Pennsylvania Real Estate Investment Trust (PEI) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Pennsylvania Real Estate Investment Trust second quarter 2009 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded today, Wednesday, July 29, 2009. I would now like to turn the conference over to Garth Russell with KCSA Strategic Communications. Go ahead, please.

Thank you. Welcome to PREIT's second quarter conference call.

Before turning the call over to management, I would like to state that this conference call will contain certain forward-looking statements within the meaning of the 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 the 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's filed with the Securities and Exchange Commission. And in particular, PREIT's interim report on Form 10-K for the year ended December 31, 2008. PREIT does not intend to update or revise any forward looking statements to reflect new information, future events or otherwise.

With nothing further, I would now like to turn the call over to Ron Rubin, Chairman and CEO, of PREIT. Ron, the floor is yours.

Thank you very much, Garth. Welcome to the Pennsylvania Real Estate Investment Trust 2009 second quarter conference call.

Joining me on the call today are Ed Glickman, President, Bob McCadden, 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 second quarter results, the status of our current projects and our expectations for the remainder of 2009. After we conclude our remarks, the call will be open for your questions.

As previously discussed, our Company, along with others like us, is experiencing the effects of the current economic downturn and its corresponding impact on consumer spending. Many retailers in our portfolio are experiencing challenging times, yet we are beginning to see positive signs in the marketplace. These retailers are being disciplined in their use of capital, and we expect this trend to continue into 2010.

There is little doubt that retailers have reduced inventory, and are operating their businesses carefully, with the result that capital spending is down, and great care is being given to future commitments. Yet there is also little doubt that the new look and feel of our redevelopment properties has captured their attention.

As Joe Coradino will discuss in greater detail, the transformation of our Cherry Hill Mall and Voorhees Town Center properties has energized shoppers and retailers in southern New Jersey. We are pleased to welcome the Capital Grill and Urban Outfitters, among others, at Cherry Hill. And we saw a number of residents move into the housing units at Voorhees Town Center.

We have also been pleased with the opening of the plaza shops at Plymouth Meeting Mall. And Joe will tell you about the new tenants who have moved in there as well. At these and at our other redevelopment properties, we are poised to capture a larger share of consumer spending when the economy improves.

As Ed Glickman will discuss in greater detail, we are pursuing a specific plan that addresses near-term and longer-term liquidity, and capital allocation issues. We are working on renewal of our credit facility, which comes due in 2010. We are also working on specific property financings, looking to use proceeds to pay down debt.

As I have noted in previous calls, while the economic environment has changed, the basic fundamentals of our business have not. Our Management team is focused, working to meet Company capital needs to advance our redevelopment and development projects, to place stores in service, to increase NOI and occupancy, and generate positive leasing spreads. As always, we continue to remain focused on creating long-term value for our shareholders.

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

Thanks, Ron. As Ron mentioned, we are in a challenging period for the Company and its merchants. To the positive, we're pleased with the impact of our redevelopment efforts in spite of the exceedingly difficult environment.

During the second quarter, we continued to open new stores, especially in our redeveloped and newly developed assets. At the same time, we face strong headwinds from the economic decline, which has impacted our portfolio metrics.

In the second quarter, real estate revenues were up slightly. Comp store sales were $337 per square foot, down $3 per square foot from last quarter and $18 per square foot from a year ago. We have also experienced a decline in our retail portfolio weighted average total occupancy to 88.9%, down 20 basis points from last year, and down 10 basis points from last quarter.

A primary factor affecting these metrics has been store closings over the past year. As we stated previously, the majority of the store closings that have occurred have been part of tenant bankruptcies. Quarter to quarter, same-store revenue was down 0.4% from last year. Same-store NOI was down 2.5%, impacted by the slight decline in revenue, as well as increased expenses. Expenses increased due to higher real estate taxes, as well as obligations under long-term outsourcing contracts.

In addition to the increase in the expense burden, the Company also experienced a decline in the proportion of expenses passed through to tenants. We believe that the improvements to our asset base are helping us stabilize our performance during a difficult economic environment, and have benefited our overall operating performance.

During our last call, we talked about the steps we were taking to preserve liquidity in face of our remaining capital commitments and limited external funding sources. Our program has included a cutback in predevelopment expenditures, the suspension of development activities at certain early stage projects, cuts in G&A including a reduction in force, reductions in the dividend payout, additional mortgage financing, sales of non-strategic properties and accessing the remaining liquidity in our bank line.

We have taken these steps to aggregate the funds needed to operate the Company, and to complete the work on our existing development and redevelopment assets. At the beginning of the year, we faced capital expenditures of $150 million to complete our work in progress. In the first six months, we have already funded approximately $90 million of this amount.

In keeping with the plan outlined earlier, we completed two mortgage transactions and three parcel sales during the quarter. Combined with the G&A cut, cash retained by reducing the dividend, and the availability under our credit line, these transactions provide us with sufficient capital to cover the costs remaining to complete.

At the end of the quarter, we exchanged 3 million shares of common stock for $25 million of convertible bonds. This transaction helped the Company to maintain leverage to gross asset value at below 65%. Addressing our near-term liquidity issues while operating within our covenants was a key milestone in our capital plan. Now that we have accomplished that goal, we are focusing our efforts on renewing our bank facilities, which mature in March 2010.

To that end, we are working diligently with our agent bank, Wells Fargo, towards finalizing a proposal for the extension of our credit facilities. We are also continuing to have discussions regarding investment and joint venture scenarios with prospective financial partners. At present, we have nothing additional to report on either of these activities.

Looking forward, the key determinant of our performance in 2010 will be the strength of retail sales. Within that broad context, however, PREIT has a set of unique circumstances. In the next 18 months, we expect approximately $240 million of construction in progress to enter service, substantially reducing the amount of non-earning assets on our balance sheet. These investments will bring an increase in revenues and NOI. While some of the positive growth will be partially mitigated by the impact of the economy on the balance of the portfolio, we expect to see net NOI growth.

Concurrently, however, we expect an increase in cash interest expense from the combination of a modestly higher level of debt and a higher average rate on those balances. Reported interest expense will also rise, as the amount of interest capitalized on the construction in progress declined. This will impact FFO and mitigate the positive NOI growth. Net income will be further impacted by depreciation on the assets brought into service.

In sum, in weathering this storm, we expect to absorb the impacts on our income statement and balance sheet, including a restructuring of our bank facilities without a significant decline in FFO. In fact, by year end 2010, we expect to be carrying the full capital costs of all of our newly developed and renovated properties before they have had a chance to achieve stabilized NOI run rates. This creates a tremendous growth opportunity for our business looking forward.

Continuing to look beyond 2010, we are quite optimistic about our prospects. Current wisdom has the economy beginning to recover next year with the consumer lagging slightly due to a slower recovering employment. With this in mind, we expect to start to see a turnaround in retailers' sentiment next year, and we look to increase occupancy for 2011 and beyond, at which time we hope to achieve stabilized returns on our recent capital investments.

At the same time, we will no longer be facing the large increases in our asset base and capital carrying costs, which we will see in the balance of 2009 and 2010. So assuming a recovery, the future looks quite positive for the Company.

Bob McCadden will now give you more details on our financial performance.

Thank you, Ed. Turning to our operating results, net loss for the second quarter was $4 million, or $0.11 per diluted share. FFO for the quarter was $37.8 million, or $0.91 per share.

As Ed mentioned, we repurchased $25 million of exchangeable notes and recorded an $8.6 million, or $0.20 per share gain. This transaction was not included previously in our 2009 earnings guidance. Excluding this gain, FFO for the quarter was $0.71 per share, above analyst consensus.

All of our retail properties except Monroe Marketplace, which opened in the fourth quarter of 2008, are included in our same-store operating results. Same-store NOI was down $1.8 million, or 2.5% when compared to the prior year's quarter.

The key drivers of this change are base strength was up a modest 0.2% for the quarter, while occupancy levels were below those of the prior year due to store closings by bankrupt tenants, average rental rates were up slightly. Of the 627,000 square feet of space impacted by bankruptcy filings in 2008, we have executed leases for approximately 15% of this space, and are negotiating leases for another 20% of this space.

Seven retailer bankruptcies have impacted 92,000 square feet of space in 2009. Of this amount, 23,000 square feet of space has closed. The balance of the space has not yet been adjudicated, and it's too early to determine what the outcome will be for the remaining spaces.

Percentage rent is down $0.4 million compared to last year, as a result of lower tenant sales, and lease renewals with higher break points. Lease termination income was down approximately $0.5 million compared to the prior year, as last year's quarter included a $1.2 million termination fee received from one tenant, which vacated three store locations.

Recoverable expenses, which include CAM, real estate taxes and redistributed utilities net of tenant reimbursements, increased by $0.4 million. Overall expense recovery rates fell from 89.0% to 88.2%, due to a combination of higher vacancy levels, more tenants paying percentage sales rent and CAM expense caps.

Bad debt expense was approximately $0.9 million higher than last year. For the quarter, bad debt expense was 1.8% of real estate revenues compared to only 1.0% last year.

G&A expenses and other expenses were down by about $1.5 million for the quarter, reflecting our continued emphasis on cost management. For example, our actual ICSC costs were about half of those amounts that we included in our 2009 budget. Base pay and incentive compensation are also lower this year.

Interest expense increased by $6.1 million over last year's quarter. 2008 second quarter included a $2 million non-cash gain recorded in connection with forward starting swaps that reduced our prior year interest expense. A significant portion of the remaining increase is due to placing completed redevelopment and development assets into service. During the second quarter, we commissioned approximately $41 million of such assets.

Since the beginning of 2008, we have put a total of $329 million into service. This increase in outstanding debt was partially offset by lower interest rates on our outstanding balances, which decreased by 21 basis points from 4.98% to 4.77% on a GAAP basis. Our average stated interest rate decreased by 68 basis points to 4.82% at the end of the second quarter, as compared to 5.50% a year ago.

Depreciation and amortization expense is higher due to construction in progress assets and recurring capital expenditures that were placed in service over the past year.

During the quarter, we borrowed the first $28 million of an expected $38 million mortgage loan on Lycoming Mall and a construction loan for Pitney Road of up to $10.0 million.

At the end of the quarter, we had outstanding debt of $2.786 billion, an increase of $41 million from December 31, 2008. At the end of the quarter, 79.7% of the Company's total indebtedness, including our share of the debt of our partnerships, was fixed. Page 33 of our supplemental reporting package includes selected debt ratios for a credit facility and term loan. At the end of the quarter, our leverage ratio was 64.6%.

We are revising our 2009 guidance to reflect the impact of the $8.5 million gain from extinguishment of debt, and the 3 million shares issued in connection with this equity for debt exchange. We expect our GAAP earnings per diluted share attributable to the Company to be a net loss between $0.93 and $1.09. We expect FFO per diluted share to be in the range of $2.88 to $3.04. Our guidance range assumes same-store NOI, excluding lease terminations, of approximately negative 3% at the upper end of the range and minus 5% at the lower end of the range.

We expect our occupancy to fall slightly in the third quarter, and then recover to a level close to our current occupancy rate in order to achieve the upper end of our range by year end.

Our guidance is wider than usual at this time of the year, due to continued uncertainty about the financial health and competence of the retail customer, and the resulting impact of the general economic and credit conditions on many of our tenants. Further, our guidance does not contemplate the impact of any potential acquisitions, dispositions or significant changes in our capital structure.

Now I'll turn the call over to Joe Coradino.

Thanks, Bob. We've completed construction on the majority of our redevelopments, and are working to enhance our customers' experience by introducing exciting new shopping and dining venues. We continue to navigate the challenging economy, and have recently recognized preliminary indicators of stabilization.

We have seen a number of tenant rent relief requests drop considerably, as the quarter registered only four new retailer bankruptcy filings that impacted our portfolio. We are working with several retailers that are taking advantage of available space in both inline and large format categories, and expect to conclude significant transactions to announce on upcoming calls.

That said, we've also made solid progress on our big three Philadelphia area redevelopments. At Cherry Hill Mall, the Capital Grill opened on June 15, and Urban Outfitters, the Philadelphia-based company that ranks as one of the nation's most successful retail chains, opened on July 3. Their store is located adjacent to the newly added Nordstrom in a two-story unit with a unique design that compliments the already distinctive property. They are already the number one volume store in their region.

Tillie's, a category-dominant store that sells West Coast style lifestyle clothing, shoes and accessories, opened this month, as did Anew, first to the Philadelphia region, PS from Aéropostale, an apparel and accessory store for tweens ages 7 to 11. Teavana and Swarovski opened along the Grand Court Promenade in July, and California Pizza Kitchen will open on August 17, 2009.

During the quarter, we executed eight new leases for over 30,000 square feet for Cherry Hill. Tenants representing 66% of the expansion areas have opened, and another 22% of the planned expansion portion of this project is either leased or in active negotiation.

We held a grand opening celebration at the new open air plaza shops at Plymouth Meeting Mall on May 1. The community was enthusiastic, welcoming four new tenants, Ann Taylor Loft, Chico's, Coldwater Creek and Jos A Bank. Construction is under way for an August opening of Ali shoes, the fifth tenant who will occupy space in the plaza shops. Whole Foods continues to work on their fit out, with an expected opening in November. At this time, 92% of the planned expansion portion of this project is either leased or in active negotiation.

At Voorhees Town Center, we opened during the quarter Serene Blu Massage and Rizzieri Master Salon, an Aveda school for beauty and wellness, accomplishing approximately 19,700 square feet. We signed a lease with Intoxx Fitness for 13,000 square feet located along the boulevard. They are working on plans and expect to open in the fourth quarter of this year. These tenant additions represent our enhanced focus on incorporating quality local and regional merchants into our properties.

The first Abitare residence building opened at Voorhees Town Center for occupancy in June. The four buildings fronting the boulevard will be complete by the fall, with the balance of the for rent residential component scheduled for completion during 2010.

The combination of residents, Rizzieri students, star employees and Intoxx members will provide Voorhees Town Center over 1,000 new customers who will live, work, shop or dine at the property daily. The award winning Town Center is taking shape, and we are experiencing increased traffic as the community interest heightens and the transformation continues.

During the quarter, we opened the 17,000-square foot DSW at Francis Scott Key Mall, and construction continues at Wiregrass Commons on the Burlington Coat location, which is on track to open in the third quarter of this year. We also turned over the Barnes & Noble at Woodland Mall, and the tenant is performing their fit out for a fourth quarter 2009 opening.

At 801 Market Street, a property we own contiguous to the gallery, we have progressed rapidly on fitting out the space for the relocation of the state office building. Tenant fit out work for the 223,000-square foot Philadelphia headquarters of the state of Pennsylvania is scheduled for occupancy beginning August 3. This is two months in advance of the planned October '09 commencement. Upon completion, the building will be one of the few buildings in the country that have achieved both historical and silver lead certifications.

While the year-over-year sales decline echos the current retail environment, there are signs that the decline is slowing. Compared to last quarter, mall comp stores fell only 1%. At Cherry Hill Mall, sales were buoyed by the much anticipated openings of Nordstrom, three new upscale restaurants and the new retail, registering a 3% increase since the first quarter. This is most remarkable, considering the marketplace decline of luxury category sales.

A positive trend also continues at Jacksonville Mall, where we added Barnes & Noble, Ulta and Red Robin last year. Further, at Wyoming Valley in Wilkesburg, Pennsylvania, which we renovated in '06, our remerchandising efforts are paying off, and translating into increased traffic and sales. We are confident that our redevelopment strategy is differentiating our properties, and they will be positioned for success as the market begins to turn.

We've instituted a number of operational initiatives aimed at driving occupancy, differentiating our properties and reducing expenses. These initiatives include a layered approach to leasing, utilizing our corporate leasing team, property managers, and in selective situations, outside brokers. This approach maximizes our ability to secure national, regional and local retailers, and non-traditional uses.

We continue to find creative methods to build relationships with merchants. We organized a franchise fair at Voorhees Town Center, approximately a dozen franchises were represented and over 50 potential operators attended. The event resulted in several qualified leads, which we are currently working on.

We have also refocused our marketing effort. In this challenged selling environment, the national retail federation is predicting a 7.7% decrease in back-to-school sales. In an effort to take advantage of the shoppers' focus on discounts, our back-to-school promotion is value-oriented, giving away free school supplies for purchases. The promotion was conceived to compete with the major discount chains that use school supplies as a loss leader. This will be promoted via a YouTube video, online ads, radio and cinema, the best reach of the 12 to 24 age group.

The retail environment holds a ray of light, as we see declining rent relief requests, retailer markdown pace returning to normal levels, and select retailers taking advantage of expansion opportunities. We remain cautiously optimistic, as we lead our business through the challenging economy.

With that, we're ready for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Quentin Velleley with Citi. Go ahead, please.

Hi, guys. It's actually Manny here with Quentin. In your opening comments, you mentioned that occupancy was going to drop in the third quarter and then kind of come back up in the fourth. Anything specific to that?

I think it's just a matter of, you have a typical seasonal fluctuation in occupancy, so typically it's lowest at this time of the year, and picks up again, as we have more merchants opening for holiday period.

Okay, and then I think Joe just mentioned that there has been declining rent relief requests. Can you give us an idea of what kind of levels those had gotten to and where they are now?

Well, I think just generally -- well, in the beginning, everybody who could was asking for rent relief, it was a free for all. And as, I think we and others like us, began to sort of sensibly consider the requests and be very selective about granting it, time passed and now you're seeing more of a trickle at this point than the volume we saw previously. You can count on one hand the number of requests that I think have come through in the past 30 days, and you need your hands and feet previously.

Okay. Turning to your redevelopment pipeline, the yield at Cherry Hill fell again now to 6.6%, could you tell us what the cash yield is on that property, and also it looks like you guys now provide a stabilization disclosure with that stabilization in 2011. Are you anticipating lower rents or weaker stabilized occupancy at that property as well?

Let me just give you a little, the background in terms of how we've historically disclosed the incremental returns. When we first start a redevelopment project, as part of our annual budgeting process, we're typically doing a five-year, as-is forecast for the property. And then we look at what the project looks like after redevelopment dollars are expended, and additional revenues are generated.

So we compare the after redevelopment NOI to the before redevelopment NOI, and that increment becomes our revenue, or net income, which we then compare against our investment. So what you would have now is the fact that the basic business, because of the economy and what's happening generally in the retail environment, we've not changed our baseline year, so what you're seeing in terms of the lower return is the fact that you have a general erosion in the baseline business.

We could have gone back and arbitrarily reset the baseline, but that would have been just that, arbitrary in terms of having to decide how much is economic related versus the specific redevelopment effort. So in effect what you really see is the redevelopment returns bearing the general decrease in overall performance of the property as a whole, in light of the current economic conditions. We put the stabilized returns in there because we thought it was important, given the fact that there's been a slowdown in leasing activity, to give you some sense of where we would expect to be when we reach that fully realized return.

I don't know, Joe, if you wanted to add anything.

I would just add, you also referenced anticipated future leasing. Our goal is not to compromise the leasing of Cherry Hill moving forward, and to continue to sort of maximize the value of the asset, so we're being careful and selective in terms of both who goes in and what the economic transaction looks like.

I'm sorry. Could you tell us maybe what the cash yield is on completion? Obviously it's 6.6 once you get to 2011.

Yes. Yes, the cash yield and completion is your expected return against the cost that's set forth in the supplemental. So it's your 200 some odd million dollars at the stipulated return. That would be your incremental cash return on that investment.

Yes, but the stabilization is 2011. Are you getting a 6.6% return once it's completed?

That's stabilization.

So what would the yield be once you finish all of the development, which you're obviously very, very close to, what would the actual yield be at that point?

Yes, I mean it's--

Is it like 5.5%, 6% or something until we get all of the shop space leased up, and then it gets to 6.6% in 2011?

Think about the way these developments -- think about Cherry Hill in particular. A large sum of the dollars were expended towards building out the Nordstrom store, which has a very low return, building out some non-revenue generating -- we put into service a parking garage, mall renovation, so most of the return is coming from the last spaces that you're leasing in the property, which would be skewed more towards 2010 and 2011. So our cash return today is relatively modest compared to what our ultimate return is expected to be.

Okay. Okay. That's great. Thanks, guys.

Thanks.

Thank you, and our next question comes from the line of Paul Morgan with Morgan Stanley. Go ahead, please.

Good afternoon. If I look at page 16 in your supplemental, it says that 36 of the 119 anchors are expiring in the next couple of years. I just wondered if you had more visibility with anchor renewals than you had with specialty stores, and if you could have any color on your discussions with the department stores in particular, about their plans for those stores over the next couple of years?

Sure. Actually we are in contact with the anchor stores, obviously on a regular basis. There's actually a meeting with one of the major anchors at their headquarters tomorrow. At this point, there are discussions going on with the various anchors. There's nothing to report where we've received any formal notice of closing. We're expecting a number of renewals to occur between now and year end.

Essentially, the anchor expirations for the most part, the earliest one occurs at Phillipsburg, with JCPenney in 2010, and that's under discussion at this point. But our anchor discussions are ongoing and nothing significant to report.

Nothing in terms of them saying we're unlikely or likely to close?

Not at this time.

Okay.

We do have three vacant anchors currently at North Hanover, Willow Grove Park and 801 Market that we're working on backfills for.

Okay, my other question is about the renewals. There's been a lot of discussion about doing short-term extensions upon renewal rather than a full renewal. Is that -- how much of your leasing right now for renewals is of the 12-month variety or 24-month instead of a longer term thing?

We have that information. Bear with us a second as we pull it out.

Sure.

So on a year to date basis, a little over half, 54% of our renewals have been short-term basis less than three years, the balance being more traditional five-year plus renewals, so we're doing these both for our benefit, as well as the tenant's. Our approach is to the extent we're looking at tenants who perhaps in today's environment are underperforming, rather than lock into a fixed occupancy rate when sales are at their lowest level, I think our view is that if we stay with short-term leases, and hopefully we can capture the uptick when the market recovers and the tenant sales recover. So it's on a year to date basis, a little over half of the renewals have been more on a short-term basis.

What was your definition of short-term?

Three years or less.

Three years or less, but a lot of them are probably like 12 months or 24 months basically?

Yes, it's probably 12 or 24 months. I would say split probably, of that amount, maybe a third a year or so, and then maybe two-thirds, two to three years.

Okay, and is there any differences in the type of malls those are taking place in, or is it just a scatter shot?

No it's across the board. It's largely tenant-driven as opposed to mall-driven.

Okay, thanks.

Thank you. And our next question comes from the line of Craig Schmidt with Banc of America. Go ahead, please.

Good afternoon. It seems like you had some positive trends going from the first quarter to second quarter, but in your guidance for same-store NOI, you're sort of in the minus three to minus five range. What are you looking at in the second half of the year that sort of takes you to that lower level as opposed to a trend that seems to be improving?

I think what you had in the first part of the year is that you have tenants who had filed for bankruptcy in '08 and '09, still continue to operate while they liquidate it. So those tenants are beginning to vacate their existing spaces, and at this point we haven't identified enough of the backfill tenants to make up for the expected store closings.

Okay, thank you.

Thank you. And our next question comes from the line of Nathan Isbee with Stifel Nicolaus. Go ahead, please. I do apologize. Please requeue, sir.

And our next question comes from the line of David Wigginton with Macquarie. Go ahead, please.

Good afternoon. You talk a lot about meeting your liquidity needs here over the course of the next couple of quarters with your various initiatives. How much of that results in an actual deleveraging of your capital structure at this point?

Initially, the only deleveraging of the capital structure is, occurs from the convert exchange. We're still at the point where in order to complete our projects, we'll probably put on another $50 million to $60 million worth of debt.

Okay, and then -- so in that vain looking at your leverage ratios within your debt covenants, you're pretty close to, 64.6 and you can't exceed 65. Does your plan include you exceeding the 65 for any period of time at this point?

Well, Dave, we actually can exceed 65%. Our credit facility modification that was put in a year ago allows us to 65% for two consecutive quarters, and given the fact that our credit facility expires in the first quarter of 2010, largely at this point it becomes more of an academic discussion.

Okay, but I guess then, so I recognize the ability to exceed it for a couple of quarters, but do you plan on hanging out for a quarter or two at this point, or is it really just -- it doesn't matter because it's maturing in the first quarter?

It doesn't matter. I mean obviously our leverage is a function of not only the level of borrowing, but also the level of NOI that we're generating on a look-back basis. And it's, capitalized at the, at a rate that's stated in the credit facility. So, it depends on a number of factors. It depends on how NOI plays out for the balance of the year. It also depends on how quickly we open up certain tenants, which will build up the speed at which we go up through that $60 million.

So there's a lot of variables at play. I don't think at this point in time, since we're close to the 65% number, we can tell you exactly when and if we're going to exceed it. It also depends on what we do in the future with the convertible bonds.

Okay. So, from your perspective then, once you've made it through the, your development gauntlet, if you will, I mean is there going to be more of a focus on delevering the capital structure?

That's the next focus. The first focus was making sure we had enough capital in place and available in order to finish the projects that we were in the middle of. And for us, it was critical that we find a way to do that without going back to our bank group, which is what we think we've accomplished.

So now we're past that and we're on to the next issue, which is how to refinance the credit facility, and then how to go forward and deleverage over time. There's no magic method for delevering the market for properties at this point is fairly weak, so asset sales are not readily in the cards at the moment.

So it's a question of going back to the capital markets at some point, but in order to do that, we feel that we need to be able to present a future road map that includes a discussion of the bank facility going forward. So that's the next item on the agenda for our capital plan, is finishing up the negotiations with our agent bank, and then ultimately our bank group about the future of the credit facility.

Okay. With respect to some of your weaker assets, have you been investing any capital into those centers at all to help them, to boost them up at this point, or are all of your resources focused on the big development projects?

Well, we are constantly reviewing the opportunities for working on individual assets as tenant interest comes up, and as we have an opportunity to do redevelopment work. But for the moment, we are in the middle of four major projects that need to be completed, where we're fairly well along, and that's got to be the primary focus of our capital at the moment, but there's a number of assets that we have on the list that we are doing redevelopment, smaller amounts of redevelopment work on.

We have launched an initiative, this is Joe Coradino, we have launched an initiative to look at public financing opportunities and economic development opportunities, focused at some of our weaker assets. There's nothing significant to report, but we are -- there is an effort around looking at our more difficult to lease assets, and we're also investigating opportunities for alternative uses for those properties, where we could drive occupancy by introducing some form of office space, medical, educational,etc.

Okay, thank you.

Thank you. And our next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Hi, good afternoon. In your discussions with your line lender about the extension, could you just talk about what you're discussing with them in terms of terms, interest rates? We've heard from some of your peers who have not closed that at least indications of where pricing would come out, maybe 350 to 4, with a 2% floor. Is that what you're looking at?

We're not prepared to have a discussion about this until we have some formal proposal on the table made, which we don't have it at the moment that we've agreed to, and that we're prepared to go out to the bank group with.

Okay, and just a little less specific, would any potential extension, would that take care of the $170 million term loan as well? Is that what you're talking about?

It's quite likely that whatever we do will be done for both of the facilities at the same time.

Okay, and one final question, how much incremental NOI did you generate in the first half from the Cherry Hill and Plymouth Meeting redevelopments?

I'm not sure if we're--.

We generally don't give out individual property NOI numbers.

Okay. All right. Thank you.

Thanks.

Thank you. (Operator Instructions). And our next question comes from the line of Michael Mueller with JPMorgan. Go ahead, please.

Yes, hi. Following up on the line question, I understand there's not a lot you could say at this point, but just in terms of general expectations, is this something that you think will materialize or happen in 2009, as opposed to getting over into 2010?

I sure hope so.

Okay.

We're in constant discussion and we're, we believe that we're close to a proposal, but this whole line renewal is complicated. There's a lot of banks involved, and we're working on trying to get it done as quickly as possible.

Okay, and in the past, I think I've seen, saw a stat in terms of unencumbered NOI, can you run through how much unencumbered NOI you have?

It's about 26% of the total NOI for the Company, about 24 properties.

Okay. Also, I think this is a JV property, but Red Rose Common, can you just give us a little background in terms of what's happening with that mortgage?

Sure. The mortgage came to term, and we have not yet paid off the mortgage. We are looking at financing alternatives to take that mortgage out. It's complicated by the fact that it is a joint venture property, and that we have a private partner in the transaction with us who we have to work with to get this accomplished.

And the private partner is the manager. Right.

Okay, thank you.

Just other points to be made, this is a property where it had both a Circuit City and Linens 'n Things that are currently vacant, so the property manager is currently working on identifying a couple of backfill tenants. So to the extent that that can be achieved, that would make the second stage of the resolution of this mortgage a little bit easier. And it's also just a non-recourse obligation.

Okay, okay, sure. And then, Ed, following up on your comments about asset sales being tougher, more likely, I mean basically when you talked about the capital markets, I mean we should read into this that step one is credit line, and step two is some sort of common raise, whether it's private or public or something along those lines. Is that how you guys are thinking about the intermediate term capital plan?

Well, I think the intermediate capital plan, and unfortunately we have to do this step by step, but the first thing on our agenda was to make sure that we have the liquidity available to complete the projects, which we have done. The second step is to make sure that we can get a transaction completed with our bank group that gives us the flexibility required to keep operating the Company, and to keep building on the asset base that we've just invested all of these dollars in.

And then the third step will ultimately be deleveraging the Company. Now, that could come from a number of different sources. I can't tell you whether it will come from partnerships, whether it will come from outside investment, whether it will come from common stock offering or some other kind of equity capitalization, but we know that the market has changed and we know that we need to bring additional equity into the Company.

Okay, but considering that it seems like your bank, you were close to proposals there doesn't necessarily seem like as if the bank groups are forcing that beforehand, before the bank agreement or line of credit get renewed. Is that -- that's a fair statement?

Since we are not at the point yet where we have a proposal, it's hard to make any fair statement one way or the other about what may or may not be in the proposal that we don't have. I mean, I'm not trying to be difficult, but I don't want to imply things that aren't there.

Okay, and just last question on the redevelopments, I mean if you're looking specifically at Voorhees and Cherry Hill for the back half of the year, I mean where are occupancies now and where do you think you could end the year on those two properties?

Give us a second.

Sure.

We're expecting to end the year at Cherry Hill at just around 90.5%.

In line.

In line, yes.

In line, okay.

And at Voorhees, around 62%. Now, Voorhees is a project that there's a lot more to do at Voorhees, keep in mind.

Sure.

We've got the bulk of the residential with the retail at grade on the boulevard is not ready for occupancy yet. So that's a project that's going to take -- you can't really look at what's going to happen in the rest of '09 for most of the project. It's really a project that will mature in 2010 and to the middle of 2011.

Okay, great. Thank you.

Thank you. And ladies and gentlemen, that does conclude our question and answer session. I would now like to turn the conference back over to Ron Rubin for any closing statements.

Thank you for joining us this afternoon, and for your continued support. We look forward to providing our next update on our third quarter earnings conference call in October. Thank you again, and have a good evening.

Ladies and gentlemen, this concludes the Pennsylvania Real Estate Investment Trust second quarter 2009 earnings conference call. Thank you for your participation, and you may now disconnect.