasing front, having executed leases during the quarter with Maggiano's, Armani Exchange and Hollister.

At Moorestown Mall, LANE furniture opened in September and construction is under way for turnover to Eastern Mountain Sports in early January. We are also pleased to announce that during the quarter we executed a lease with Hollister for a mall location, and with Pot Belly Sandwiches to take an outparcel location adjacent to the previously announced Pei Wei Asian Diner, both of which are expected to open in the summer of '08. All of these additions in conjunction with the facade renovation of the property, will continue to enhance the customer shopping experience.

Site work is under way for Whole Foods in the lifestyle edition of Plymouth Meeting Mall. Construction is underway for the restaurant addition to include the first Red Stone Grill in Pennsylvania, PF Changs and California Pizza Kitchen. Construction at Voorhees Town Center progresses as we move toward completion of the mall renovation in advance of the holiday season. Construction is also under way for New [Cherokee's] first crazy city, an indoor amusement park which we expect to draw families from a wide trade area leading to increased traffic and sales. At Willow Grove Park, our new Cheesecake Factory opened to great success in September, and Boscov's is under construction with an anticipated opening in April of '08.

Several redevelopment projects are nearing completion this quarter. At Beaver Valley, both Dick's Sporting Goods and Steve and Barry's opened during the quarter. In-line with mall occupancy with male over 90%. At Magnolia Mall where Dick's Sporting Goods opened this past May, a 29,000 square foot Barnes & Noble opened in September, bringing in-line occupancy at the mall to 94.4% from only 81.8% a year ago. The esthetic renovation which will be substantially complete for the holidays, will mark the completion of this project.

At New River Valley Mall, momentum continued to build as the New River Valley Community College opened its doors in August to higher than anticipated enrollment, bringing over 800 college students to our threshold. Our new food court is expected to open in November, along with our adjacent Power Center, which includes Best Buy, Old Navy, Staples and Bed, Bath and Beyond. With these additions, a retail hub has been established to serve the students, faculty and staff of Virginia Tech. In-line occupancy at the property has been driven from 87% at the time of the Company's merger with Crown America, to 94.8% as of September 30th, 2007. Our (inaudible) of the mall on schedule. Dick's Sporting Goods opened on October 19th and steel is up for the new two story Boscov's expected to open concurrently with the completion of the mall renovation in August of '08.

As an indication of our success at redeveloping properties, premier merchants are seeking space in these enhanced locations. The resulting elevated merchandise offerings has a portfolio-wide impact on increased sales and traffic. Our customer centric redevelopment focus is creating value as evidenced by our 10 properties, boasting sales generation of over $400 a square foot.

With that, I would like to turn it over to Bob McCadden.

Thanks, Joe. For the next few minutes I will cover our third quarter GAAP earnings, provide additional color on our third quarter's operating results, update you on our current capital spending plans, and review our raised FFO guidance for the balance of 2007. Net income available to common shareholders for the third quarter of 2007 was $13.7 million or $0.35 per diluted share. Quarterly results were significantly impacted by the redemption of all of our 11% preferred shares on July 31st. The redemption of preferred shares in the quarter resulted in a $13.3 million increase in our net income available to common shareholders. Additionally our fixed charges were significantly reduced as a result of this transaction. During the third quarter of 2006, net income available to common shareholders was 1.1 million or $0.02 per diluted share.

During the quarter, we recorded a $247,000 gain on the sale of a parcel of land adjacent to Wire Grass Commons, one of our malls. We also generated additional management revenues from third party leasing commissions and tenant representation assignments. Also, we have aggressively managed our discretionary G&A spending. We continue to experience compression in our expense recovery rates. Our expense recovery rate, which we calculate as expense reimbursement as percentage of [canned], real estate taxes and utility expenses on our same store properties was 88% in the third quarter as compared to 89.5% in the third quarter of last year.

Over the past few years, there has been a trend toward gross leases and percentage of sales leases in lieu of minimum rent at many of our redevelopment properties. As we complete projects in our redevelopment pipeline, we will work towards converting some of these leases back to net leases. Marginal increases and non anchor occupancy should also favorably impact our expense recovery rates going forward.

Through September 30 for this year, capital spending related to our redevelopment projects totaled approximately $117 million and an additional $51 million was spent on ground-up developments. As Joe mentioned, our spending is beginning to ramp up as a number of our larger projects, including Cherry Hill, Voorhees Town Center, and [Summit Meeting] Malls are now under construction. We expect to spend an additional 65 to $75 million by the end of the year, bringing our aggregate 2007 spending to 233 to $243 million. Looking forward, we anticipate that our redevelopment construction and progress balance will peak in mid-2008.

As of September 30th, 2007, we had $2.4 billion of debt outstanding which represented approximately 59.6% of our total market capitalization. The redemption of our preferred shares had the effect of increasing this ratio by about 300 basis points from our June 30th, 2007 balance. As we work through our current pipeline, we expect our leverage to increase until the bulk of the redevelopments come on stream.

As of September 30, 2007, fixed rate debt comprised 85% of the Company's indebtedness, including our proportionate share of the debt of our partnerships. Our floating rate debt will vary from period to period, depending upon the timing of our capital spending and ongoing financing plans. Our fixed rate debt had an average coupon rate of 5.94%, which represents a 47 basis point reduction in our average fixed rate debt of 6.41% from a year ago. After funding the redemption of the preferred stock as of September 30, 2007, we had $245 million outstanding under the credit facility. Getting us back to amounts required to support letters of credit, we had approximately $238 million of available borrowing capacity under the credit facility.

During the third quarter, we repurchased 152,500 shares at an average price of [$35.57] for an aggregate total of $5.4 million. As a reminder, during 2005 and '06 we entered into a total of $400 million of forward starting swap arrangements to hedge the interest rate risk associated with new debt that we anticipate issuing next year to repay the 7.43%, 15 property cross-collaterized (inaudible) when it comes to in the middle of the year.

Turning to earnings guidance, we are raising our guidance for 2007 FFO per diluted share between $3.82 and $3.87. Our net income per diluted share is expected to be between $0.67 and $0.72. The increase in our guidance results from the third quarter events already discussed, third party development fees and greater visibility into our annual results at this time of the year. This guidance assumes that the [ICFC] forecast for the economy and consumer holiday spending are on target. We have also assumed no unusual or significant tenant related credit problems through the early part of next year. Our full year numbers do not assume any additional gains on outparcel sales. Further, our guidance is based on a steady paced business model assuming no acquisitions or dispositions of property in the last quarter of this year.

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

(OPERATOR INSTRUCTIONS) Your first question is coming from Jonathan Litt from Citi. Please.

Hi, this is Ann Bici with John. Could I get some more color on the increase in guidance? You previously stated in your commentary that you just had had more visibility. What specifically is running ahead of expectations?

Well, I think from the third quarter, we had some positive surprises in terms of the outparcel sale. The other thing that will affect our fourth quarter results is we entered into a development agreement with [Centar] relating to a [rate sale] in Western Pennsylvania. That should add about $0.01 for the fourth quarter. And I think we have a better sense of store openings at this point, as well as expectations regarding tenant sales performance.

Okay. And what's your outlook on re-leasing spreads if the portfolio? They compressed a bit in the third quarter.

I think you probably have to look at our year-to-date. Any given period you're going to have re-leasing spreads affected by a couple transactions. If you look at our year-to-date results that's probably a good indication of what we expect, at least in the near term.

Okay. And then, just thinking generally about retailers and their weaker sales that we've seen recently, has that impacted your redevelopment plans at all and have you seen retailers being more cautious on entering your redevelopments?

Actually, we think our redevelopment -- this is Joe Coradino. We think our redevelopments are having the effect of receiving higher proportion than our typical share of open to buys from retailers, because the excitement we're generating at properties like Cherry Hill with Nordstrom and Crate and Container and what we're doing at Plymouth Meeting and Voorhees and Moorestown, throughout the portfolio we're getting a number of what I would call first of the portfolio tenants, because of the excitement and the positive results we're getting from our redevelopments.

Okay. And then on the development schedule, if we think about Monroe Marketplace, New Garden Town Center and Spring Hills, those have pretty low leasing at this point. I guess first, turning to Monroe, what's your expectation there? Could it be pushed back? And then on Gainesville, is there any resolution there with the authorization of the development?

It's our -- this is Ed. It's our expectation that Gainesville will take us some time to work through and there's no immediate notion as to how long a period of time that will be. In terms of [Swansboro] and Monroe Marketplace, I think it's a great project and that ultimately it will pick up leasing momentum. New Garden has been a work in progress for a number of years, but we think that we're finally pushing through and we're looking forward to some excitement in 2008.

Do you have any targets for where you expect leasing to be by, say, next year at this same point?

We're working on our 2008 plans, and we'll be discussing our 2008 expectations in our next conference call.

Okay. And then my last question, can you comment on how far you are with your 2008 lease expirations?

2008 lease expirations, how are we doing on leasing development in 2008.

I think it's at this point we are -- we're on schedule and on budget with respect to our lease expirations. We're focused right now on completing our leasing game plans and again, we're optimistic that driven by the redevelopments that we'll get more than our fair share of tenant movement.

Are you above 50%?

I don't think I can quote a percentage right now.

Okay. Thank you.

Thank you. Your next question is coming from Matt Ostrower of Morgan Stanley. Please go ahead.

Just to make sure I understand on the same store front, you had decent spreads or fairly consistent to date, you had an uptick in occupancy, and you still reported low same store NOI growth, mainly because of expense recoveries, is that a fair statement?

No, I think there's a bunch of factors. Obviously, a lot of occupancy increase that we had were kind of back-ended. You're not getting the full benefit of those in the quarter. I mean, expense recoveries continue to be an issue but I'm not sure if one is kind of directly related to the other, Matt.

Okay. I guess I just more generally, it seems like your operating metrics look pretty good and I was surprised those basic metrics and then to see the same store NOI growth was only up 50 basis points. Especially, as it seems like some of your redevelopments are sort of maturing here, and I think some of them are in your same store pool, so I guess just, again, do you have any general comments about why that growth wouldn't be a little bit higher?

Just to clarify, our same store pull of the entire portfolio. We don't have any sales or acquisition or dispositions. The other big driver in terms of the overall NOI growth, is, I think, some of the redevelopment properties, Plymouth Meeting and Voorhees Town Center, in particular, and to a lesser extent Moorestown, have seen greater erosion and issue than we had anticipated. So, while we have had very stong performance from the completed project, those that are in the throws of construction, if you visit some of these properties and have to try to get to the mall around the pile of dirt, you can understand why we're suffered a little bit or some of our (inaudible) have suffered at this property.

Okay. So it's still, we could still read this as sort of the ongoing negative impact of the redevelopment process, I guess?

Yes, much more pronounced where we're I would say in heavy construction.

Okay. And I think -- guidance may be stale, but I think you guys had talked around like a 1.5% same store NOI growth guidance.

Yes. I think we came out of the year with that as an expectation. We're probably moderating that. I think our year-to-date results of 0.6% ex-lease terms, we may do a little bit better than that but we don't expect to be where we started the year originally.

So something south. You're basically saying the 0.6% isn't a bad run rate for the fourth quarter, you don't expect much of a ramp from there?

Maybe slight. It's going to be driven, with the leverage you have in terms of percentage rent, percentage sales, largely driven by how the consumer comes out for the holidays.

Okay. Great. And then, I guess just finally, can you make any commentary at all about what you're seeing in terms of asset pricing? Have cap rates moved? Are there any transactions out there that are obviously (inaudible) but just on the sort of day-to-day basis, are you seeing any kind of closing of the bid out spread that apparently is out there?

Been hearing a lot of talk but not seeing any definitive results.

Okay. Thank you very much.

Thank you. Your next question is coming from David Fick of Stifel Nicolaus. Please go ahead.

Hi, it's actually [Nate] here with David. Just in line with that last question, can you give us what the number -- what the same store NOI excluding the completed redevelopments was?

Yes, we haven't broken the number out that way.

Okay. Could you talk a little bit about your thinking and why you look to buy out at Valley View?

Well, it was a question of Valley View that the site where we were to serve as landlord was no longer going to be the operative site for where the Harness Racing Track was going to be built. We had some rights that followed to the new site, but we felt that compromise was necessary with respect to the licensee, in order to get something built out there. We are clearly of the view that the settlement and the waiver and termination of our rights was financially advantageous to the Company.

You're going to be the construction manager for fee for both the racetrack and the casino operations?

Correct.

That's for [evictee]?

Correct. 6, 8.

And we're looking at this at maybe being worth about $1 a share, net present value? What would you say?

That's probably a little bit less than -- it's, present value, somewhere in the $25 million range.

You've got $30 million residual payment, 2019, plus 59 million in 9 year increments; right?

Yes, 59 includes the $30 million bullet in 2019.

Yes, 3 million a year for nine years and then $30 million final payment in 2019.

Okay. Thanks.

So the payment stream starts a couple years out.

And could you just remind us how big your buyback authorization is?

100 million.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS) Your next question is coming from Craig Schmidt of Merrill Lynch. Please go ahead, sir.

Thank you. I noticed there was some modest increases in total project cost at Lehigh Valley and Willow Grove from second to third quarter. I just wondered if that was increased material cost or maybe an increase incentive or a change in some slight change in the plan?

The increases in cost at Lehigh Valley were really driven by a decision the partnership made to enhance the mall's interior, by virtue of installing a large skylight in the center court, which we think is going to, again, help to enhance the overall shopping experience. At Willow Grove it was basically the result of a change in the nature of the transaction that we anticipated, which previously included a theater and then was recycled to take the theater out and include restaurants and a Boscov's.

Okay. And the occupancy increase, I wondered if that was throughout the portfolio or were they concentrated at your redeveloped malls?

One second. We're getting you an answer.

In our supplemental on page 13 we lay out the occupancy. I think we have larger increases in our redevelopment properties. Kind of short answer to your question is the increase is more concentrated at the redevelopment properties that are being completed.

Okay. Great. Thanks a lot.

Thank you. Your next question is coming from Michael Mueller of JPMorgan. Please go ahead, sir.

Hi, my question was answered already. Thanks.

Once again (OPERATOR INSTRUCTIONS) At this time, there appear to be no more further questions. I will now turn the floor over to Ron Rubin for any closing remarks.

Thank you, all, for joining us on our third quarter 2007 earnings call. We look forward to your participation on our fourth quarter call and our full year 2007 results call in February of 2008. Thank you all, again, and have a good day.

Thank you. This concludes today's Pennsylvania Real Estate Investment Trust third quarter 2007 earnings conference call. You may now disconnect your lines and have a wonderful day.