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Pennsylvania Real Estate Investment Trust (NYSE:PEI)

Q4 2008 Earnings Call

February 25, 2009 3:00 pm ET

Executives

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

Analysts

[Quentin Valaley] – Citigroup

Michael J. Bilerman – Citigroup

Nathan Isbee – Stifel, Nicolaus & Company

Michael W. Mueller – JP Morgan

Ben Yang – Green Street Advisors

Craig Schmidt – BAS-ML

Operator

The Pennsylvania Real Estate Investment Trust fourth quarter and year end 2008 conference call. Before turning the call over to management for their prepared remarks, I must state that this conference call will contain certain forward-looking statements within the meaning of the federal securities laws.

The forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events and trends, and other matters that are not historical facts. These forward-looking statements reflect brief, current views about future events and are subject to risks, uncertainties, and changes in circumstances that might cause future events, achievements, or results to differ materially from those expressed or implied by the forward-looking statements.

PREIT's business might be affected by uncertainties affecting real estate businesses in general, as well as specific factors discussed in documents PREIT has filed with the Securities and Exchange Commission, and in particular, PREIT's annual report on Form 10-K 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.

Now I'll turn the call over to Ron Rubin, Chairman and Chief Executive Officer of Pennsylvania Real Estate Investment Trust. Ron, the floor is yours.

Ronald Rubin

Thank you very much. Welcome to the Pennsylvania Real Estate Investment Trust Year End 2008 Conference Call. Joining me on the call today are Ed Glickman, President, Bob McCadden, our 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 fourth quarter 2008 results, the status of our current projects, and some of our expectations for 2009. After we conclude our remarks, the call will be opened for your questions.

The company, like other REITs and others in our sector, is experiencing the effects of the current economic downturn and its corresponding impact on consumer spending. Many retailers in our portfolio experienced a difficult 2008, and have taken a step back to assess market conditions. Where they can push transactions off until 2010 or 2011, they will.

The company is focused on plans that principally address liquidity and capital allocation and provide for the successful completion of our development and re-development projects. As Ed Glickman will discuss in more detail, the company closed over $800 million in financings in 2008. We are working on additional financings, including the renewal of our credit facility, which comes due in March 2010.

These efforts are part of the strategy of the company to meet our capital needs for the near future. The decision to reduce the dividend, although a difficult one for us, we believe was prudent in these times where liquidity is critical. As we have noted in previous calls, while the economic environment has changed, the basic fundamentals of our business have not.

Our management team is focused, continuing to work to complete our re-developments and our development projects and attempting to place stores in our properties, to increase NOI and occupancy, and to generate positive leasing spreads.

As always, we continue to remain focused on creating long-term value for our shareholders. And with that, I'll turn the call over to Ed Glickman.

Edward A. Glickman

Thanks Ron, 2008 was a challenging year for the company, but in spite of strong headwinds, we were able to accomplish a number of critical goals. First, we made significant progress towards the REIT divisioning of three Philadelphia metro assets, Cherry Hill, Plymouth Meeting, and Voorhees Town Center. Joe Coradino will give you the details on these in a few minutes.

Second, we made progress at a number of key development stage assets. Monroe Marketplace opened and we are 90% leased and 76% occupied, with Kohl's, Best Buy, Target, Dick's Sporting Goods, Bed, Bath & Beyond, and Starbucks. Sunrise Plaza in Forked River, New Jersey, is open with Home Depot and Kohl's. And construction has started at our Pitney Road Plaza project in Lancaster, anchored by Lowe's and Best Buy.

Third, we are reconstructing three floors of the former Strawbridge's Headquarters at 801 Market Street, for use by the state of Pennsylvania as offices. We expect occupancy later this summer.

Despite our progress in moving our development and redevelopment assets forward, we are faced with a declining retail environment and pressure on our operating metrics. Sales per square foot dropped by 4.5% year-to-year, inline occupancy is off by 140 basis points. Store closings, bankruptcies, and bad debt are all up.

In 2009, we expect that we will give up the NOI growth created by our new projects to the impact of the drop in consumer spending that is being experienced across our portfolio. We are hoping that these new assets would be added into core growth; however, they cannot achieve that goal in this environment. Instead, we expect that 2009 same store NOI will be down 1 to 3%.

At the same time, as NOI growth is elusive, our interest costs will rise as our work in progress assets come into service and we can no longer capitalize these costs. Combining lower than anticipated NOI with higher than anticipated interest costs, has led us to lower our 2009 FFO expectations. Bob McCadden will lay this out for you in greater detail in a few minutes.

Building on this 2009 outlook, we have established a plan to provide the company with the requisite liquidity to complete our in progress projects and operate our business during these uncertain times.

First, in 2008 we completed approximately $930 million of financing transactions, including new mortgages, extensions, and a term loan successfully refinancing our $400 million [revec] and modifying and extending our line of credit into 2010.

Second, in 2009 we have put into place the conservation strategy to address our capital requirements and liquidity needs during this difficult year. Establishing this strategy has forced us to make some difficult choices. We have cut back on a number of projects in our development pipeline, this means that we will be expecting interest and costs related to land that is being held for future development, rather than capitalizing these charges.

While we have always been paying these costs in cash, this change in accounting will also impact FFO. We have cut G&A, reflecting the near-term prospects for our business, while respecting our desire to maintain core skills and competencies for the next cycle.

After almost 50 years, we have also cut the dividend to reflect the need to retain capital in the company in the face of the unprecedented liquidity crisis in the market. We have reduced our dividend to a level that we believe the business can support, is in line with our expected taxable earnings, and creates $46 million of additional liquidity.

We will add to this liquidity from the dividend reduction in G&A savings, the remaining availability under our credit facility, and proceeds from additional financing transactions to pay the 2009 project costs, which we expect at up to $140 to $150 million.

We also expect that we will be able to extend or refinance the limited 2009 mortgage maturities that we face. Again, Bob McCadden will provide more detail. This takes us to 2010 and the upcoming maturity of our line of credit. We have begun discussions regarding an extension of this facility. Those discussions are in an early stage and there is nothing to report at this point.

Regarding the long-term future, we are clearly living through a unique period. In all that we are doing, we are attempting to make a reasoned, but forward-thinking and responsive approach to a highly volatile market. Our first goal is to preserve our investments through this difficult period. As always, we appreciate your interest in PREIT.

Now, Bob McCadden, our CFO, will give you our financial highlights.

Robert F. McCadden

Thank you, Ed. I will review our financial performance for the fourth quarter and provide our guidance for 2009. We reported net income for the fourth quarter of $2.3 million or $0.05 per diluted share. FFO for the fourth quarter was $44.4 million or $1.08 per share.

Let me review some items impacting comparability between years. All the amounts I describe will include the results for majority owned properties, as well as our percentage of ownership interest and our partnership properties.

In December, we repurchased $46 million of our exchangeable notes, for $15.9 million plus accrued interest, resulting in a $29.3 million gain. In January 2009, we repurchased an additional $2.1 million of these notes for $700,000.

Our impairment charges include $4.6 million of goodwill, $11.8 million related to White Clay Point, a planned mixed-use development in Chester County, Pennsylvania, near the Delaware border, $7 million related to Sunrise Plaza, a power center in Forked River, New Jersey, $3 million related to Valley View Downs, a planned gaming operation in western Pennsylvania, and the balance of the impairment charges related to pre-development costs at a small land parcel adjacent to one of our properties.

Same store NOI decreased by 1.3% to $84.2 million for the fourth quarter, as a result of the following reasons. We had six tenants operating in 44 locations and occupying 366,000 square feet in our portfolio that filed for bankruptcy protection.

As a result, we wrote-off pre-petitioned accounts receivable of approximately $800,000, straight line rent receivables of $700,000 and $600,000 of deferred lease inducement costs, for a total NOI impact of $2.1 million, or $0.05 per share for the quarter.

Percentage rents earned from tenants during the fourth quarter of 2008 were lower, as compared to last year's comparable quarter, reflecting overall economic trends and renewals with higher sales breakpoints. Specialty leasing revenues were also down slightly in the fourth quarter, when compared to 2007's comparable period.

We do not include inline specialty leasing tenants in our reported occupancy percentages. If we did, our non-anchor occupancy would have increased by 420 basis points at year-end, slightly lower than the 440 basis points at the end of 2007.

We benefited from higher lease termination fees, which were $1.5 million in the fourth quarter, versus $200,000 in the prior year. We invested approximately $345 million in our consolidated properties this year, including land and property acquisitions. As a result, we had higher depreciation and interest expense related to construction progress assets that were placed in the service over the past year.

In 2008 we commissioned approximately $138 million of redevelopment assets and $44 million related to our development properties. In the fourth quarter of 2008, these amounts were $43 million and $37 million, respectively.

Interest expense increased as a result of higher average debt balances, partially offset by lower average interest rates. The average interest rate on our outstanding debt balances decreased by 91 basis points to 5.07% at the end of 2008 as compared to 5.98% at the end of 2007; on a GAAP basis, our average rate fell by 41 basis points from 5.42% to 5.01%.

G&A expense in the fourth quarter was $8.5 million, almost $1.5 million below our recent run rate. During the fourth quarter, we completed $173 million in new non-recourse secured financing at a weighted average interest rate of 6.16%.

At the end of the quarter, we had outstanding debt of $2.8 billion, an increase of $47 million from September 30th. Our credit facility leverage 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 53%, which is about 1% higher than the ratio at the end of the last quarter. We do expect that our leverage ratio will approach 65% by the middle of the year and exceed that level by the end of the year.

As a reminder, our credit facility permits leverage to exceed 55% for two quarters, as long as we stay below 70%. At the end of the quarter, 81% of the company's total indebtedness, including our share of the debt of our partnerships, was fixed.

At the end of 2008, our contractual commitments for construction contracts, tenant allowances, and other costs related to our projects were less than $100 million. Additional spending of up to $50 million would be undertaken only when tenant commitments are obtained or when we are obligated to perform under an existing contractual arrangement.

We expect to meet the capital requirements from the available borrowings on our credit facility and from additional secured debt financings. Our unencumbered properties currently generate approximately 28% of our NOI.

Turning to 2009 guidance, we expect GAAP earnings per diluted share to be a net loss between $1.15 and $1.35. We expect FFO per diluted share to be in the range of $2.75 to $2.95. Our guidance range takes into consideration the following factors; as Ed mentioned, an overall decline in NOI of 1% to 3%, excluding lease termination fees. In 2008 we recorded lease termination fees of $4.1 million. In 2009 our guidance assumes termination fees of $2 million.

The impact of approximately 80 stores operated by a tenant that sought bankruptcy protection in 2008; these stores occupied approximately 600,000 square feet and generated revenues in excess of $10 million. So far in 2009, two tenants, F&K Menswear and Rich Camera, have filed for bankruptcy protection. In the aggregate, they represent 12 locations occupying 23,000 square feet and approximately $1 million in annualized revenues.

We have budgeted higher bad debt expense as a result of the weak economic conditions. Bad debts are estimated at 1.5% of revenues in 2009. In 2008 our bad debt expense was approximately 1% of revenues. Prior to 2008, we were running at a level of 50 to 75 basis points per year.

Interest expense will increase, due to the value of the assets placed in service during 2008 and expect to be placed into service during 2009. In 2008 we placed approximately $182 million of assets into service, including $80 million in the fourth quarter.

In 2009 we anticipate placing over $300 million of such assets into service, with approximately $100 million of that amount in the first quarter, largely at Cherry Hill Mall, and about half of the total in the second half of the year. Once we place costs associated with the CIP into service, we stop capitalizing costs and charge interest to earnings.

Interest expense in 2009 also includes non-cash interest charges of approximately $3.1 million or $0.08 a share, as a result of the change in accounting for our exchangeable notes, which is effective as of January 1st of this year.

We will also incur non-cash interest expense for approximately $1.9 million, or $0.05 per share on an annualized basis related to amortization of swaps settled in 2007 and 2008, and additional amortization to deferred costs related to our line of credit extension. In 2008 interest expense included a non-cash $2 million credit, as result of a gain on swap in effect events.

Because of the slowdown of development activities, we will stop capitalizing interest on certain redevelopment and development properties. This will result in additional interest expense of approximately $4 million to $4.5 million.

We expect to see savings in our G&A expenses; however, these reductions are expected to be offset by lower management company revenues and lower interest income. Our FFO guidance does not include the aspect of any acquisitions or dispositions or gains on the sale of any assets.

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

Joseph F. Coradino

Thanks Bob. In spite of the current economic conditions, there are a number of positive events occurring in our portfolio, particularly in our major redevelopment properties. While comp stores declined from $358 to $342 per square foot, there are a number of drivers which are all not unique to our portfolio.

One factor that is unique is our redevelopment effort. And that is, a portion of this decline is attributable to the dislocation associated with the redevelopment at Cherry Hill Mall, where the food court, historically one of the highest producing costers in the per square foot basis, was out of service for several months.

Our retail portfolio weighted average total occupancy declined by 40 basis points to 90.9%. As Bob mentioned, this was driven primarily by the closing of retailers due to bankruptcy and liquidation. We are continuing to work through these bankruptcies and are in meaningful discussions with retailers to backfill approximately a third of the square footage being vacated by retailers who filed in the fourth quarter.

Renewal spreads were relatively flat, with only a 10 basis point increase over expiring rents on 260,000 square feet of non-anchor renewals. As has been the case recently, we have executed several short-term renewals for a number of reasons.

While we always seek to maintain flexibility in light of our redevelopment program, most recently our focus is on renewing and retaining tenants. In this environment, we remain focused on maintaining occupancy in the near-term and flexibility over the long-term.

Toward this end, of the 87 non-anchor renewals executed this quarter, 48 had lease terms less than three years. Additionally, we have executed or are in advanced stages of negotiation for 74% of our 2009 non anchor renewals.

Last quarter we informed you that we had opened four new anchors, and 323,000 square feet, including the Burlington Coat Factory stores at Chambersburg, [Lycoming] and Union Town malls and the 88,000 square foot new proto type JC Penney store at Gadsden Mall in Alabama.

We continue construction on the remaining Burlington Coat Factory locations at Cumberland Mall and Wiregrass Cummings, which are scheduled to open in the first and third quarters of 2009 respectively, and the replacement of Value City at Frances Scott Key, with a Value City Furniture as DSW to be complete when DSW opens for business in the second quarter of '09.

We continue to make significant construction and leasing progress on the three major re-developments in the Philadelphia metro area. At Cherry Hill Mall, the Nordstrom's store is nearly complete with stocking commencing in the next few days for their March 26th Grand Opening party.

The transformation of this property is striking, from the tile selection to the finishes to the luxurious soft seating, and awe inspiring expansive Grand Court. It is an architectural masterpiece. The relocated food court is back in service, the new parking garage is open, and the renovation is nearing completion.

We are also pleased to announce that we signed a new lease with Urban Outfitters, for a $12,700 square foot two level store in the new Nordstrom wing of the property. We are underway with construction and expect it to open this summer. The exterior façade fronting Route 38, will complement the impressive collection of new dining opportunities we're calling Bistro Row.

Construction continues on this aspect of the project, with Manggiano's opening this week, Season's 52 nearing completion with a planned opening on March 23rd, and the shelves being completed for Capital Grill and California Pizza Kitchen with tenant fit outs underway for a planned second and third quarter opening, respectively.

The new mall addition leading the Nordstrom is being completed, with spaces turned over to Coach, Johnston and Murphy, Bright and Collectibles, Steve Madden and Urban Outfitters. In addition to two food court bays that opened during the fourth quarter, elsewhere in the mall we opened our portfolio's second garage store, and expanded 15,000 square foot GAP Super Store.

Since the close of the quarter, two additional food court bays and an expanded American Eagle opened at the property. Approximately 83% of the planned expansion portion of this project is either leased or in active negotiation.

At Plymouth Meeting Mall, during the fourth quarter, we opened our fourth new restaurant, [Benny Hanna,] on an out parcel, as well as a Citibank branch on an out parcel on the north side of the property. Construction on the new Crazy City is nearly complete and we look forward to their opening next month.

During the quarter we signed a lease with Anne Taylor Loft for the lifestyle component of the project. We've turned over the lifestyle spaces to Anne Taylor Loft, Chico's, Cold Water Creek, and Joseph A. Bank, all of whom are under construction for second quarter openings.

As we look toward the final stages of the project, we are expecting to turn over [Hall Foods] building during the first quarter and look forward to a grand opening of the Lifestyle Addition in the Spring of this year, with [Hall Foods] following in November.

Approximately 84% of the planned expansion portion of this project is either leased or in active negotiation. At Voorhees Town Center, construction is commenced on the 17,000 square foot [Reseri] Salon and Spa, which includes a Premier Aveda Spa, training facility, and retail outlet.

The first floor salon fit out is nearly 90% complete, with the second floor [Reseri Institute] just over 50% complete.

Residential construction continues on the mixed use buildings, with initial resident occupancy beginning in April. Leasing of the apartments is progressing at a brisk pace. The parking and roadways for the mixed use portion of the property under construction are progressing, and the boulevard is expected to open in March.

In light of our focus is to secure best of breed local and regional tenants for this property, we are finalizing the lease for a 20,000 square foot local restaurant and market place. We are in advanced discussions for a 13,000 square foot athletic facility, and have acquired an additional liquor license in anticipation of securing another locally recognized restaurant to anchor the other end of the boulevard.

At 801 Market Street, a property we own contiguous to the Gallery, demolition and core and shell work are complete for the 224,000 square foot Commonwealth of PA Office, on floors four, five and six. Tenant fit out work began in late '08 and is progressing quickly for a phased move in over the summer, in advance of the October 2009 commencement.

We are aware of the current economic climate and its impact on our tenant and shopper base. With a reduction in open to buys announced by so many national retailers, our efforts are focused on tenant retention and cultivation of local and regional merchants, with careful consideration being given to every rent relief and capital deployment request.

We are encouraged by the retailer interest in our redevelopment properties, many of whom cite that while they're open to buys are severely limited, they look forward to being able to consummate transaction to these properties.

We remain dedicated to delivering a differentiated product, and are confident that our portfolio is poised for success as the market rebounds. With that, we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Michael Bilerman – Citigroup.

[Quentin Valaley] – Citigroup

Hi, it's [Quentin Valaley] here, I'm with Michael, I guess you've spoken through how you are going to try and refinance your near-term maturity, including [Milan] in 2010, but I guess if we look at the group in total your leverage is quite high. I'm just wondering if you could talk through the strategy that you've been working on, in terms of trying to reduce that leverage ratio to try and help get these refinancings done.

Edward A. Glickman

At the moment, this is – at the moment we're tying to assure that we have enough liquidity to continue to work towards completion of the three or four major projects that we have that are in progress, being Cherry Hill, Plymouth, Voorhees, and the build out of the 801 Market space at The Gallery.

And so, to that end, in 2009 we're looking to the additional liquidity that will be set aside from the reduction of the dividends, any savings from G&A, and additional secured financings that we will put into place above the proceeds that are required to refinance existing maturities. It's our expectation that through those sources, including the liquidity and the existing line of credit, that we'll have enough funds to complete these projects and being them into fruition.

In 2010, once the majority of our capital expenditures are completed, assuming that the dividend level stays at the same rate, we'll start to generate additional liquidity that could either be put towards continued development, redevelopment projects, or reduction of outstanding liabilities. And again, we'll cross that bridge when we come to it.

But at the moment, we're focused on 2009 and discussing with our bank group the renewal of the existing line of credit.

Michael J. Bilerman – Citigroup

Won't you – Michael Bilerman speaking, won't you – you're going to go in excess of your covenant towards 70% on your leverage, there's got to be some deleveraging plan that you got to start putting into place this year and other forms of capital, because you can't get it in 2010 and have the $570 million between the credit line and the unsecured term loan come due, without any capital to replace it, let alone deleveraging the balance sheet.

So, I can understand you want to get enough capital to finish these projects, but there's got to be something on the other side of it to meaningfully reduce leverage.

Edward A. Glickman

At the moment we're focused in 2009 on the completion of these three projects as I just mentioned, and the balance of the proceeds to the line of credit, additional secured financing, and the reduction in the dividend. Obviously, we're not spending this money in a vacuum, the money that we’re spending is to finish projects that will create kind of live streams that will grow the value of the company’s asset base organically, and that naturally de-levers the portfolio.

So again, they’re 2009 we have four projects that are under construction. We’re not starting new projects, we’ve cut out all new expenditures but we do need to finish the projects that we’re in the middle of.

Robert F. McCadden

Let me just add a little bit of color to that Michael, just following up on Ed's point. If we would have gone back and looked at what our expectations would have been upon the completion of all these redevelopment projects, by the end of this year we will have completed, invested all the capital and given the current economic conditions, we’re probably not realizing the full benefit, not probably we aren’t realizing the full benefit of the capital expended.

Assuming that tenants begin to start doing more deals later this year and the early part of 2010, in fact we have very little marginal costs associated with getting that incremental tenant and that incremental tenant deal additional NOI, which creates gross asset value and again creates the natural delivering of the balance sheet that Ed was describing.

[Quentin Valaley] – Citigroup

And just on the development top line, Voorhees Town Center, I noticed the yield went down from 9.2% to 7.9% and Monroe went down from about 8 to 7.1%, and with Monroe there was actually a reduction of a projected share of cost. I’m just wondering if you can talk through what the drivers of that was?

Robert F. McCadden

Let me take Monroe first. In the case of Monroe, there is a second phase to that development that we’re again putting off because our goal is to conserve the capital for the four projects that I mentioned. So had Monroe been fully built out, which there is a second phase to that project, again all the infrastructures have been placed, all the base costs have been paid.

And hence, the marginal development is more profitable. So again, it’s as I mentioned, we have a capital conservation strategy, which is pulling in some of the additional development that would be done in existing sites so that we can finish the four key projects that we discussed.

Joseph F. Coradino

Just to follow up on your question, at Voorhees, we experienced an increase in project quotes of approximately $3.7 million, driven mostly by additional fit out costs for their various retail uses that will be coming to the project, as well as additional interest and tax carrying costs really associated with moving the stabilization period further out for that project.

Operator

Your next questions is from Craig Schmidt – Bank of America-Merrill Lynch

Craig Schmidt – BAS-ML

The expected returns on the incremental investments listed on page 26, I assume those are stabilized. I’m wondering what you think the actual return might be in ’09 for your big three projects, just given the tough leasing environment.

Robert F. McCadden

Yes the – I’m not sure we can give you an impact in 2009 on a stand alone basis. Effectively they do represent stabilized returns, I think we’ve talked in the past that it’s probably anywhere from 12 to 18 months to stabilization completion. That’s probably extended now; we would expect to reach stabilization on those projects rather than in 2010 which we maybe previously represented.

Our view today is it's probably 2011 when we get to stabilization.

Craig Schmidt – BAS-ML

And how much do you think they need to, just roughly on average to grow between say ’09 and ’11 to reach stabilization.

Robert F. McCadden

Well if you think about the – I guess it’s kind of what Ed was describing. The marginal, all the costs are effectively occurred so any incremental dollar that we get in terms of additional leasing absorption in any good projects between now and 2011 is – effectively it's going to return the yield on the project.

I think when we talked about in the past, is that we bring a project on line the expectation is that we’re covering the cost of carry. I think this year because of the softness in the economy we’re probably not going to be there.

So actually as we bring these projects on line in 2009, it’s actually a net drag on earnings as you can see from the higher interest cost as compared to a relatively overall portfolio. Flat to slightly down NOI.

Operator

Our next question is form the line Nathan Isbee – Stifel Nicolaus.

Nathan Isbee – Stifel Nicolaus & Company

You talked in your prepared comments about the redevelopment efforts, as much as it’s not going to generate growth next year but it probably will limit the down side in same store NOI erosion. Can you just give us a little bit of a better sense of A, what the redevelopment is generating and how the other parts of the portfolio are operating?

Edward A. Glickman

I think the contribution is probably not much different than what we talked about on previous calls that I think where we deployed capital on the whole the projects that were completed in the last couple of years, including those that are expected to be completed in 2009, will continue to be net positive growth.

I think the growth across the portfolio has been somewhat retarded if you will by our expectations of higher day expense, we essentially used for budgeting purposed a flat rate across the portfolio, where we don’t know where those big debts are going to ultimately reside.

And I think as we mentioned in the last call, we continue to be hurt by softness in the economy in Florida, where our property in Florida is showing a fairly significant decrease in NOI as a result of the conditions that exist there.

Nathan Isbee – Stifel Nicolaus & Company

Are you talking about Orlando?

Nathan Isbee – Stifel Nicolaus & Company

Okay. And can you just talk about the two Boscov’s in North Hanover, Willow Grove and where those stand?

Robert F. McCadden

Yes. Both of those leases have been rejected by Boscov’s and we’re in the process in both of those assets of developing a replacement strategy. We are in discussions with a number of tenants for Willow Grove where we would break it up into a "soft good retailing," as well as entertainment and restaurant.

With respect to the former Strawbridge's store at Willow, and at Hanover we’re focused more on a replacement of utilizing the box for relocation of an existing anchor that is in the market.

Nathan Isbee – Stifel Nicolaus & Company

So in your – the reason you did not take a write down at North Hanover is that you had really built the box for Boscov’s you expect to put them in there with minimal cost?

Robert F. McCadden

Yes. I think the cost incurred when we look at the real-estate operating assets as your total. So in looking at the cash flow associated with the entire property against the cost that we have invested, so our expectations, when we look at this over a multi-year time horizon, so our expectation is that we find a replacement for that empty box and or tenant, as well as fill the vacancy at Willow Grove.

Nathan Isbee – Stifel Nicolaus & Company

Okay and there was an article a few months back that PREIT had loaned Boscov’s some money, is there any truth to that and like what are the terms and the motivation for doing that?

Joseph F. Coradino

We did. PREIT did make an investment in the Boscov’s in their reorganization and we – the investment that was made was $10 million in the total transaction and we regained a loan there, which is currently being paid and our expectation is that the loan will be repaid shortly, within the next couple years.

And it was a very advantageous transaction for both Boscov’s and for PREIT because it helped us keep the lights on in a number of our stores and the original operators are now in running the business and the reports that we get are that they are operating the business, not this month but earlier they were quite profitable.

Nathan Isbee – Stifel Nicolaus & Company

Okay and just one last question, does your net income projection for ’09 assume any other gains for convert buys?

Robert F. McCadden

No. Other than we did have the small transaction in January, a little over a million gain.

Operator

(Operator Instructions). Your next question comes from Michael Mueller – JP Morgan

Michael Mueller – JP Morgan

A few questions here, first, I just want to tie back to Craig's question about the initial yield. Bob, if we assume that the $300 million coming online that you referred to, it sounds like that's coming online at around a 5% initial yield or a little bit lower. Is that reasonable, a reasonable expectation based on what you said?

Robert F. McCadden

Yes it is below the 5% initially, I can't give you a specific number.

Michael Mueller – JP Morgan

Okay, but it's below 5% on that $300 million, okay. And then going back to the question about leverage at year end approaching 70%, I mean how should we –

Robert F. McCadden

I don’t think we said that. We didn’t say that. I think we said we are currently, believe we are beneath 55%, we approach 65% at the middle of the year and we exceed 65% toward the end of the year, but I don’t think in any of our estimates did we get close to a 70% threshold.

Michael Mueller – JP Morgan

Okay so implicit in the idea that you would break the covenant if you are two quarters beyond that end of 2010, is the assumption that you guys are working toward that the credit line gets refinanced or recast this year with new terms that would let you out of that? In which case you're assuming that in your numbers or yes I guess the question is are you assuming the credit line gets redone in 2009?

Robert F. McCadden

Yes our expectation is as Ed mentioned, we have begun very preliminary discussion with the banks and we will work diligently over the next couple of months, quarters to complete the refinancing and have a new credit facility in place hopefully by the end of the year.

Michael Mueller – JP Morgan

Okay is the remedy to that situation north of 65% for two quarters, more likely to be at this point the redoing of the terms at the credit facility or kicking up extra proceeds from mortgages to pull you back down below that 65%?

Robert F. McCadden

Yes I mean all of these things are available to us, certainly as we mentioned we have a fairly wide range of spending in terms of what we are committed for and what we could spend.

Otherwise we assess the performance of the company over the next quarter, so we'll be in a much better position to either scale back spending; certainly we can reduce costs in other areas of the company. Obviously, opportunistically, we saw an opportunity to buy back converse with the fourth quarter which allowed us to reduce leverage on that three to one basis, so there's a lot of tools in the toolbox that we have available to ensure that we remain in compliance with the existing covenants.

Michael Mueller – JP Morgan

Okay you've got about $180 million of mortgages coming due in 2008. If you go above that and you've talked about refinancing with excess proceeds, what's a reasonable, what have you guys assumed about that $180 million, what's a reasonable amount?

Robert F. McCadden

Just over the $180 million, I guess there's $110 million in joint ventures at Springfield Mall and Lehigh Valley that are subject to buy right extension options. So our expectation would be that those would be extended in 2010.

The Palmer Park Mall property, which mortgage matured in January, that's already been paid off. We have two other properties aggregating $47 million, Red Rose, which is the joint venture, Power Center and Valley View Mall, which comes through in October.

Our expectation is that at a minimum we would be able to finance those for their existing balances, if not just slightly above, so we would be looking to place some new mortgage debt on previously unencumbered assets and that would be somewhere in total, the $100 million range.

Michael Mueller – JP Morgan

Okay I mean are you guys thinking about, should we assume anything in terms of tapping the unencumbered pool above and beyond that, at this point?

Robert F. McCadden

Not at this point.

Michael Mueller – JP Morgan

Not at this point, last question, I think in your comments about cap interest, you said cap interest would go down to $4 to $4.5 million in 2009. I want to make sure that that was only relating to the projects put on hold, is that correct?

Robert F. McCadden

That's actually the additional interest cost that for the projects that we put on hold, we probably would have capitalized somewhere in the $4 to $4.5 million range, had those projects still been active.

So as a result, our interest expense will go up for the fact that we're no longer capitalizing interest on those. The increase in our interest expense projected is because we in effect stopped capitalizing interest on those projects.

Michael Mueller – JP Morgan

Yes, just those, not the three or four big redevelopments?

Robert F. McCadden

No, it shouldn't be capitalized on those.

Michael Mueller – JP Morgan

Okay and what was the cap interest on the quarter?

Robert F. McCadden

For the quarter it's under supplemental, let me turn to the, I'm all thumbs today, but it's on the page where we – all right, the number for the quarter is $4.4 million.

Operator

Your next question is from Ben Yang – Green Street Advisors.

Ben Yang – Green Street Advisors

It looks like tenant sales fell around 8% during the fourth quarter in your portfolio, does this sound about right to you and is there any reason to think that this fourth Q result won't continue into 2009?

Robert F. McCadden

Yes I think the number is right over the holidays we were around a little over 8% decrease for November December combined. We've had some preliminary results in for January and sales decreases were slightly above 5%.

Ben Yang – Green Street Advisors

Is that what you're expecting for the full year, somewhere in the 5% down neighborhood?

Robert F. McCadden

I mean, it's anybody's guess in terms of where we would expect to see sales.

Ben Yang – Green Street Advisors

Okay and then what kind of occupancy decline is baked into your same store NOI forecast for the year?

Robert F. McCadden

Bear with me a second, on a – in line, we probably have about 60 basis points at the upper end of the range to about 87.5%, probably another – lower end of the range a couple of hundred, 300 basis points if we were to hit the low end of our range.

Ben Yang – Green Street Advisors

So you're saying it could be as down as far as 300 BIPs for the year?

Robert F. McCadden

On an in line basis it's probably half that on an overall basis.

Ben Yang – Green Street Advisors

Okay and then just last question, you have a bunch of tenants that pay percentage of sales deals, do they pay their share of CAM or is that an expense that you pick up as a landlord?

Robert F. McCadden

We would have absorbed that typically.

Ben Yang – Green Street Advisors

And that's for all tenants that go on those temporary leases?

Robert F. McCadden

Right.

Operator

And our next question is a follow up question from the line of Michael J. Bilerman – Citigroup

Michael J. Bilerman – Citigroup

I just have a follow-up question, does the new term loan, the unsecured term loan that you got have the same covenants as the line of credit?

Robert F. McCadden

Yes.

Michael J. Bilerman – Citigroup

So that would fall under the same 65% leverage?

Robert F. McCadden

It does it has the same covenants.

Michael J. Bilerman – Citigroup

Is there any other covenant that you're close to breaching on the line or the term loan?

Robert F. McCadden

At the moment, we're not close to breaching any of our covenants.

Michael J. Bilerman – Citigroup

Other than the debt [GAV]?

Robert F. McCadden

We're not supposed to be breaching the debt [GAV]. We're 63%; the breach would be 70%.

Michael J. Bilerman – Citigroup

I guess at 65% you're allowed to be over 65% for two quarters and then you have to get back below.

Robert F. McCadden

Right.

Michael J. Bilerman – Citigroup

What's in the unencumbered pool right now and the size of it, on a book basis?

Edward A. Glickman

It's identified. I don’t have the numbers off the top of my head. We've identified book basis in our supplemental of the assets that are secured.

Michael J. Bilerman – Citigroup

Yes. And then going back to the dividend, obviously reducing the dividend to below AFFO allows you to preserve cash. You talked a little bit about the potential of having the flexibility of paying that in stock. I guess off the current dividend level, that would give you $43 million of additional equity capital and it's a lever that you can do now, today, as a way to protect yourself even further, rather than heading into 2010 thinking about other deleveraging events.

In the pace that the NOI yields don’t come in where you want them to and other things, why put yourselves in a box then, sort of take the position today to add liquidity where you can?

Robert F. McCadden

Well there are other possible things that we can do if we need to delay the dividend for a year. So we thought that paying the dividend in stock, particular was a bad idea and we reduced the level of dividend to the point where we thought it was sustainable.

Our view is that if we're in quite a long recession we will need to have a renegotiation with the bank in any case. If we're in a recession that turns around, then hopefully in 2010 we'll be in a different position anyway. So if we're in a very long dragged out recession, we need to have a discussion.

Michael J. Bilerman – Citigroup

You're saying on being able to pay back the line of credit and the unsecured term loan?

Robert F. McCadden

Well there's not much liquidity in the capital markets, selling properties to buyers who can't get financing is difficult. So there's not, that's not the solution to the problem. So obviously, it's to generate excess cash flow over time and use that to reduce the outstanding liabilities and that takes time. There's no solution for this but time and a return to a more reason to market.

Michael J. Bilerman – Citigroup

Right I understand that but I guess if you're given the past deal to pay the dividends in stock and that would give you an additional $40 million of retained free cash flow on top.

Robert F. McCadden

Sure but taking the dividends in stock doesn’t obviate the need of the people you're paying it to to come up with the cash to cover the receipt of their stock.

Michael J. Bilerman – Citigroup

I mean they can you can pay – there will be a little bit of cash portion, but I guess it's just I think it would probably rather a healthy company and the stock that goes up rather than the one that potentially has liquidity issues down the road.

Robert F. McCadden

On a company with $3 billion worth of debt we're not sure that the $40 million makes it a healthy company or not. So I'm not sure that that’s the solution to the global financial crisis.

You know it's one opportunity that companies have but you also can defer your dividends for a year into the next year and make it up at the end of that period, so there's other options than paying out the dividends in stock. The trustees do review this on a quarterly basis, so I think any decision that we make in one quarter does not necessarily hold forever.

Joseph F. Coradino

We had a lengthy discussion about the dividend and we looked at all the various options and the company's decision was to go in this direction.

Michael J. Bilerman – Citigroup

Okay is there anything on the extensions of Lehigh, 1 Cherry Hill and Springfield, or those are completely as of right, you don't have any, there should be no issues in extending those loans?

Robert F. McCadden

[No issues at all].

Michael J. Bilerman – Citigroup

On those specific assets.

Robert F. McCadden

In the case of Springfield, there is a reappraisal obligation but that would only require us, to the extent there was a value that was less than be part of the agreement, then there would be a pay down requirement but it would not require that the loan be paid in full.

Operator

Your next question is a follow-up question from Ben Yang – Green Street Advisors

Jim Sullivan – Green Street Advisors

Hi, it's Jim Sullivan here with Ben. There have been a number of questions on the call regarding your covenants. There's been I think quite a bit of frustration expressed with respect to where you stand in your covenants. Many of your peers disclosed their covenants and exactly where they stand, you don’t. What's the logic behind not disclosing that?

Edward A. Glickman

Not disclosing our covenants and where we stand?

Jim Sullivan – Green Street Advisors

Yes.

Edward A. Glickman

I think Bob just disclosed our major covenant and where we stand.

Jim Sullivan – Green Street Advisors

That's the only covenant you have?

Edward A. Glickman

No we have four covenants, but that's typically the most constraining covenant.

Jim Sullivan – Green Street Advisors

So if you're well within the others, why don’t you disclose what they are and where you stand?

Robert F. McCadden

There's no reason why we're trying to hide, let me give them to you, we have three other covenants. There's an interest coverage, fixed charged, EBITDA to debt ratio. Covenant requirements are 1.7%, 1.4% and 9.75%, that today or at the end of December we're at 1.94% on the interest coverage ratio, 1.64% on the fixed charge ratio, and 10.3% on the debt yield covenant.

Jim Sullivan – Green Street Advisors

That's great, I'd encourage you to put that in your disclosure going forward, thank you.

Operator

Thank you, ladies and gentlemen. That does conclude our question-and-answer session for today's call. I would like to turn the call back over to Ron Rubin for any closing comments.

Ronald Rubin

Okay again, thank you for your continued interest in the Pennsylvania Real Estate Investment Trust. We're going to continue to keep you informed as important events take place within our company. This concludes our call, again thank you.

Operator

Thank you ladies and gentlemen. This does conclude the Pennsylvania Real Estate Investment Trust fourth quarter 2008 earnings conference call. We thank you for your participation, you may now disconnect.

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