西蒙地產 (SPG) 2002 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Chelsea Property Group fourth quarter and year 2002 earnings results conference call. At this time all lines are in listen-only mode with a question and answer session to follow. Should you require operator assistance while on this call, key star and zero and we'll be happy to assist you.

Before we begin I have been asked to read the following notice pertaining to the Private Securities Litigation Reform Act of 1995. This statement is made in the following discussion that relate to future plans, events, expectations, objectives or performance or assumptions underlying such statements are forward-looking statements. As such, they involve a number of known and unknown risks and uncertainties that could cause the actual results to differ materially from those that are set forth in or employed by forward-looking statements. Risk factors include without limitation the receipt of regulatory entitlements for and completion of development projects in the U.S. or abroad, construction risks, the availability and cost of capital and foreign currency, credit risk, the company's ability to lease its properties, retail, real estate and economic conditions, risk inherent to being a partner in joint ventures, commercial and technological risks related to the company's investment in e-commerce enabling technology, and competition.

We direct you to the company's various filings with the Securities and Exchange Commission for a detailed discussion of risks and uncertainties. Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that today's call includes time sensitive information that may be accurate only of today's -- as of today's date. March 4th, 2003. As a reminder, today's conference call is being recorded, Tuesday, March 4th, 2003.

Now I would like to introduce Mr. David Bloom, chairman and CEO of Chelsea Property Group. Please go ahead, sir.

Good afternoon. Welcome to our year-end 2002 earnings call. We have much to cover so we'll get right to it.

Mike Clarke, our chief financial officer, will recap our fourth quarter and full year 2002 results. Also, he will provide guidance on 2003. Bill Bloom, our vice chairman, will tell you why we took the write down on Chelsea Interactive and where we go from here with our e-commerce business. Les Chao, Chelsea's president, will update our international activities. Tom Davis, our chief operating officer, will go over our domestic operations. Next we'll entertain questions -- Mike?

Thank you, David, and good afternoon, everyone.

As reported last evening, fully diluted FFO per share for the fourth quarter gained 10% to 85 cents from 77 cents in the same quarter last year, adjusted for a two for one stock split in May 2002. For the year 2002, FFO per-share rose 8% to$2.85 from $2.65 in 2001. These results were three cents ahead of street consensus estimates. FFO per-share from real estate operations for the fourth quarter rose 12% to 91 cents from 81 cents in 4Q '01 and for the year 2002, real estate operations gained 13% to $3.14 from $2.78 in 2001.

Chelsea Interactive reported a $3.1 million operating loss or 6 cents per-share for the fourth quarter versus a $1.9 million loss or a 4 cents per-share in 4Q 01 and for the year 2002, Chelsea Interactive reported a $13.4 million operating loss or 29 cents per-share versus a $5.3 million loss or 13-cent per-share in 2001. The company also recognized a non-recurring impairment charge of 34.4 million equal to the net book value of its investment in Chelsea Interactive as of December 31st, 2002. This charge did not affect FFO.

Due to the current market conditions and cost related to securing additional brand users for the platform, the company now believes that it will not be able to recover the net book value of its investment in Chelsea Interactive through future cash flows before reaching its stated $60 million funding limit. The company had funded 52.4 million through year-end 2002. Any future funding will be a charge against FFO in the period that it occurs.

Bill Bloom will discuss Chelsea Interactive in greater detail next on this call.

The three cents per-share favorable variance in the fourth quarter results -- in fourth quarter results was primarily due to stronger than forecasted tenant sales that resulted in percentage rents exceeding expectations in our wholly owned domestic centers as well as Japan. In addition to percentage rents, much of our fourth quarter real estate growth was generated from the $530 million of acquisition activity completed during 2002. New development also contributed growth from four wholly owned domestic expansions totaling 185,000 square feet completed over the last 15 months and a 70,000 square foot expansion of our 40% owned Rinku premium outlets in Japan.

Improved occupancy in our premium outlets and other retail portfolio was another positive factor affecting fourth quarter growth. Base rent leasing spreads at our core premium outlets continued at a double-digit pace. During 2002, we released and renewed about1 million square feet of GLA and initial contractual cash basis rents under new leases improved by 13% to $24.23 per square foot from $21.46 per square foot for expiring leases.

Please note that income from unconsolidated investments for the fourth quarter,2002, includes operating results from Chelsea Japan only. The $3.5 million decline from 2001 is due to partnership interest buyouts during 2002 that required consolidation of five centers from their buyout dates.

Now moving on to discuss liquidity and capital resources. We successfully completed two favorable capital market transactions during the fourth quarter totaling $270 million. These transactions included a $120,000,000 3.5 million common share offering and a $150 million, 6%, 10 year unsecured bond offering. Proceeds were used to permanently finance the two acquisitions that were completed during the fourth quarter and to partially pay down our credit facility.

Additionally, we issued approximately 1.3 million common units from our operating partnership valued at $45 million. These units are convertible 1 for 1 to the company's common stock. Also during the fourth quarter, we received an outlook upgrade to positive from stable on our current ratings for Moody's. This followed a similar upgrade from Standard & Poor's in the third quarter. These upgrades demonstrate that we were able to achieve our objective of maintaining or improving our strong financial position as we continue to grow.

Our leverage remains modest at a debt-to-market capitalization ratio of 37%. We have a well-latter (ph) debt maturity schedule with no meaningful debt maturing before 2005. Variable interest rate debt represents less than 10% of our total outstanding debt, and our interest and fixed charge coverage ratios continue to be very favorable at 3.9 and 3.1 times.

During 2002, we were able to reduce our all-end interest cost by 60 basis points and our current average interest rate is running at about 7.2%. Also during 2002, we raised our quarterly dividend by 24% to 48 and-a-half cents from 39 cents per-share in 2001. This increase was to maintain our reach status and cover the increase in our taxable income.

From a cash flow standpoint, we continued to comfortably cover our dividends at roughly one and-a-half times. Today we are well-positioned to fund our growth in the short and long-term. We have about $120 million available under our $200 million revolving credit facility for short-term needs as well as continued flexibility to access the equity and debt markets for long-term needs.

Finally, I would like to comment on FFO per-share estimates. As stated in yesterday's press release, we have increased our previous 2003 guidance by approximately 32 cents to $3.40 per-share. This increase is attributed roughly evenly to lower expected losses from Chelsea Interactive as a result of the fourth quarter write-down and higher expected results from real estate operations. These - this increase assumes, among other things, that the company's core portfolio and new development projects perform as expected and that there are no unanticipated changes in world economic and market conditions that may affect the company's business.

After 2002, we continue to be on track to meet or possibly exceed our current five-year growth plan which targets a 10% FFO per-share compounded growth rate through 2006. This plan is based on growing our real estate business through internal sources, domestic and international development, and domestic acquisitions. The write-down of Chelsea Interactive should have no affect on this plan.

Let me also remind everyone that it is quite early and these expectations are subject to many variables including economic and marketing conditions, tenant sales, continued favorable releasing spreads and delivering domestic and international projects on time and on budget for an exchange rate and completing strategic acquisitions. We also stated that our growth during the five-year period is likely to be somewhat uneven from year to year.

Thank you and now I would like to turn things over to Bill Bloom to discuss Chelsea Interactive -- Bill?

Thanks, Mike. Good afternoon.

As announced in our release during the fourth quarter we fully wrote down the 34.4 million dollar net book value of our investment in Chelsea Interactive. This is of course a disappointing step for a business model in which we have believed for several years and many ways still believe. Unfortunately, market conditions continue to be weak. We have not been able to bring on new brands on to the platform fast enough. And at the same time, we are approaching our funding limit of $60 million. As you know, we set that limit some time ago and we intend to standby it. We believe at this time that it is unlikely that Chelsea Interactive will be able to achieve sufficient cash flow to reach break even in self-fund additional brands before we reach the limit. As a result, we have chosen to reserve the remaining $7 million of our commitment to cover Chelsea Interactive's operating needs over the next 12 to 24 months as well as potential transition or line-down cost.

One by-product of this we will no longer be able to investment meaningfully in getting additional brands. However, we will be able to continue operating the platform while we pursue discussions with 3-party technology or financial partners to invest in or acquire Chelsea Interactive. Operationally, Chelsea Interactive continues to perform extremely well. We currently have eight brands using the platform, including Polo, Timberland, Cole Haan, Elizabeth and Maidenform.

Sales increases during the fourth quarter and 2002 as a whole are dramatic. The same stores results up approximately 77% for the quarter and 48% for the year. Also of note our total growth volume was up approximately 500% for the fourth quarter. From a technological standpoint, the platform remains both strong and scalable with a service uptime during December of 100% and significant additional capacity. Chelsea Interactive's very able team based in Reston, Virginia, will support the client brands with no changes in the immediate future. In fact, in spite of our announcement we have recently signed an agreement with Janesco (ph) to bring their Johnson & Murphy brand on to the platform. And we are still in discussion with names like Barney's (ph) New York and a large brand for a launch later this year.

To sum up the write down will have no immediate affect on Chelsea Interactive operations. We are in active discussions with potential technology and financial partners who may invest in or acquire the company. However, while we're optimistic about finding a permanent way to keep the platform going there is no assurance that will happen. For 2003, we estimate a cash spend of approximately $4 million or eight cents per-share to support Chelsea Interactive. As Mike discussed, this amount will be charged to FFO as incurred. I will keep you updated on the status of our discussions with third-party investors. Thanks.

Good afternoon, this is Les Chao. Thanks, Bill.

As usual, I'll start with Japan. We're on track to deliver two major projects this year. The first of these is a new center, Sano Premium Outlets located an hour north of Tokyo off of the Toki (ph) Expressway. Phase one of 180,000 square feet will have its grand opening a week from Friday on March 14th. We expect it to open 100% leased to about 80 different brands plus seven restaurants. As in our first two centers in Japan, more than half of the tenants will be international brands with the remaining being made up of leading Japanese domestic brands. The international brands include Coach (ph), Furlo (ph), Brooks (ph) Brothers, Bali (ph), Ascotta (ph), Se Cashmere (ph), Lecost (ph), Timberland, Kenzo (ph), Nautica (ph), Diesel (ph), Bose (ph), Royal Copenhagen, and Wedgewood (ph).

Sano is our second project in the Tokyo market serving the large permanent population on the north side of the city as well as tourist traffic headed to Neko (ph) and the mountain resort areas. The project potentially can be roughly doubled in size. Our second project for 2003 is an expansion of Chelsea Japan's flagship property, Gotemba Premium Outlets. This center is located to the west of Tokyo on the Tome (ph) Expressway near Mt. Fuji and the Hokene (ph) resort area. We have been under construction since the fall and are on schedule to open in July. The expansion covers about 170,000 square feet and will bring Gotemba to 400,000 square feet making it once again the largest outlet center in Japan. In addition to size, we are bringing a very exciting group of new brand stores to the center including Dunhill (ph), Hugo Boss, Wedgewood, Katespay (ph), Se Cashmere, Theory, French Connection, Ferragamo, Furlo, and Prada (ph), as well as some I can't mention yet. We believe the expansion will make Gotemba the Woodbury Common of Japan, and in fact it will have almost as many stores. We expect that by the end of the year Chelsea Japan's portfolio will total 820,000 square feet, roughly a 75% increase over 2002. We are continuing to make progress on projects in the other major markets of Fukuoka and Nagoya, which are scheduled for completion in 2004 and 2005. Including expansions, our goal is to reach 1.5 million square feet within the next two and a half years. Chelsea Japan is the market leader and our partners are fully committed to executing the growth plan. In Mexico, things are moving a little more slowly. As you may recall we were scheduled to start construction around the beginning of the year. Unfortunately a couple of our permits have been delayed and although we're confident that we will have them in hand within the next few weeks, they have delayed our start. Additionally, because this is our first project in the country, we are trying to achieve a higher level of leasing commitments before the start of construction and that is also taking longer than we thought. Grading of the master plan site started some weeks ago and at this point our best estimate that is construction of the outlet portion will begin this summer for an opening in the spring of 2004. Lastly, Korea, unfortunately while we continue to be very interested in the Korean market, after many months of working together, our perspective partner has not been able to reach a go decision. So our development efforts at this point are at best delayed. We consider Korea an important market and there appears to be a strong demand on the part of brands doing business there, so we intend to continue our development effort. However, as you know, the picture is much more complex today given what is happening across the border and as far as we're concerned at this point a delay is not necessarily a bad thing.

That is it for international and now I'll turn it over to Tom Davis.

Thank you, Les, good afternoon.

2002 proved to be a very consisting year for Chelsea in terms of sales performance and our premium portfolio. We achieved positive same-space sales gains every quarter with our highest gain for the year coming in the important fourth quarter. As reported, same-space sales in our domestic portfolio were up 3% for the2002 fourth quarter and up 2% for the full year of 2002 versus the same periods in 2001. The fourth quarter results were a pleasant surprise given the strong December 2001 sales and unfavorable weather comparisons. Weighted average sales for the full year 2002 were $383 per square foot versus $379 per square foot in 2001.

We are pleased to report that our highest percentage gainers for the year were our larger market dominant properties. Same-space sales for January of 2003 were up low single digits. Although we have not yet received tenant sales for February, we expect them to be down significantly due to inclement weather and subsequent weather related center closings during the month. Weekends, including the President's Day holiday were particularly hard hit.

Moving to leasing, we ended the quarter and year at 99% occupied in our premium portfolio and 95% occupied in our other remaining domestic centers. This compares to 98% and 91% for the same periods last year. Over 50 companies opened a store for the first time in the Chelsea Property Group during calendar year 2002. Some of the better known brands from this group include Le Sport Sac (ph), Ecoshoe (ph), Orvis, The Sharper Image, Versace, Bruno Maggli (ph), Carolena Herrera, Christopher Radko (ph), Diadro (ph), Lucky Brand Jeans, LL Bean, Earl Jean, Sergio Rossi, Laura Piana (ph), and John Varvatos.

Tenant bankruptcies totaling 326,000 feet in 2002 versus 328,000 square feet in 2001 were virtually flat in the year-over-year comparisons. We would expect similar levels of bankruptcy filings during this calendar year. Thus far, one company, Music for Asong (ph), occupying approximately 67,000 square feet as filed. Our experience is that most tenants that have filed did not move to chapter seven but emerged from bankruptcy with most stores intact. Leasing and development efforts are continuing on plan.

We have two new centers under construction. Both are joint ventures with Simon (ph) Property Group. Las Vegas, which we anticipate will open this summer, is approximately 85% pre-leased. We are on time and on budget. Chicago is approximately 62% pre-leased. This center is also on budget with a planned opening in the spring of 2004. The cost of these projects are in the range of $180 to $200 per square foot and we expect to achieve unleveraged returns in the range of 14%. Also in our pipeline and in various stages of predevelopment, our new ground up projects in Seattle, Washington, the Poconos of Pennsylvania and the Jersey Shore. We have discussed Seattle in past calls, recently we signed land agreements for both the Poconos and the Jersey Shore sites. We are continuing our search for sites in selected major markets where Premium Outlets centers do not exit.

In addition to the new projects I have just covered, we have the capability to add new phases totaling in excess of 500,000 square feet to our existing projects. Timing depends on meeting pre-leasing and return hurdles. We have come off a very active year in terms of acquisitions. In April we acquired a 305,000 square foot outlet center in Edinburgh, Indiana from Prime Retail. Also in April we acquired Simon's 50% interest in Orlando Premium Outlets, giving us 100% ownership in this 428,000 square foot center. In August we acquired Fortress' 51% interest in four outlet centers totaling approximately 1.6 million square feet, giving us 100%ownership. In November we acquired two outlet centers totaling 583,000 square feet from J and J Properties, and in December we acquired the outlet centers - four outlet centers totaling 1.3 million square feet from New Plan XL (ph).

Total acquisitions in our domestic business in calendar year 2002 exceeded $530 million and added an excess of two million square feet of newly owned space with a potential to add an additional 140,000 square feet of expansions. We expect to continue to be an acquirer of outlet properties and are positioned to act when the time is right. More importantly, we have the discipline to be patient and sit on the sidelines of an opportunity that does not meet our return hurdles.

During the year we disposed of five non-core assets. We anticipate selling additional properties when values are appropriate. At year-end 2002, we owned and operated 56 domestic outlet properties. Twenty-four of these carried our premium brand, representing 57% of our total domestic gross leasable area and 82% of domestic net operating income. The balance of 32 centers was categorized as other properties. Other includes moderate outlet centers, small Vanity Fair anchored centers and traditional strip centers.

Last month we completed the conversion of our Smithfield, North Carolina outlet center to Carolina Premium Outlets. Currently we plan to convert six additional moderate outlet centers to premium during the next 12 to 24 months as our property upgrades and retenanting efforts are completed. Upon completion of these conversions, the domestic portfolio would include 31 Premium Outlet centers comprising approximately10 million square feet, representing approximately 75% of our total domestic gross leasable area and approximately 90% of our domestic net operating income. The 25 other properties consist of approximately 4 million square feet.

In closing, our domestic business has performed exceptionally well in 2002 despite the obvious difficult retail environment and the weak global economy. This continues to reinforce the strength of our properties, our team, and the dominant position we hold in the outlet sector. Thank you.

Operator, we are now open to take calls -- or questions, I'm sorry.

If you have a question key star followed by one on our phone. If you question has been answered or you want to withdraw press star two. Star one for questions.

The first question comes from Lee Schalop from Banc of America Securities.

Hi. A few questions first on the existing portfolio in 2002 you signed leases that were approximately 13% higher than the average expiring rent. Can you give us a sense of that -- if that is something that you think is consistent with current rents in the portfolio and market and if we would see more of that in 2003?

Lee, we have obviously started our re-leasing efforts for 2003 being a couple of months into it and I would expect that we will see -- see similar levels, low single digit increases in those leases as they expire.

Okay. Then moving on to the acquisitions you mentioned that your total acquisitions, you were 530 million. You have never given us a sense of the return on that. Could you share what you expect the returns on those acquisitions will look like?

Yes, Lee, this is Tom Davis. The returns we mentioned or what we thought the returns were stabilized when we made the individual acquisitions during the course of the year. On a stabilized basis they are near 11%.

Okay. That is on average for the total 530 million?

Yes, it is.

Okay. For -- you mentioned the returns on the new developments in the United States. Les, could you give us the returns on the new developments in Japan?

I'm sorry, yes. In Japan, since the beginning of our joint venture we have generally had a higher hurdle rate than we do in the states and typically it's 20% in the first year and if we are able to beat our sales assumptions, it can be higher than that so we continue to look for 20% less returns in Japan.

And the projects that are going to open, you are on track for that number?

Yes.

Okay. Two more questions. One on, the closing of Interactive, can you give us a sense if there is a potential worse down-side cases if it turns out not to be sellable or you can't find someone to step in for you, could there be additional cost beyond the numbers that you outlined in this call to keep your existing customers there happy.

Lee, this is Bill, the scenario we're looking at is 7 million is adequate and we do not intend to go over the 60.

Okay. Then one last question on dividends. Could you give us a sense of if the year turns out like you've laid it out with the guidance of 340,where would the dividend have to go to maintain reached status?

This is David Bloom. We have our board meeting next week and we'll take up the dividend. We can only say that we're certainly going to meet reach status but I can't really discuss what that might be until we make that decision.

Okay. Very nice quarter. Thanks.

Thank you.

Again key star one for questions.

And Mark Strauss (ph) from Marcus and Millichad (ph) has the next question.

I have a couple of questions regarding your disposition plans. I notice there is quite a few of your properties on the market. Are those going to -- looking to continue to dispose of those and how affective it is in your disposition plan?

This is Tom Davis. We really are not actively out there with a lot of properties in the disposition world. We do have a number of the smaller Vanity Fair anchored centers that were at one point in time. Like I said earlier, we expect to have some additional dispositions occur, but they'll only occur providing we get the pricing that we think is appropriate. So we're not aggressively out there marketing our dispositions.

Are you carting a specific cap rate for those dispositions based on current income?

No. On some cases it might be underlying land value.

Thank you.

You're welcome.

And there are no other questions in queue.

Again star one for questions, and we have a question from Ralph Block from Bay Isle Financial.

Good afternoon or good morning here. A couple of questions. One from -- are you seeing any changes in the momentum for new brands or is it pretty much what it has been like over the past year or two?

This is Tom. Are you referring to new brands coming into the outlet sector?

Yes.

Well, as I mentioned, we had 50 new brands come into the industry in 2002 so we do expect that trend to continue. I will say that when brands come in they generally come in a little less active. They may come in on a very selective basis for one or two centers. On our case we benefit from that because we own the flagship properties on both coasts. So the better brands that are coming in but they're coming in to open less number of stores.

Which in our case, that is fine with us. We like to be -- we like to have more selective tenants.

Okay. But there is still a fair amount of interest from people who haven't been in the stores before, I guess.

Yeah, I mean, we ended the year 99% occupied. We have been at 98 and 99% consistently. So as some tenants that do exit the business leave, we are replacing them with new brands.

Okay. And another question. Can you give us sort of a little bit of a flavor as to how you approached conversion of the moderate centers into premium? In other words, do you essentially retenant part or all of the center or how do you go about that?

Sure, it's Tom again. It really depends on where that center is currently positioned in the market. In some cases it is not a reap tenanting. The tenant mix already tilts our premium definition. The property just requires some fixing up. When we convert a center to premium, we want to have all the customer amenities in place. Some places we'll add information booths to these properties. Some cases we're making significant changes to the landscape design, the common areas and in some cases again, it is an upgrading of the tenant mix. But we don't convert to premium until all of those components are in place.

And what would be sort of a typical change in rent from a moderate to a premium?

It really depends on the existing tenant leases obviously whether the options are in place or not but, you know, there is a premium to available space when we do the conversion because we get a big benefit of our branding position and the marketing that is behind that. So there is benefit if there is vacancy.

This is David Bloom just to add to that. We have always found the best strategy is, you bring in the best brands and give the right amenities and that draws volume and what follows is the rest. So the rent will increase over a lengthy period of time. But having good, sound, growth in the tenant mix and volume leads to good sound growth in rents and they tend to track up over a very long period of time.

Okay. And the last question. Are you seeing any changes in the pricing environment on potential acquisitions or is that pretty stable over the last three to six months?

This is David Bloom again. What we saw last year is we believe that some of the pricing got a little bit more aggressive for I'd say assets of light kind. Because there is different quality of assets obviously that that are for sell and we thought better centers were undervalued and weaker centers were overvalued and pricing seemed more aggressive toward the end of last year. However, we do see a lot of centers potentially for sale right now. We have not been able to agree on price. So I have given an amount of centers that seem to be potentially for sale, we think we might be able to get back to achieving our return hurdles.

Thanks and congratulations on a great year, guys.

Thank you.

And that was our final question.

Thank you, everybody, and we'll see you for our next -- you'll hear from us on our next earnings call. Thank you.