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Pennsylvania Real Estate Investment Trust (NYSE:PEI)

Q4 2010 Earnings Conference Call

February 23, 2011, 3:00 pm ET

Executives

Garth Russell – IR, KCSA Strategic Communications

Ron Rubin – Chairman & CEO

Ed Glickman – President & COO

Bob McCadden – EVP & CFO

Joe Coradino – President of PREIT Services, LLC and PREIT-RUBIN, Inc.

Analysts

Mani [ph] – Citi

Craig Schmidt – Bank of America-Merrill Lynch

Nathan Isbee – Stifel Nicolaus

Michael Mueller – JPMorgan

Ben Yang – KBW

Quentin Velleley – Citi

Cedrik Lachance – Green Street Advisors

Operator

Good afternoon, ladies and gentlemen. Welcome to the Pennsylvania Real Estate Investment Trust Fourth-Quarter 2010 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) This conference is being recorded today, Wednesday, February 23, 2011.

I’d now like to turn the conference over to Garth Russell with KCSA Strategic Communications. Please go ahead, sir.

Garth Russell

Thank you, Britney. Before turning the call over to management for their prepared remarks, I’d like to state that 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 may be affected by uncertainties affecting real estate businesses generally as well as specific factors discussed in PREIT’s press releases, documents PREIT has filed with the Securities and Exchange Commission, and in particular, PREIT’s Annual Report on Form 10-K. PREIT does not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.

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

Ron Rubin

Thanks very much, Garth. Ladies and gentlemen, welcome to the Pennsylvania Real Estate Investment Trust Year-End 2010 Conference Call.

Joining me on the call today are Ed Glickman, the 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 fourth-quarter performance and our results for 2010. We will also discuss our expectations for 2011. After we conclude our remarks, the call will be opened as usual for your questions.

The company's performance improved in 2010, as consumers and retailers gained confidence in the economy, as the year progressed. This confidence has continued into 2011, though there still remain significant concerns with respect to employment growth, interest rates and geopolitical issues.

The company made significant progress on a number of fronts. We improved our balance sheet and reduced our leverage in part by refinancing our credit facility, by raising equity, and selling some non-core assets, using the proceeds to pay down debt.

The company's cash position is much stronger providing us with flexibility, should there be more opportunities to improve the balance sheet and grow our business.

On the operating front, we also achieved meaningful increases in occupancy and sales. We are working to continue these trends in 2011.

I’m also pleased with our annual same-store NOI performance, which is above our announced guidance.

We haven’t lost our opportunistic culture. However, we are being very selective, and with a quite uncertain acquisition environment, our management team has focused on strengthening our financial position and on improving our operational performance and investing in our own properties. In doing so, we are working to place and keep tenants in our malls, to improve our occupancy, and maximize NOI as part of our strategy to create long-term value for our shareholders.

With that, I will turn the call over to Ed Glickman.

Ed Glickman

Thanks, Ron. Good afternoon and thank you for joining us on the call. 2010 has been a year of great challenges and great accomplishments for the company. We began 2011 in a far better place than we were 12 months ago. While we still faced the changing landscape of the retail industry both the economy in general and our company in particular has made significant progress in the last 12 months.

At the end of 2009, we had just completed our redevelopment program and we were faced with both the operational challenges of bringing these projects online and the financial challenges of carrying the increased leverage from our investment.

Our newly renovated assets have been well received in the market with 27 of 38 malls showing improved same store sales. Overall, we are now at $350 per square foot. This is only 4% below our peak performance of $364 per square foot in June of 2007. We’re optimistic that our assets will continue to gain momentum as the overall economy continues its recovery.

At the same time, we have taken a number of decisive steps to improve our financial leverage. With the help of our bank group, we successfully restructured our credit facilities and then began the process of delevering by issuing equity and selling assets.

While we are not yet where we would like to be on either the operational side or the financial side of the business, we have demonstrated the ability to manage through a highly adverse environment and make demonstrable progress in achieving our stated goal.

On the operational side of the business, in spite of the bright line economic indicators turning positive, we continue to face a fragile consumer and cautious retailers.

In 2010, we’re able to keep our assets vital, negotiating pricing to improve occupancy. We ended the year at 91% occupancy with 24 of 38 properties improving.

In 2010 and in 2011, we also faced the expiration of over 3.6 million square feet of anchor tenants. And it was concerned that this would adversely impact us. To-date, we’ve successfully negotiated the expansion of all of the space that has come to term with less than 300,000 square feet to negotiate before year-end. At the same time, as we extended our anchor tenancy, we shortened small shop lease terms to protect our upside against a strong recovery.

So far, the strategy of pushing occupancy and negotiating pricing, and cutting term has been successful. We had experience a 4.8% increase in same-store sales. And our same-store NOI is up 2.5% for the quarter.

We also believe that the increased level of activity in our assets, set the stage for improved lease economics, a key area of focus for the company in 2011.

On the financial side of the business through property sales, equity issuance and applying cash on hand, we reduced debt by 13% and completed the amortization required for the extension under our credit facility.

We have significantly improved our liquidity and have the requisite capital to operate our business. Along with this restructuring, however, came higher interest costs from increased spreads and fees. We have also chosen to operate at a low level of floating rate debt, which further limits risk, but also comes at a cost.

Our 2011 guidance speaks to the full-year impact of these and other 2010 events. First, the proceeds from the company's equity raise and power center sale were applied to debt reduction. We believe that this is the right strategy in face of the uncertain economic environment.

By reducing leverage and limiting our exposure to floating rate debt, we have improved the quality of the company's earnings, but this would come at a cost. It is our goal to further reduce leverage and to pursue capital transactions that lower the risk on the balance sheet. We will do this on an opportunistic basis and when market conditions are advantageous. In the interim, again, we have the liquidity and capital assets for what we need.

Second, our NOI forecast of minus 1% to plus 1% reconciles the improvements that we’ve seen in the company’s operating performance with the full-year impact of the reduced pricing. We believe that increasing the activity level of our properties, in some cases, by bringing in alternate uses and replace incentives with lower rent levels will ultimately drive sales performance, attracting new merchants and leading to increased rental income.

Third and last, as a result of the timing of our announcement, our guidance is also impacted by what we know about the border situation.

Bob will now give you additional color on our financial performance.

Bob McCadden

Thank you, Ed. PREIT's net loss for the fourth-quarter was $8 million or $0.15 per diluted share. FFO as adjusted was $32.2 million or $0.56 per diluted share compared to $37.3 or $0.81 per share in the prior period.

The prior year amounts have been adjusted to exclude the impairment charges, totaling $74.2 million and a $13.1 million gain on the extinguishment of debt. FFO on a per share basis also reflects the dilutive effect of the 10.35 million share offering completed in May of 2010.

Key factors impacting our operating results include the following

As Ed mentioned previously, same-store NOI increased by 2.5% or $1.9 million. Last year’s fourth-quarter benefited from a $2.7 million gain from a parcel sale in October of last year and $2.6 million of NOI generated by the power centers that we subsequently sold in September of 2010.

Interest expense increased by $700,000, compared to the prior year's quarter despite lower average outstanding debt balances.

Outstanding debt for the fourth-quarter 2010 averaged $2.41 billion, as compared to $2.79 billion in last year's fourth-quarter, a decrease of $380 million.

The increase in interest expense is due to higher interest rates on our bank borrowings and two joint venture mortgage loans, increased amortization of deferred financing expenses associated with new debt and lower capitalized interest.

We placed $103 million of completed development and redevelopment assets in to service since the end of 2009. Our effective interest rate for the quarter was 6.21%, 92 basis points higher than last year's fourth-quarter.

G&A expenses, net of management company revenue, increased by $1.4 million in the quarter, due primarily to higher incentive compensation accruals. While reducing debt by almost $350 million since the end of 2009, we've been able to improve our liquidity position by $107 million.

As of December 31, 2010 we had $47 million of cash on hand and $148 million of unused capacity under the revolving credit facility. Our liquidity is sufficient to meet all of our near-term capital needs.

At the end of the quarter, 97.2% of our debt with either fixed or swap to fixed. Our leverage ratio was 67.15% compared to 70.8% a year ago.

Turning to 2011 guidance, we expect GAAP earnings per diluted share to be a net loss between $0.88 and $0.78. We expect FFO per diluted share to be in the range of $1.56 to $1.66 per share.

Let me bridge the gap from 2010’s operating results. In 2010, same-store NOI net of lease terminations were $277.6 million. We expect same-store NOI growth to be between minus 1% and 1% excluding lease termination fees.

Inline occupancy is expected to increase by 100 to 200 basis points from 2010’s levels. We anticipate a seasonal downturn in occupancy during the first half of the year with increasing occupancy in the latter part of the year, as new tenants open stores for holiday 2011.

In 2010, we recorded lease termination fees of $3.3 million. Our guidance range assumes a lower level of termination fees from $1.5 million to $2.5 million. Interest expense will be impacted by a full-year of higher interest rates on our bank borrowings and the two joint venture property mortgages mentioned previously, the cessation of interest capitalization on assets placed in service over the past year and higher interest rates on swap debt.

Interest expense during the fourth-quarter of 2010 was $36.8 million. This should be a reasonable run rate for 2011, as we’re taking into account the following two adjustments:

First, we refinanced the mortgage loan in Springfield Mall at the end of November. The interest rate increased from 1.36% at the end of the third quarter to a fixed rate of 4.77%. You should adjust the fourth-quarter run rate for two months of interest on this loan at the higher rate.

Second, as disclosed on Page #28 of our supplemental, last year, we entered into an interest rate swap on $200 million of our term loan that steps up on March 11th of this year. The swap effectively increases the base rate from LIBOR plus 61 basis points to LIBOR plus 177 basis points. The impact of this step up swap in 2011 is approximately $2 million.

All the other items on our income statement, management company revenues, G&A, and other expenses are effectively flat on a net basis, when compared to 2010.

Additionally, weighted average shares in 2011 are estimated to be approximately $57.8 million, as compared to 53.5 million shares in 2010, an increase in weighted average shares of 4.3 million.

Recurring capital expenditures and tenant allowances are expected to be in the range of $30 million to $35 million. Finally, our guidance does not assume any additional acquisitions or dispositions.

With that, I'll turn the call over to Joe Coradino.

Joe Coradino

Thanks, Bob. The retail economy has continued its gradual improvement with key indicators including employment and housing, gaining positive momentum. While we’re witnessing rising fuel and raw material cost to retailers, the consumer has continued to shop and drive sales at our shopping centers.

We realized a year-over-year enclosed mall comp sales increase of 4.8% from $334 per square foot to $350 per square foot, which compares favorably to the 3.3% national increase in sales. Notably, we experienced positive sales gains at 27 of our 38 mall properties, with 23 now reporting sales over $300 per square foot.

From a retailer perspective, eight of our top 10 rent paying tenants realized increases in sales. The sales increases were led by our premier properties, Cherry Hill, Jacksonville, Woodland, and Lehigh Valley malls, where average sales were $521 per square foot, up 13.3% over 2009.

We believe our portfolio is showing signs of turning the corner on the economic downturn of 2008. We opened over 1 million square feet in new tenants and ended 2010 with positive net absorption of 453,000 square feet. We increased total occupancy by 160 basis points to 91%, a move that was primarily the result of inline leasing activity. We ended the year with non-anchor occupancy of 87.2%, an increase of 260 basis points over ’09.

When temporary tenants are included, enclosed mall non-anchor occupancy increases 430 basis points to 90.4% and total mall occupancy is at 92.6%, a significant increase over last year. These occupancy gains were also driven by our General Manager leasing program which generated over 160,000 square feet in transactions during 2010. The introduction of alternative uses and a successful incubation of tenants in our attempt to firm conversion program also contributed.

We are beginning to see improvement on the fundamentals of our business with long-term renewal spreads beginning to stabilize. Specifically, renewals in properties with sales over $350 per square foot are achieving positive renewal spreads of 2.8%.

Conversely, in properties, with those below $350 per square foot, we are experiencing negative renewal spreads of 9.2%. However, for all these renewals with terms over three years, we are seeing positive renewal spreads in excess of 1%.

In our view, the fourth-quarter leasing spreads on new deals do not reflect a trend rather the fourth-quarter reflects a significant effect of a few transactions that we do not expect to be replicated. We expect 2011 spreads on new deals to return to earlier 2010 levels.

We experienced no bankruptcies during the quarter compared to three bankruptcies during the fourth-quarter of '09. Our exposure to Borders who filed for bankruptcy protection last week is limited. We currently have seven small-format Borders comprising 31,000 square feet in the portfolio and five large format stores totaling 160,000 square feet.

Two of our large format stores are on the closing list; Patrick Henry Mall and Whitehall Mall. At Patrick Henry, we already have a queue of interested prospects.

We are continuing to realize the impact of our investments in redevelopment. Our efforts to upgrade the merchandise in our properties have resulted in improved sales metrics. Our Woodland Mall in Grand Rapids where we added Barnes & Noble, sales ended the year at $499 per square foot, increasing 13.9% over 2009.

We expect these sales gains to continue their upward trajectory, bolstered by the first in our portfolio opening of the North Face. At Cherry Hill Mall, the comp sales productivity is $559 per square foot, an impressive increase of 25.3% over 2009. This improvement is a result of securing the right merchants for the market.

We strengthened our tenant line up during the quarter with the opening of 12 merchants in 32,000 square feet. Key openings during the fourth-quarter included White House Black market and Marciano.

Also during 2010, we opened Buckle, Guess, Francesca's Collections and 77kids. Cherry Hill has been transformed into the retail powerhouse to South Jersey. At this time, we are forecasting 2011 year-end occupancy at approximately 95%.

At Plymouth Meeting Mall, the comp sales productivity increased by 31% over '09, driven by the new addition to the property, including California Pizza Kitchen, P.F. Chang's and Redstone Grill.

We continue to improve our tenant line up during the quarter with opening seven merchants in 28,000 square feet. Key openings include Orvis in the South Plaza, and Express in the main mall. The leasing activity has driven total occupancy to 87.7%, an increase of 180 basis points over 2009.

At Voorhees Town Center, construction continues on the township municipal building. Demolition is complete with tenant improvements underway.

We continue consolidating the mall retailers under the first level of the mall. During the fourth-quarter, we opened a 20,000 square foot tilt, a large scale nationally recognized arcade in place of the previous tenant Children's Place opened in their new 5,100 square foot first level location, joining Victoria's Secret and Payless Shoes.

The announcement of the town hall relocation has already begun to generate additional prospective tenants and we are in active discussions with medical and educational uses for a majority of the space on the second level of the mall.

The residents at Avatar continue to come online and increases in traffic at the site with six buildings now available. The residential occupancy at year-end was approximately 95% and in the last 60 days, two new buildings opened for occupancy.

We are underway with construction of two signature restaurants expected to open in the fall of '11. They will complement Coffee Works which opened on the Boulevard in December.

We also had a strong year of leasing in our strip and power center assets. We opened 153,000 square feet, vacated as a result of the bankruptcy filings of Circuit City and Linens' N Things resulting in total occupancy at our strip and power centers at 95.8% at the end of 2010, 700 basis point increase.

So we have made significant improvements on many of our operating initiatives in 2010, including sales, occupancy, revenue and controlling expenses. We're encouraged by these positive operating metrics we have registered with the improving retail climate. We continue to build on the platform created by our complete or redevelopment assets and look forward to sharing continued positive developments on future calls.

With that, we're now ready for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Quentin Velleley with Citi. Please go ahead.

Mani – Citi

Hey, guys, this is actually Mani [ph] here with Quentin. My first question is on Borders. What exactly are you including in guidance for the impact of those closing?

Ed Glickman

You have roughly about $0.5 million of loss revenue associated with the two stores.

Mani – Citi

You're not including any other potential closing?

Ed Glickman

We are not.

Mani – Citi

Okay. In terms of renewals, are tenants looking to do short-term deals, especially, on a percentage basis, kind of what's your proportion of those types of deals?

Ed Glickman

I’d say for the most part, the challenge to operators are continuing, and we are also pursuing that, looking for shorter term deals, but for the most part, you're beginning to see the retailers, who are performing to work towards longer-term transactions in our properties.

Mani – Citi

Okay. And then, Joe, on Cherry Hill. I think, you said that you expect the occupancy of that asset to go to 95%?

Joe Coradino

That's correct.

Mani – Citi

I was just surprised given the productivity at the mall that the occupancy was down so much in 2010.

Ron Rubin

Well, remember that part of that is driven by the fact that we incorporated the second level now into the calculation of occupancy for the property.

Joe Coradino

And the other driver, Mani, was at the end of last year, Forever21 had opened its larger format stores and was also operating a second store in the first level. So, at the end of 2010 that second store was occupied by a temporary tenant, which isn’t included in our occupancy statistic.

Mani – Citi

Got it. And then finally, Bob, for G&A, I think you said that you expect the 2011 number to be sort of flat with 2010, but 4Q I think was higher than what you had initially guided to?

Bob McCadden

Right.

Mani – Citi

So should we kind of expect the 4Q run rate, which would get us higher than 2010 or 2010 all in number?

Bob McCadden

Yes, look at this 2010 all in number.

Mani – Citi

Okay, thanks, guys.

Operator

Thank you. Our next question comes from the line of Craig Schmidt with Bank of America-Merrill Lynch. Please go ahead.

Craig Schmidt – Bank of America-Merrill Lynch

Thank you. I had a couple of questions on the redevelopment projects. I assume the occupancy number at Voorhees doesn’t include the city municipal offices. Do you know what the number will roughly be once they settle in there?

Ron Rubin

You are correct, it does not include it. They are going to be occupying about 20,000 square feet, sort of grow on that.

Ed Glickman

We are actually selling them the condominium interest in a property, so you will be reducing the numerator and the denominator obviously at that point.

Craig Schmidt – Bank of America-Merrill Lynch

Got it. And then of the probably say 41% of vacant, how much would be on the second floor versus the first floor of the non-anchor space?

Ed Glickman

Well, a lot of the occupancy or the vacancy also includes the property along the boulevard, so it’s the street level retail. So I mean this is a matter of practice as the buildings are complete, wait some period of time, and then if the space is not leased, we typically put it into service following the occupancy of the first tenant.

Ron Rubin

But the goal of the project at this point is to relocate all of the second floor tenants to the first floor, the retail tenants, which is in the process of being executed, if not already completed. And then to populate the second level to take advantage of City Hall moving on to that second level and to continue to proliferate the second level with office tenants. That's the comment I made in my script regarding we’re in discussions for the majority of that space, if not all of it, with several tenants.

Craig Schmidt – Bank of America-Merrill Lynch

Great. And then on Plymouth Meeting, I see that the non-acre space is 81.2. I know you're trying to pick that number up. Where do you think that number will be year-end 2011?

Ed Glickman

Our CEO gave the right answer. He said it will be an improvement, but we'll get more specific in a moment. 86% occupancy is projected at year-end.

Craig Schmidt – Bank of America-Merrill Lynch

Great, okay, thanks a lot.

Operator

Thank you. Our next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Nathan Isbee – Stifel Nicolaus

Hey, good afternoon. Can you talk a little bit about the space demand from traditional retailers at your lower productivity malls?

Ron Rubin

I think as you can see our focus in our lower productivity malls has been alternative uses and local retailers. And as I pointed out, our General Managers program resulted in over 160,000 square foot of leases in 2010. I think the retailer demand is stagnant at best right now for those properties. It’s a selective mall-by-mall decision. In some cases, the retailers are performing in the lower productivity malls; in some cases, they’re not. So we make a case-by-case decision, but I’d say generally the answer to that question is that you’re not seeing significant expansion in the secondary market malls by national retailers.

Nathan Isbee – Stifel Nicolaus

Okay. And then I think you’d spoken on the last call up being in discussions of about 300,000 square feet of non-traditional retailers, some medical uses, educational uses, can you just talk about where you stand with those?

Ron Rubin

The 300,000 square, some of that number has been concluded during the fourth-quarter. Yes, I don’t have that specific number, but the bulk of that is really healthcare usage at this point, probably, upwards of 150,000 square feet of that 300,000 are transactions in progress that we are optimistic for in 2011.

Nathan Isbee – Stifel Nicolaus

Some of that fell out, some of that got done?

Ron Rubin

Yes, deals always die unfortunately

Nathan Isbee – Stifel Nicolaus

Okay. On Cherry Hill, in terms of leases signed today, that have yet to come online, sort of NOI for '11, how much do you have in the bag there?

Ed Glickman

We have, I would say, about 21,000 square feet committed at this point, and probably, a number that's double of that that we're working on transactions with right now. I think with Cherry Hill, again, and I think I mentioned this on our previous call. We're being very selective about transactions. The center is doing $559 a square foot in sales, with 25% sales growth year-over-year, which in terms of 25% sales growth, I don't know another asset in America that could compete with that. If you do, I'd be happy to learn about it.

But having said that, we're being very selective and very careful about who we put into the property and while we're in a business where quarter-over-quarter metrics are important, we're more focused on creating value for the long-term at Cherry Hill. We have the queue of tenants, but we want to do the right deals at our terms.

I can give you a long list of prospective tenants, which our General Counsel won't allow me to do, but 21,000 feet right now, but good things in the future for Cherry Hill.

Nathan Isbee – Stifel Nicolaus

Sure. I know it’s early; you had brought Express into the interior of Plymouth Meeting, are there any signs that that’s helping the interior, are you seeing any others?

Ed Glickman

Yes. They’re about 20% over plan in that store which is good news and we’re working on a number of transactions to build off of that in similar categories, similar price points.

Nathan Isbee – Stifel Nicolaus

National retailers?

Ed Glickman

That’s correct.

Nathan Isbee – Stifel Nicolaus

Okay. And then just to finish up. Any progress on the Willow Grove or Hanover anchor space?

Ed Glickman

There’s progress. We’re moving forward, but again, nothing to report on.

Nathan Isbee – Stifel Nicolaus

Got you. All right. Thanks so much.

Operator

Thank you. Our next question comes from the line of Michael Mueller with JPMorgan. Please go ahead.

Michael Mueller – JPMorgan

Hi. Maybe a little bit away, but can you talk about how you are thinking about the, I guess the term loan. I think it’s that converts that come due in ’12 and the term loan in ’13 and just how you are thinking about refinancing those and maybe while you’re at it, touch on asset sales as well. What you are thinking about, is anything definitively in the market at this point in time, etc.

Bob McCadden

So, we have the convert that comes due next May. And our thought is that we’ll either look for some kind of an extension of that convert or we’ll refinance it. If we don’t like the terms, if we don’t like where the stock price is or where the interest rate environment is, we’ll use the line of credit to pay that off, so that’s our feeling about the converts.

In terms of the loan that comes due on Cherry Hill Mall, as Joe just mentioned, the Mall is doing extremely well and we feel very comfortable with the ability to refinance.

Michael Mueller – JPMorgan

Sorry, I said the term loan. I think I said the term loan, if not, I meant to say the term loan?

Ed Glickman

Well, the term loan and the line of credit are essentially tied together.

Bob McCadden

But we have the ability on the pay down to extend that another year from '13 to '14. We've already got the requirements for an extension, Mike.

Michael Mueller – JPMorgan

Got it. Okay. And then anything on the asset sale front we should be thinking about?

Ed Glickman

Not at the moment. We still have the two remaining of the seven assets, which are part of the original Cedar transaction that has not yet been included.

Michael Mueller – JPMorgan

Okay. For guidance purposes, are they treated as being sold?

Ed Glickman

They are not.

Michael Mueller – JPMorgan

Okay, thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Ben Yang with KBW. Please go ahead.

Ben Yang – KBW

Hi, good afternoon. Ron, at the end of last quarter you were just starting to hold non-traditional medical office initiative. Now that you've had a few months under your belt, and I assume you had several conversations at this point. Can you just give us an idea of what the reception has been from some of the existing retailers, are they concerned at all about what you're doing and is it possible that you might have to lower the rent, if they are maybe located in that medical office wing, is that something that we should be thinking about or be concerned about?

Joe Coradino

This is Joe Coradino. First off, we’re being quite selective about where we introduce those alternative uses, and they’re typically in properties that where occupancy would be welcomed by other retailers, number one.

I think the other thing is that we obviously see this as a positive, and we see great synergy between retail and medical. And I think our discussions with both the retailers and healthcare is that it’s a significant opportunity, just a couple of examples around the country, where it's already been accomplished with Vanderbilt University going into a mall environment. You never know when someone’s going to hold you up, but at this point, we’re optimistic that there is a value added opportunity with healthcare.

Ben Yang – KBW

So there hasn’t really been any push back, it sounds like from some of the retailers at those particular properties that you’ve identified?

Joe Coradino

No, not at this point.

Ben Yang – KBW

Okay, great. And then I think you also mentioned that in terms of re-tenanting the two large format Borders spaces that there was a queue of retailers kind of lined up. Can you just give us an idea who might be taking that type of space, is it kind of a competing book store, is it a retailer that you have to carve it up into smaller space, who do you think is going to take that space in your portfolio?

Joe Coradino

Certainly, one possibility is a competing book store. I think the other possibilities include large format, soft goods retailers, number one. Number two; there is the possibility, particularly at Patrick Henry of carving that up into additional restaurants, restaurants at that center do exceedingly well, in excess of $4 million each, the two restaurants that we have in the space, so we are considering that as well.

So again, it's something that, I think, for Patrick Henry, with the investment that we have initially put into it as part of the redevelopment, number one. And also the fact that we think it's important with the competitive property Peninsula Center that was developed, that we merchandise that, consistent in a way with the positive demographics in the area. So again, being somewhat careful in who we put in, I want to make sure that as a result of making decision, it's one, economically a good decision, and two, from a merchandising perspective, drives traffic and sales.

Ben Yang – KBW

And that $0.5 million of lost revenue that you talked about related to Borders, does that assume that you re-tenant that space this year?

Ron Rubin

(inaudible)

Ben Yang – KBW

Okay, thank you.

Operator

Thank you. Our next question is a follow-up question from the line of Quentin Velleley with Citi. Please go ahead.

Quentin Velleley – Citi

Hi, good afternoon. Ed, in your prepared remarks, you spoke a little bit about opportunistic capital raisings. If we look at the balance sheet and leverage levels, and it's kind of around the nine times net debt-to-EBITDA ratio, and you sort of suggested that there's not a lot of asset sales that are underway at the moment. So how you're sort of thinking about potentially raising common equity to further delever, and also, maybe if you're thinking about preferred equity as well?

Ed Glickman

So we've looked at a possibility ranging from the convert and extending and expanding that. We've looked at preferred stock, and we've also looked at different flavors or raises of common equity from going out and issuing more shares to going out and doing an ATM program.

But, as I have said, we intend to be opportunistic, look at how the market responds to the stock and see what we think is the improvement in the core performance of the portfolio and we are also keeping tabs on the interest rate environment, but we’d like to overtime reduce leverage as we have said. We intend to do it in the most advantageous way possible for the company.

Quentin Velleley – Citi

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Cedrik Lachance with Green Street Advisors. Please go ahead.

Cedrik Lachance – Green Street Advisors

Thank you. Just to stay on the same line of question, but maybe turning to property sales instead. Could you give me a sense of what you consider non-core assets at this point and what's your appetite to market them?

Ron Rubin

We have a number of malls that we don’t think are core. Those would be the ones that have the lower sales productivity and places where we don’t think the investment of marginal capital will necessarily be helpful at least for what we would like to see with the property, so those are possible.

But at the moment, those are usually sold to financial buyers. And those buyers aren’t really in this market at the moment. We have some additional power centers that we could contemplate at some point in time doing something with they are not core, in some sense, they are fully realized, but again we've sold most of the power centers that we felt were the ones that were the least strategic to the portfolio. So again, I don't think that in the near-term, the leverage issue will be solved by further portfolio build.

Cedrik Lachance – Green Street Advisors

But when I look at where your stock price seems to persistently trade at a fairly large discount to net asset value and given that there actually are very few properties are being marketed, why not take advantage of perhaps the window in the market and try to sell a few, if not a large chunk of assets, which would help you realize an AV, and at the same time, delever the company by quite a fair bit?

Ron Rubin

I guess the question is what you can consider to be a window of opportunity here for the properties and which ones that we feel we have that would meet that window and yet are not strategic to leasing the balance of the portfolio. So in our thought, the properties that would meet today's window, as we perceive it, are the ones that are key to keeping the balance of the portfolio leased.

Cedrik Lachance – Green Street Advisors

So, essentially impossible for you to sell the top half through portfolio?

Ron Rubin

Yes. I would say so.

Cedrik Lachance – Green Street Advisors

All right. Thank you.

Operator

Thank you. And I'm showing no further questions in the queue. I’d like to turn the call back to Mr. Rubin for any closing remarks at this time.

Ron Rubin

Thank you for joining us this afternoon and for your continued support. We'll continue to provide with updates that takes place within the company and we will obviously provide our update for First Quarter 2011 Results in April. Thank you again and have a good evening.

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