Pennsylvania R.E.I.T. Q4 2007 Earnings Call Transcript

Feb.27.08 | About: Pennsylvania Real (PEI)

Pennsylvania R.E.I.T. (NYSE:PEI)

Q4 2007 Earnings Call

February 26, 2008 3:00 pm ET

Executives

Garth Russell – KCSA

Ron Rubin – Chairman, CEO

Ed Glickman – President

Joe Coradino – EVP, Head of Retail Operations

Bob McCadden – CFO

Analysts

Ambika Goel – Citi Investment Research

Craig Schmidt – Merrill Lynch

Nathan Isbee – Stifel Nicolaus

Michael Mueller – J.P. Morgan

Matt Ostrower – Morgan Stanley

Ryan Bennett – Lehman Brothers

[Margin Rower] – MSR Capital Management

Ben Yang – Greenstreet Advisors

Operator

Good afternoon ladies and gentlemen and thank you for standing by, welcome to the Pennsylvania Real Estate Investment Trust fourth quarter 2007 earnings conference call. During today’s presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. If you have a question, please press the star followed by the one on your touchtone phone. If you’d like to withdraw your question, please press the star followed by the two. If you are using speaker equipment, please lift the handset before making your selection. This conference is being recorded today, February the 26th, 2008 and I will now return the conference to Mr. Garth Russell of KCFA, please go ahead.

Garth Russell

Thank you, before starting the call today I’d like to read the forward looking statement. This conference call will contain certain forward looking statements within the meaning of the Federal Securities Laws. Forward looking statements relate 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 views about future events and are subject to risks, uncertainties, 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 affected real estate [businesses] generally as well as specific factors discussed in documents previously filed with the Securities and Exchange Commission and in particular PREIT’s annual report on form 10K for the year ended December 31, 2006. PREIT does not intend to update or revise any forward looking statements to reflect new information, future events or otherwise. Now I’d like to turn the call over to Ron Rubin, Ron the floor is yours.

Ron Rubin

Thank you very much. Welcome to the Pennsylvania Real Estate Investment Trust’s fourth quarter 2007 investor conference call. Joining me on the call today are Ed Glickman, President, Rob McCadden, CFO and Joe Coradino, Executive Vice President 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 and our full year 2007 results, the status of our current projects and some of our plans for the future. After we conclude our remarks, the call will be open for your questions.

Our operating performance in 2007 affected by up to 12 ongoing redevelopment projects was in line with our announced expectations. The five projects completed during the year are producing strong results. We expect the remaining redevelopments will also perform well and go a long way towards strengthening our overall portfolio. We all understand that the company is not immune from the economic challenges facing our country. To date, however, we have not been unduly impacted by store closings or bankruptcies. We are monitoring conditions closely and working with our tenants to insure that they and our customers continue to have good experiences at our properties. As always, we remain focused on maximizing long term returns for our shareholders and with that I will turn the call over to Ed Glickman.

Ed Glickman

Thanks Ron. As Ron mentioned, our company is not immune from the cycles of the US economy. The retail development and redevelopment cycle is however measured in years, not in months nor days and in 2008 we expect to bring to fruition a number of projects that were initiated prior to our entry into this period of uncertainty. In 2008, we focused on completing these long term initiatives including Cherry Hill, Plymouth Meeting and Voorhees Town Center.

In spite of the fourth quarter slowdown in consumer spending, we had an exceptional year. FFO was $3.90 per diluted share which was above our guidance of $3.82 to $3.87 provided in October. This positive variance was primarily a result of a payment for our management work on [Swancy] Mall. 2007 FFO includes $0.32 from the redemption of our 11% preferred stock. Net of this benefit we would have ended the year at $3.58 per share, a $0.04 decrease from 2006.

This result reflects a decline in the amount of land sales year to year as admitted property performance focused on our assets currently under construction. We mitigated these impacts by higher corporate revenue, lower G&A and the benefits of capital markets transactions such at the issuance of our 4% convert and the call of our 11% preferred. Indicative of a trend we expect to see continue, funds available for distribution for the year were up to $2.31 bringing our dividend payout ratio for 2007 below 100%. As Bob will discuss later, we are focused on conserving our capital to ensure the completion of our work in progress. Total NOI for the portfolio for 2007 was $303.4 million down 0.8% from $305.7 million in 2006. The decrease in NOI reflects the sale of [Stookle] Mall in February of 2007.

After adjusting for lease termination-ing the same store NOI is up 0.4% from $299.8 million in 06 to $301.0 million in 07. NOI performance was improved by growth in our redevelopment properties completed in 06 which were up 8.8% year to year. Overall same store performance was brought lower by significant operating declines at Plymouth Meeting Mall and Voorhees Town Center which have been impacted by major construction which is going on at those sites. For the fourth quarter, funds from operations was $1.12 per diluted share compared to $1.25 for the fourth quarter of 2006, a decrease of 10.4%.

The decrease in fourth quarter FFO was primarily due to $0.13 that we received in the fourth quarter of 06 from the sale of land at Voorhees Town Center. For the quarter, NOI was $84.7 million flat. Same store NOI was also flat. Improvements in minimum rent will offset declines in percentage rents and diminished tenant expense recovery. In the fourth quarter we experienced some softness in tenant sales that had an impact on our percentage rent. Funds available for distribution for the quarter was $0.68 against a $0.57 dividend payout. Sales productivity at our properties continues to improve in 2007 with sales per square foot at $358.00, a $4.00 increase despite the holiday softness. We have 16 of 39 mall properties performing above $350.00 per square foot.

These properties rent, I’m sorry represent approximately 60% of fourth quarter NOI. During 2007 we executed 606 non anchor leases for 2.1 million square feet. This is against 684 leases or 2.5 million square feet in the same period in 2006. At year end 2007, overall mall occupancy was at 90.4%, up 320 basis points from 87.2% at year end 2006. Overall, average minimum rent for the mall portfolio was also up at $30.53, a 2% increase from $29.93 in 2006.

These higher occupancy and rent levels achieved at year end 07 reflect the progress that we have made on our redevelopment activity. During 2007, we increased our investment in real estate by approximately $252 million, including the $183 million on redevelopment and $68 million in development. Joe Coradino will discuss our [REIT] development work in depth with you in a few moments. On the development side, in 2007 we opened a new River Valley Tower Center with Best Buy, Bed Bath & Beyond, Pet Smart, Olive Garden and Panera Bread. We expect that occupancy will be at 100% [unintelligible] opens next month.

We are also under construction at [Monterol] Marketplace in [Solance] Grove, PA where approximately 70% of the space is spoken for with Target, Giant’s, Michael’s, Dick’s and Staples as key merchants. The first group of stores is expected to open for holiday 2008. We are also under construction at our [Lacy] Township New Jersey project now named Sunrise Plaza. Home Depot opened last October with Kohl’s and Staples expected by spring 09.

At this project we are now 90% committed. Including our continued investment in these development properties, we expect to grow our investment and real estate during 2008 by up to $370 million by renovating, extending and constructing new retail space. Of this amount, up to $180 million will be spent on our three largest mall redevelopment projects, again Cherry Hill Plymouth Meeting and Voorhees Town Center. Now, Joe Coradino will provide you with detailed information on each of our redevelopment projects and Bob McCadden will discuss our capital plans.

Joe Coradino

Thank you Ed. The year 2007 marked an inflection point for our company. It was the first time since the Crown American Company and Ralph’s property acquisitions that we began to recognize the impact of the transformation of our portfolio. As an illustration, in 2007 we executed leases with 17 new first in the portfolio tenants, including Cheesecake Factory, Dave & Buster’s, Eastern Mountain Sports, Mangiano’s, Armani Exchange, Books-A-Million, [Aries], Payway Asian Diner, Chipotle and Crazy City.

We celebrated major notable tenant additions to our portfolio during 07. We opened three Dick’s sporting goods, a Magnolia, Beaver Valley in North Hannover Malls and added expanding retailers such as Barnes and Noble and Regal Cinema. The redevelopment program continues to generate strong performance. Of the company’s 38 malls, eight redevelopments were completed in 06, five in 07 with nine slated for completion in 08 and 09, representing over 50% of our portfolio.

These projects are creating value within our portfolio. For projects completed in 06, NOI has increased by 8.8% when comparing 07 to 06. During 2007, we completed redevelopment in the secondary market segment of the portfolio at Beaver Valley, Francis Scott Key, Magnolia and New River Valley Malls. For 2007, sales growth at these properties increased by 1.9% to $307.00 per square foot. This is particularly impressive when considering national retail trends and recognizing that the redevelopments were not complete for the full year.

In 2007 we announced redevelopment plans and commenced construction on North Hannover and Jacksonville malls. In 2007 we achieved full entitlement, permitting and commence construction on five of our Philadelphia metro area properties, Cherry Hill Mall, Plymouth Meeting Mall, Voorhees Town Center, [Woolgrowth] Park and Morristown Mall. At Cherry Hill Mall, the demolition of the former [store bridges] is complete and we are preparing for a March 08 ad delivery to Nordstrom’s. In November, we opened the first Crate & Barrel and Container store locations within our portfolio.

During the quarter, we executed a lease with Apple and opened Armani Exchange and Hollister, three premier concepts in keeping with our goal of elevating merchandising in advance of Nordstrom’s opening. In addition to signing Mangiano’s, we are finalizing leases with several exciting restaurant concepts for Bistro Row, extending the dining component at the mall. At Voorhees Town Center, the mall interior renovation was complete for holiday 07 and construction is underway on Town Center Boulevard with the first phase of the residential component expected to be complete for fall of 08. During 07, we executed a lease with Crazy City, a 19,000 square foot indoor theme park targeted towards preteens as well as the Learning Experience, a 10,000 square food child daycare facility.

However, of particular note is the execution of a lease of our 50,000 square foot headquarters office for Star Group, South Jersey’s largest advertising agency, for occupancy during the third quarter of 08. Of the 225,000 square feet of total gross leasable area or exterior space within the project, we have letters of intent or executed leases for approximately 50% of the space. At Plymouth Meeting Mall, tenant construction continues on the out parcels for PF Chang’s and California Pizza Kitchen, both of which are expected to open in April of this year as well as Redstone Grill and Citibank which will open in June. Benihana, the last remaining out parcel is expected to open in August.

The mall addition including Whole Foods is under construction and we’re working towards a 2008 delivery. Most importantly, during the quarter we completed exciting transactions with Dave & Buster’s for approximately 30,000 square feet which is under construction and will open in July and Crazy City, for 23,000 square feet, is expected to open in the Fall of 08. This will establish the mall as a regional shopping, dining and entertainment destination.

At Willow Grove Park, Cheesecake Factory opened in the Fall of last year and during the year we opened a two level H&M, Whitehouse Black Market and Sephora in our continuing mall remerchandising efforts. We do expect that [Bosgobs] here and at North Hannover will open later than previously planned. At Morristown Mall, Lane Furniture opened in September and construction is underway to turn over the Eastern Mountain Sports during the first quarter. During the fourth quarter of 07 we opened Hollister and we’re underway with Potbelly Sandwiches where an out parcel location adjacent to Payway Asian Diner, both of which are expected to open in the summer of 08. All of these additions in conjunction with the façade renovation of the property will continue to enhance the customer shopping experience and differentiate the property from nearby Cherry Hill Mall.

In 2007 we made great strides in advancing our redevelopment programs, developing plans and strategies for two more of our assets with completions scheduled for 08 and 09. At Gadsden Mall in Gadsden Alabama, we’re pleased to announce our first new JC Penney store in recent history. Construction has commenced on the 85,000 square foot JC Penney store to replace the former 65,000 square foot [Phelps] store which relocated into the former [McCray’s] store in August of 07. The new JC Penney store is expected to open in the third quarter of 08. In addition, a 15,000 square foot Books-A-Million will be added to the Sears wing of the mall in the fourth quarter of 08.

At [Wireplace] Commons in Doughton Alabama, a 24,000 square foot expansion of [Belk’s] Department store is underway for completion in the fourth quarter of 08. Additionally during the fourth quarter, we executed a lease for a new 80,000 square food Burlington Coat Factory to replace the vacant [Neprase] anchor box which was scheduled to close before [sebelps] acquisition of [McCrave’s]. Construction on the Burlington Coat is scheduled to commence in the fourth quarter of 08 and we expect to open the new anchor in the second quarter of 09.

In the first quarter of 08 we executed six new leases, representing over 375,000 square feet of space for tenants that will replace Value City anchors and Chambersburg, Cumberland, Francis Scott Key, [Lychomy] and Union Town Malls. At each of these centers, the existing Value City anchors were closed by March 31 of 08. At Chambersburg, [Lychoming] and Union Town Malls, Burlington Coat Factory will occupy the existing Value City anchor box and is expected to open in the third quarter of 08. At Francis Scott Key, a Value City Furniture will take approximately 49,000 square feet of the existing Value City anchor and is expected to open in the third quarter. A new 17,600 square foot DSW will take the remaining square footage from the previous Value City box and will open in the first quarter of 09.

At Cumberland Mall, Burlington Coat factory will occupy 75,000 square feet of the previous Value City anchor space and is expected to open in the fourth quarter of 08. We are marketing the remaining 25,000 square feet of space to potential large format retailers and projecting an opening in 09. The total investment for the five mall portfolio’s deals executed in the first quarter of 08, including costs associated with the potential large format retailer at Cumberland Mall was $23.9 million and the initial return on investment was 7.3%. We believe we are well positioned to continue to grow the company in the face of the current retail environment driven by the success of our redevelopment strategy. We see 2008 as a year of cautious optimism. We plan to capitalize on opportunities from our redevelopments and look forward to sharing our results with you on future calls. Now I’d like to turn it over to Bob McCadden.

Bob McCadden

Thanks Joe, for the next few minutes I will cover our fourth quarter GAAP earnings and operating results, update you on our current capital spending and financing plans and provide our initial FFO guidance and assumptions for calendar year 2008. Net income available to common shareholders for the fourth quarter of 2007 was $8.7 million or $0.22 per diluted share. During the fourth quarter of 2006, net income available to common shareholders was $15.6 million or $0.42 per diluted share. Last year’s operating results in the fourth quarter included a $5.1 million land sale gain.

Depreciation and amortization is higher as a result of the additional space commissioned over the past two years. As Ed mentioned, our operating results exceeded the upper end of our guidance range as a result of two events. First, we received a $1.5 million or $0.04 a share payment relating to an incentive management fee. We also increased our self insured general liability reserves as a result of a yearend review of our outstanding claims and an estimate of our incurred but not reported incidents. [After] giving effect to the portion of reimbursable from tenants, FFO was reduced by approximately $0.01 per share due to this event.

The fourth quarter also includes a $1.1 million or $0.03 per share write off of abandoned project and dead deal costs which were contemplated in our earlier guidance. For the full year, this amount was $1.5 million or $0.04 a share. A portion of additional insurance provision and the other write offs are included in our G&A expenses in our income statement. As of December 31, 2007, we had $2.4 billion of debt outstanding which represented approximately [6]0% of our total [Norfolk] capitalization compared to [5]0% at September 30th.

The change results principally from a decline in our share price from September 30th as our debt balance increased by $77 million in the quarter. We expect our leverage to increase throughout 2008 as we continue to execute our redevelopment plans with high levels of spending on the three large Philadelphia area projects. At December 31, 2007, fixed rate debt comprised 82% of the company’s indebtedness, including our proportionate share of the debt of our partnerships. Our floating rate debt increased slightly from September 30, 2007 and will vary from period to period depending upon the timing of our capital spending and other financing plans.

At the end of 2007 we had borrowed $330 million under our credit facility, after giving effects to amounts required to support letters of credit, we had approximately $153 million of available borrowing capacity. In January of this year, we closed on a $55 million supplemental mortgage loan on Cherry Hill Mall. This 5.51% loan was provided by Prudential and Northwestern Mutual and will mature in October 2012. A portion of the proceeds were used to pay down credit facility borrowings, leaving us with $195 million of borrowing capacity as of today. At the end of 2007, our fixed rate debt had an average coupon rate of 5.94% which represents a 46 basis point reduction in our average fixed rate debt of 6.38% at the end of last year.

Our press release includes our initial estimate of earnings and FFO for 2008. We expect our net loss per diluted share to be between $0.12 and a $0.02. FFO per diluted share is expected to be between $3.60 and $3.70. Key assumptions underlying this guidance include excluding lease terminations fees in both period, we expect overall NOI growth of 3-4%. This includes the expected full year contribution from our new ground of development projects. Same store NOI growth of 2.5-3.5% again excluding lease termination fees. In 2007 we had lease termination fees of $1.6 million or approximately $0.04 a share. Our 2008 guidance assumes termination fees of $1.5-$2 million or $0.04-$0.05 a share. In 2007 we had gains on sales of non operating real estate, including condemnation proceeds totaling $2.5 million or $0.06 per share.

Our 2008 guidance assumes land sale gains of up to $0.01 per share. Our 2007 bad debt expense was approximately 0.5% of real estate revenues or $2.6 million on a supplemental basis, including our proportionate share of our joint ventures. For 2008 we have increased our estimate by $1 million to 0.7% of real estate revenues or approximately $3.6 million. Our 2008 guidance also includes approximately $1.1 million or $0.03 a share of additional development fee revenues associated with the Value Downs racing project. Our assumption for G&A expenses is that they will average just over $11 million per quarter.

As in prior years, we do not expect these expenses will be incurred ratably during the year, typically our expenses are higher in the second quarter as a result of the ICFC convention and other company sponsored events that are sponsored during that period. Our guidance assumes that interest rates on new fixed rate long term financings will be between 5.75 and 6.75%. The actual rates obtained on these planned financings will depend on prevailing market conditions when these transactions are consummated. Higher depreciation and amortization expense is also expected as a result of the additional assets placed in service.

As Ed mentioned, our capital spending estimate for 2008 includes $250-$300 million to fund redevelopment projects currently underway and several other projects, including the Burlington Coat deals and the Gadsden and [Wiregraph] project that Joe discussed earlier. In addition, we anticipate spending $50-$70 million during 2008 to complete Sunrise Plaza and New River Valley Center, fund the ongoing development of Monroe Town Center and other projects in our ground of development pipeline. The carry capital expenditures, including tenant allowance are expected to range from $30-$35 million next year. PREIT has a total of $625 million of debt with 2008 maturities, including approximately $400 million under the 15 properties cross collateralized [remik].

This represents about one-quarter of our outstanding debt balances. Most of these loans have scheduled maturities in the second half of this year. I’ll review each significant maturing loan in more detail. The [remik] which represents 64% of our maturing obligations has a 7.43% stated interest rate and matures by its term in 2025. In July 2008, we have an option to replay this loan without penalty. If we elect not to repay the loan, the interest rate would increase by 300 basis points after September 2008. Anytime thereafter, we have the ability to repay the loan without penalty. Using our estimate of 2008 NOI for these properties and assuming a 7.5% cap rate, the value of these properties is in excess of $1.2 billion.

At maturity, the loan to value ratio on these assets would be approximately 33%. For accounting purposes, at the time of the Crown acquisition in 2003, this loan was marked to market at an interest rate of 4.99%. While the refinancing of the [remik] will be dilutive from an FFO perspective, we expect that any refinancing transaction will still be accretive to FAD. During 2005 and 2006, we entered into a total of $400 million of forward starting interest rate agreements in connection with the redemption of the [remik]. Similar to the transaction that we did to hedge the financing due to the [collar] preferred stock in 2007, we will cash settle these SWAP transactions. Any gain or loss in this settlement will be reflected as an adjustment to interest expense over a ten year period.

As of December 31, 2007, these SWAPs were out of the money by approximately $9.3 million. Today the out of the money value is approximately $8 million. The final amount will not be determined until the settlement date. Approximately 18% or $113 million of our scheduled 2008 maturities are short term loans that could be extended by their terms until 2010. In both cases, the loans are on joint venture properties that we own with Simon [Crabcow]. As we have discussed on previous calls, our capital strategy has been to place long term fixed rate debt on our stabilized properties. Today, our company is financed with a combination of debt provided by several sources including life companies, the CMBS market and commercial bank lenders.

We have utilized our credit facility and banking relationships to finance certain of our acquisitions and to fund our redevelopment and development spending. We have also maintained unencumbered assets to support our unsecured borrowings. We expect this course strategy to be an integral part of our 2008 financing plan. Given the turbulence in the debt markets, we will consider all of the options available to us. This may include increased use of bank turn debt, shorter loan terms and variable rate financing. As we have done in the past, we will evaluate the use of interest rate SWAPs or other hedging instruments when appropriate. We will also consider sales of non strategic properties or joint venturing certain properties with institutional investors on reasonable terms. With that we will open it up for questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen at this time we will now begin the question and answer session. As a reminder, if you have a question please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, please press the star followed by the two. If you are using speaker equipment, please lift the handset before making your selection. One moment please for our first question. Once again, ladies and gentlemen, if you would like to ask a question, please press star one at this time. If you are using speaker equipment, please lift the handset before making your selection. Our first question comes from the line of Ambika Goel, Citi Investment Research, please go ahead.

Ambika Goel – Citi Investment Research

Hi, this is Ambika with Michael [Billhamlen], could you go through how the pullback in the economy is effecting your lease up at your redevelopment and then also at the redevelopments, what kind of leeway do tenants have that stay at the assets to exit the assets, to exit their stores without paying a lease term fee, if you could just walk through the logistics of that.

Joe Coradino

Hi, this is Joe Coradino. For the most part our redevelopments have been relatively unscathed. I mean if you look at all the activity in terms of store closings and bankruptcies, across our portfolio we really have four announced store closings. And with respect to the redevelopments in particular, again with some of the exciting anchor tenants we have opening including Nordstrom and Whole Foods and Dave & Buster’s and the first of the market tenants, we believe that we’re going to be successful in leasing this space up. We may be somewhat of a delay in certain cases but generally I think that we’ll achieve the anticipated lease [sell].

Ambika Goel – Citi Investment Research

Okay and what kind leeway do retailers, say for example Ann Taylor decides to close stores and they happen to be an asset that’s being redeveloped, because they might be on a percentage of sales lease, can they exit that lease without paying a lease term fee?

Joe Coradino

That’s an interesting point that I’m glad you mentioned Ann Taylor as a matter of fact. We don’t have any announced Ann Taylor closings in our portfolio and actually we were working, we only have one Ann Taylor in a lifestyle addition that we’re doing and that may or may not come to fruition but it’s not a transaction that will impact us with any significance one way or the other.

Ambika Goel – Citi Investment Research

Okay, thank you.

Operator

Our next question comes from the line of Craig Schmidt, Merrill Lynch, please go ahead.

Craig Schmidt – Merrill Lynch

Thank you, looking at your development and redevelopment summaries it looks like Monroe Marketplace projected cost has gone up as our Voorhees and both the yields on those projects have come down. I wondered if you could give some color on those projects?

Joe Coradino

At this point at Voorhees, we are, the cost increases that we’re experiencing at Voorhees are really driven by scope increases. And by scope increases, primarily the office building that is going to be fully occupied, 100% occupied by the Star Group. And the residential component has experienced a certain delay in startup but they are right now under construction, foundations are being poured and they’re expecting to begin framing in the next couple of weeks.

I think generally in terms of costs, we see a couple of things and it varies by market. One thing we see is in the Philadelphia market where we have a number of major projects going up, we see a stabilization in material costs but a scarcity of labor, really driven by the conventions center construction and the casino construction in Atlantic City. But we, at this point, on our major projects, we believe, particularly Cherry Hill employment that we’ll deliver on budget.

Bob McCadden

Craig this is Bob McCadden, with respect to Monroe Township, the reason for the cost increase there, we originally had contemplated the sale of a parcel to an anchor. That’s not going to occur so rather than sell the parcel and have the anchor billed on their account, effectively we’re going to be building space for other tenants. As a result, our costs have gone up. So again, it’s really a scope change as opposed to necessarily caused by the increased costs.

Craig Schmidt – Merrill Lynch

Okay and the yields falling because you’re not able to get compensated for that expenditure then?

Bob McCadden

Yeah, the yield’s still above what our threshold would be, it’s been [unintelligible] primarily the result of, an effect of sale would result in immediate cash were to be spending some money and carrying the project for a little bit longer than we would have anticipated. That would be just kind of a [tad sale].

Craig Schmidt – Merrill Lynch

Okay and then just the shift in same store NOI to the guidance of 2.5-3.5%, it seems unlike our peers who have been sort of [scaling] back their same store NOI, you’re growing yours in what is obviously a more challenging economy. What is your thinking there?

Bob McCadden

Our same store portfolio includes the redevelopment projects, so the funds that we’re putting into redevelopment are coming through as investments that are yielding, some of them starting in 08, some of them starting in 09 and that’s pushing up the same store numbers.

Craig Schmidt – Merrill Lynch

Is it the ones that are completed in 07 that are pushing it up then?

Bob McCadden

And also as we bring some of the property onboard in the latter part of 08.

Craig Schmidt – Merrill Lynch

Okay and that’s enough to mitigate any kind of concerns you have for the more challenging environment?

Bob McCadden

At this point.

Craig Schmidt – Merrill Lynch

Okay, thank you.

Operator

Our next question comes from the line of Nathan Isbee, Stifel Nicolaus, please go ahead.

Nathan Isbee – Stifel Nicolaus

Hi, good afternoon, just following up on Craig’s question, how would you break out the 2.5-3.5% same store growth between redevelopment an existing stabilized portfolio?

Bob McCadden

Well we typically don’t break that out but I think maybe to assume that the projects that we completed in 07 will have the type of first year out of the box returns of which we saw in 2006, kind of in the mid to high single digits. So, that’s, you know our expectations. In large part we have a fairly healthy pipeline of projects that are under really in full construction to 2008 so you know you have like we have in the past but now we have more of the assets that are coming out than we have going in so we have a net positive in NOI projected for 08 compared to, you know basically being flat this year.

Nathan Isbee – Stifel Nicolaus

Okay and how much would you expect the expense reimbursement rate to increase in 08?

Bob McCadden

Our expectation is that 08 if we can hold our recoveries to where they were in 2007 we’d be pleased, again given the disruption that we have on some of the larger projects. Our expectation is that as we complete more of the larger projects that we’ll start to see some improvement in that, but for 2008 we don’t really see much change from this year, positive or negative.

Nathan Isbee – Stifel Nicolaus

Okay and then just last one, can you talk about the office rents that you signed at Voorhees?

Bob McCadden

We’re not in a position to disclose that.

Nathan Isbee – Stifel Nicolaus

Okay, thank you.

Operator

Our next question comes from the line of Michael Mueller, J.P. Morgan, please go ahead.

Michael Mueller – J.P. Morgan

Yeah, hi, a few questions here. First of all I was wondering with respect to guidance, can you give us an idea of what [remik] refinancing scenario that your guidance assumes?

Bob McCadden

I think we mentioned that for all of our 2008 refinancings we’re assuming somewhere in the 5.75-6.75 range and I think the reason we have the range is given the uncertainty of the capital markets, based on what’s out there and the economy is going to be somewhere, anywhere in that range.

Michael Mueller – J.P. Morgan

Okay, looking, going to the development pipeline for a minute, the I guess the delayed construction completions specifically at [Clemeth Beating] and Voorhees, I know you kind of touched on this throughout parts of the call but can you lay out exactly what was pushing it back for each one of those and what should be thinking of in terms of how far into 2009?

Joe Coradino

Well I think initially the delays at Plymouth Meeting were really driven by entitlements by the, the lengthy entitlement process we had to go through. And at this point I think we’re anticipating delivering the restaurants and Dave & Buster’s and Citibank and the majority of the property in 08. Some may shift into 09 but it’s difficult to pinpoint exactly what might slip into 09 at this point.

Michael Mueller – J.P. Morgan

Okay and what about Voorhees then?

Joe Coradino

Well Voorhees in terms of the leasing of the retail, it’s driven largely by the construction of the residential buildings on the street. And they are under construction anticipating moving their first tenants in in September, October of this year which would put us in a position to begin tenant construction. So we’re really looking in Voorhees for a majority of the tenant movings to occur in spring of 09, retail.

Michael Mueller – J.P. Morgan

Okay and sticking with Voorhees, I just want to confirm, you did say that in terms of space that was under letter of intent or lease was 50% of the space?

Joe Coradino

That is correct.

Michael Mueller – J.P. Morgan

Okay, do you have those numbers as well for Plymouth Meeting and Cherry Hill?

Joe Coradino

Well at Cherry Hill I mean essentially the mall is close to full occupancy at this point and we’re building an addition. We’ve got very strong lease up. I don’t have the specific number but we could get back to you with that, we had a very strong lease up. The two level addition is not opening up for approximately a year and again the lease up, given the fact that it’s going in the front of the Nordstrom’s store is not something we have any level of concern about.

Michael Mueller – J.P. Morgan

Okay and what about Plymouth Meeting?

Joe Coradino

Again at Plymouth Meeting, there’s a lease up program going on. If you look at Dave & Buster’s and Crazy City and a number of other transactions, about 80,000 square feet that is either signed leases or about to be leased inside the mall should take the occupancy level into the mid 80’s and in terms of the exterior, the lifestyle addition, the un-leased area in the lifestyle addition is approximately 25,000 square feet and that area for the most part with the exception of two spaces is spoken for.

Michael Mueller – J.P. Morgan

Okay and great, one last question for Bob, in terms of the guidance, the 2.5-3.5% same store versus the 3.5-4.5 overall. What’s the difference? What’s not in the same store bucket?

Bob McCadden

It’s basically the redevelopment at [Lacy] Town Center, Sunrise Plaza and New River Valley Center that opened up in the fourth quarter of 2007. So I think we mentioned earlier in the call that we have a [Ross] opening up that will complete New River Valley Center in the first quarter and we expect on Sunrise Plaza you know Kohl’s and some other stores to open up later in 2008. [Unintelligible] the difference.

Michael Mueller – J.P. Morgan

[Grand op] okay, great thank you.

Operator

Our next question comes from the line of Matt Ostrower, Morgan Stanley, please go ahead.

Matt Ostrower – Morgan Stanley

Good afternoon, could you just, I guess you’ve given some general guidance about the refinancing side of the equation and the range is useful, could you just talk a little bit more specifically, I assume you’re out there talking to potential lenders already, can you be a little bit more specific about what type of lenders are involved here and then are these going to be individual mortgages that you’re going to refinance this with? What’s the appetite for sort of B and C quality mortgages versus on a higher quality models, just give us some more color on the overall environment as it stands today as opposed to what might happen over the next six months.

Ed Glickman

[Unintelligible] our job here is to the A and B quality model credit and tell you that we are out in the marketplace talking to a number of lenders of different types, actually probably a wider range of lenders than we’ve spoken to recently. Everything from commercial banks, foreign commercial banks, investment banks, insurance companies, so we’ve been out and have had a lot of conversations.

We’re looking for financings you know sometime over the summer because we have a window between when we can pay off the [remik] and when we, you know the outside date which would be September and obviously there’s a lot of logistics involved in trying to refinance that many properties at once, even in a market that would be much more let’s say accommodating than the one we’re in now. But so far we’ve met with a good reception, you know the [remik] is probably somewhere about a 33-40% let’s say loan to value ratio and so we have plenty of room on that financing and you know our view would be that we’ll have some support from our existing bank group where we’ve had a number of conversations with as well as a group of lenders that we’ve had a long standing relationship with over the years of different sorts.

Matt Ostrower – Morgan Stanley

And just to be more specific, I assume that the 7.5% cap rate that you threw out in talking about the potential leverage levels and the amount you could get, that’s a number that’s stemming from the conversations that you’ve had, so you feel pretty confident at least as of today in that kind of a number?

Ed Glickman

I don’t believe I threw out a 7.5%, I think Bob did. Bob is comfortable with that number.

Matt Ostrower – Morgan Stanley

That’s not exactly confidence inducing.

Ed Glickman

Well, at this stage what we’ve done you know is we’ve gone out and we’ve discussed the properties with the lenders. We’ve started to introduce the properties into the market. We don’t need to refinance all the properties to come out of the [remik] and you know the range I think of the cap rates is going to be fairly wide on that portfolio because the property productivity levels are fairly wide on the portfolio. So you know what I believe is after we’re through going into the marketplace and the lenders have looked at the properties, they’ll pick assets that they intend to lend on then we’ll negotiate ranges and values. But I think there’s a broad enough range between 30-40% if you want to extend the range and today’s marketplace that we think we have abundant collateral.

Bob McCadden

Matt, just wanted to point out as to the cap rate and the properties, of the 15 properties in the [remik], about half of them have been through the redevelopment process and are I think probably in ideal shape from a lending standpoint, from an underwriting perspective, sales productivity is improving, lease up is strong, the malls look good, so if anything the properties actually would look to finance on average have a lower cap rate we believe than the 7.5 average, because that 7.5 does include some lower quality assets, but they tend to be smaller in size than some of the better properties, including properties like Patrick Henry Mall.

Matt Ostrower – Morgan Stanley

But just to be clear, that 7.5, the context for that number is market context that you’re having today, talking to people to actually underwrite these things that you feel some confidence, I know everything can change overnight in these kind of markets, but as of today anyway that number seems like a reasonably conservative number to you based on that kind of feedback.

Ed Glickman

We would say it’s a reasonable number, I don’t know what a qualifier is in terms of conservative [overlay] different views on it.

Matt Ostrower – Morgan Stanley

But it’s coming from the market to you. And then the other thing, you alluded again to this joint venture, well not again but I guess maybe [unintelligible] you talk about it on the conference call [overlay].

Ed Glickman

Matt, but before you make any assumptions I think it’s unfair to put words in our mouth. We have not going out, lenders, we haven’t gotten appraisals, we haven’t done the underwriting, the values that are described, we’re using sources like [you] sources to come over that value so just don’t make any assumptions beyond what I think we want to represent being as the facts to where those numbers.

Matt Ostrower – Morgan Stanley

Okay, so it’s an informal, this is not a formal number obviously. And then the JV reference that you made, is that, are you talking about that in the context of look if theoretically we have a lot of options here or are you talking about that in the context of gosh we really do think even though the market may not believe this, we really do think there is actually a fairly decent appetite out there right now for JV interests in the assets that you own. And then if that’s true, could you just sort of characterize that a little bit just so again we’re trying to get a sense for what’s in the marketplace.

Ron Rubin

This is Ron. Look, we all know that the debt markets are chaotic right now and that every single transaction is an adventure. We can’t predict what’s going to happen in the next week let alone you know over the next few months. But clearly we are a resourceful company and we do have a lot of relationships and we’re exploring those relationships to determine whether there’s opportunities for us to consider possible joint venture arrangements and possible debt scenarios. But as we sit here today, you know and you’re aware of the chaos in the debt market and in our entire sector. So we are continuing to look, we’re continuing to explore but as we sit here today we obviously can’t commit to anything but other than just the fact that we’ve been having meaningful conversations with people who we’ve done business with in the past.

Matt Ostrower – Morgan Stanley

Okay and just to confirm, my sense is that there’s few if any sort of [D mall] transactions that have taken place over the last three or so months, is that also your observation?

Ron Rubin

Yes.

Matt Ostrower – Morgan Stanley

Okay, great, thank you.

Operator

Our next question comes from the line of Ryan Bennett, Lehman Brothers, please go ahead.

Ryan Bennett – Lehman Brothers

Hi, good afternoon, sorry not to harp on the JV comments but would you be willing to look at contributing stabilized assets going forward or would you be able to contribute some of your redevelopment as well do you think?

Ed Glickman

At this point we’ve mentioned a number of possible sources of financing and obviously we are having discussions with a number of people but we’re not prepared to get into detail on this conversation. It’s too premature in the process for us to comment.

Ryan Bennett – Lehman Brothers

Alright, fair enough, thanks a lot.

Operator

Our next question from the line of [Margin Rower], MSR Capital Management, please go ahead.

[Margin Rower] – MSR Capital Management

[Unintelligible] financial questions, the first is approximately what level do you think your debt leverage or your aggregate debt, approximately when I should say do you think that aggregate debt will peak out based on your current capital spending plans and following up on that, what if anything can you tell us about your intentions on your share repurchase authorization which I know you have, it looks like it’s been pretty dormant the last year.

Ed Glickman

Given the amount of capital spending that we’re doing this year and also the schedule of bringing properties into service or bringing the new investment into service, it’s likely sometime at the end of 2008. The company is at least near term leverage reaches a maximum and that’s dependent on a large number of factors including the schedules of many projects. So that’s about as definitive as we can be. And in terms of the application and rationing of capital, our number one priority as I think a number of us have said in the conference call is to complete the three major projects that we’ve been focused on as well as the company’s in process ground up development work.

Beyond that, should we be the beneficiary of additional capital, we’ll have to look at what opportunities present themselves at the time, including as always you know the utilization of that capital to buy back stock, the realization of that capital for the dividend, the utilization of the capital for additional real estate investments, it’s really too early to tell. We have to be a lot further along in the significant amount of financing that we need to do this year to make an educated comment.

[Margin Rower] – MSR Capital Management

Thank you very much and good luck.

Operator

Our next question comes from the line of Ben Yang, Greenstreet Advisors, please go ahead.

Ben Yang – Greenstreet Advisors

Thanks, you guys have been pretty open about the fact that you’ve had to offer lease and rent concessions to some tenants impacted by your pretty sizable redevelopment activities but if you kind of do a look through of your portfolio it looks like the average rents at a number of malls not in the redevelopment program have actually fallen in 07 and it seems kind of unusual that you would see that fall for that metric during the course of the year. Are you in any offering some kind of rent concessions throughout your entire portfolio?

Ed Glickman

No, not at this time.

Ben Yang – Greenstreet Advisors

I mean is there any reason some of the average rents are up, your malls are actually falling?

Ed Glickman

The only, I don’t know what specific properties you’re talking about but in a number of our properties you’ll see average rents fall because big boxes have been introduced.

Ben Yang – Greenstreet Advisors

So it’s more of a factor of kind of a changing mix?

Ed Glickman

Yeah we’ve guided Magnolia we are adding as an example we are adding a bouquet, a Barnes and Noble and Dick’s Sporting Goods and you’re taking up inline space or [unintelligible] mall where you’re doing a similar kind of thing. But keep in mind that in most cases, in many cases, we are occupying previously vacant space with those boxes and relocating existing tenants and driving occupancy significantly.

Ben Yang – Greenstreet Advisors

Okay and then you’ve previously talked about trying to convert some of your percentage of sales deals to [best] minimum rent, is that a process that’s going to be automatic or do you in any way have to hit some kind of sales bogies in these redevelopments for that to occur?

Ed Glickman

They’re typically short term in reference to an existing lease so it might be one or two years then they automatically convert back. When you’re typically in a redevelopment environment you want to keep your options open and keep tenants in place until you can complete the redevelopment, drive sales, so it’s clearly temporary and something that I think will turn around. You’re seeing probably a good deal of that at Voorhees right now, Plymouth Meeting, centers like that. That’ll turn around as the redevelopments come online later this year and into 09.

Ben Yang – Greenstreet Advisors

Great, thank you.

Operator

Ladies and gentlemen, if there are additional questions please press the star followed by the one at this time. If you are using speaker equipment, please lift the handset before making your selection. At this time we do not have any further questions, I will turn the conference back over to management for any closing remarks.

Ron Rubin

I want to thank all of you for your participation, this has been an extremely large group on the phone for this session and we appreciate it very much. We’re very pleased and that’s not self serving. We’re very pleased with the results of our redevelopments so far, that is our strategic bet for this company and we’re going to continue with that process, hopefully successfully as the ones that we’ve done so far and we’ll continue to keep you informed. Thank you very much.

Operator

Ladies and gentlemen this concludes the Pennsylvania Real Estate Investment Trust fourth quarter 2007 earnings conference call. We would like to thank you for your participation, have a pleasant day, you may now disconnect.

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