Pennsylvania Real Estate Investment Trust (PEI) 2008 Q4 法說會逐字稿

Welcome to the Pennsylvania Real Estate Investment Trust fourth quarter 2008 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, February 25th of 2009. I would now like to turn the conference over to Garth Russell, with KCSA Strategic Communications. Please go ahead.

Thank you. Welcome to the Pennsylvania Real Estate Investment Trust fourth quarter and year-end 2008 conference call. Before turning the call over to Management for their prepared remarks, I must state that this conference call will contain certain forward-looking statements within the meaning of the Federal Securities Laws. The forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, and 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 the forward-looking statements. PREIT's business might by affected by uncertainties affecting real estate businesses in general, 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 Form 10-K, for the year ended December 31st, 2007. PREIT does not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.

I will now turn the call over to Ron Rubin, Chairman and 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 year-end 2008 conference call. Joining me on the call today are Ed Glickman, President; Bob McCadden, our CFO; and Joe Coradino, President of our Management Company and Head of our Retail Operations. Also in the room today are Vice Chairman George Rubin and General Counsel Bruce Goldman.

Today we will discuss our fourth quarter 2008 results, the status of our current projects, and some of our expectations for 2009. After we conclude our remarks, the call will be open for your questions.

The Company, like other REITs and others in our sector, is experiencing the effects of the current economic downturn and its corresponding impact with consumer spending. Many retailers in our portfolio experienced a difficult 2008, and have taken a step back to assess market conditions. Where they can push transactions off until 2010 or 2011, they will. The Company is focused on plans that principally address liquidity and capital allocation and provide for the successful completion of our development and redevelopment projects.

As Ed Glickman will discuss in more detail, the Company closed over $800 million in financings in 2008. We are working on additional financings, including the renewal of our credit facility, which comes due in March 2010. These efforts are part of the strategy of the Company to meet our capital needs for the future.

The decision to reduce the dividend, although a difficult one for us, we believe was prudent in these times where liquidity is critical. As we have noted in previous calls, while the economic environment has changed, the basic fundamentals of our business have not. Our Management Team is focused, continuing to work to complete our redevelopments and our development projects, and attempting to place stores in our properties, to increase NOI and occupancy, and to generate positive leasing spreads. As always, we continue to remain focused on creating long-term value for our shareholders, and with that, I will turn the call over to Ed Glickman.

Thanks Ron. 2008 was the challenging year for the Company, but in spite of strong head winds we were able to accomplish a number of critical goals. First, we made significant progress towards the repositioning of three Philadelphia Metro assets, Cherry Hill, Plymouth Meeting, and Voorhees Town Center. Joe Coradino will give you the details on these in a few minutes.

Second, we made progress at a number of key development stage assets. Monroe Marketplace opened, and we are 90% leased and 76% occupied, with Kohls, Best Buy, Target, Dick's Sporting Goods, Bed Bath & Beyond, and Starbucks. Sunrise Plaza in Forked River, New Jersey, is open with Home Depots and Kohls, and construction has started at our Pitney Road Plaza project in Lancaster, anchored by Lowe's and Best Buy.

Third we are reconstructing three floors of the former Strawbridge's headquarters at 801 Market Street for use by the State of Pennsylvania as offices. We expect occupancy later this summer.

Despite our progress in moving our development and redevelopment assets forward, we are faced with the declining retail environment and pressure on our operating metrics. Sales per square foot dropped by 4.5% year to year. In line occupancy is off by 140 basis points. Store closings, bankruptcies, and bad debt are all up.

In 2009, we expect that we will give up the NOI growth created by our new projects to the impact of the drop in consumer spending that is being experienced across our portfolio. We are hoping that these new assets would be additive to core growth; however, they cannot achieve that goal in this environment. Instead, we expect that 2009 same-store NOI will be down 1% to 3%.

At the same time, as NOI growth is illusive, our interest costs will rise, as our work in progress assets come into service and we can no longer capitalize these costs. Combining lower than anticipated NOI with higher than anticipated interest costs has led us to lower 2009 FFO expectations. Bob McCadden will lay this out in greater detail in a few minutes.

Building on this 2009 outlook, we have established a plan to provide the Company with the requisite liquidity to complete our in-progress and operate our business during these uncertain times. First, in 2008, we completed approximately $930 million of financing transactions, including new mortgages, extensions, and a term loan, successfully refinancing our $400 million REMIC, and modifying and extending our line of credit into 2010.

Second, in 2009, we have put into place a capital conservation strategy to address our capital requirements and liquidity needs during this difficult year. Establishing this strategy has forced us to make some difficult choices.

We have cut back on a number of projects in our development pipeline. This means that we will be expensing interest and costs related to land that is being held for future development, rather than capitalizing these charges. While with we have always been paying these costs in cash, this change in accounting will also impact FFO. We have cut G&A reflecting the near term prospects for our business, while respecting our desire to maintain core skills and competencies for the next cycle.

After almost 50 years, we have also cut the dividend to reflect the need to retain capital in the Company in the face of the unprecedented liquidity crisis in the markets. We have reduced our dividend to a level that we believe the Business can support, is in line with our expected taxable earnings and creates $46 million of additional liquidity.

We will add to this liquidity from the dividend reduction in G&A savings, the remaining availability under our credit facility, and proceeds from additional financing transactions, to pay the 2009 project costs, which we expect at up to $140million to $150 million. We also expect that we will be able to extend or refinance the limited 2009 mortgage maturities that we face. Again, Bob will provide more detail.

This takes us to 2010 and the upcoming maturity of our line of credit. We have begun discussions regarding an extension of this facility. Those discussions are in an early stage, and there is nothing to report at this point.

Regarding the long-term future, we are clearly living through a unique period. In all that we are doing, we are attempting to make a reasoned, but forward thinking and responsive approach, to a highly volatile market. Our first goal is to preserve our investments through this difficult period. As always, we appreciate your interest in PREIT. Now, Bob McCadden, our CFO, will give you our financial highlights.

Thank you, Ed. I will review our financial performance in more detail for the fourth quarter and provide our guidance for 2009. We reported net income for the fourth quarter of $2.3 million, or $0.05 per diluted share. FFO for the fourth quarter was $44.4 million, or $1.08 per share.

Let me review some items impacting comparability between years. All of the amounts I will describe will include the results for our majority owned properties, as well as our percentage ownership interests, and our partnership properties. In December, we repurchased $46 million of our exchangeable notes for $15.9 million, plus accrued interest, resulting in a $29.3 million gain.

In January 2009, we repurchased an additional $2.1 million of these notes for $700,000. Our impairment charges include $4.6 million of goodwill, $11.8 million related to White Clay Point, a planned mixed-use development in Chester county Pennsylvania near the Delaware border; $7 million related to Sunrise Plaza, a power center in Forked River, New Jersey; $3 million related to Valley View Downs, a planned gaming operation in western Pennsylvania; and the balance of the impairment charges related to predevelopment costs and a small land parcel adjacent to one of our properties.

Same-store NOI decreased by 1.3%, to $84.2 million for the fourth quarter, as a result of the following reasons. We had six tenants operating in 44 locations and occupying 366,000 square feet in our portfolio that filed for bankruptcy protection. As a result we wrote off [pre-petition] accounts receivable of approximately $800,000, straight line rent receivables of $700,000, and 600,000 dollars of deferred lease inducement costs, for a total NOI impact of $2.1 million, or $0.05 per share for the quarter.

Percentage rents earned from tenants during the fourth quarter of 2008 were lower as compared to last year's comparable quarter, reflecting overall economic trends and renewals with higher sales break points. Specialty leasing revenues were also down slightly in the fourth quarter, like compared to 2007's comparable period.

We do not include in-line specialty leasing tenants in our reported occupancy percentages. If we did, our non-anchor occupancy would have increased by 420 basis points at year end, slightly lower than the 440 basis points at the end of 2007. We benefited from higher lease termination fees, which were $1.5 million in the fourth quarter, versus $200,000 in the prior year.

We invested approximately $345 million in our consolidated properties this year, including land and property acquisitions. As a result, we had higher depreciation and interest expense, related to construction and progress assets that were placed into service over the past year. In 2008 we commissioned approximately $138 million of redevelopment assets and $44 million related to our development properties. In the fourth quarter of 2008, these amounts were $43 million $37 million, respectively.

Interest expense increased as a result of higher average debt balances, partially offset by lower average interest rates. The average interest rate on our outstanding debt balances decreases by 91 basis points to 5.07% at the end of 2008, as compared to 5.98% at the end of 2007. On a GAAP basis, our average rate fell by 41 basis points from 5.42% to 5.01%. G&A expense in the fourth quarter was $8.5 million, almost $1.5 million below our recent run rate.

During the fourth quarter, we completed $173 million in new non-recourse secured financings, at a weighted average interest rate of 6.16%. At the end of the quarter, we had outstanding debt of $2.8 billion, an increase of $47 million from September 30th. Our credit facility leverage is based on the ratio of total liabilities, the gross asset value as defined in the loan agreement.

At the end of the quarter, our leverage ratio was approximately [53]%, which had is about 1% higher than the ratio at the end of the last quarter. We do expect that our leverage ratio will approach 65% by the middle of the year, and exceed that level by the end of the year. As a reminder, our credit facility permits leverage to exceed 65% for two quarters, as long as we stay below 70%.

At the end of the quarter, 81% of the Company's total indebtedness, including our share of the debt of our partnerships, was fixed. At the end of 2008, our contractual commitments for construction contracts, tenant allowances, and other costs related to our projects were less than $100 million.

Additional spending of up to $50 million would be undertaken only when tenant commitments are obtained, or when we are obligated to perform under an existing contractual arrangement. We expect to meet the capital requirements from available borrowings under our credit facility and from additional secured debt financings. Our unincumbered properties currently generate approximately 28% of our NOI.

Turning to 2009 guidance. We expect GAAP earnings per diluted share to be a net loss between $1.15 and $1.35. We expect FFO per diluted share to be in the range of $2.75 to $2.95.

Our guidance range takes into consideration the following factors, as Ed mentioned an overall decline in NOI of 1% to 3%, excluding lease termination fees. In 2008, we recorded lease termination fees of $4.1 million; in 2009, our guidance assumes termination fees of $2 million. The impact of approximately 80 stores operated by tenants that sought bankruptcy protection in 2008. These stores occupied approximately 600,000 square feet and generated revenues in excess of $10 million.

So far in 2009, two tenants S&K Menswear and Ritz Camera, have filed for bankruptcy protection. In the aggregate, they represent 12 locations, occupying 23,000 square feet ,and approximately $1 million in annualized revenues.

We have budgeted higher bad debt expense as a result of the weak economic conditions. Bad debts are estimated at 1.5% of revenues in 2009; in 2008 our bad debt expense was approximately 1% of revenues. Prior to 2008, we were running at a level of 50 to 75 basis points per year.

Interest expense will increase due to the value of the assets placed in service during 2008, and expect to be placed into service during 2009. In 2008, we placed approximately $182 million of assets into service, including $80 million in the fourth quarter. In 2009, we anticipate placing over $300 million of such assets into service, with approximately $100 million of that amount in the first quarter, largely at Cherry Hill Mall and about half of the total in the second half of the year. Once we place costs associated with CIP into service we stop capitalizing costs, and charge interest to earnings.

Interest expense in 2009 also includes non-cash interest charges of approximately $3.1 million or $0.08 a share, as a result of the change in accounting for our exchangeable notes, which is effective as of January 1st of this year. We will also incur non-cash interest expense of approximately $1.9 million, or $0.05 per share, on an annualized basis, related to amortization of swaps settled in 2007 and 2008, and additional amortization of deferred costs related to our line of credit extension. In 2008, interest expense including a non-cash $2 million credit as a result of a gain on swap ineffectiveness.

Because of the slow down in development activities we will stop capitalizing interest on certain redevelopment and development properties. This will result in additional interest expense of approximately $4 million to $4.5 million. We expect to see savings in our G&A expenses; however, these reductions are expected to be offset by lower management company revenues and lower interest income. Our FFO guidance does not include the effect of any acquisitions or dispositions or gains on the sale of any assets.

Now, I will turn the call over to Joe Coradino.

Thanks, Bob. In spite of current economic conditions, there are a number of positive events occurring in our portfolio, particularly at our major redevelopment properties. While comp store sales declined from $358.00 to $342.00 per square foot, there are a number of drivers, which are all not unique to our portfolio.

One factor that is unique is our redevelopment effort. And that is that a portion of this decline is attributable to the dislocation associated with the redevelopment at Cherry Hill Mall, where the food court, historically one of the highest producing clusters on a per square foot basis, was out of service for several months.

Our retail portfolio weighted average total occupancy declined by 40 basis points to 90.9%. As Bob mentioned, this was driven primarily by the closing of retailers, due to bankruptcy and liquidation. We are continuing to work through these bankruptcies and are in meaningful discussions with retailers to back fill approximately a third of the square footage being vacated by retailers who filed in the fourth quarter.

Renewal spreads were relatively flat, with only a 10 basis point increase over expiring rents on 260,000 square feet of non-anchor renewals. As has been the case recently, we have executed several short term renewals for a number of reasons. While we always seek to maintain flexibility in light of our redevelopment program, most recently our focus is on renewing and retaining tenants.

In this environment we remain focused on maintaining occupancy in the near term, and flexibility over the long term. Toward this end, of the 87 non-anchor renewals executed this quarter, 48 had lease terms less than three years. Additionally, we have executed or are in advanced stages of negotiation for 74% of our 2009 non-anchor renewals.

Last quarter, we informed you that we had opened four new anchors in 323,000 square feet, including the Burlington Coat Factory stores at Chambersburg, Lycoming, and Union Town Malls, and the 88,000 square foot new prototype JC Penney store, at Gadsden mall in Alabama. We continue construction on the remaining Burlington Coat Factory locations at Cumberland Mall and Wiregrass Commons, which are scheduled to open the first and third quarters of 2009, respectively, and the replacement at Value City at Francis Scott Key, with the Value City Furniture and DSW, to be complete when DSW opens for business in the second quarter of '09.

We continue to make significant construction and leasing progress on the three major redevelopments in the Philadelphia metro area. At Cherry Hill Mall, the Nordstrom store is nearly complete, with stocking commencing in the next few days for the March 26th Grand Opening party. The transformation of this property is striking, from the tile selection to the finishes, to the luxurious soft seating, and awe-inspiring expansive Grand Court. It is an architectural masterpiece. The relocated food court is back in service, the new parking garage is open, and the renovation is nearing completion.

We are also pleased to announce that we signed a new lease with Urban Outfitters for a 12,700 square foot two-level store in the new Nordstrom wing of the property. We are underway with construction and expect it to open this summer. The exterior facade fronting route 38 will compliment the impressive collection of new dining opportunities we're calling Bistro Row. Construction continues on this aspect of the project, with Maggiano's opening this week, Seasons 52 nearing completion, with a planned opening on March 23, and the shelves being completed for Capital Grill and California Pizza Kitchen, with tenant fit outs underway, for a planned second and third quarter opening, respectively.

The new mall addition leading to Nordstrom has been completed with spaces turned over to Coach, Johnston and Murphy, Brighton Collectibles, Steve Madden, and Urban Outfitters. In addition to two food court bays that opened during the fourth quarter, elsewhere in the mall, we opened our portfolio's second Garage store and expanded 15,000 square foot Gap Superstore. Since the close of the quarter, two additional food court bays and expanded American Eagle opened at the property. Approximately 83% of the planned expansion portion of this project is either leased or in active negotiations.

At Plymouth Meeting Mall during the fourth quarter, we opened our fourth new restaurant, Benihana, on an outparcel, as well as a Citibank branch on an outparcel on the north side of the property. Construction on the new Crazy City is nearly complete, and we look forward to their opening next month. During the quarter we signed a lease with Ann Taylor Loft for the lifestyle component of the project.

We have turned over the lifestyle spaces to Ann Taylor Loft, Chico's, Coldwater Creek, and Joseph A. Bank, all of whom are under construction for second quarter openings. As we look toward the final stages of the the project, we are expecting the turnover Whole Foods' building during the first quarter, and look forward to a grand opening of the lifestyle addition in the spring of this year, with Whole Foods following in November. Approximately 84% of the planned expansion portion of this project is either leased or in active negotiations.

At Voorhees Town Center, construction has commenced on the 17,000 square foot Rizzieri Salon and Spa, which includes a premier Aveda spa, training facility, and retail outlet. The first floor salon fit out is nearly 90% complete, with the second floor Rizzieri Institute just over 50% complete.

Residential construction continues on the mixed use buildings, with initial resident occupancy beginning in April. Leasing of the apartments is progressing at a brisk pace. The parking and roadways for the mixed use portion of the property under construction are progressing, and The Boulevard is expected to open in March. In light of our focus to secure best-of-breed local and regional tenants for this property, we are finalizing a lease for a 20,000 square foot local restaurant and marketplace; we are in advanced discussions for a 13,000 square foot athletics facility, and have acquired an additional liquor license in anticipation of securing another locally recognized restaurant to anchor the other end of The Boulevard.

At 801 Market Street, a property we own contiguous to The Gallery, demolition and core and shell work are complete for the 224,000 square foot Commonwealth of PA Office, on floors four, five and six. Tenant fit out work began in late '08 and is progressing quickly for a phased move-in over the summer, in advance of the planned October 2009 commencement.

We are aware of the current economic climate and its impact on our tenant and shopper base. With the reduction in open to buys announced by so many national retailers, our efforts are focused on tenant retention and cultivation of local and regional merchants, with careful consideration being given to every rent [relief] and capital deployment request. We are encouraged by the retailer interest at our redevelopment properties, many of whom site that, while they're open to buys are severely limited, they look forward to being able to consummate transactions at these properties.

We remain dedicated to delivering a differentiated product, and are confident that our portfolio is poised for success as the market rebounds. With that, we are now ready for questions.

Thank you, sir. (Operator Instructions). Our first question is from the line of Michael Bilerman with Citigroup. Please go ahead.

It is [Quinton Valeli] here, I'm with Michael. I guess you have spoken through how you are going to try to refinance your near-term maturities in quoting the line in 2010. But I guess if we look at the group in total, your leverage is quite high. I'm just wondering if you could fork through the strategy that you have been working on, in terms of trying to reduce that leverage ratio to try and help get those refinancings done?

Well, at the moment, this is a - - at the moment we are trying to assure that we enough have liquidity to continue to work towards completion of the three or four major projects that we have that are in progress, including Cherry Hill, Plymouth, Voorhees, and the build-out of the 801 Market space at the Gallery. And so to that end, in 2009, we are looking to need additional liquidity that will be set aside from the reduction of the dividend, any savings from G&A, and additional secured financings, that we will put into place above the proceeds that are required to refinance existing maturities. And it is our expectation that through those sources, including the liquidity end of the existing line of credit, that we will have enough funds to complete these projects and bring them into fruition.

In 2010, once the majority of our capital expenditures are completed, assuming that the dividend level stays at the same rate, we will start to the generate additional liquidity, that could either be put towards continued development and redevelopment projects or reduction of outstanding liabilities. And again we will cross that bridge when we come to it. But at the moment we are focused on 2009 and discussing with our bank group the renewal of the existing line of credit.

But aren't you, it's Michael Bilerman speaking, you are going to go in excess of your covenant towards 70% of your leverage. There's got to be some deleveraging plan that you've got to start putting into place this year, in other forms of capital, because you can't get into 2010 and have the $570 million between the credit line and the unsecured term loan come due, without any capital to replace it, let alone deleveraging the balance sheet. I can understand you want to get enough capital to finish these projects, but there has got to be something on the other side of it to meaningfully reduce leverage.

At the moment, we are focused in 2009 on the completion of these three projects as I just mentioned, from the balance of the proceeds of the line of credit, additional secured financing, and the reduction in the dividend. Obviously we are not spending this money in a vacuum. The money that we're spending is to finish projects that will create NOI streams that will grow the value of the Company's asset base organically. And that naturally delevers the portfolio.

So again, 2009 we have four projects that are under construction; we are not starting new projects. We have cut out all of the new expenditures, but we need to finish the projects we are in the middle of.

Let me just add a little bit of color to that, Michael. Just following up with Ed's the point, if we would have gone back and looked at what our expectations would have been upon the completion of all of the redevelopment projects, by the end of this year we will have completed, invested all of the capital. And given the current economic conditions we are probably not realizing the full benefit, not probably, we aren't realizing the full benefit of the capital expendit, assuming that tenants begin to start doing more deals later this year and early part of 2010, the fact that we have very little marginal costs associated with getting that incremental tenant, and that incremental tenant yields additional NOI, which creates gross asset value and, again, creates a natural delevering of the balance sheet that Ed was describing.

And just on the development pipeline, Voorhees Town Center, I notice the yield went down from 9.2% to 7.9%, and Monroe went down from about 8% to 7.1%. And with Monroe there was actually a big reduction in the projected share of costs. I am just wondering if you can talk through what the drivers of that was.

Well, let me take Monroe first. In the case of Monroe, there's a second phase to that development that we're again putting off, because our goal is to conserve the capital for the four projects that I mentioned. So had Monroe been fully built out, which there is a second phase to that project, again all the infrastructure is in place, all of the base costs have been paid, and hence the marginal development is more profitable. So again it is as I mentioned, we have a capital conservation strategy which is pulling in some of the additional development that would be done at existing sites. So that we can finish the four key projects that we discussed.

Just to follow up on your question. At Voorhees, we experienced an increase in project costs of approximately $3.7 million, driven mostly by additional fit out costs for the various retail uses that will be coming to the project, as well as additional interest in tax carrying costs really associated with moving the stabilization period further out for that project.

Okay. Thanks, guys.

Thank you. Our next question is from the line of Craig Schmidt with Bank of America/Merrill Lynch. Please go ahead.

Thank you. The, the expected returns on the incremental investments listed on page 26, I assume those are stabilize? I am wondering what you think the actual return might be in '09 for your big three projects, just given the tough leasing environment?

Yes. I am not sure if we can give you an impact in 2009 on a stand-alone basis. Effectively, they do represent stabilized returns. I think we have talked in the past that it is probably anywhere from 12 to 18 months to stabilization completion, that's probably extended now. We would expect to reach stabilization on those projects rather than in 2010, which we may have previously represented, our view today it is probably 2011 when we get to stabilization.

And how much do you think they need, just roughly on average, need to grow between say '09 and '11 to reach stabilization?

If you think about the, and this is kind of what I was describing, the marginal, all of the costs are effectively incurred. So any incremental dollar that we get in terms of additional leasing absorption on any of the projects between now and 2011 effectively is going to return the yield on the project. I think what we have talked about in the past is that when we bring a project online, expectation is that we are covering the cost of carry. I think this year because of the softness in the economy, we are probably not going to be there. So actually as we we bring these projects on line in 2009, it is actually a net drag on earnings as you can see from the higher interest costs as compared to a relatively overall portfolio, wide, flat to slightly down NOI.

Okay. Thank you. That's helpful.

Thank you. Our next question is from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Hi, guys. Good afternoon. You talked in your prepared comments about the redevelopment efforts, as much as it's not going to generate growth next year, but it probably will limit the downsizing same store NOI, your erosion. Can you just give us a little better sense of what the redevelopment is generating and how the other parts of the portfolio are operating?

The contribution is probably not much different than what we talked on previous calls, that I think where we've deployed capital, on the whole, the projects that were completed in the last couple of years, including those expected to be completed in 2009, will continue to be net positive growth. I think the growth across the portfolio has been somewhat retarded, if you will, by our expectations of higher bad debt expense We essentially use, for budgeting purposes, a flat rate across the portfolio, although we don't know where those bad debts are going to ultimately reside. And I think as we mentioned in the last call, we continue to be hurt by softness in the economy in Florida, where our property in Florida is showing a fairly significant decrease in NOI as a result of the conditions that exist there.

Are you talking about Orlando?

Orlando.

Okay. And can you just talk about the two Boscov's in North Hanover and Willow Grove, where those stand?

Both of those leases have been rejected by Boscov's, and we are in the process in both of those assets of developing a replacement strategy. We are in discussions with a number of tenants for Willow Grove, where we would break it up into a both soft goods retailing, as well as entertainment and restaurant, with respect to the, the former (inaudible) store at Willow. And at Hanover we are focused more on a replacement of utilizing the box for relocation of an existing anchor that's in the market.

Uh-huh. So the reason you would did not take a write down at North Hanover is that you had really built the box for Boscov's, and you expect to put them in there with minimal costs?

Yes. I think the, the cost of it incurred when we looked at the real estate operating assets in total, so looking at the cash flow associated with the entire property against the cost that we have invested.

So our expectation, and we look at this over a multi-year time horizon, so our expectation is that we find a replacement tenant for that empty box at North Hanover, as well as fill the vacancy at Willow Grove.

Okay, and there was an article a few months back that PREIT had loaned Boscov's some money. Is there any truth to that, and what are the terms and the motivation for doing that?

PREIT did make an investment in Boscov's in their reorganization. And the investment that was made was $10 million in the total transaction. And we have retained a loan there, which is currently being paid. And our expectation is that the loan will be repaid shortly, within the next couple of years, and it was a very advantageous transaction for both Boscov's and for PREIT because it helped us keep the lights on in a number of our stores. And the original operators have are now in running the business and the reports that we get are that they're operating the business not this month but earlier, they were quite profitable.

Okay. Just one last question, does your net income projections for '09 assume any other net gains for convert buys?

No. Other than we did have the small transaction in January, a little over a million dollar gain.

Okay. Thank you very much.

Thank you. (Operator Instructions). Our next question is from the line of Michael Mueller with JPMorgan. Please please go ahead.

A few questions here. First I just want to tie to Craig's question about the initial yield. Bob, if we assume that the $300 million coming online that you refer to, it sounds like that is coming online at around a five initial yield or a little bit lower. Is that reasonable a reasonable expectation, based on what you said?

Yes, I said it is below 5% initial yield. I can't give you a specific number.

Okay, but it is below 5.

Yes.

On that 300, okay. And then, going back to the question about leverage at year end approaching 70%, how should we - - ?

I don't think we said that. We didn't say that. I think we said that we are currently beneath 65, we approach 65% at the end, middle of the year, and we exceed 65% toward the enough the year, but I don't think in any of our estimates did we get close to 70% threshold.

So implicit in the idea that you would break the covenant if you are at two quarters beyond that into 2010, is the assumption that you guys are working toward that the credit line gets refinanced or recast this year with new terms that would let you out of that, in which case you are assuming that in your numbers, or I guess the question is are you assuming the credit line gets redone in 2009 at some point?

Our expectation is, as Ed mentioned, that we have begun very preliminary discussions with the banks, and we will work diligently over the next couple of months, quarters to complete the refinancing and have the new credit facility in place, hopefully by the end of the year.

Okay. Is the remedy to that situation, north of 65 for two quarters, more likely to be at this point the redoing of terms of the credit facility, or taking out extra proceeds for mortgages to pull you back down below that 65%?

All of these things are available to us, certainly, we mentioned we have a fairly wide range of spending in terms of what we're committed for and what we could spend. So as we assess the performance of the Company over the next quarter or so, we will be in a much better position to either scale back spending, certainly we can reduce costs in other areas of the Company. Obviously opportunistically, we saw an opportunity to buy back converts from the fourth quarter which allowed us to reduce leverage on a three-to-one basis. So there's a lot of tools in the tool box that we have available to insure that we remain in compliance with the existing covenants.

Okay. You have got about $180 million of mortgages coming due in 2008. If you go above that, and you were talking about refinancing with excess proceeds, what have you guys assumed above that $180 million, what is a reasonable amount - - ?

Let's talk about the $180 million. I guess there's $110 million at joint ventures at Springfield Mall and Lehigh Valley that are subject to buy-right extension options. So our expectation would be that those would be extended into 2010.

The Palmer Park Mall property, which the mortgage matured in January, that has already been paid off. We have two other properties aggregating $47 million, Red Rose, which is the joint venture, Power Center and Valley View Mall, which comes due in October, our expectation is that at a minimum we would be able to finance those for their existing balances of not slightly above. So we would be looking to place some new mortgage debt on previously unencumbered assets, and that would be somewhere in the $100 million range.

Are you guys thinking about, should we assume anything in terms of capping the unencumbered pool above and beyond that, at this point?

Not at this point.

Not at this point, okay. Last question, I think in your comments about cap interest you said cap interest would go down to $4 million to $4.5 million in 2009, I want to make sure that that was only relating to the projects put on hold. Is that correct?

That's actually - - it's the additional interest costs that, for the projects that we put on hold, we probably would have capitalized somewhere in the $4 million to $4.5 million range, had those projects still been active. So as a result, our interest expense will go up, but for the fact, or, for the fact that we are no longer capitalizing interest on those. The increase in our interest expense projected is because we in effect stopped capitalizing interest on those projects.

Yes, just those, not the three or four big development or redevelopment projects.

Yes, they continue to be capitalized on those.

Okay. And what was the cap interest in the quarter?

For the quarter, it is in our supplemental when you turn to the - - I'm all thumbs today.

That's fine. If it's in the sup, we can grab it.

It is on the page where we - - Alright, the number for the quarter is $4.4 million, page four.

Okay. Great. Thank you.

Thank you. Our next question is from Ben Yang with Green Street Advisors. Please go ahead.

Hi, good afternoon. It looks like tenant sales fell around 8% during the fourth quarter in your portfolio. Does that sound about right to you, and is there any reason to think that this 4Q result won't continue into 2009.

I think the number is right over the holidays we were around a little over 8% decrease from November, December combined. We've had some preliminary results in for January, and sales decreases were slightly above 5%.

Is that kind of what you're expecting for the full year, somewhere in the 5% down neighborhood?

I mean it is anybody's guess, in terms of where we would expect to see sales.

Okay, and then what kind of occupancy decline is baked in your same-store NOI forecast for the year?

Bear with me a second. In line, we probably have about 60 basis points at the upper end of the range, to about 87.5%, probably the lower end of the range, another couple hundred, 300 basis points, if we were to hit the low end of our range.

So you're saying it could be down as far as 300 bips for the year, is that - - ?

On an in line basis, probably half of that on an overall basis.

Okay. Just last question, you have a bunch of tenancy who paid percentage of sales deals, do they pay their share of [CAM], or is that an expense that you pick up as the landlord?

We would absorb that typically.

And that's for all tenants that go on those temporary leases?

Right.

Great. Thank you.

Thank you. And our next question is a follow up question from the line of Michael Bilerman with Citigroup.

Yes. I had a couple of follow up questions. Does the new term loan, the unsecured term loan that you have, have the same covenants as the line of credit?

Yes.

So that would fall under the same 65% leverage piece?

It does. It has the same covenants.

Are there any other covenants you are close to breaching on the line or the term loan?

At the moment we are not close to breaching any of the covenants.

Other than the debt to GAV?

We are not close to breaching the debt to GAV.

We are at 63%. The breech would be 70%.

I guess at 65%, you are allowed to be over 65% for two quarters, and then you have to get back below.

Right.

What is in the unencumbered pool right now, and the size of it on a book basis?

It is identified; I don't have the numbers off the top of my head, but we have identified book basis in our supplemental, and the assets that are secured.

Yep. And then, going back to the dividend, obviously reducing the dividend to below AFFO allows you to preserve cash. Can you talk a little bit about the potential of having the flexibility of paying that in stock? I guess off the current dividend level that would give you $40 million, $43 million of additional equity capital and it is a lever that you can do now, today, as a way to protect yourself further, rather than heading into 2010 thinking about other deleveraging events, in the case that the NOI yields don't come in where you want them to and other things, why put yourself in a box then sort of take the decision today to add liquidity where you can?

There are other possible things that we can do if we need to delay the dividend for a year, so we thought that paying the dividend in stock, in particular, was a bad idea. And we reduced the level of dividend to the point where we thought it was sustainable. Our view is that if we are in quite a long recession, we will need to have a renegotiation with the bank in any case. If we are in a recession that turns around then hopefully in 2010, we will be in a different position anyway. So if with are in a very long dragged out recession, we need to have a discussion.

You are saying on being able to pay back the line of credit and the unsecured term loan?

Well there's not much liquidity in the Capital Markets; selling properties to buyers who can't get financing is difficult. So that's not the solution to the problem. So obviously, it is to generate excess cash flow over time, and use that to reduce the outstanding liabilities. And that takes time. There's no solution for this but time and a return to a more reasoned market.

Right, I understand that. But I guess if you are given the pass to be able to pay the dividend in stock and that would give you an additional $40 million of retained free cash flow on top of it - -

Sure but paying the dividend in stock doesn't obligate the need of the people you are paying it to to come up with the cash to cover the receipt of their stock.

They can, you can pay a - - there will be a little bit of a cash portion, but I guess it is just I think they would probably rather a healthy company and a stock that goes up, rather than potential liquidity issues.

A Company with $3 billion worth of debt, we are not sure that the $40 million makes it a healthy Company or not. So I am not sure that that is the solution to the global financial crisis. You know, it is, it is one opportunity that companies have but you also can defer the dividend for the year into the next year, and make it up at the end of that period, so there are other options than paying out the dividend in stock.

Right.

The trustees do review this one on a quarterly basis. So any decision that we make in one quarter does not necessarily hold forever.

Right.

We've had a lengthy discussion about the dividend, and we looked at all of the various options, and the Company's decision was to go in this direction.

Okay. Is there anything on the extensions of Lehigh, One Cherry Hill and Springfield, or those completely, as of right, there should be no issues in extending those loans?

No event of default.

On those specific assets.

In the case of Springfield there's a reappraisal obligation, but that would only require us to the extent there was a value that was less than required to the agreement, then there would be a pay down requirement, but it would not require that the loan be paid in full.

Okay. Thank you.

Thank you. And our next question is a follow up question from the line of Ben Yang with Green Street Advisors. Please go ahead.

This is Jim Sullivan here with Ben. There have been a number of questions on the call regarding your covenants. There has been, I think, quite a bit of frustration expressed with respect to where you stand on your covenants. Many of your peers disclosed their covenants and exactly where they stand. You don't. What is the logic behind not disclosing that?

Not disclosing our covenants and where we stand?

Yes.

I think Bob just disclosed our major covenant and where we stand.

That's the only covenant you have?

No, we have, we have four covenants, but that is typically the most constraining covenant.

So if you are well within the others, why don't you disclose what they are and where you stand?

There's no reason why we are trying to hide them. Let me give them to you. We have three other covenants, an interest coverage, fixed charge and EBITDA to debt ratio. Covenant requirements are 1.7, 1.4, and 9.75%. Today, or at the end of December, we are at 1.94% on the interest coverage ratio, 1.64% on the fixed charge ratio, and 10.3% on the debt yield covenant.

That's great. I would encourage you to include that in your disclosure going forward. Thank you.

Thank you. Ladies and gentlemen, that does conclude our question-and-answer session for today's call. I would like to turn the call back over to Ron Rubin for any closing comments.

Okay, again thank you for your continued interest in the Pennsylvania Real Estate Investment Trust. We are going to continue to keep you informed as important events take place within our Company. This concludes our call. Again thank you.

Thank you. Ladies and gentlemen, this does conclude the Pennsylvania Real Estate Investment Trust fourth quarter 2008 earnings conference call. We thank you for your participation. You may now disconnect.