"Welcome to the Horizon Group 3rd Quarter conference call As a reminder, this conference is being recorded Friday, November 17, 2000. I would now like to turn the conference over to Mr. Gary Skoien, Chairman, President and CEO. Please go ahead, sir.
Gary Skoien: Thank you very much. Good morning, and thank you for joining us. With me for this call today is David Tinkham, who’s our Chief Financial Officer. The purpose of today’s call is to discuss 3rd quarter 2000 results. Before we begin the discussion of the financial results, let me comment on another recent corporate activity. In October, we amended our corporate charter to preserve our ability to utilize net operating losses for federal income tax purposes. The amendment was approved at our annual shareholders meeting in August, conditioned upon the receipt of a favorable ruling from the Internal Revenue Service. This ruling was received in October. The amendment imposes a limit on share ownership to no more than 4.9 percent of the company’s shares. Reducing our ownership limit preserves our ability to use our net operating losses, which amongst other things provides us with the flexibility to expend cash flow to reduce debt, make capital expenditures or expand operations while maintaining our REIT status. Returning to financial results, 3rd quarter funds from operations, or FFO, was 30 cents per share on a diluted basis. This compares to 39 cents per share during the 3rd quarter of 1999 and 31 cents per share during the 2nd quarter of 2000. Now I’d like to turn over the earnings report to David Tinkham.
David Tinkham: Thank you, Gary. As you mentioned, funds from operations for the 3rd quarter of 2000 total 30 cents per share on a diluted basis, compared to 39 cents per share in the 3rd quarter last year. There were numerous factors which caused the decrease in 3rd quarter results. Interest expense increased by $52,000 compared to the same quarter of the prior year. This was primarily due to an increase in the 30-day LIBOR rate, resulting in an average total rate on our Nomura financing of 8.53 percent during the 3rd quarter of this year, compared to 7.09 percent in the 3rd quarter last year. We reduced total debt outstanding to $105.1 million at the end of the 3rd quarter of this year, compared to $107.7 million at the end of the 3rd quarter of 1999. This reduction was accomplished primarily by scheduled principal payments on our Nomura indebtedness, which totaled $1.6 million over the 12-month period, together with scheduled principal payments on our JP Morgan loans and the loan on our corporate office building in Michigan. Our outstanding debt currently is composed of the following: $46 million of 8.46 percent fixed rate financing which matures in July of 2008 and is secured by two separate mortgages. The first mortgage is secured by our properties in Daleville, Indiana, Summerset, Pennsylvania, and Tulara, California. The second is secured by our properties in Gretna, Nebraska, Sealy, Texas and Traverse City, Michigan. We also have $55.8 million of floating rate debt which matures in July 2001 and bears interest at 30-day LIBOR, plus 190 basis points. It is secured by the other seven centers in our portfolio. We also owe approximately $2.5 million secured by our office building in Michigan. Base rent declined by $223,000 in the 3rd quarter of this year, compared to the same period a year earlier. While in general we have been successful in retaining existing tenants, in many cases we have done so by reducing their rents. Centers which have experienced the greatest declines in rental revenue are primarily those which we refinanced last summer. In aggregate, the properties subject to the JP Morgan financing experienced a quarter-to-quarter decline in base rent of approximately $442,000, while the base rents from the properties subject to our Nomura financing increased by approximately $205,000 in the current quarter compared to the same quarter in the prior year. Expense recoveries decreased by $308,000 quarter-to-quarter as a result of a reduction in operating expenses and real estate taxes of $120,000 and as a result of a greater proportion of tenants paying gross rent and rents based on sales in the quarter. During the 3rd quarter of this year, tenants paying rent based on a percentage of sales accounted for approximately 12.6 percent of total revenue. General and administrative expenses decreased by $177,000 in the current quarter as a result of decreases in personnel and related expenses and the fact that we have incurred indirect debt restructuring fees of $115,000 in 1999 related to the JP Morgan refinancing which we did not incur this year. Statements made in this call which are not historical facts are forward-looking statements based upon economic forecasts, budgets and other factors, which by their nature, involve known risks, uncertainties and other factors which may cause the actual results, performance or achievements of Horizon Group Properties, Inc. to be materially different from any future results implied by such statements. In particular, among the factors that could cause actual results to differ materially are the following: business conditions in the general economy, competitive factors, interest rates and other risks inherent in the real estate business. For further information on factors which could impact the company and the statements contained herein, reference is made to the company’s filings with the Securities and Exchange Commission.
G. Skoien: Thank you, David. During our last call we discussed potential portfolio sales and the issues which we had encountered with consummating such sales. As a result of these issues, we began to look at individual property sales. Since our last call, we’ve initiated discussions with several parties regarding the sale of two of our properties. These discussions are preliminary, but are being pursued aggressively. While our longer term goal continues to be the sale of properties, for the near term we have shifted our focus to refinancing the A pool properties. As David mentioned, the debt on the A pool properties matures in July 2001. We do not anticipate a problem with refinancing the A pool properties. Taken as a pool, these properties have a history of increasing net operating incomes. However, the difficulties being experienced by Prime Retail have significantly impacted the capital markets as they relate to factory outlets. We are encouraged by recent announcements by Prime Retail, which may indicate an improvement in their situation. Nevertheless, given the overall context, we believe it only prudent to aggressively work to refinance these properties as soon as possible. In terms of operating results, occupancies at the properties are up to 83.3 percent from 81.8 percent during the 3rd quarter of 1999. They are only slightly up from the 2nd quarter of 2000. Perhaps more importantly, occupancy at the A pool has increased by 5.2 percent from 81.5 percent during the 3rd quarter of 1999 to 86.7 percent during the 3rd quarter of 2000. Notable improvements in occupancy from the 3rd quarter of 1999 to the 3rd quarter of 2000 include the Holland, up from 85.7 percent to 89.2 percent; Medford, up from 87.7 percent to 92.8 percent; Lakeshore Marketplace in Muskegon, up from 69.2 percent to 86.5 percent; and Warrenton, up from 91.9 percent to 93 percent. Notable improvements from the 2nd quarter to the 3rd quarter occurred at Laughlin, where occupancy increased from 89.4 percent to 91.2 percent; Medford, where occupancy increased from 89.6 percent to 92.8 percent; and Gretna, where occupancy increased from 80 percent to 82.8 percent. During the 3rd quarter, there were 27,199 square feet of new leases executed. This includes three Bon Worth stores to be located in Monroe, Sealy and Warrenton, and a Pier One store of 8,100 square feet at Lakeshore Marketplace in Muskegon. Pier One is working to open this store by year end, which will bring occupancy at that center to 89.1 percent. Renewals during the 3rd quarter were at 64 percent of expirations. This is on par with the historical rate of 65 percent experienced by Horizon since June of 1998. Third quarter, same-store sales declined 6.6 percent as compared to the 3rd quarter 1999. The decline for the A pool was down 5.8 percent, and for the B pool, 8.1 percent. Comparing last 12 months same-store sales, improvements occurred at Laughlin, Monroe, Muskegon, and Tulare. This concludes my comments on the 3rd quarter. I’m happy to answer any questions. Jeremy?
Operator: Ladies and gentlemen, should you have questions or comments, you will need to press the one followed by the four on your telephone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you would like to withdraw your polling request, you may do so by pressing the one followed by the three on your telephone. If you are using a speakerphone, please pick up the handset before pressing the numbers. The first question comes from Rob Schwartzberg with FBR. Please go ahead with your question or comments, sir.
Rob Schwartzberg: Good morning. It’s Rob Schwartzberg. I really had a couple of questions. One: which are the two centers that you’re most likely to look at selling? I know Lakeshore is one of them. I wasn’t sure about the other one. And, could you provide any guidance as to when you’d like to consummate a transaction on one or both of those centers.
G. Skoien: The other center is Dry Ridge, Kentucky.
R. Schwartzberg: So it’s not part of the A pool, then.
G. Skoien: They’re both in the A pool.
R. Schwartzberg: Oh, I’m sorry. You’re right.
G. Skoien: We’d like to do that as soon as possible. As I indicated, we have one party – well, I didn’t indicate this. We have one party who has a very strong interest in Dry Ridge, and they’re working through that right now, and actually a handful of groups are doing due diligence on Lakeshore. The thing with Lakeshore is that every month that goes by, something improves there. That’s really become the ground zero for retail in the Muskegon market with the advent of the CBL mall kitty corner to the property. So, you know, you’re always torn between selling now and missing some of the upside, as opposed to just getting the money now. I think strategically what we’d like to do is be able to sell it at a good price which recognizes some of the potential for upside. I think we’ll be able to capture that in a sale, and to be able to pay down some of the Nomura debt with those proceeds making the financing of the balance a little easier to undertake.
R. Schwartzberg: So, as it relates to Lakeshore, if you’re talking with a few different people; let’s say one of those people made an offer in the next two to three weeks. When do you think that would actually close by? I’m still trying to get a little better sense of your timing. I guess my question relates in some part to Prime Retail and the fact that they’ve kind of narrowly averted a crisis. I guess you don’t want to sell a center when you have to sell a center, like in say June or July when this debt is coming due.
G. Skoien: Right. I believe, Rob, that being a power center, it’s a lot more straightforward, both in terms of financing and in terms of due diligence, than the factory outlets. A couple of parties have indicated that what they’d be looking at is a 30-day due diligence period and a 30-day close, and I think that’s a pretty reasonable expectation. The real question, I think, is the front end - how long it’s going to take to negotiate a price.
R. Schwartzberg: If I could ask one detailed question. What was the occupancy of the Nomura pool for the 2nd quarter of 2000. It was 86.7 in the 3rd quarter. I missed one of those numbers.
G Skoien: One second, Rob. The 2nd quarter of 2000 or 1999?
R. Schwartzberg: June 2000.
G Skoien: 86.3.
R. Schwartzberg: OK. And –
D. Tinkham: So it was only slightly up – It was up 4/10ths of a percent.
R. Schwartzberg: Right. Right. But what’s happening to rental rates or terms? Are you doing anything on the concession side, or you know cutting rates or anything like that in order to maintain or slightly improve that occupancy?
G. Skoien: Well, we’re clearly focused on getting occupancy up. As the numbers indicate, we’ve been pretty successful on that. As Dave indicated, we are having to do more gross and/or percentage deals than you probably would like to if your portfolio was performing at 100 percent. Having said that, you know, one of the biggest leases signed was the Pier One lease that I mentioned. That’s a standard lease with a base rent and extras, and I don’t believe, really, any concessions.
R. Schwartzberg: OK. Alright. Thank you.
G. Skoien: Thanks, Rob.
Operator: Michael Weiss with Mentor Partners, please go ahead with your question or comments.
Michael Weiss: OK. Is this all that’s coming out of the results of the studying of alternatives – the sale of one of two properties? And, are you getting anywhere on the refinancing? Is there any news that you could give us? Is there just nobody out there that wants to touch –
G. Skoien: I think, Michael, what’s really happened is this. We went down the road with a portfolio sale. We were not able to conclude the sale, and I really think it had a lot more to do with the buyer’s ability to put together what they needed to do the deal, as opposed to really the financing on it. But, whatever; it didn’t work. We’ve started down the road of doing one-off sales, but frankly, as I said in my comments, we really have shifted our focus to this financing piece. So, I think the fact that you are only seeing a couple of properties in discussion for sale is really because we really haven’t been actually doing much on that end. Obviously, if anybody called and indicated an interest in sales, we’d start a discussion, but we’ve really backed off. We think it’s absolutely critical we get it refinanced. Now, to your question about nobody out there willing to finance. We don’t believe that that’s the case. We’re early in the process. We’ve only recently started talking to parties, and we have had what you would probably expect at the front end of the process. We’ve had some people say we don’t do factory outlets for whatever reason, and we’ve had others say they have an interest in it and get us a package. We’re in the process of doing that right now. The good news is with this portfolio, as I indicated, since June of ’98, the A pool has had rising income. That’s a real positive thing. Several centers have had rising sales. That’s a real positive thing. So, there’s some compelling stories here, and so we are guardedly optimistic. Until we get a little further down the road, I think we won’t have a real complete handle. I can’t over-emphasize the sort of pall that the whole situation in Prime Retail has really put over the capital market as it relates to this asset class.
M. Weiss: Would you say that – You seem to be running about, what $1.20 FFO?
G. Skoien: Yes.
M. Weiss: Would you say that would be a good estimate for the year?
G. Skoien: I don’t know. David?
D. Tinkham: It’s probably not going to be too far off that. I think as we indicated, some of the properties subject to the JP Morgan financing are experiencing some weakness, and in aggregate, they’ve been dragging down the A pool results. We might come up a little short of that.
M. Weiss: So, if I said $1.15, that’s probably better.
D. Tinkham: You’re probably reasonably on target.
M. Weiss: Now, of the $1.15 you have allocated – I know you haven’t done it yet – how much would you say is Nomura pool versus JP Morgan pool? Can you say that?
G. Skoien: We really haven’t. It would be unfair to say. We really haven’t allocated G&A and gone through that sort of analysis. Suffice it to say you’ve really heard the numbers and what direction the B pool has been taking. I think we’ve reported on the two different pools for the last two or three quarters on these calls. It has been sort of a consistent story, where to the extent FFO has been down, it’s been the result of a decline in the B pool which exceed the increase in the A pool. We have continued to work on paring back our G&A and we’re continuing. There’s more things happening there which of course will help. The other thing we’ve been working on which relates to G&A, but also hopefully affects down the road some of our equity, is leasing up the vacant space at our corporate building in Muskegon. We just this quarter put Smith Barney into the space and a local hospital company into another space. That’s a positive thing. I can’t directly answer your question. We’ve really not looked at it that way. I will tell you what though, we’ll try to do that for our next call.
M. Weiss: OK. If I have any further questions, I’ll buzz back in. I’ll let somebody else go.
G. Skoien: Thank you.
Operator: Rob Schwartzberg, please go ahead with your follow-up question.
R. Schwartzberg: Yeah. I guess it had to do a little bit with what you touched on which relates to the availability of financing. Are there even people out there who would want to see the package and their level of interest, and what kind of terms – how tough would they be, I guess, at this point?
G. Skoien: Well, you know, Rob, there are people that have expressed an interest in looking at it. You know, we clearly have nobody saying they’re ready to step forward, but we’re really too early, I think, in the process to get that. We’ve heard all sorts of things, from 230 or 250 over to 350 over. I think LTV may be a little lower than you’d expect to see, but I think we’ve got the income to cover the debt without a problem. Again, we are early in this process. We’re going to be talking on a pretty widespread basis, and we’re going to be talking to people both about one-off deals on assets as well as cross collateralized pools.
R. Schwartzberg: You mentioned, I think, that on the A pool, they also had a same-store sales decline. What do you think is driving that?
G. Skoien: You know, I really don’t know. Unfortunately, the national factory outlet sales numbers lag by a quarter – the results we have. But, ICSC just put out numbers that go through the 2nd quarter, which on a 12-month basis had sales down, I believe, 6.6 percent. It was very close to that. You know, that’s not a real great picture about the factory outlet industry taken as a whole. Having said that, as we’ve always said, you know, properties that are doing well – you know Laughlin keeps going up in sales and Medford keeps going up or had been going up in sales. Now it’s sort of stabilized. Monroe is going up in sales. Lakeshore is going up in sales. There are some positive things happening, so of course the averages don’t tell you everything. But Holland, I think we mentioned on the last call, has impacted by the general growth mall that was opened in Grand Rapids, and it’s pretty clear. You can see what’s happened there. We’re still feeling the impact of people who had been shopping as a community/regional mall going to Grand Rapids to shop. You know, we’d expect to see that easing up and coming back, but that’s had an impact there. The B pool, to be as frank as I can, the fall off at Sealy has just been off a cliff. Those sales declined. Then, for the same reason, but I’m not sure that we’re going to see them climbing back up like I think will happen in Holland. Having competition that cuts off the site has been a real problem.
R. Schwartzberg: Is Secured Capital still under some sort of engagement with the company at this point?
G. Skoien: They are, and they are out seeking financing. I think it’s fair to say that they’re fairly, again, optimistic about it. Nobody wants to say that it’s easy.
R. Schwartzberg: Are they the primary agent?
G. Skoien: You know, it just is not easy.
R. Schwartzberg: Right. Are they the primary agent or firm that is out there helping you to seek financing?
G. Skoien: Yes, they are. But what we’ve told them is that they think they’re going to get some feedback very quickly, very quickly meaning four or five weeks. If we’re not making real progress, we’ve told them that this is too important. We’re going to have to widen and bring in somebody else at the same time. They understand that. I think they’ve got real incentive to get this thing going.
R. Schwartzberg: Do you pay them on a monthly basis? Is that a significant portion of G&A?
G. Skoien: No. No. It’s really a commission. The only thing we’ve paid them has been out-of-pocket reimbursables for printing books and their travel and the like. I think all told that last year was somewhere in the neighborhood of $60,000 or $65,000 that’s been billed. That’s not to say there may not be some other costs they’ve yet to bill us for.
R. Schwartzberg: Right. I guess – I mean I know that you’ve taken a different direction, but they’ve been under engagement since September of ’99, with sort of mixed results. I guess how much room are you willing to give them?
G. Skoien: I think they do know the properties very well. I think they have been – They’ve been working very hard at it. As I’ve said, I think we’re going to give them another time period, but not enough that would preclude us from getting somebody else actively engaged in getting it financed. And, frankly, we’ve talked to some other parties about doing that. Of course, as we all know, any party you talk to is going to tell you sure we can get this done. The proof is in the pudding.
R. Schwartzberg: Right. I guess that’s just the thing. We’re starting to get into the new year, and we do have this deadline coming up here. So the timing, I guess, is becoming more critical. That would be my only comment. Is anything happening as it relates to helping the company realize its substantial NOL position?
G. Skoien: Nothing that I can comment on, but clearly that is something that’s out there all the time.
R. Schwartzberg: Alright. Thanks for your help. It’s a good quarter. I appreciate it.
G. Skoien: Thanks, Rob.
Operator: Ladies and gentlemen, if there are any additional questions or comments at this time, please press the one followed by the four on your telephone. Sir, I’m showing that there are no further questions at this time. Please continue.
G. Skoien: I have nothing else to comment on. I really appreciate everybody participating, and we’ll keep plugging ahead. Thank you very much.
Operator: Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect, and thank you for participating.
HORIZON GROUP PROPERTIES, INC" |
