西蒙地產 (SPG) 2002 Q3 法說會逐字稿

Good morning, and welcome to the Chelsea Property Group's conference call to discuss the third quarter 2002 earnings. Before we begin, I have been asked to read the following notice pertaining to the Private Securities Litigation Reform Act of 1995.

The statements made in the following discussion that relate to the future plans, events, expectations, objectives, or performance or assumptions underlying such statements are forward-looking statements. As such, they involve a number of risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. Forecasting (ph) risks and uncertainties are discussed from time to time in Chelsea Property Group's (inaudible) with the Securities and Exchange Commission.

As a reminder, today's conference call is being recorded Wednesday, November 13th, 2002.

Now I'd like to introduce Mr. David Bloom, Chairman and Chief Executive Officer of Chelsea Property Group. Please go ahead, sir.

Thank you. Good afternoon, and welcome to the call. With me are Bill Bloom, our Vice Chairman, Les Chao, President, Tom Davis, COO, and Mike Clarke, our Chief Financial Officer.

We've had an eventful few months since our last call. We have a lot to go over in a short period of time. Mike will cover our financial, Les our international efforts, Bill will update you on Chelsea Interactive, Tom will discuss the domestic portfolio with respect to sales, leasing, development, and acquisitions. We will conclude by entertaining any questions - Mike.

Thank you, David, and good afternoon, everyone. As reported last night, fully diluted FFO per share for the third quarter gained 6% to $71 cents from $67 cents in the same quarter last year, adjusted for a two-for-one stock split in May 2002. These results were a penny ahead of Street consensus.

Real estate operations gained 11% to $79 cents per share versus $71 cents in 2000 -- excuse me, 2001 and a penny ahead of internal estimates. Chelsea interactive reported a $3.8 million loss, or 8 cents per share, which was equal to internal estimates.

The penny of favorable variance in real estate results was primarily from percentage rents exceeding expectations in our wholly-owned domestic centers, as well as Japan.

In addition to percentage rents, much of our third quarter real estate growth was generated from the $428 million of acquisition transactions completed since September 2001, including the $4.3 million square foot portfolio acquired from Konover Property Trust (ph) in late September 2001, the single asset acquisition of Edinburgh, Indiana outlet center, and the buyout of Simon Property Group's 50% interest in Orlando Premium Outlets closed at the beginning of the second quarter, and the buyout of Fortress' 51% ownership interest in four Premium Outlet centers completed on August 20th.

And to a lesser degree, from new development opened since June 2001, including wholly owned domestic expansions totaling 130,000 square feet at Allen (ph) and Napa Premium Outlets and at 70,000 square foot expansion at our 40%-owned Rinku Premium Outlets (ph), which opened in March 2002.

Base rent leasing spreads at our core Premium Outlets continued at a double-digit pace on combined re-leasing and renewal activity. For the 12 months ended September 30, 2002, we re-leased or renewed about 950,000 square feet of GLA, and initial contractual cash basis rents under new leases were 12% higher than expiring leases.

Please note that income from unconsolidated investments for the third quarter includes a full quarter of operating results from Chelsea Japan and only partial operating results from four joint venture centers due to our buyout of Fortress' 51% interest on August 20th, at which time revenues and expenses from the four centers were fully consolidated similar to our other wholly-owned centers.

The line item income from unconsolidated investments for the fourth quarter of 2002 is expected to only include operating results from Chelsea Japan. In the third and fourth quarters of 2001, this line item included our share of operating results from the four Fortress joint venture centers and Orlando Premium Outlets, which at the time was 50% owned (ph).

In the third quarter, we closed and recorded a $10.9 million, nine (ph) non-FFO gain on the sale of roughly 40% of our European investment that we mentioned on our second quarter conference call.

With respect to liquidity and capital resources, we are well-positioned to finance the recently announced transactions to acquire six outlet centers for $282.5 million, continue to fund our current development pipeline, and position ourselves to take advantage of future acquisition and development opportunities.

With the strong price performance of our common stock and interest rates at historic lows, we are in the process of analyzing the various public debt and equity alternatives that will best fit our overall corporate financing strategy of maintaining a strong and flexible balance sheet, while maintaining or improving our investment-grade debt ratings.

During the quarter we received an outlook upgrade to positive from stable on our credit ratings from Standard and Poor's in a rather difficult economic environment.

At September 30th, 2002, our balance sheet remained strong, with debt to market capitalization at 36%, a well laddered debt maturity schedule and no meaningful debt maturing before 2005. Variable interest rate debt represented only 11% of total outstanding debt, and our interest in fixed charge coverage ratios on a pro forma basis after consolidation of the four Fortress joint venture outlet centers were favorable at 3.8 and three times, and we currently comfortably cover our dividend at roughly 1.5 times.

As of today, our $200 million revolving credit facility has about 85 million of availability, more than enough to fund the $50 million needed to close the Albertville and Johnson Creek transaction later this month and for current cash requirements.

We intend to access the public debt and/or equity markets to permanently finance our recently announced acquisitions and to replenish some or all of our revolving credit facility. We are in discussions with the members of our bank group to possibly increase our credit facility capacity and/or provide short-term bridge financing should it be necessary.

Finally, I'd like to comment on FFO per share estimates. With respect to the full year 2002, we are comfortable with the Street consensus estimate of $2.82 per share, barring any unforeseen events or circumstances, assuming tenant sales meet current internal projections, which Tom Davis will discuss later in the call, and that the two recently announced transactions to acquire six outlet centers and the related financing will occur on January 1st, 2003.

We expect FFO per share from real estate operations to be around $3.12, and the loss from Chelsea Interactive to be around 30 cents per share.

As far as earnings guidance for 2003, we are comfortable that we can meet or possibly exceed the current Street estimate of $3.08. Let me remind you that it is still very early, given the many variables that could affect our business in 2003, and that we haven't completed our internal projections. However, now that we are in the position to close on the two accretive acquisitions on or before year-end, and even with the discontinuance of the Mills annual $5.1 million non-compete income, we feel more confident that we can achieve 10% compounded growth through 2003, the second year of our five-year plan, and that we remain on course to reach our target of 10% compounded growth through 2006.

As I mentioned, this depends on many variables, including market conditions, continued favorable re-leasing spreads, delivering domestic and international development projects on time and on budget, and completing strategic acquisitions, all to be discussed later on in this call.

Thank you, and now I'd like to turn things over to Les Chao to discuss our international business - Les.

Thanks, Mike. I'll be brief today. First, Japan. Construction has started on Phase II of Gotemba Premium Outlets, our center west of Tokyo. Opening is scheduled for the third quarter of next year. The second phase of 175,000 square feet will bring the center to its full size of 400,000 square feet.

As I mentioned on previous calls, leasing has gone extremely well, and we expect to open 100% occupied with a very strong mix of tenants. We do expect the construction to aggravate an already difficult parking and traffic situation, so sales are likely to be somewhat affected during the construction period. However, upon completion of the second phase, Gotemba will again be the largest outlet center in Japan and indisputably the best in terms of tenant mix.

North of Tokyo we are well under way on the construction of Phase I of Sono (ph) Premium Outlets. Opening is scheduled for March of next year, and again, we expect to be fully leased upon opening. Phase 1 is just under 200,000 square feet, and the project can eventually be doubled in size.

Elsewhere in Japan, we are working on specific sites near Nagoya and Fukuoka, the third and fourth largest cities, and these together would be expansions will form the pipeline for 2004 and 2005. Based on projects currently under construction and likely to proceed, we should be able to more than double the size of Chelsea Japan's portfolio in the next 18 to 24 months.

In Mexico, we are in the final stages of the predevelopment of Puenta Norte Premium Outlets. At this point we expect to have had a groundbreaking for Phase I of the project, about 200,000 square feet, in early December. Opening is scheduled for late 2003 or early 2004.

There's not much new news from Caria (ph) -- we are continuing to work with our prospective partner, a very large Korean company, in creating a joint venture that will cover both the first project and the rest of the country. Our earliest delivery date for a Premium Outlet Center in Korea will be the fall of 2004. We expect to have more definite news regarding the JV within a few weeks.

Finally, just a recording (ph) item. The $10.9 million gain on sales in this quarter's financial statement is related to the sale of just under half of our 12.5% interest in value retail PLC. That transaction closed on July 1st and produced gross cash proceeds of $11.3 million, which were transferred back to the U.S. The gain was not included in FFO for the quarter.

That's it for international, and now I'll turn it over to Bill.

Thank you, Les. On our last conference call, we were asked, what kind of upside is keeping Chelsea interested in e-commerce down the road? We answered that the potential upside was dependent on the number of brands we could bring on and the sales they could deliver.

We thought we had a relatively modest additional investment to make, and that we should be able to get to a positive return on that incremental investment, albeit with significant risk. In order to get to the next level, we had been looking for a strategic partner or partners. Our thinking remains the same.

Chelsea Interactive's performance in the third quarter improved in several ways. With the successful launch of Polo late in July, our platform has seen an increase in traffic and sales. Polo has seen a comp sale increase, along with improved operating efficiencies, since their transition to the CI platform.

Let me give you some highlights. Traffic for the platform was up 238% in the aggregate for the third quarter versus the third quarter of 2001. Sales for the platform were up 297% for the third quarter versus third quarter 2001, and 171% year-to-date. Same-store comp sales were up 33% for the third quarter versus the third quarter last year and 28% year to date, and same-store comp sales for October and November are up over 55%. We are pleased to announce that we have agreed to terms in our negotiating contracts with new brands expected to launch next year. These brands include Johnson & Murphy, a division of Genesco, Barney's of New York, Windsong, a licensing company for an intimate apparel in a relationship with Maidenform, and a multibillion-dollar brand that, for sensitivity reasons, has asked not to be announced.

Our third quarter loss was 8 cents a share. It was 3 cents a share excluding depreciation. We maintain our estimate of a loss for the year of 30 cents a year, 11 cents a share excluding depreciation. We continue our commitment not to invest more than the $60 million in CI (ph). We are currently in discussions with a potential partner to grow this business to the next level, and others have expressed interest. If we do not find an appropriate partner, we currently estimate we have enough funds to operate through next year.

Based on today's shares outstanding, we estimate our 2003 loss to be approximately 26 cents a share, of which depreciation and amortization is expected to be approximately 22 cents a share, giving us an EBITDA loss of 4 cents a share. We believe we can potentially be able to reach break-even on a cash from operations basis by the second half of next year.

I look forward to updating you on our progress on our next call. Thank you. Let me turn it over to Tom.

Thank you, Bill. Good afternoon. As reported in our release, same space sales in our domestic premium portfolio were up 2% from the third quarter and 1% year-to-date versus the same periods last year. We achieved positive same-space sales for each month in the quarter. As you are all aware, the fourth quarter is the most important in terms of sales.

Last year, we experienced a weak October following the aftermath of September 11th. November 2001 sales were flat, but December's sales were very strong as we benefited from Americans taking trips closer to home, and from extremely dry, mild weather in the Northeast.

While results from tenants who have thus far reported in October suggests that October same-space sales are strong, unless we again benefit from an unusually good weather in November and December, sales comparisons could be difficult.

For our internal forecast, we assume a slightly down quarter. If November and December results are similar to the numbers we are seeing in October, our projections will be conservative.

Moving to leasing, we again ended the quarter 98% occupied in our Premium portfolio, and 93% occupied in the remaining domestic centers. We expect to be at or above these levels at year-end, barring any unforeseen bankruptcies and subsequent tenant closings.

During the quarter, 15 new tenants opened a store for the first time in a Chelsea property. We are under construction in both Las Vegas and Chicago. The first to be delivered, Las Vegas, is planned to open August 3rd, 2003. Presently we are 74% pre-leased. Costs are estimated at approximately $200 per square foot, and returns are projected in the area of 14%. Chicago, also under construction, is projected to open in spring 2004, and is 60% pre-leased. Costs are estimated at $180 per square foot, and returns are projected similar to Las Vegas at 14%. Both projects are joint ventures with Simon Property Group and billed as single phases of approximately 435,000 square feet.

We have completed our in-fill expansion for this year, totaling 55,000 square feet. These expansions added Hugo Boss, Sergio Rossi, Versace, John Varvatos (ph), Cerie (ph), Earl Jeans (ph), Bottega Bonetta (ph), and Salvatore Ferragamo (ph) to our already-strong tenant roster in Desert Hills, California. LL Bean and Liz Claiborne were added in Flemington, New Jersey, and Bose and an expanded Kenneth Kohl (ph) store was added in Napa, California. The ROA on this combined in-fill expansion was in excess of 17%.

We continue to make progress in Seattle. We own additional land in Camarillo, California, Allen, Texas, and Rentha (ph), Massachusetts, with the potential to add approximately 350,000 square feet of new space in the coming years. The timing of these projects will depend on us achieving our return hurdles and securing the necessary entitlements. We are also pursuing additional Phase I Premium Outlet developments in major markets where we do not have a presence.

We continue to be active on the acquisition front. We signed a definitive agreement to acquire two outlet centers from JMJ Properties. The properties include a 278,000 square foot center in Johnson Creek, Wisconsin, located midway between Milwaukee and Madison on I-94, and a 305,000 square foot center in Albertville, Minnesota, located approximately 20 miles northwest of Minneapolis/St. Paul, also on I-94. Both centers have expansion opportunities.

Weighted average sales for the combined properties for the 12-month period ending September 30, 2002, were approximately $300 per square foot. Combined, the properties are 98.5% occupied, and tenants' occupancy cost-to-sales are approximately 7%.

Using internal estimates for full-year 2003 NOI, the cap rate is approximately 11. The total purchase price is $89.5 million, to be composed the cash of approximately 45.5 million and the issuance of limited partnership units in the operating partnership of approximately $44 million. We anticipate a closing on this transaction by month-end.

We expect to convert Albertville to our Premium brand within 12 to 24 months. Johnson Creek will be added to our other property designation. Although this center has all the moderate price point brand names and is expected to give us stable NOIs, at this time it lacks the fashion component we feel is necessary to rebrand the center premium. Our focus will be to attract these brands for a potential future expansion of the property.

Yesterday we issued a press release announcing we signed a definitive agreement to acquire four outlet centers from new plan. The properties include a 293,000 square foot center in Jackson, New Jersey, located at exit 16 on Interstate 95, the same exit as the Six Flags Great Adventure theme park; a 4,000 square foot in Osage Beach, Missouri, a popular tourist destination at Lake of the Ozarks (ph); a 329,000 square foot center in St. Augustine, Florida, located on I-95 between Daytona and Jacksonville, Florida; and the 317,000 square foot center in Branson, Missouri located in the heart of Branson, four miles from our existing Branson metal center (ph) we acquired in 2001 from Konover Property Group.

Weighted average sales for the combined properties for the 12-month period ending September 30 were approximately $300 per square foot, and the centers were approximately 93% occupied for the same period. Tenant occupancy cost sales are approximately 7.3%. The total purchase price is approximately $193 million. This implies a cap rate of 11% on our internal estimates of 2003 NOI. We project a year-end closing on this transaction.

Jackson, Osage, and St. Augustine will be converted to our Premium brand within 12 to 24 months. Branson will be added to our other property group. However, this market is a good example of the benefits we discussed in the past on consolidating and rationalizing the outlet sector. The Branson market currently has three outlet centers totaling in excess of 880,000 square feet. We believe the market supports two centers, not three.

Tanger (ph) has a successful and well-positioned center in the market. We will own the remaining two centers, assuming the new plan transaction closes. We plan to further enhance and stabilize the newly-acquired new plan center and reposition our existing center as a neighborhood shopping center.

At our cost of ownership, we should be able to accomplish this at very attractive returns. This should become a win for the tenants, a win for the outlet shopper, and a win for Chelsea.

These transactions further solidify our market dominance in the domestic outlet sector. We are adding highly productive properties to our Premium portfolio, rationalizing overdeveloped markets, and simultaneously eliminating outlet developers in the process.

Moving to dispositions, in July we sold two centers previously acquired from Konover Property Group in Livingston, Texas, and Tucson, Arizona, and an outparcel in Story City (ph), Iowa, for approximately $2.6 million. No gain or loss on these sales were recognized.

In November, we sold a center previously acquired from Konover Property Group in Mineral Wells, Texas for approximately $750,000, resulting in a gain of approximately $300,000.

Thank you. And I'll now turn the call back over to David.

Thank you. Now we'll be happy to entertain any questions.

Thank you. Ladies and gentlemen, if you would like to register for a question today, you'll need to press the 1, followed by the 4 on your pushbutton phone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your polling request, you may do so by pressing the 1, followed by the 3. If you are using a speakerphone, please pick up your handset before entering your request. Once again, if you do have a question, please press the 1 followed by the 4.

One moment, please, before the first question.

The first question will come from Lee Scallop (ph) from Bank of America Securities. Please go ahead.

Thanks, everyone. A few questions. First, on the -- you know, sort of the two big external sources of growth, the acquisition and the development pipeline, could you give us a sense of where you see that potential pipeline? I don't know if it would help to do it in temples of innings, but where are we in terms of opportunities to acquire and the opportunities to build? Are there a lot more out there, or is this getting late in the game?

Lee, this is David. I'll let Tom give you statistics. This is in terms of acquisitions, not the pipeline, but in terms of the acquisitions he can give you have an idea of approximately what we might control in terms of space in the industry.

Yeah. We currently control approximately 20% of the number of domestic outlet centers and approximately 25% of the total GLA that's out there, and we also control about 50% of the top 30 centers, and the top 30 centers are really identified by a trade organization made up of outlet retail tenants.

As far as what's out there left to acquire, there are still three other outlet REITs -- Tanger, Prime, and Horizon -- and together they own approximately 20 million square feet. There are also a number of independent owners that have multiple centers, like Charter Oaks and Bells (ph), and together they're in excess of 6 million square feet. And there's still a number of individual property owners that have two to three million square feet of centers that we'd have some interest in.

As far as the pipeline domestically, as I mentioned, we are out there seeking new ground of development in markets we're not present. For competitive reasons, I'd prefer not to talk about specifically where they are, but there is still a number of major markets where a premium outlet center does not exist. So there's also opportunity on that side.

Lee, it's hard to guess exactly how many of these will come for sale and when. They would have to be for sale at the appropriate price. So it would just be kind of a guess, but somewhere probably in the middle of the game.

And then clearly you guys had good results in terms of sales, putting up comp store increases in sales versus a decrease for the malls, on average. Can you talk about anything that you think is causing you to be able to increase sales while they're seeing sales decrease?

This is David. Lee, I don't know if I can comment so much on why the malls are doing what they're doing, but last year we had a weak September, because September 11th did have an impact. So, during September, we had very nice comp increases, particularly at the tourist destinations and ones that cater to the international traveler such as Orlando, Woodbury, and our one in Hawaii. That has continued and even accelerated, it appears, into October. We don't have all the October results.

The reason we mentioned we were concerned about later in the quarter is that, maybe even more so than the mall business, we had a very strong late November/December last year for a variety of reasons that Tom discussed, but business has been pretty good.

Now, one more question, then I'll turn over the floor. I'm not sure if you mentioned, but can you talk about the timing for beginning construction in Seattle?

We didn't mention the timing, and we're still working on the entitlements, and it's been a long process and it continues, but we're making progress.

Thanks very much.

You're welcome.

Our next question will come from the line of Craig Schmidt (ph) from Merrill Lynch. Please go ahead.

I have a couple questions. First question is a small one -- what was the cap rate on the Edinboro (ph), Indiana property?

12%.

Okay. And looking at Chelsea Interactive another way, at what time or what signal would you need for -- to pull the plug on that. I know you're looking a possible JV partner and some sales are trending, but at some point, when would you make a final judgment on that?

Craig, this is David. I guess it could be for a variety of reasons. One would be if we think we're going to exceed the $60 million commitment. The second would be if we thought any additional dollar we would put in we were to get back or get a return on that dollar. And I guess a third would be if we thought that the brands that were with us weren't happy and wanted us to get out.

Is this Christmas sort of an important hurdle, or does it not really matter how you do this Christmas on Chelsea Interactive?

Well, I wouldn't want to say it wouldn't make a difference. It would have to be a surprising change downwards in sales from where they're trending, and they've been trending -- actually the last few weeks have been by far the best relative to what we've projected. So actually, sales have been going extremely well.

If they fell apart, or let's say we had a dramatic problem with our infrastructure, it would have to be something that would be hard to see right now, because things have been working, but it's something that would have to be a major surprise.

Great. Thanks.

You're welcome.

The next question will come from the line of Jeff Donnelley (ph) from Wachovia Securities. Please go ahead.

Good afternoon, guys. A few questions. I'll spread them around. Mike, just considering the recent rash of acquisitions, you mentioned that you're going to be looking at debt and equity. I guess what metrics are you going to be using to target Chelsea's leverage, I guess? Where would you like that to be?

Well, Jeff, this is Mike. I don't think it's going to be any different or dramatically different from where we are today. We like to stay in that range on our debt-to-market cap of between, you know, 30% and 40%. We're pushing up a little bit to the midrange of that expectation.

We also want to maintain our coverage ratios at levels that will make it possible for us to retain or to improve our current investment-grade credit rating. That probably -- you know, we're probably looking at, you know, in the threes on interest and, you know, maybe the high twos or so in fixed-rate coverage.

So, you know, we're kind of right in there, but obviously with these acquisitions, we will have to do somewhat of a balancing act, and we know that we want to basically retain our strong balance sheet position and be flexible to move forward and do more acquisitions. But we have our charge from the rating agencies, and we hope to stay within those limits and move forward and finance these acquisitions effectively.

Okay. And then, concerning Chelsea Interactive, Amazon.com just recently launched an apparel sales initiative. I was wondering if you guys could talk about what this means for you guys and what the competitive advantages of Chelsea Interactive is to the extent that you find that to be a direct competitor.

This is Billy. Amazon's program is to put together (ph) with the apparel tab, as they call it. Our brands are interested. I think there's a number of business issues they need to work out on the product and pricing and placement of the products.

From a technical standpoint, just as they have announced other brands, we can integrate with them technically. So it's really a brand marketing decision, really looking at that as an affiliate deal from the brands perspective. So we're prepared to work with them in that regard.

So does that mean that, effectively, like a polo.com links its Web site to that tab, and would those sales then count to you, or is this an alternative channel that competitive with you?

Those sales would actually flow and be fulfilled by Polo, so those sales would flow through our platform.

Oh, okay. Any hint on what the multibillion dollar brand sells?

No.

Just a last question really for Les. There's a lot of negativism out there in the headlines concerning the current state of Japan's economy. I was wondering if you could talk a little bit about why you guys think that has not materialized in the sales of your centers over there?

It's hard to point to any single thing although, you know, the general fact of the strong Japanese consumer, the shopper, is very much alive and well. There's still a tremendous amount of spending power and savings wealth in Japan, and it's also a culture that is -- they view shopping almost as entertainment. So certainly that part of it has held up the traffic in sales on the retail side.

The Japanese economy, obviously, has been under a lot of pressure for a decade now, and the financial system looks like it's, you know, due for a big correction. But in terms of the consumer, that really hasn't shown up in the sales number yet.

The other aspect that affects sales in Japan is the exchange rates. I think the Japanese generally are traveling abroad less and staying home more, and we see that certainly in terms of the Japanese traffic at our U.S. centers. So, to the extent that they're staying home in Japan more, they're (ph) still shoppers, and I think that works in our favor, particularly when the economy is uncertain.

Okay. Thanks.

If there are any additional questions, please press the 1, followed by the 4 at this time.

The next question will come from Ralph Block (ph) from Bay Isle Financial. Please go ahead.

Just curious as to whether or not there is any significant deferred maintenance at the centers being acquired from New Plan, and whether you have any significant cap ex to put in there, and if so, what might your return be post those cap ex requirements?

This is Tom Davis. We have identified some work that needs to be done at those four properties. Our estimates are approximately three to five million will be spent, and that will be spread out over the next 24 to 36 months. The majority of that expenditure will be recaptured through our tenant leases. The only really landlord expense that we will face is when we redo the signage from our current names to the Premium brand, and that will not be significant.

This is David. In a general rule, when we talk about cap rates looking forward on a projected NOI basis, we also put into our cost structure the cost of fix-up for the properties that we have identified.

So that 11% number takes account of that deferred maintenance.

That's correct.

Okay. Thanks.

You're welcome.

Once again, ladies and gentlemen, if you do have a question, please press the 1, followed by the 4 at this time.

I'm showing there are no further questions at this time. Please continue with your presentation or any closing remarks you have.

Thank you, everybody, and we will talk with you after our next earnings release.

Ladies and gentlemen, that does conclude our conference call today. We thank you for your participation and ask that you please disconnect your lines.