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Glimcher Realty Trust (NYSE:GRT)

Q3 2009 Earnings Call

October 30, 2009 10:00 am ET

Executives

Lisa Indest - VP, Finance and Accounting

Michael Glimcher - Chairman and CEO

Marshall Loeb - President and COO

Mark Yale - CFO

Analysts

Quentin Velleley - Citi

Michael Bilerman - Citi

Carol Kemple - Hilliard Lyons

Rich Moore - Royal Bank of Canada

Operator

Welcome to the Glimcher Realty Trust third quarter analyst Earnings Call. My name in Erika and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call Ms. Lisa Indest, Vice President, Finance and Accounting. Please proceed.

Lisa Indest

Welcome to the Glimcher Realty Trust 2009 third quarter conference call. Last evening a copy of the press release is circulated on the newswire and hopefully each of you have had the opportunity to review our results. Copies of both the press release and our third quarter supplemental information packet are available on our website at glimcher.com.

Certain statements made during this conference call which are not historical maybe deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a more detail description of the risks and uncertainties that may cause future events to differ from the results discussed in the forward-looking statements, please refer to our earnings release and to our various SEC filings. Management may also discuss certain non-GAAP financial measures.

Reconciliations of each non-GAAP measure to the comparable GAAP measure are included in our earnings release and the financial reports we filed with the Securities and Exchange Commission. Members of management with us today are Michael Glimcher, Chairman and CEO, Marshall Loeb, President COO and Mark Yale, CFO.

Now I would now like to turn the call over to Michael.

Michael Glimcher

Thank you for joining us on today's call. We are very pleased with the company's execution of its business plan during the first nine months of fiscal year 2009, especially when considering the challenging economic environment we are currently facing.

Since our last conference call in July, we’ve made tremendous progress and enhancing our liquidity and balance sheet position. Last month, we announced that we have received non-binding commitments from all the [credit banks] for the modification of the company’s credit facility, including the extension of its maturity date through December of 2011.

Later in September, we successfully competed a secondary equity offering, raising nearly $110 million of net proceeds. Due to the strong demand, we have the opportunity to upsize our offering. The gross proceeds were $35 million above the original targeted level and will allow the company to proactively meet the anticipated debt reduction targets, included in our pending credit facility modification through 2011.

Finally, with the [conveyance] of the Eastland Mall, North Carolina property in September, and extension of our commitments to extend the company’s Tulsa and Surprise joint venture loans, our organization has now addressed all of its 2009 mortgage debt maturities.

(Inaudible) equity in today’s pricing was certainly a difficult decision, we believe was the right one, first is capital coupled with the commitments to extend the company’s credit facility, address significant uncertainties regarding our liquidity and balance sheet heading into 2009.

We recognized there is still work to be done on the de-levering front, but now have more flexibility in time, execute our strategy that includes potentially joint venturing or selling assets from within the portfolio. We currently have three of our assets listed, two A quality mall properties, Lloyd Center and WestShore Plaza as well as our Polaris Towne Center in institutional-quality power center located in Columbus, Ohio.

Although, we were initially disappointed that sales contract on our Lloyd Center property was terminated. We remain encouraged by the progress we have made with others regarding a potential transaction. We remain committed to our asset sales and joint venture program, and we will continue to seek to raise at least $50 million of capital for a combination of sales or partial sales of Lloyd, WestShore and Polaris Towne Center.

We delivered solid quarter from a financial standpoint with our $0.40 of reported FFO per share for the third quarter falling within our initial guidance range, even when considering the additional shares issued in connection with the equity offering.

Property fundamentals were for the most part in line with the company's operating plan. Mall store occupancy was approximately 92% as of September 30, 2009, an increase from the prior quarter of 160 basis points. Accordingly, we remain optimistic that we will finish the year with inline occupancy between 92% and 93%.

Consistent with our guidance re-leasing spreads were positive for the quarter up 7%. Our best quarterly result year-to-date and a 5% decline in mall store sales with in line with our expectations going into the quarter.

We were also encouraged by customer traffic only being down by approximately 1% portfolio wise, in improvement from the prior quarters. As we have said before, we might be spending a bit less in the current environment, she is still filling up. All of this once again supports the view that malls still represent the premier distribution channel for most retailers and consumers.

We continue to make solid progress on our Scottsdale Quarter ground up development project located in Scottsdale, Arizona. Construction of phase I is substantially complete and we have a GMP contract for Phase II greatly reducing any remaining construction risk on the project.

From a leasing perspective, we currently have over 90% of Phase I retail addressed through signed leases or letters of intent. We also continue to move forward with office leasing and in fact several tenants have either moved in or currently under construction.

We currently have over 50% of the office space now addressed through signed leases or leases out for signature. The fact that we have maintained leasing momentum speaks to the irreplaceable nature and strategic value of this project long-term.

Accordingly, we are looking forward to showcasing the property at the upcoming NAREIT conference next month in Arizona.

With that said, I’d like to turn the call over to Mark Yale to provide you with more detail on our financial results.

Mark Yale

As Michael discussed, we reported FFO per share of $0.40 for the third quarter of 2009, which after neutralizing for the September equity offering fell to the upper end of our guidance range.

Our comp NOI growth for Core Mall portfolio was in line with expectations down by approximately 4% for the third quarter, driven primarily by loss rental income from tenant bankruptcies, store closings and rent relief. Lost rent from Steve & Barry's alone represented 120 basis points of the quarterly decline.

In the release we did provide updated 2009 FFO guidance in the range of $1.53 to $1.60 per share, which now reflects the increase in outstanding shares as a result of the recent equity offering. We also slightly narrowed the top end of our range due to a lack of lease termination and outparcel sales activity during the second half of this year, with an expected closing date for the credit facility modification and extension late in the fourth quarter; we are not anticipating a material impact on our 2009 results.

We should note that this guidance range does not address potential impact of any asset sales that Michael discussed.

Other key assumption that make up the full-year guidance, include a 3% decline in Core Mall NOI, 18 million in total G&A cost, lease termination and outparcel sales income in the range of $1.2 million to $1.7 million, and net fee income of between $3 million to $3.5 million.

Additionally, we are now assuming an average LIBOR rate of approximately 25 basis points to 50 basis points for the remainder of the year. We also provided FFO per share guidance for the fourth quarter of 2009 in the range of $0.28 to $0.35. Key assumptions is driving the guidance, include net fee income of $1 million, lease termination income of 3 to 500,000 and a decline in Core Mall NOI of around 3% to 4%.

Turning our attention to the balance sheet with the conveyance of the Eastland, Charlotte property to the servicer in September, without penalty or any default, the execution of loan extension on the Tulsa JV mortgage and the commitment to extend the Surprise JV construction loan, we have now address all of our 2009 mortgage debt maturities.

Additionally, during the third quarter, the lender fund at the remaining $5.5 million on the $24 million mortgage loan for the company’s lifestyle addition at Polaris. We also received an additional $10 million commitment relating to the financing on the company’s Grand Central Mall property, which we expect to fund within the next couple weeks. This still bring the total outstand on the mortgage loan to $40 million. At this point, we have completed our syndication efforts on this financing.

As Michael mentioned, we’ve previously received commitments from all current lenders for the extension and modification of the company’s credit facility. During October, one of lenders previously in default on its funding obligation and eligible to provide a commitment care their default and is now has a vote in the modification. Additionally one of the other lenders’ non-binding commitments recently expired.

That being said, we are working with all the lenders on getting the deal close which we still expect to occur late in the fourth quarter. On the year term, we have given notice to the administrative agent of our intent to exercise our one-year extension option, included in a current agreement, which muse the maturity from December 2009 to December 2010, thus giving us ample time to get the modified deal executed.

Continue with our focus on the balance sheet, we want to point out the significant increase in cash and cash equivalents as our quarter end. Approximately $88 million related to proceeds generated from the company's recent equity offering. We expect that these proceeds will be applied against outstandings on the company's credit facility, on closing, on the modification, and extension. We finished the quarter with $366 million outstanding on our facility.

Finally, our near-term mortgage debt maturities remained quite manageable. When factoring available extensions, we have only two maturing mortgages in 2010, totaling approximately $80 million, both of which are non-recourse. One mortgage is on our Mall at Johnson City, a center doing $400 per square foot sales; the other one, our Polaris Towne Center an institutional quality power center. Also, average debt yield on mortgages that matured through 2012 is over 16%, a strong indication that we do not have leverage issues at the property level.

With that, I would now like to turn the call over to Marshall.

Marshall Loeb

As Michael mentioned, we are working through a challenging environment that commenced well over a year ago. The good news is we’re starting to signs that the headwinds are beginning to abate.

On the leasing front, we finished the quarter with inline occupancy for our Core Mall portfolio at 91.9%, a 160 basis points improvement from June 30, comfortably places us within the range of our year-end occupancy target of 92% to 93%. Also contrary to what you hear in the media, retailers are expanding even in a difficult environment.

For example, this year within our Core Mall portfolio we’ve done eight new anchors, totaling 300,000 square feet which were scheduled to open prior to 12/31/2010. In addition to the 300,000 square feet of new ‘09 deals we opened another five anchors totaling a 170,000 square feet year-to-date.

Within our core portfolio smaller shops base year-to-date we have approximately 60 new stores totaling a 160,000 square feet scheduled for 2009 or 2010 openings with under a quarter of that amount actually opened as of 09/30.

In summary, retailers are wisely remaining cautious, but we are seeing a growing pipeline of new deals. We believe the solid holiday season from the retailers is the next step to help fill that pipeline.

While annual sales declined during the third quarter, we continued to seeing signs of stabilization, as the trailing 12 months of average in line sales as of September 30th, increased from 06/30 and is down under 2% from 12/31 ‘08. In another words sales per square foot fell during 2008, but it held relatively steady throughout 2009.

Also consistent with what we are hearing from retailers, we experienced a much improved September in terms of sales, down only 1% across the portfolio compared to September of ‘08 and actually saw a 3% increase in traffic for September, obviously a month doesn’t make a trend, but with an improving economy and easier comps on the horizon, we are cautiously optimistic about fourth quarter.

Additionally, with the solid jobs, most retailers have done managing their inventories and costs. We believe most will have an opportunity and improve profitability this holiday season.

With fixed CAM growing within our portfolio we continue to focus on managing operating expenses. Our benchmark to measure results is the CPI rate of inflation and on this basis, we are happy to say that our CAM growth has been roughly three quarters, the rate of inflation over the past five years generating over $6 million in savings.

Finally, we expect new retail supply nationally over the next several years to be nominal at best. Having well located assets, occupied in the 90 plus percent range bodes well for our portfolio. We are optimistic this will strengthen the position of our assets, when retailers began to expand again.

At this time, I’ll turn the call back to Michael.

Michael Glimcher

It’s amazing to think about where we were about 12 months ago, and what has transpired in the capital and credit markets. When topic with deep economic recession is currently been one of the most challenging periods in the company’s history, that is why I am so proud of how our organization has navigated through this difficult economic times and volatile capital markets.

We responded quickly and capably to the recent opportunity to raise capital through common equity offering. We have more diligently in getting our credit facility standard and addressing all of our mortgage debt maturities.

Finally, we maintain a clear focus on property operations and leasing, maximizing property performance in this down economic environment. We have an experienced team, a short focus on executing our business plan and a solid Core Mall portfolio generating stable cash flows.

All of this has and will continue to carry us through these unprecedented times and more importantly position us well for performance into the economic recovery.

Now, with that said, we’d like to open up our call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Quentin Velleley with Citi. Please proceed.

Quentin Velleley - Citi

It’s Quentin here with Michael Bilerman. Just the first question, with the Lloyd Center file, which didn’t proceed in the end, can you just run through what happened in the due diligence process which stopped the file from proceeding?

Michael Glimcher

Absolutely correct. Understand that where we were in the process with the Lloyd Center sale, frankly under general circumstances we would have never disclosed because we were out in the market with an equity offering and going out into the market with an equity offering. I would say that based on a typical operating method maybe prematurely talk about the sale. It was under contract but there were not dollars at risk at that point.

When it came down to really micro concern, macro concerns rather about the sector, the kind of question that were asked by buyer and issues that were raised by the buyer could have been raised about any mall of any quality across the country. They really want specific issues with Lloyd and it was a buyer that had thought. Frankly, a lot of open their shopping centers but not a lot in the mall space and frankly just didn't get comfortable with the sector and not so much the asset.

Quentin Velleley - Citi

Okay. Could you mention there were some other buyers, looking at that buyer is now out of the equation? Has your expectation of the value of that asset change following that process?

Michael Glimcher

Not at all. In fact, if you look at the operating results for the quarter and the way things have trended, I think in a more positive manner throughout the year, we are feeling really good about Lloyd. We're feeling really good about its position in the marketplace. There were a number of backup offers. Again, if you choose a buyer you don't always choose the right buyer, but we had a number of credible quality buyers and again our first choice would be to do a joint venture versus an [allied] sale, and frankly we’re in communication with backup buyers and JV partners on both Lloyd and WestShore and Polaris Towne Center. Hopefully in the near future we’ll have more progress to update you on.

Michael Bilerman - Citi

It’s Michael Bilerman speaking. I guess if you go back to the time when you raised the equity, you raised the equity at 3.75, obviously your stock is below that today, you go to the press release announcing your capital initiatives and then announcing the equity offering. While there is no money hard and that was clear in the perspective, you certainly did make a team as though it was closer to reality in terms of your capital plan that you’ve had this definitive sale and I think the market is sort of pulled you that they are a little bit unhappy with sort of getting a little bit of a (inaudible).

Michael Glimcher

That’s not really the case Michael. Again, having under contract, we believe we were crystal-clear and I can tell you I personally met with either by phone or on person with every investor bought in the offering and we were clear that while we didn’t have a substantial deposit, there were no dollars at risk and there was a chance that the sale may not go through.

So, that’s just not the case and again, had we not been out in the market with the offering, we probably would have waited until dollars were risked to disclose just like, where we are today. We are talking to you and we’re very optimistic about where we’ve [back of] offers, but we frankly are not going to disclose anything until there are substantial dollars at risk.

Quentin Velleley - Citi

On the bank that’s barred on their commitment, does that in any way impact any other banks commitment and what was the cause of that bank’s commitment that has [barred]?

Michael Glimcher

Quentin, it’s Michael again, I’ll fall back on the offering again. When we went out to do the offering and offering in my mind is, it’s the most substantial think that’s going to accomplished on, as it relates to balance sheet, as it relates to getting the credit facility modified. There were some things that we need to do that, were number one, talk about, where we were with the line commitments.

In a normal environment, we wouldn’t have even talked about what was commitments and frankly all of these commitments are non-binding, whether it’s our line or any of our peer group, and when you look at the process and the timing and taking people to get their line modified, our process is not any different than anyone else’s, probably the only difference is it relates to line and frankly as it relates to its asset sale is that we disclosed, where we were a little early in the process.

What’s most important to alliance to the bank group are pay down, which were able to facilitate and frankly without asset sales and only with the equity offerings, we have enough capital to facilitate the necessary pay downs to have alliance in effect in to 2011 for the terms that are on the table, additionally security and rates.

So, the banks have a lot to win in this. They have a pay down opportunity. They have security opportunity, and they’ll get a substantial increase in rate. They have every bit of motivation and are working with us as partners to get it done. So, we feel good about that progress, and frankly we want to get it done. So, that we can have the term and we can the have at least your covenant.

In the mean time, as Mark said, we made notice of that we’re going to extent the existing line through the end of 2010 and all we have to do to facility that is to pay a fee and we are fully incompliance with that line. So, we are all working here together and I would really couple both these issues with, they were disclosed a bit earlier than they would have been in the normal course of business, because it was necessary for the equity offering.

Marshall Loeb

We are right, where we thought we would be in the process. It takes a long time to get through documentation and get everything wrap together to get closed and it's not unusual for commitments to expire and it's more of a just formality to go through get those update and get close. So, it just where we are in the process and we are very comfortable and everything is moving in the right direction.

Quentin Velleley - Citi

Mike, I just want to come back to the equity offering for a second and just understand the mindset of having, that have raised it. I think if you had looked at some other companies that have raised equity over the course of this year. They have had more definitive progress on asset sales or line renewals prior to raising the equity on the premise that doing those things would be beneficial for the equity price. Therefore, I can raise equity to higher price by dilution. It almost seems that you guys were a little bit of the reverse that you, how to take the equity, when it was in order to get the line and announce some of the things have fallen back, but rather than you didn't have a luxury of waiting.

Michael Glimcher

I wouldn’t necessarily look at it that way. I would say that the things that we talked about accomplishing and then we want to accomplish internally. We're extending our line, which frankly in the interim we do have through 2010 now and we will have through 2011 once we get this documented. Asset sales JB program is important, but the fact that we got the equity offering done first take some pressure off and frankly gives us a better negotiating position with our potential buyers because it's something that we want to do, but we don't have to do.

It's something that we like to get done sooner, but if it takes a bit longer that's okay as well, and the timing of when we pull the trigger on the offerings, we watch the market and we look at it really before the Labor Day and holiday weekend and we thought there might be an opportunity and we were advised by our bankers as there might be a good opportunity to hit the market then. It was well received, a number of foreign institutional investors have left our shares came back in and frankly we were able to issue more than we initially anticipated and I would argue that that’s probably better capital than the capital that we would gain from just selling assets. Its new equity into the company versus it’s certainly diluted on the existing shares but it’s still new equity into the company.

Operator

Our next question comes from the line of Carol Kemple with Hilliard Lyons.

Carol Kemple - Hilliard Lyons

In your press release you talked about raising that proceeds of $50 million of the three assets sold. How do you come up with that numbers? Assuming you sell all three in 80:20 joint venture; how did you determine that amount?

Michael Glimcher

We really focused on the amount of proceeds that we’re looking to achieve, so we said about $50 million and that may come in the form of an outright sale of end asset and may come in the form of a JV of a couple of the assets, we really just looked at a bag of money that we’d like to collect and how we arrived there, there is small [bridge] to get there.

Carol Kemple - Hilliard Lyons

Then you talked about how mall store occupancy increased in the quarter. What new stores opened in your mall?

Marshall Loeb

It’s Marshall Loeb. We had several Forever 21s in it, so I guess the good news is what the 70% of our revenue comes from tenants that are under 1% of our total revenues. So, it is a pretty indicative, pretty large blend of stores during the quarter. No one in particular kind of theme or anything like that. We are pleased with the quarter; it was a lot of just activity across a variety of tenants.

Operator

(Operator Instructions) Our next question comes from the line of Rich Moore with Royal Bank of Canada. Please proceed.

Rich Moore - Royal Bank of Canada

I am trying to figure out, I guess I’ am sure exactly understand. Mark, is the $100 million still in cash on the balance sheet?

Mark Yale

88 million of its still in cash in the money market fund, that is correct.

Rich Moore - Royal Bank of Canada

Now tell me again why that is, because you have a balance of what probably about 340, I’d say something like that on the line of credit?

Mark Yale

It’s actually a $366 million outstanding. So we paid a portion of the line down at the end of the quarter to show compliance with all the covenants. As Michael said, we have the remaining 88 million from the equity offering and that we plan to apply against the facility upon closing of the modification.

Rich Moore - Royal Bank of Canada

What is the reason for waiting for the close of that? I mean, why not just pay it down right now?

Mark Yale

I think there are multiple things with the bank group, we’d like to see which are our pay down and security in ways, and I think its important for us as Mark said, that we see it and we actually have closed on the modification and in a such point as we close, then we’ll take this proceed and pay it down.

Rich Moore - Royal Bank of Canada

So Michael, is it like a negotiating tool to keep it in cash, is that kind of what I understand?

Michael Glimcher

I don’t know. I would just say that it certainly elaborate that we can pull on something that our bank group has their pay down and we’d like to pay them down. We’d like to have the modification finish. So we’d like to see both these things happen at the same time rather than separately.

Rich Moore - Royal Bank of Canada

Should I read that, do you think as the negotiations are bit sticky at this point with the bank group?

Michael Glimcher

Not what so ever. Our bank group has been tremendous and I will tell you, Mark and myself and Marshall, we personally met with each of them and they have all to work with and they have all been great partners. So, I wouldn’t read it that way whatsoever.

Rich Moore - Royal Bank of Canada

On the reduction that the ultimate reduction in the line of credit. I mean, where do you think that goes to? What do think they're looking for? What you guys planning do even regardless of what they're looking for?

Mark Yale

I mean the way of line works with the equity we issued June 30, 2011 the line steps down to $325 million in terms of total capacity. That obviously gives you a benchmark and then we'll have to look from there in terms of the role. As just Michael said, we are still committed to raising capital from selling assets. So, we're going to continue to work and be well under that $325 million capacity that the line provides in 2011.

Rich Moore - Royal Bank of Canada

I was thinking Mark that it would probably have to go below $200 million. Do you think that's too much or is that about right?

Mark Yale

In terms of capacity size?

Rich Moore - Royal Bank of Canada

Yes. Well, eventually, yes.

Mark Yale

We talked about it in the last call probably somewhere in the neighborhood of $250 million line is something that as we get into 2012 we are thinking about.

Rich Moore - Royal Bank of Canada

On the three assets that you guys have that you are looking to sell. Did any of the public REITs look at those?

Michael Glimcher

Rich, we signed probably 50 CAs on them and I think there was maybe a competitor in a market looked at some information or want to look at the information, but that we have any real activity from the public REITs, no. It doesn't work to buyers.

Rich Moore - Royal Bank of Canada

Then last thing I have guys is the drop in the anchor rent spread for the quarter, what was that exactly?

Marshall Loeb

Hey Rich, it’s Marshall. There’s really two leases we did. One we replaced is Steve & Barry's with our Sporting Goods store in Grand Central Mall in Parkersburg and that went from 7.50 to 7. So, we went backwards a little bit there and that will open just before Thanksgiving this year.

Then the other one, we took the bigger hit it was a renewal of a Best Buy in Minneapolis. So, that’s the headquarters, it was one we were just in and it’s a small sample of two. They’ve got a lot of stores in their headquarters market, this is an older store and we just had a tougher negotiation with them. So, that brought the average down to negative 20% for the quarter. So, one with the Best Buy renewal downsize, and another one was replacing the Steve & Barry’s which we did a little better on.

Operator

There are no further questions at this time. I would like to turn the call back over to Miss Lisa Indest for closing remarks.

Lisa Indest

Thank you everyone for participating in the Glimcher Realty Trust third quarter conference call. You may contact us directly with any additional questions or access our filings through glimcher.com.

Operator

Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.

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