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Pennsylvania Real Estate Investment Trust (NYSE:PEI)

Q3 2008 Earnings Call

November 3, 2008 3:00 pm ET

Executives

[Garth Russell - KCSA Strategic Communications]

Ronald Rubin - Chairman of the Board of Trustees, Chief Executive Officer

Edward A. Glickman - President, Chief Operating Officer, Director

Robert F. McCadden - Chief Financial Officer, Executive Vice President

Joseph F. Coradino - President of PREIT Services, LLC and PREIT-RUBIN, Inc., Director

George F. Rubin - Vice Chairman of the Board of Trustees

Bruce Goldman - Executive Vice President, General Counsel, Secretary

Analysts

Analyst for Michael J. Bilerman - Citi Investment Research

Michael J. Bilerman - Citi Investment Research

Nathan Isbee - Stifel, Nicolaus & Company, Inc.

Michael W. Mueller - J.P. Morgan

Ben Yang - Green Street Advisors

Craig Schmidt - Merrill Lynch

[Martin Roher - MSR Capital Management]

Operator

Welcome to the Pennsylvania Real Estate Investment Trust’s third quarter 2008 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference call is being recorded today, Monday, November 3, 2008.

I would now like to turn the conference over to [Garth Russell with KCSA Strategic Communications].

Garth Russell

Before letting management get going with their prepared remarks, I’m going to read the forward-looking statements. This conference call will contain certain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are related 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 business generally as well as specific factors discussed in the documents previously filed with the Securities and Exchange Commission and in particular PREIT’s annual report on Form 10K for the year ended December 31, 2007. PREIT does not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.

It is now my pleasure to turn the call over to Ron Rubin, Chairman and CEO of PREIT.

Ronald Rubin

Welcome to Pennsylvania Real Estate Investment Trust’s third quarter 2008 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 third quarter 2008 results, the status of our current projects and some of our plans for the future. After we conclude our remarks the call will be opened for your questions.

The company is experiencing the effect of the current economic downturn and its corresponding impact on consumer spending. Many retailers in our portfolio have been cautious throughout the year and we have seen a level of concern as the year has progressed. We are not happy with the drop in our share price to levels which we believe are not consistent with the value of our real estate assets. However you can rest assured we are focused on a specific plan that addresses liquidity and capital allocation, provides for the successful completion of our development and redevelopment projects, and which maintains occupancy and generates positive leasing spreads.

As Ed Glickman will discuss in more detail, the company has closed on in excess of $600 million in financings this year using these proceeds to repay our REMIC and to fund our development and redevelopment programs. In doing so the company has reduced its overall borrowing rate. We do however have more work to do. We are working on additional financings whose terms we will announce upon closing. These financings are part of the strategy of the company to meet our capital needs in a challenging environment.

The Boscov’s bankruptcy process is proceeding with bids having been submitted for the company. We have eight Boscov’s in our portfolio and two more under construction. The outcome of the process is not sufficiently clear for us to predict future events. To date we do know that no Boscov’s stores in PREIT malls are among those presently being closed. We are in consistent contact with the partner and individuals, and we’d obviously like to see the company emerge from bankruptcy in what we consider to be a successful manner.

As I have noted in previous calls, while the economic environment has been changing in the past year, the fundamentals of our business have not. Our management team is focused, working to advance our redevelopment and development projects, to place stores in service, increase NOI and occupancy, and generate positive leasing spreads. As always we remain focused on maximizing long-term returns for our shareholders.

With that I’ll turn the call over to Ed Glickman.

Edward A. Glickman

I would like to review with you our third quarter performance figures. Funds from operations for the quarter of $0.77 was down $0.39 quarter-over-quarter and funds from operations for the year-to-date period of $2.49 was down $0.30 for the nine month comparison. Funds from operations was impacted in both periods by the $0.32 gain in the redemption of the preferred stock which took place last year and in addition by $0.06 in other gains during the 2007 nine-month period. In contrast, this year’s results include $0.05 of swap gains related to the implementation of our capital plan.

Net operating income for the quarter was $72.4 million, up slightly quarter-over-quarter. For the nine months it was at $222.7 million, up 2% for the year-to-date comparison. Same-store net operating income which in the case of PREIT includes 98% of our total NOI was down 1.4% quarter-to-quarter and up 0.5% for the year-to-date comparison. PREIT NOI as well as occupancy was hindered by 10 anchors in transition.

During September 2008 four of these 10 reopened including three new Burlington coat stores and one new J.C. Penney. The other six vacant spaces have leases in place to new tenants. These transactions are outlined in detail on page 21 of this quarter’s supplemental and Joe Coradino will discuss them in a few minutes.

Occupancy was down 60 basis points in line primarily reflecting the unanticipated closure of underperforming stores. Including anchors occupancy was down 90 basis points. This additional decline reflected a large number of anchor spaces still in transition. We did however have a busy quarter in leasing with 52 new leases for approximately 127,000 square feet and 91 renewals for approximately 285,000 square feet. Turnover spreads were strong with re-leasing spreads on a previously leased base up 20.8% and renewal spreads up approximately 3%.

Sales for the period were $351 down 2.8%. This decline impacted the majority of the portfolio crossing both geographic and property quality lines.

PREIT’s performance in the third quarter shows the positive impact of our newly renovated assets against the backdrop of increased retailer and consumer concerns regarding the challenging economic environment. As PREIT brings its newly renovated assets on line, retailer concerns have resulted in a higher-than-anticipated level of store closures and a number of delayed openings. As a result our overall occupancy is down mitigating the positive contribution from our development and redevelopment work. At a time when we expected to see significant gains from new and redeveloped assets coming on-stream, our overall performance has been flat.

The fact that we are able to maintain our equilibrium in the current market demonstrates the resilience of our company and bodes well for the future of the portfolio. First, we have a diverse portfolio of assets with limited exposure to any one retailer. Second, our development and redevelopment work continues to be well received in the market place. Thus we believe that we are facing timing rather than permanent variances and that our projects will ultimately create significant value for the company even in this unique and difficult market.

During the third quarter we completed five new mortgages for total proceeds of $344 million, completed two tranches of a new term loan facility for a total of $170 million, extended over $650 million of existing mortgage and line of credit financing, and paid off $413 million of existing mortgages including the REMIC. By completing these transactions including the refinancing of the REMIC we have lowered our financing costs, given the company the ability to move forward with our work in progress and have put us in a position to weather this downturn.

As we look forward to 2009 and we remain focused on completing our in-process projects, Cherry Hill, Plymouth Meeting, Voorhees Town Center and The Gallery. To accomplish this we have pulled back on our pipeline to focus our available liquidity on these current objectives. In addition we are currently processing four mortgage transactions that we hope will close by year end. We are also in preliminary discussions with other capital providers and potential joint venture partners.

Given this market we have no illusions about the challenges involved but our success today should illustrate the level of commitment that we bring to the [inaudible] and our determination to bring our projects to completion. This work is vital to the long-range health and vitality of the company, and even in this difficult market we continue to have success in bringing exceptional projects to market.

For example, earlier this month we held a grand opening for Monroe Market Place our newly developed power center in Selinsgrove, Pennsylvania. The tenants include Kohl’s, Target, Dick, Giants, Best Buy, Bed Bath & Beyond and Red Robin.

As we mentioned previously we have been evaluating each new development and redevelopment projects. This quarter we added Pitney Road Plaza in Lancaster, Pennsylvania to our development pipeline. This project is a 230,000 square foot power center will include Best Buy, Lowe’s and a 12,000 square foot out parcel.

The previously disclosed office space project in the former Strawbertson space at the Gallery at Market East has been included in this quarter’s redevelopment summary in our supplemental disclosure. This 224,000 square feet has been leased to the Commonwealth of Pennsylvania with an expected occupancy date in the third quarter of 2009.

Thank you for your continued interest in PREIT. And now I’ll turn the call over to Bob McCadden our CFO.

Robert F. McCadden

I will review our financial performance in more detail for the third quarter, update our capital spending plan and provide our guidance for the balance of the year.

We reported a net loss for the third quarter of $7.6 million or $0.20 per diluted share. Funds from operations for the third quarter were $31.8 million. On a per diluted share basis FFO was $0.77. Let me review some items impacting comparability between years. All the amounts I described will include results from majority owned properties as well as our percentage ownership interests in our partnership properties.

Same-store NOI decreased by 1.4% to $71.3 million for the third quarter for the following reasons: Last year’s third quarter included approximately $100,000 of revenue from five Value City stores that were closed earlier this year. Burlington Coat Factory, the replacement anchor, opened three replacement stores in the third quarter of this year and four additional anchors are expected to open between now and the third quarter of next year.

Percentage rents earned from tenants during the third quarter of 2008 were lower as compared to last year’s comparable quarter reflecting overall trends in the economy. We had no re-lease termination revenue in this quarter as compared to last quarter and we also had a $1.5 million increase in [bayethetics] expense as a result of bankruptcy filings by Boscov’s, [Steven Barries] and other retailers. We had to increase reserves for delinquent accounts related to regional and local tenants.

We had higher depreciation and amortization expense as a result of development and redevelopment construction progress that was placed in service over the last year. Since the end of third quarter 2007 we have commissioned approximately $150 million of redevelopment assets and an additional $48 million related to our development properties.

Our interest expense increased as a result of higher average debt balances primarily due to capital spending partially offset by lower average interest rates. The average cash interest rate on our outstanding debt balances at the end of the quarter was 5.23% as compared to 6.02% at the end of the third quarter of 2007, a decrease of 79 basis points. On a GAAP basis our average rate fell by 34 basis points from 5.4% to 5.10%.

G&A expense in the third quarter was $10.4 million consistent with our recent run rate.

In summary, the positive contribution from our redevelopment properties in the quarter has been largely offset by erosion in earnings at certain of our other properties while Orlando Fashion Square in particular has been hit hard this year as a result of the downturn in the Florida economy.

As Ed mentioned, during the third quarter this year the company closed approximately $340 million in new secured financings and $170 million in unsecured financings. The weighted average cash interest rate on this new debt is approximately 5.72%. During the same period we repaid $413 million including the $400 million REMIC which had a weighted average cash interest rate of 7.43%. At the end of the quarter we had outstanding debt of $2.7 billion, an increase of $113 million from June 30.

Our credit facility leverage covenant is based on the ratio of total liabilities to gross asset value as defined in the loan agreement. At the end of the quarter our leverage ratio was approximately 52.2% which is moderately higher than the ratio at the end of the last quarter. Based on our earnings guidance range, we anticipate that our leverage covenant will be approximately 52.8% at the end of the year and increase further during 2009. As a reminder, our credit facility permits leverage up to 70% for two quarters.

As previously announced the company exercised the extension option on the $500 million credit facility which now has a maturity date of March 2010. At the end of the quarter fixed rate debt comprised 80% of the company’s total indebtedness including our proportionate share of the debt of our partnerships. At the end of the quarter we had borrowed $380 million under our credit facility. [Inaudible] for getting the amounts required to support letters of credit, we had available borrowing capacity of approximately $109 million at that date.

As previously mentioned we are currently in the market for additional secured financings to provide the necessary liquidity to fund our capital requirements for 2009. At the end of September we had 24 unencumbered retail properties which represent over 30% of our annual NOI.

The debt schedule in our supplemental reflects three mortgage loans with the remaining 2008 maturities. We are currently in discussions with the existing life company lenders on Exton Square Mall to replace the $93 million maturing obligation with a new fixed rate loan provided by these same lenders. The replacement loan would be subject to new underwriting by the lenders including an updated market value appraisal for the property. While we are still in negotiations with the lenders, we anticipate that the proceeds from the replacement loan will be less than the existing loan.

Last week we closed on a refinancing of the existing loan at Whitehall Mall, a joint venture property that we own with [Crestor Simon]. There were no excess proceeds from this refinancing.

The remaining 2008 maturity, our own in Springfield Mall has two additional one-year extensions and earlier this month we exercised our extension option and anticipate receiving lender approval during the fourth quarter.

Our capital spending estimate for the last quarter of 2008 is a range of $80 million to $85 million to fund the capital requirements of the redevelopment projects and developments currently underway.

We are adjusting our full year FFO and net income estimates for 2008. We expect GAAP earnings per diluted share to be a net loss between $0.15 and $0.20. We expect FFO per diluted share to be in the range of $3.50 and $3.60. Our guidance range was reduced as a result of the following factors: Additional store closings and delays in leasing at certain of our redevelopment properties impacting minimum rent and expense recoveries.

Our forecast of specialty leasing revenues was adjusted downward from previous quarters by approximately $0.02 per share from our earlier expectations. Many of our smaller temporary tenants have not been able to obtain sufficient credit for their rent and merchandise stock for the holiday period. Higher bad debt expense is a result of continued softness in the economy.

Also we expect reduced fees as a result of the amendment to our development agreement with Valley View which was executed in the third quarter. As a result we have ceased recording development fees which were approximately $0.01 per share per quarter over the past four quarters.

We expect overall NOI growth excluding lease termination fees to be up between 1% and 2% with same-store NOI essentially flat.

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

Joseph F. Coradino

The economic backdrop described earlier in the call has influenced consumer spending habits and has impacted our retailers. As compared to the third quarter of last year comp store sales declined from $362 to $351 per square foot. A significant portion of this decline is attributable to the dislocation associated with the redevelopment of the Cherry Hill Mall. According to the National Retail Federation holiday sales will gain only 2.2%, well below the 10-year average of 4.4% and the slowest growth since 2002 when holiday sales rose 1.3%.

The decline in occupancy discussed by Ed was driven primarily by the closing of underperforming retailers. We also continue to work through tenant bankruptcies. In addition to Ron’s Boscov’s update, Linens-N-Things has three stores in our portfolio. One location is closed and it is expected that the remaining two will close early in ’09. We have 15 locations impacted by the White Hall Jewelers bankruptcy and expect that these leases will be rejected and all remaining stores will be closing during the fourth quarter.

As Ed mentioned we achieved an increase of 2.9% over expiring rents with 285,000 square feet of non-anchor renewals. The compression is a result of several short-term renewals where we renewed underperforming retailers at their current terms with the goal of maintaining occupancy in the near term while providing ourselves the flexibility to re-lease these spaces in a more favorable economic environment.

However despite these economic conditions our leasing momentum has continued as we signed 143 transactions during the quarter including J. Crew at Cherry Hill, [Pihana] at Willow Grove, [Zooney’s] at Patrick Henry, Trade Home Fuse at Woodland, Airy at Willow Grove, Logan Valley in [Mitney Malls] and Coach and American Eagle for expansion premises at Cherry Hill.

On the anchor front we opened four new anchors in 323,000 square feet during the quarter including the previously announced Burlington Coat Factory stores at Chambers Third at Lycoming and Uniontown Malls and the 88,000 square foot new prototype J.C. Penney store at Gadsden Mall in Alabama. At Jacksonville Mall in Jacksonville, North Carolina in addition to the Barnes & Noble that opened earlier this year, Red Robin opened during the quarter and Ulta Cosmetics opened their 10,000 square foot today. The exterior renovation work continues and is expected to be completed early next year.

Construction progresses on the remaining Burlington Coat Factory locations at Cumberland Mall and Wiregrass Commons which are scheduled to be opened in the first and second quarters of ’09 respectively and the replacement at Value City at Francis Scott Key with Value City Furniture and DSW to be completed when DSW opens for business in the second quarter of ’09.

We continue to make significant progress on the construction and leasing on the three major redevelopments in the Philadelphia Metro area.

At Cherry Hill Mall the interior renovation is progressing with new ceilings, flooring, skylights, redesigned columns, fixtures and architectural enhancements visible throughout the mall. The renovation will be complete along with the opening of the new parking garage prior to Black Friday. The food court relocation is complete and expected to be fully occupied for the holiday shopping season.

Construction of the exterior shell in the new Nordstrom building is nearing completion and on schedule for a grand opening on March 27 of ’09.

We’ve made tremendous progress on Bistro Row. We’ve signed leases and are under construction with four notable restaurants; Mangiano’s, Seasons 52, The Capital Grill and California Pizza Kitchen; which will complement the existing Bahama Breeze and provide dining opportunities that are unparalleled in the South Jersey market. Seasons 52 a new upscale dining concept from Darden offers a low calorie seasonally modified menu. With its first location in the Northeastern United States it’s sure to attract new shoppers.

The mall addition is progressing with the space being ready for turnover to tenants to begin their construction. As we look toward the opening of this new wing we are focused on completing leases and starting tenant construction for store openings in the first quarter of ’09. Approximately 86% of the expansion portion of this project is either leased or in active negotiations.

As reflected in our supplemental disclosure, we experienced an increase in project costs of approximately $8.8 million driven mostly by expenditures related to securing tenancy at the project. We are confident that upon completion, Cherry Hill will take its place as the trophy retail venue in our portfolio with over 25 first-to-market retailers.

At Voorhees Town Center the 50,000 square foot headquarters for the Star Group and the 10,000 square foot Learning Experience Daycare facility opened in August. We are pleased to announce that we’ve executed a lease for the [Rijerie] Salon & Day Spa for a total of 17,000 square feet for a premier of aided spa training facility and retail outlet.

Residential construction continues and the mixed use buildings are underway with resident occupancy expected to commence in the first quarter of next year. The delay is the function of our partner’s desire to commence marketing of the residential units for spring occupancy.

At Plymouth Meeting Mall the recently introduced restaurants, P.F. Changs, California Pizza Kitchen, Redstone Grill and Dave & Buster’s, continue to report great success at the property and we expect the trend to continue when Benihana opens later this month. We will also open a Citibank branch on an out parcel on the north side of the property by month’s end.

Customers are enjoying the truly unique shopping experience at the center as we move forward with our premier property program which we’re introducing at several of our Delaware Valley properties. This program consists of curbside valet parking, enhanced customer service and a white glove security program implemented by Disney-trained instructors.

Construction continues on the Whole Foods building and the Lifestyle addition at Plymouth Meeting. The grand opening of the Lifestyle addition will take place in the spring of ’09 and we’re in discussion with Whole Foods after their announcement to delay and reduce ’09 store openings to confirm a fourth quarter ’09 opening for this location.

At 801 Market Street, a property we own contiguous to The Gallery, demolition is complete for the 224,000 square foot Commonwealth of Pennsylvania office space on floors four, five and six. Tenant construction has commenced for an October ’09 rent commencement.

During the quarter we executed a letter of intent with a large format department store and are in discussions with junior boxes to occupy the lower levels of the building.

While we’re aware of the state of the retail environment, we maintain the [inaudible] major redevelopments. We’re bringing a differentiated product to market and creating a compelling platform for retailers. As they projects reach stabilization, we believe it will be a transforming event for our portfolio with premier properties in one of the largest retail markets in the nation.

With that we’re now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Analyst for Michael J. Bilerman - Citi Investment Research.

Analyst for Michael J. Bilerman - Citi Investment Research

I just want to get this clarified. With your work outstanding on your current development pipeline versus the credit or the debt that you’ve got available, what’s the difference and how are you looking at refinancing that at the moment?

Robert F. McCadden

If you look at the amounts that we have in our supplemental which is the difference between what we’ve spent to date and [inaudible] project costs, that’s approximately $200 million for our development properties. As we mentioned, we have at the end of September $109 million on a credit facility and we’re out in the market place for additional secured financings on currently unencumbered properties that will provide the necessary liquidity to fund the completion of the redevelopments.

Analyst for Michael J. Bilerman - Citi Investment Research

What’s planned if that gets delayed?

Robert F. McCadden

The capital needs really come in 2009 so we’re certainly confident in terms of where we are in the process with the transactions that we’re negotiating to be able to close it before the end of this year.

Michael J. Bilerman - Citi Investment Research

Do your covenants have some restrictions on the amount of secured debt that you can have?

Robert F. McCadden

It’s a secured debt covenant but we get credit to the extent there’s excess value in an encumbered asset so we’re really not anywhere close to that covenant. Almost under no circumstance do we see that covenant coming into play.

Michael J. Bilerman - Citi Investment Research

What’s the amount of NOI off the four unencumbered assets that you’re looking to procure debt on?

Robert F. McCadden

We don’t talk about the specific assets but in total the NOI for the unencumbered assets is north of 30%.

Michael J. Bilerman - Citi Investment Research

30% of your NOIs -

Robert F. McCadden

30% of our NOI is derived from assets that are currently unencumbered.

Michael J. Bilerman - Citi Investment Research

And the four specific ones that you’re going after; I’m just trying to get a sense of how much financing that’s going to get you. We can put our own cap rates in NOI so I’m not asking you for asset values. I’m just trying to get a sense of how much NOI is targeted.

Robert F. McCadden

I guess at this point we typically have not given NOI on specific assets. From a competitive perspective we’d rather not disclose that at this point.

Analyst for Michael J. Bilerman - Citi Investment Research

On your distribution, the payout ratios above AFFO, I wonder if you’ve investigated potentially pulling back your distribution? I’m noticing that your dividend payout ratio is above your AFFO level so I’m just wondering if you’ve investigated potentially reducing your dividend?

Ronald Rubin

The simple answer is we review almost every quarter with our Board the whole dividend issue and we certainly recognize the importance of the dividend to our shareholders. We’ve worked towards finding the right balance between the payment of the dividend and our company’s capital needs, and we’ll continue to do so.

Michael J. Bilerman - Citi Investment Research

When was the last time the Board had the discussion on the dividends?

Ronald Rubin

We have it every quarter.

George Rubin

It was two weeks ago we announced the fourth quarter dividend payment.

Michael J. Bilerman - Citi Investment Research

You don’t find any need to use that as a funding source right now?

Ronald Rubin

Not at the moment.

Analyst for Michael J. Bilerman - Citi Investment Research

In your press release you commented that your FFO was hit by a bend in project costs. Can you just discuss exactly what that relates to?

Robert F. McCadden

That actually occurred in the first half of the year and was related to a project that we had. It was a development project outside of Chicago that we had invested some money in terms of [inaudible] deposits and predevelopment costs that during the year when we saw what was happening in the retail environment decided to pull back from that. But that was a first half and not a third quarter event.

Operator

Our next question comes from Nathan Isbee - Stifel, Nicolaus & Company, Inc.

Nathan Isbee - Stifel, Nicolaus & Company, Inc.

Getting back to the dividend question, cap ex and the TAs both increased dramatically this quarter. Can you give us some detail of what caused that and is that a good run rate now?

Robert F. McCadden

No. That’s more just a function of seasonality. Obviously the return on cap ex we do most of the work in the third quarter. It depends on what we’re doing where but we would expect the numbers that are in the third quarter would not be representative of an annual run rate. Again likewise for the number of tenants that we’re opening for holiday and back-to-school ’08. We had large tenant allowance payments in this quarter. We expect to see both the numbers down substantially in the fourth quarter.

Nathan Isbee - Stifel, Nicolaus & Company, Inc.

Getting back to the financings, Exton Town Center, what is the expected size on that new loan?

Robert F. McCadden

At this point since we’re still in discussions with the lender, it would be premature for us to talk about that.

Nathan Isbee - Stifel, Nicolaus & Company, Inc.

What is currently the total recourse that you have in your portfolio?

Robert F. McCadden

In terms of the bank covenants? I’m not sure what the question is.

Nathan Isbee - Stifel, Nicolaus & Company, Inc.

The total recourse you have on any secured debt?

Robert F. McCadden

I don’t have the number but it’s relatively modest because most of the mortgage lines that we have have no recourse back to the company. It’s probably under $100 million; probably even under $50 million.

Robert F. McCadden

Right.

Nathan Isbee - Stifel, Nicolaus & Company, Inc.

You spoke about $80 million of development spending through year end. Given all the movement in your completion date, can you just update where you expect your spending to be in ’09 the first six months and then full year?

Robert F. McCadden

If you look at total projects that we have under development or roughly $200 million, take out a little bit less than that. So if you figure $80 million in the fourth quarter, you have about $120 million give or take in all of 2009, most of that coming in the first three quarters of the year. If you think about the projects we have, Cherry Hill I think has about $75 million to $77 million to go and that’ll be spent largely between now and the middle of the second quarter of next year.

Operator

Our next question comes from Michael W. Mueller - J.P. Morgan.

Michael W. Mueller - J.P. Morgan

Following up on the prior question, Bob can you give us an idea of what you guys think the full year current cap ex will be in terms of tenant improvements leasing commissions? And do you guys see your dividend as being covered on that basis?

Robert F. McCadden

On a 12-month basis [inaudible] supplemental we were slightly over 100% payout ratio. Considering we expect our fourth quarter this year to be greater than our fourth quarter of last year in terms of coverage, we should be at or around full coverage at that point.

Total for the year between returning cap ex and TA for this year is probably around $32 million to $33 million.

Michael W. Mueller - J.P. Morgan

That doesn’t include the development? That’s just operating portfolio?

Robert F. McCadden

That’s operating.

Michael W. Mueller - J.P. Morgan

What is the current fixed charge coverage?

Robert F. McCadden

Do you have another question while I’m looking for that?

Michael W. Mueller - J.P. Morgan

Yes. Thinking more on the operating side, given what you were talking about in terms of store closings, etc. and where occupancy you think it’ll pencil out on a full year basis this year, and where do you think it moves to in 2009?

Robert F. McCadden

We haven’t provided any ’09 information yet. Obviously at the next call we’ll provide guidance for ’09 as well as our view of occupancy.

Michael W. Mueller - J.P. Morgan

Can you give us a range in terms of cap rate where you see lenders where they’re underwriting the real estate to today when they’re taking a look at the assets? What’s a ballpark range?

Robert F. McCadden

I think what we’re finding is that most lenders are underwriting on a coverage basis and not a cap rate basis.

Michael W. Mueller - J.P. Morgan

What’s that range?

Robert F. McCadden

1 to 5 minimum.

Michael W. Mueller - J.P. Morgan

I think Ed you mentioned working on a joint venture. It sounded like maybe potential asset sales as well. One, do you think there’s a likelihood something closes by the end of the fourth quarter? And can you give us a rough idea in terms of magnitude how much we’re talking about here? Is it $20 million, $30 million or $100 million, $200 million?

Edward A. Glickman

We’ve been having a number of discussions and I don’t know that at this point we can handicap any of them especially not before the end of the year.

Robert F. McCadden

The fixed charge coverage ratio is about 162 at the end of this quarter.

Operator

Our next question comes from Ben Yang - Green Street Advisors.

Ben Yang - Green Street Advisors

On the line of credit, was that the same bank group involved in the recent extension and are there any more extension options on that?

Robert F. McCadden

It was the same bank group involved on the extension. I think maybe you’re asking about the term facility which was a different group bank but the question regarding the line of credit was the same group. They did extend and there are no more extensions under the original agreement.

Ben Yang - Green Street Advisors

Is it too early to put a game plan together today for how you might address your term loan in the unsecured credit line?

Robert F. McCadden

The term loan has a buy rate extension at the end of its first period. It’s never too early to start discussion regarding the line of credit but we thought that particularly last month wasn’t a great time for us to be going out and having that discussion. So I think we’d like to see some stability in the capital markets.

Ben Yang - Green Street Advisors

Switching gears a bit regarding percentage of sales, it looks like you’ve had to offer a number of more deals recently. Have you had to offer percentage of sales to tenants taking space in your recently redeveloped space as well?

Joseph F. Coradino

No, that’s not where that’s coming from in the newly redeveloped assets.

Ben Yang - Green Street Advisors

I know you had previously talked about those deals burning off probably by 2009 and 2010. Given that you’ve essentially ramped up offering those type of deals, is it fair to say t hat we can see these in place as long as 2012 or 13?

Joseph F. Coradino

A lot of that’s a function of you’re balancing maintaining occupancy and maximizing the current increment space so clearly we do these on a very selective basis where we think it gives us an opportunity to keep the tenant in place while we book the backfill with a replacement tenant. Typically the tenants who are getting this often times are more challenged in terms of their business models so what it does is give us the additional time to find a replacement tenant.

Ben Yang - Green Street Advisors

Are you having to offer more than say one-year deals under these types of extensions or offers?

Joseph F. Coradino

They’re typically one-year at a time if we extend. What you’ll find is if you were to look at the roster of tenants who are percentage of sales and with minimum rent, it’s not consistent from year-to-year. You typically see tenants kind of moving out of that status. So if you were to look at that from this time now to a year ago, you’d find a different mix of tenants in that group of tenants receiving that rent break.

One other point. We typically negotiate a recapture rate so to the extent we find that replacement tenant we can in effect move the other existing tenant out unless they agree to stay on at full rent.

Operator

Our next question comes from Craig Schmidt - Merrill Lynch.

Craig Schmidt - Merrill Lynch

In the lower guidance for FFO for the year, what are you assuming for same-store NOI and sales for the last two months of the year?

Robert F. McCadden

I think we said we expect same-store NOI to be roughly flat for the full-year excluding lease terminations.

Craig Schmidt - Merrill Lynch

So the ’05 through the nine months was flat? Is that the way to look at it?

Robert F. McCadden

I think we’re flat for the entire year.

Craig Schmidt - Merrill Lynch

Sales trends. I understand that the last 10 days of September were particularly worse. I’m just wondering what you see for the next three months?

Joseph F. Coradino

I think I mentioned it in my remarks. I think we’re expecting it to be a difficult holiday season. I’m in agreement with the estimates of around 2% same-store sales growth which is pretty difficult. It’s the worst in the past six years.

Operator

Our next question comes from [Martin Roher - MSR Capital Management].

[Martin Roher - MSR Capital Management]

In terms of where you see your debt levels peaking given the redevelopment capital which you discussed and absent any joint venture or asset sales, is it unreasonable to expect that the early part of 2009 will be the peak of your absolute debt level?

Robert F. McCadden

I think it probably goes not to the early part but rather the end of 2009 and maybe even into 2010. Essentially in the absence of a joint venture we’re funding all of our development ground up as well as redevelopment with debt capital. So if we continue to spend dollar for dollar, the absolute value of our debt will continue to increase.

[Martin Roher - MSR Capital Management]

You’ve done a very good job on the improvement in base rents year-to-date through the third quarter. When I look at the schedule in your supplemental disclosure, in 2009 and 2010 it looks like your expiring rents are well under what you’ve been currently leasing most of your space at. Is it unreasonable to expect significant a bump up over those couple years in terms of rent rate growth?

Joseph F. Coradino

I think it’s a little too early to answer that question. We’re in the midst of going through our leasing game plan process right now and looking at ’09 and ’10 particularly as it relates to our three major redevelopments in the Philadelphia area.

Operator

I’m showing that there are no further questions. I’ll turn it back to you for closing comments.

Ronald Rubin

Let me just say that in our nearly 50 years in business the company has continued to implement its plans in different market cycles. This is another one. Throughout the company has completed its projects and repaid its loans. While the world today has certainly changed, it’s not the first time we’ve gone through a cycle. We’ll continue to draw on our experience and on our approach to business. This approach has allowed us to grow and to continue to operate as a stable and profitable company. Hopefully our experience will give us the ability to meet the challenges ahead. Thank you for joining with us today.

Operator

Ladies and Gentlemen, that will conclude today’s teleconference. We do thank you again for your participation. At this time you may disconnect. Have a nice day.

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Source: Pennsylvania Real Estate Investment Trust Q3 2008 Earnings Call Transcript
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