西蒙地產 (SPG) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2003 Chelsea Property Group Inc. conference call. My name is David and I'll be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question-and-answer session toward the end of this conference. [Operator Instructions]

Before we begin, I've 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 future plans, events, expectations, objectives, or performance or assumptions underlying such statements are forward-looking statements. As such, they involve a number of unknown and unknown risks and uncertainties that may cause actual results to differ materially from those set forth in, or implied by, forward-looking statements. Risk factors include without limitation the receipt of regulatory entitlements for and completion of development projects in the United States 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; risks inherent to being a partner in joint ventures; risks inherent in developing and marketing a technology-based business 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 as of today's date, November 5th, 2003.

As a reminder today's conference call is being recorded Wednesday, November. 5th, 2003. Now I would like to introduce Mr. David Bloom - Chairman and Chief Executive Officer of Chelsea Property Group. Please go ahead, sir.

Welcome to our third-quarter earnings call. With me today is Bill Bloom, our Vice Chairman, Les Chao, our President, Tom Davis, our Chief Operating Officer and Mike Clarke, our Chief Financial Officer. As you may remember, on our last call, we were able to announce an increase in our 2003 FFO per share guidance. Based on our third-quarter results and current outlook, we're pleased to announce that we anticipate to be at the higher end of 2003 guidance range.

Michael will cover this in some greater detail along with our financial results. Tom will cover our domestic portfolio and Les, our international portfolio. Mike.

Good afternoon, everyone. As reported last evening, fully diluted FFO per share for the third-quarter gained 25 percent to 89 cents from 71 cents in 2002. This was two cents ahead of the street consensus estimate. FFO per share attributable to real estate operations for the third quarter rose 14 percent to 90 cents from 79 cents in 2002.

Chelsea Interactive reported a $680,000 loss or a little more than a penny per share versus a $3.8 million loss or eight cents per share in the third quarter of 2002. Third-quarter real estate growth was primarily generated from $647 million of acquisition and partnership buyout activity, completed after the second quarter of 2002. New development also contributed significant growth, including openings of the first phase of [indiscernible] Premium Outlets in March and the second phase of Gotemba Premium Outlets in July as well as the opening of Las Vegas Premium Outlets in August.

Base rent leasing spreads at our Core Premium Outlets also continued to contribute growth. For the twelve months ended September 30, 2003, we released a renewed about 1.3 million square feet of GLA and an initial contractual cash basis rent under new leases improved by 13 percent to $25 per square foot from $22.16 per square foot for expiring leases.

Percentage range and income from unconsolidated investments were positively impacted by strong incentive sales from wholly-owned and joint venture centers, respectively.

In September, the Company sold a 164,000 square foot non-core center in Mesa, Arizona, require from Conover and realized a gain of $900,000. Net proceeds of $4.9 million were used for general corporate purposes.

Our balance sheet continues to give us sufficient access to capital to support both acquisitions and development. About a month ago, Moody's Investor Services raised our senior debt rating to be AA2 and our preferred stock to investment-grade or BAA 3.

These upgrades were similar to those issued by Standard & Poor's in July and aligned our ratings with both agencies.

As I mentioned, our balance sheet remains strong. Levered and used to be modest (inaudible) market capitalization ratio of 32 percent with a well sequenced debt maturity schedule and variable interest rate debt representing about 15.15 percent of total outstanding debt.

Interest in fixed charge coverage ratios continue to be favorable at 3.8 and 2.9 times, respectively, and our common dividend is safely covered at 1.4 times. In terms of liquidity, we have about $110 million available under our $200 million revolving credit facility for short-term needs and a $1.6 billion public shelf registration to access the equity and debt markets for long-term needs.

Finally, I'd like to comment on FFO per share estimates.

Based on the current outlook, we expect that 2003 FFO per share will be at the high end of our $3.45 to $3.50 guidance for the year. This guidance assumes among other things that the Company's corporate folio and new development projects perform as expected and there are no unanticipated changes in world economic and market conditions that might affect the Company's business. Our guidance continues to be based on a preliminary purchase price allocation for our most recent acquisitions in Tannersville, Pennsylvania and Las Vegas, Nevada.

We are currently performing our evaluation analysis of the assets and in place leases under the statement of financial accounting standards No. 141. This is a non-cash item that may have an effect on our current FFO per share guidance.

As we approach the end of year two of our current five-year plan, we are ahead of schedule to exceed our target of 10 percent FFO per share compounded growth through 2006. However, it's still early and these expectations are subject to many variables including economic and market conditions, tenant sales, continued favorable releasing spread, delivering domestic and international development projects on time and onbudget, foreign exchange rates and interest rates.

As previously stated, our growth during the five-year period is likely to be somewhat uneven from quarter to quarter and year-to-year. However, we remain confident that we should meet or beat the 10 percent compounded growth rate target.

Thank you and now I'll turn things over to Tom Davis to discuss our domestic portfolio. Tom.

Thank you, Mike. Good afternoon. As reported in our release, same space sales in our domestic premium portfolio were up 6 percent for the third-quarter and 2 percent year-to-date versus the same period last year. We achieved a very solid sells quarter. Same space sales were up 5 percent in July, 5 percent in August and 7 percent in September versus the same months last year.

We're also pleased to report some of our largest tenants have the strongest sales gains during the quarter. As you are aware the fourth-quarter is the most important in terms of sales. Currently, sales momentum is good across all geographic regions. We did, however, experience a temporary sales decline in our two Southern California centers last week due to the fires. If the weather cooperates, we should achieve or exceed our internal forecast that assumes flat sales to LY for the balance of the year.

Moving to leasing, again, we ended the quarter 98 percent occupied in our premium portfolio and 93 percent occupied in the remaining domestic centers. Each of the portfolios grew year-over-year by approximately 1.6 million square feet. Yet we again achieved high occupancies equal to last year levels for the same period. We expect to be at or above these levels by year end, barring any unforeseen bankruptcies and subsequent tenant closings. Over a dozen new stores opened for the first time at the Chelsea Property Group during the quarter. Some of these brands include L.E. Hatari (ph) Adrienne Vittadini, Swarovsky, Ascot Chang, Lands End, Samsonite Black Label, Vertigo and Pincaldi. Chicago Premium Outlets - a joint venture project with Simon Property Group - is continuing on time and onbudget for a May 2004 opening.

This 438,000 square foot center is located on Interstate 88 - approximately 35 miles west of downtown Chicago in Aurora, Illinois. The center is presently 72 percent preleased. We expect to be at or near 100 percent at time of opening.

Additional phase 1 ground up projects in active stages of predevelopment and pre-leasing include Seattle, Jersey Shore, and the Pocono region of Pennsylvania.

On our last call we mentioned our development team has identified two additional new sites. One of those sites is located in the Philadelphia market. As we progress further, we plan on discussing the specific location of this property as well as the second market in more detail. In addition, we have largely completed construction on a 124,000 square foot expansion to our property in Albertville, Minnesota.

Tenant openings will begin in the latter part of the fourth-quarter with a full opening by March 2004. This expansion will bring our center size to a total of approximately 430,000 square feet. A small in fill expansion totaling approximately 22,000 square feet in our Tannersville, Pennsylvania property is scheduled to begin in the spring of next year and opening in the late fall of 2004.

We have completed the site work on our Pad development in [indiscernible] MA. The five (indiscernible) parcels will total approximately 59,000 square feet. Three of the five users are under contract with the fourth and final stages of negotiations. The users include Dunkin' Donuts, Pizzeria Uno, Cracker Barrel and a furniture store. The last remaining Pad is being actively marketed.

We expect all users to be open by year end 2004. To recap our new development activity, we have six new ground up projects in various stages of pre development and pre-leasing, totaling in excess of 2.2 million square feet. In addition, we plan to complete all available expansions totaling in excess of 500,000 square feet by year end 2006.

The total cost for all this development will be roughly $460 million and we expect to achieve unlevered initial returns in the neighborhood of 12 to 14 percent.

Our domestic development team is intensifying their search for additional ground-up developments. Historically, we have enjoyed our highest returns in this area. We continue to pursue and evaluate acquisition opportunities - however, we anticipate we may be less active than the previous three years.

The recent announcement by Tanger to acquire Charter oaks and the pending Lightstone Prime merger may take some properties off the market in the near-term. The pricing on recent acquisitions suggests we may have reached the level where we are better devoting our time and resources to new development.

However we are prepared and have the ability to respond quickly if market conditions should change. We do have an option in place to acquire a single asset. The window to exercise this option is between mid year 2004 through mid year 2006. Based on the current success of the asset, it is likely that we will exercise this option and purchase this property at a predetermined favorable caprate.

We believe we're now the established leader in the domestic outlet sector in both size and quality of properties. We intend to improve on that position through a well executed plan to upgrade properties, rebranding them to premium, develop new ground-up premium centers, acquire properties and dispose of noncore assets as appropriate.

Thank you and I will now turn the call over to Les Chao who will cover our international ventures.

Thanks, Tom, good afternoon. We had a productive quarter in Japan completing one major expansion and starting construction of one new project. As previously announced, the much anticipated second phase of Gotemba Premium Outlets opened in July. Gotemba continues to perform extremely well. During the third-quarter sales per square foot for the entire center annualized at over $1,000 per square foot. With almost 400,000 square feet of [indiscernible] and 160 plus tenants, Gotemba is now by far the largest outlet center in Japan.

Based on its size, location, and quality, we're confident that it will be the dominant property in the Tokyo market for the foreseeable future.

In August, we started construction of Tosu [indiscernible] Chelsea Japan's fourth (ph) project. This center is located about 20 miles south of Fukuoka, which is the capital of Keushu (ph) [indiscernible] Japan's southernmost island. Fukuoka is Japan's fourth-largest metropolitan area with a population of more than 9 million.

Our site is located on a major highway within a 30 minute drive of downtown. Phase 1 will have a gross leasable area of about 185,000 square feet and is on schedule to be completed by March of 2004. We expected to be fully leased upon opening.

Sano Premium Outlets - which was our second project in the Tokyo market - opened in March and continues to perform well. Annualized sales into the opening remain over $1,000 per square foot and while that number will decline as we lose the grand opening effect, we expect sales to stabilize at a high level. Phase II of the project is scheduled to start construction early next year [indiscernible]. [indiscernible] premium outlets are centered near Osaka also continues to perform well after its expansion last year. Average sales rose after the expansion and has stabilized in the range of 650 to $700 per square foot. We are planning the third phase to be completed during the next 12 to 18 months.

Overall upon the opening of Tosu Premium Outlets in March, Chelsea Japan's portfolio will exceed one million square feet. At this point, Chelsea Japan is on track to achieve its goal of roughly 1.5 million square feet by 2006.

Moving onto Mexico, site work for Punta Norte Premium Outlet - our project in Mexico City - was substantially completed during the third-quarter construction has begun. Phase 1 will have roughly 230,000 square feet of leasable area and is scheduled to open late in 2004. As you may know, this project ha experienced a series of delays to entitlement and infrastructure issues. But at this point we believe the major hurdles have been overcome.

Finally, we are also continuing to explore opportunities in other international markets. The timing of these developments is less predictable but we will certainly keep you updated as things take shape. Thank you and we're now ready for any questions.

[Operator Instructions].

Craig Schmidt for Merrill Lynch.

In the mall category, we're seeing sort of a broad-based remerchandising effort toward the home categories. I wonder if anything corresponding with the outlet industry has taken place.

This is Tom answering the question. The home category has always been fairly represented in the outlet business. There are some active players out there that have shown some signs of maybe doing some additional stores. But there's no influx of any substantial number of new tenants that aren't already in the business.

Okay and [indiscernible] [inaudible] wondering are the premiums trading at the same level that the nonpremium centers are? Or is one doing better than the other?

Again, this is Tom. The premium are outperforming the certainly the Other Properties. However we do have a number of outlets centers we are transitioning to Premium and are in various stages of being retenanted as well as -- we are in the process of making improvements to those properties. Those are performing just slightly below the Premium for the quarter if memory serves me correctly. They were up about 4 percent on same space. And we anticipate we will have the process converting them to Premium done by the spring of 2004. So we are seeing encouraging results on those we're upgrading.

Last question. Is the 6 percent a sign of the international traveler returning or is this [indiscernible] happening without that event?

Actually it is happening without that event. There has been some improvement in that area, but we're certainly not back to pre 9/11/2001 levels. So most of our increases are coming from our domestic business - our domestic customers.

Jeff Donnelly from Wachovia Securities.

Tom, have you found in the past that the momentum you see in the third-quarter carries over to the fourth or put another way is the third a useful predictor of the fourth quarter sales?

Typically we do see momentum carrying into the fourth quarter - weather is just so hard to predict. Like I said in my prepared remarks, if weather holds, I would expect that we're going to come in above what we're currently projecting. October is not in yet but the preliminary look at the center information that we review weekly would indicate that we believe October will also be a positive month. I can tell you that the general feel out there right now is that retail sales are pretty good so the tenants are fairly upbeat. And that certainly helps as we go into our leasing efforts for next year.

Just want to add to that we might forget but last year I believe it was beginning about mid-November, certainly end of December that the weather particularly on the East Coast became unfavorable. And again, particularly on weekend. So in terms of weather, the comparisons that we have normal weather should be easier - not more difficult.

[indiscernible] can you guys give us an update maybe on the Vegas property -- I guess, a little more specific on what you've been hearing on data points at Las Vegas Premium Outlets and also now that you had had a longer look under the hood at Las Vegas Outlet Center, what your thinking is there over the next 24 to 36 months, I guess?

This is Tom again. We are pleased with the early sales results in Las Vegas Premium Outlets. They are exceeding the levels that we expected at present. Again it's early, but we had one full month - month of September where Las Vegas Premium Outlets was open to measure the impact on the Las Vegas Outlet Center in the market. When we originally did our projections, we anticipated that the existing center sales would drop about 20 percent from the time of opening of Las Vegas Premium Outlets through the end of this year and then we anticipated a further drop of 10 percent in '04 and then sales would level out. What we found in the month of September we're pleasantly surprised. Sales were only down 7 percent so we feel very good about that acquisition. We think we made a very good buy and early indication is it's not being impacted nearly as much as we thought it would. The existing center is really functioning much more as a local shopping center and we're finding that Las Vegas Premium Outlets is more attractive to the visitor which is the way we were planning to position [indiscernible].

As it stands now, do you plan make any design changes to Las Vegas Outlet Center? Or do you think you'll leave it in its current format just given how you're going to position it?

Our plan at present is to keep it pretty much the way it's designed, we have made the name change so all the pylons and all the signage has been converted but we don't plan any major renovations to the exterior or interior of that mall. It's actually in very good condition.

With the acquisition of Charter Oak it strikes me that there are few if any large portfolios out there remaining in the marketplace. Is that correct? I guess should we expect acquisition activity in the future just I guess to exclusively be sort of [indiscernible].

This is Tom. That is correct that of the -- certainly of the public REITS, two of them Tanger acquiring Charter Oaks obviously and the LightStone (ph) prime transaction - they are larger portfolios so we think they may not be available in the near term. It's not to say that what can happen down the road. There is still a number of other owners that have multiple centers, centers where we may have some interest and there is approximately a dozen or so individual owned outlet centers that we also have interest. So it is just a difficult thing to time but there is still opportunity for us but the larger portfolios right now, we think, or at least the near term some properties may not be available.

Jeff, on that one, too, it is our understanding without going into specific groups of properties or property that even within somebody's other public companies or larger portfolios some are held in joint ventures with other partners and have debt on them cost collateral certain properties and depending upon how exit strategies were negotiated so forth, it doesn't mean that some of those properties couldn't come back at the market at some future date.

Lee Schalop from Banc of America Securities.

First on the strong sales results. Can you attribute that to anything specifically? Is it something that you guys did differently or you think it's just a natural part of the economy bouncing back - just -- 6 percent is obviously a pretty strong number.

It's Tom, obviously I hope to think that some of the investment and time we've put into our marketing efforts are beginning to bear some fruit but I will tell you that the economic conditions are certainly very favorable right now. And as I mentioned, we are seeing nice results from some of our larger tenants. The fashion category's doing very well and athletic footwear category happens to be performing very well at present. So there is an underlying good momentum across all geography and across our larger tenants. So we're feeling pretty positive about that for now and hopefully for the balance of the year.

And then Les, on the international side, you covered all the stuff that's under construction and I recognize stuff that is still in the planning stage is more difficult but could you talk a little bit about other places - Korea, China, Europe - where we may see developments down the road?

We are continuing to explore those markets. As you say they are difficult at times. The complexity of developing internationally is generally a notch above what we do in the U.S. in part because we have to find good local partners. And in fact, that turns out often to be the great time-consuming upfront work that we have to do. So we are looking actively in various places in Asia to begin with - including China although [inaudible] we are uncertain that that market is ready for kind of the outlet project that we do.

We are going back to Korea. We're actively in Korea and exploring that market but you know we had a potential partner drop out on us last year and at this point we are regrouping but our view of Korea remains unchanged and in that is generally very positive view of the potential due to a successful outlook project there.

Other parts of Asia include Australia, portions of greater China - including places like Hong Kong and [indiscernible] but those are a little bit further down the line and again, have their own challenges to meet before [indiscernible]. We are still looking at Europe. That is also [indiscernible] set of constraints in terms of being -- how fragmented various countries are and there may be an opportunity to enter that market by means other than developing in other words by acquisition [indiscernible] but at this point it's still pretty early [inaudible].

Did you guys give an update on Chelsea Interactive?

No, we didn't but (indiscernible) can give you a short update [indiscernible].

We announced last quarter that we did enter into a JV agreement - we had conditions that needed to be met and we were continuing to negotiate on those conditions and are making progress toward that end.

I guess - based on that would you expect something to close maybe in the next quarter?

Potentially.

Later in the first quarter [indiscernible]

Ralph Block from Bay Isle Financial.

Les, could you give us a kind of an overview of what you think is going on in the Japan economy now (indiscernible) improvement (indiscernible) better (indiscernible) to consumer spending there?

Well, I'm not an economist but just from the standpoint of reading headlines it seems to me that the latest news in the last few months has been mixed. I think there seems to be generally a rising tide of consumer confidence and also in the stock market [indiscernible] done very well. But underlying that, on the other side is still great concerns about the state of the national debt and unemployment and so forth. So it's a pretty mixed bag I think looking at it macroeconomically. It's hard to say what all that translates to in terms of sales momentum or properties, specifically, but clearly, all three of the existing properties that we have are doing very well.

The two older ones have stabilized at a very high level and we are continuing to improve the tenant mix and improve the critical mass and scale [indiscernible] each one of those properties. So the demand is there but it would be hard to attribute any portion of our sales performance to something specific happening in the economy [indiscernible] [inaudible].

On your fourth center - Tosu - are you planning on a similar tenant mix or is that going to be a little different from your first three?

It would be similar. Tosu is in the [indiscernible] market which is a little bit different demographically and geographically from the others. The department stores in Fukuoka tend to be a little bit stronger in terms of their sway over the brand names. So, probably, in the first stage you'll wind up with (indiscernible) little bit less at the luxury end than, say, Gotemba. However our experience is (indiscernible) Gotemba is a good example of it, our experience is that once you have a successful [indiscernible] you should be able to fill in with the higher end tenants [indiscernible] [inaudible].

And is your expected investment return similar to the others? On a percentage basis?

[technical difficulty].

There are no further questions at this time. I would like to now turn the call back to you for some closing remarks.

Thanks very much, everybody, and we look forward to speaking to you when we have our year end results. Thank you.

Thank you, sir, and thank you for your participation. This concludes your conference call - you may now disconnect.