CBL & Associates Properties, Inc. (CBL) 2004 Q4 法說會逐字稿

Good day and welcome to the CBL & Associates Properties, Inc. conference call. Today's call is being recorded and will be available for replay starting today at 1 p.m. eastern time and running through February 10th at 8 p.m. eastern time by dialing (719) 457-0820 and entering confirmation code 508154. At this time for opening remarks I would like to turn the call over to the President, Mr. Stephen Lebovitz. Please go ahead sir.

Good morning. We appreciate your participation in CBL & Associates Properties, Inc. fourth-quarter and year-end 2004 conference call.

Joining me today is John Foy, the Company's Chief Financial Officer, and Katie Knight, Director of Investor Relations, who will begin by reading our Safe Harbor disclosure.

This conference call contains forward-looking statements within the meaning of the Federal Securities Laws. Such statements are inherently subject to risk and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the events and results discussed in the forward-looking statements. During our discussion today, references made to 'per share' are based on a fully diluted, converted per share. Also references made to community centers are only those that are wholly owned by CBL & Associates Properties, Inc. We direct you to the Company's various filings with the Securities & Exchange Commission including, without limitations, the Company's Annual Report of Form 10-K and management's discussion and analysis of financial conditions and results of operations included therein for a discussion of such risks and uncertainties.

A transcript of today's comments including the earnings release and additional supplemental schedules will be furnished to the SEC on Form 8-K and will be available on our website.

This morning we posted revised supplemental schedules to our website which can be found in the Investor Relations section under Financial Reports.

This call will be available for replay on the Internet through a link in our website at cblproperties.com. This conference call is the property of CBL & Associates Properties, Inc. Any redistribution, retransmission or rebroadcast of this call without the express written consent of CBL is strictly prohibited.

During this call the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. A description of each non-GAAP measure and a reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure will be included in the earnings release on Form 8-K.

Thank you Katie. Before we begin, we would like to take a moment to acknowledge the addition of Matt Dominski to our Board of Directors. We are honored that Mr. Dominski, former CEO of Urban Shopping Centers and Co-Founder of a private real estate investment firm, Polaris Capital, has joined our Board. Mr. Dominski has an excellent reputation in the industry and brings a wealth of experience in the real estate business. We are excited to have the benefit of his guidance and knowledge and look forward to his contributions.

Overall, 2004 was one of the most successful years in CBL's history, particularly in light of the formidable obstacles we faced at the start of the year. We were challenged with a large number of bankruptcies, a highly competitive acquisition environment, numerous vacancies resulting from the repositioning of tenets during construction and redevelopment and dilution from the sale of shopping centers to the Galileo America joint venture. We tackled the challenges of 2004 head on and I believe demonstrated just how much our Company is capable of achieving.

Notably, we had one of our best years on the acquisition front this past year acquiring 8 malls, averaging $360 per square foot in sales, or just under $1 billion. In doing so, we maintained our philosophy of disciplined growth by paying a weighted-average cap rate of 7.7%. We achieved gains in occupancy during the year despite the nearly 500,000 square feet of vacancies we faced from store closings and bankrupt retailers. We were delighted to increase our annual common dividend in the fourth quarter by 12.1% to $3.25 per share. We once again attained and exceeded our goal of double digit FFO per share growth recording a 12.9% increase over 2003. Total returns to CBL's shareholders exceeded 40% for the year. For the past 5 years we have averaged a 37.7% per year total return to shareholders. We view this as another outstanding year for our Company and for our shareholders and look forward to 2005 as another productive year.

We achieved notable leasing results in 2004, completing over 2.5 million square feet compared with 2.2 million square feet in 2003. This included 1 million square feet of new leases signed and 1.5 million square feet of renewal leases. Comparatively in 2003 we signed approximately 1.1 million square feet of new leases and 1.1 million square feet of renewal leases. All leasing figures exclude results achieved in the community center portfolio contributed to the Galileo America joint venture. For the entire portfolio, leases in the year were signed at 11.5% higher average base rent per square foot than average base rent per square foot on vacated space. Leases for stabilized malls were signed at 17.2% higher average base rents per square foot than those on vacated space. For the year, leasing spreads for the same mall shop space in the total portfolio were 1.1% higher based on initial rents and 3.3% higher based on average rents.

Total portfolio occupancy increased 90 basis points to 94% with a 10 basis point increase in the mall portfolio to 94.3%. Occupancy for the associated centers at December 31, 2004 was 91.8% with community center occupancy at 94%. We were pleased with our occupancy gains this year, especially in light of the number of store closings we experienced.

As a result of bankruptcies, since June 30, 2003, we have faced 118 store closings totaling approximately 457,000 square feet and representing $8.1 million in annual minimum base rent as a result of bankruptcies. We have re-leased approximately 47.6% of the space closed at 3.5% higher rents on a rent-per-square-foot basis and at comparable rents based on total annual base rents.

Friedman's Jewelers recently announced that they have filed Chapter 11. We have 28 stores in our portfolio comprising 43,000 square feet and approximately $2 million in annual base rent. We have not been informed of any store closings. We do not anticipate 2005 to present nearly as many challenges on the bankruptcy front.

We would like to take a moment to address the recent department store consolidation trend. With regards to the May Company-Federated merger rumors in our portfolio, we currently have 28 May Company department stores at 25 malls comprising approximately 3.8 million square feet. We have 8 Federated Department Stores at 8 malls comprising approximately 1.4 million square feet. Of the 36 stores, 22 are department store owned and 14 are leased. The 36 stores contribute less than 0.6% of our total annual revenues.

We have one situation of overlap at Monroeville Mall in Monroeville, Pennsylvania, where we have both a May Company, Kaufmanns and a Federated, Lazarus store. Those stores are performing well, and we do not anticipate any material impact to our portfolio should a merger occur.

Regarding the Sears-Kmart merger relative to our portfolio, we have 66 Sears stores in our portfolio which comprise 8.2 million square feet and contribute less than 0.8% of our total annual revenues. We own 16 of the stores. Sears stores perform well in our malls and are normally situated in a prime location within the mall. Just last week, Sears announced that they would not be closing any of their mall-based stores. It is hard to predict what the new combined management teams at the Sears-Kmart organization have in mind, but I am sure that they will aggressively maximize the productivity of each of their store locations.

In 2004 we opened 9 new developments, totaling 1.9 million square feet, including Coastal Grand Myrtle Beach, a nearly 1 million square foot regional mall in Myrtle Beach, South Carolina.

In 2005 we have approximately 2 million square feet of new developments, representing over $216 million of net investment scheduled to open, including our new development on the West Coast, Imperial Valley Mall, which will open on March 9th. This 60/40 joint venture with MG Herring Group will open more than 80% leased and committed and will offer shoppers an exciting mix of approximately 100 retailers and restaurants including 4 department stores, JC Penney, Sears, and Dillard’s, and Robinsons-May which are both new to the market. There will also be a food court and a state-of-the-art stadium seating 14 screen Ultrastar Theatre.

In October we plan to open the 420,000 square foot Southaven Town Center in the Memphis suburb of Southaven, Mississippi. The open air center is currently approximately 90% leased and committed and will feature a 2 level Dillard’s, a JC Penney, Linens n’ Things, Circuit City and approximately 104,500 square feet of small shop space to include retailers such as Pier 1, Kirklands, Pac Sun, Lane Bryant, American Eagle, and many more.

Other projects opening in 2005 include the 144,000 square foot expansion Fayette Mall in Lexington, Kentucky anchored by Dick's Sporting Goods; the 225,000 square foot community center, Cobblestone Village at Royal Palm Beach, in Royal Palm Beach, Florida; Chicopee Marketplace, 156,000 square feet community center in Chicopee, Massachusetts; Hamilton Corner, a 68,000 square foot redevelopment project in our home town of Chattanooga, Tennessee; the addition of a Tweeters Electronics at Cool Springs Mall in Nashville, Tennessee; a 45,000 square foot addition of a Dick's Sporting Goods at Citadel Mall in Charleston, South Carolina; and Monroeville Village, a 75,000 square foot open air expansion at Monroeville Mall in Monroeville, Pennsylvania.

Consistent with our philosophy of sustaining our malls competitive position we completed 3 renovations in 2004 -- Northwoods Mall in North Charleston, South Carolina; CherryVale in Rockford, Illinois; and Panama City Mall in Panama City, Florida.

We have 2 renovations planned for 2005 for an estimated investment of $28 million excluding deferred maintenance costs. Fayette Mall in Lexington, Kentucky will receive a multi-million dollar update as well as the expansion we previously mentioned. We will begin the renovation of Cool Springs Galleria in Nashville, Tennessee this year and expect to complete that project in 2006.

In 2004 we added a total of 12 big box stores and 8 anchor retailers to our malls. We believe these additions have made a positive contribution to further strengthen our tenant mix and are an effective use of space. We make it our practice to identify under-performing retailers and replace them with the retailers who are better suited to that location. We have had success in this approach and intend to continue this focus in 2005.

2004 ended with our malls benefiting from a strong holiday sales season. For stores of 10,000 square feet or less, same-store sales for the year increased 2.8% to $314 per square foot for stabilized malls compared with the 1.1% increase in 2003. We are optimistic that this trend will continue throughout this year.

Occupancy cost as a percentage of store sales was 12% for 2004 as compared with 12.2% for 2003.

2004 was a stellar year for CBL on the acquisition front. We completed nearly $1 billion in acquisitions of operating properties. We purchased 8 malls and 2 associated centers totaling over 7.7 million square feet including 2 malls acquired in the fourth quarter. We expanded our geographic footprint entering 2 new states, Missouri and Indiana, as a result of the acquisitions. We will continue to take a disciplined approach to acquisition opportunities. We will maintain our acquisition criteria of market-dominant malls that offer upside potential and are immediately accretive.

I would now like to turn the call over to John for the financial review.

Thank you Steven. In January we completed the final phase of the Galileo joint venture, with a contribution of 2 power centers; one community center and a community center expansion project for $58.6 million. The transaction value of all 3 phases totaled approximately $562.8 million with total estimated GAAP gains of $99.4 million. We are pleased to have had the opportunity to enter into this very beneficial joint venture. We anticipate receiving increasing benefits from our partnership interest as well as fee-based income going forward as Galileo continues to expand.

Financial results for the fouth quarter 2004 and the full year were very strong and included -- fourth quarter 2004 FFO per share was $1.67 representing a 33.6% increase over the fourth quarter 2003 FFO of $1.25 per share. For the year, FFO rose 12.9% to $5.41 per share from $4.79 per share in the prior year. We are extremely pleased to have once again achieved double-digit growth in FFO per share, especially considering the dilution we faced from the sale of the properties to Galileo. Approximately 69% of the increase in FFO was funded from external growth and 31% through internal growth.

For the quarter, same center NOI increased 6.8% for the portfolio. Same center NOI for the mall portfolio increased 7.1% as a result of increases in percentage rents, CAM reimbursements, short-term leasing and sponsorship income. In addition, in the fourth quarter 2004, bad debt expenses were $1.5 million lower compared with the same quarter prior year.

For the year 2004 the same center NOI for the portfolio was up 3.1% with a 2.2% increase in same center NOI in the mall portfolio. The rise in mall portfolio NOI was due to increases in base rents, percentage rents, CAM reimbursements, short-term rents and sponsorship income. This was offset by a $2.2 million increase in bad debt expense over the prior year.

G&A for the year was a reasonable 4.6% of total revenues, the same as 2003. In the 2004 G&A, approximately $1.1 million of the expense for the year was attributable to costs associated with compliance with Section 404 of the Sarbanes-Oxley Act. Our debt to total market capitalization ratio at December 31, 2004 was 42.4% compared with 46% for the prior year period. This level provides us with a tremendous amount of financial flexibility and will allow us to take advantage of opportunities.

Variable-rate debt comprised 21.5% of total debt and 9.1% of total market capitalization at year end. We are comfortable with this level and intend to maintain our conservative stance.

Our EBITDA-to-interest coverage ratio for 2004 was 3.12 times compared with 2.85 times for 2003.

Our cost recovery ratio for the year was 101%; slightly above the high 90's levels we had anticipated. The increase in cost recovery ratio was primarily driven by higher occupancy, increases in utility recoveries and recoveries from new and acquired centers. Most of our remodels in new centers include new and more efficient energy management systems. In addition, seasonality contributed to the fourth quarter results, as has been the case historically. We expect to sustain this level in 2005.

As you all know, in November we provided guidance in the range of $5.14 to $5.19 per share for the full year and our actual results are far greater. Let us spend a few moments and walk you through the variances between the high end of our previously issued guidance and the actual results.

In late November, we completed the acquisition of Mall Del Norte in Laredo, Texas and Northpark Mall in Joplin, Missouri. This contributed approximately $0.02 in FFO to the quarter and year end, including a half a penny resulting from FAS 141. We had previously stated in our press release that we would see approximately $0.05 in gains to FFO from early sale of Charter Oak Marketplace in Hartford, Connecticut. We received approximately $1.2 million or $0.02 per share in FFO from an acquisition fee and management fees from Galileo's Phase I closing of the Samuels acquisition. Additionally, we booked approximately $0.01 in lease termination fees and $0.02 in gains from out parcels sales in the fourth quarter.

NOI as reported increased to 3.1% or 60 basis points higher than the upper end of our estimated range of 2 to 2.5% which added approximately $0.04 to our FFO per share.

Percentage rent attributable to 2003 acquisitions were $0.02 higher than anticipated. Another $0.05 was attributable to higher than anticipated income from license agreements, short-term rents and utility reimbursements from 2003 acquisitions. Better than expected performance from 2004 acquisitions accounted for approximately $0.04 of the variance from short-term rents and license agreements.

The above was offset by approximately $0.05 in impairment loss during the quarter as a result of losses on one community center sold in the fourth quarter and anticipated net losses on the sale of community centers to incur in the first quarter of 2005. As a result of the fore mentioned, our FFO for the year end up at $5.41 per share.

In December we issued 7 million depository shares of 7.375% series D cumulative redeemable perpetual preferred stock. We raised gross proceeds of $175 million and are excited to have achieved the 3rd largest non-rated preferred offering of 2004 and the lowest non-rated preferred rate in the past 3 years. Proceeds were used to reduce outstanding balances on our lines of credit.

Before we open the call for Q&A I would like to take a moment to discuss our outlook for 2005. In our earnings release, we issued a 2005 FFO per share guidance range of $5.66 to $5.74. These estimates do not include any impact from unannounced acquisitions, gains from out parcel sales, termination fees or unannounced one-time gains from the sale of non-operating properties. Our guidance range assumes NOI growth of 2 to 3% for the year.

In general, for 2005 we are seeing many of the same challenges we faced at the beginning of 2004. We expect to experience some bankruptcies and store closings and have planned for a reasonable amount in our budgeting. We also anticipate another highly competitive year for acquisitions. We hope to continue to make selective acquisitions primarily on a one-off basis.

Based upon the strength and experience of our employees and the plans and strategies we have in place, I believe we are more than ready to meet the challenges that face us and to continue to deliver the kind of growth investors have come to expect from CBL.

Thank you again for joining us on our call today and Stephen and I will be happy to answer any questions you may have.

[OPERATOR INSTRUCTIONS] We will go first to Michael Bilerman with Smith Barney.

I have John on the phone with me as well. John, I wanted to ask, and I hate to sound like a broken record on this tenet recovery ratio -- I want to make sure. You said you were going to expect 100% next year. Is that what is baked into your guidance?

Yes it is.

Is there a range between the high and low or that's just one factor?

I think it's based upon what we've seen and that's just one factor Michael.

Have you been able to go back and be able to quantify yet how much of that reimbursement comes from CAM recovery?

We should have that in the next day or so. We'll post that on our Internet page as such. I think you know though, as we pointed out, that it was really driven by the fact that the new malls, we were able to manage utilities much, much better which was about a $2.3 million benefit to us. In addition that the seasonality and the higher occupancy all drove that as well and then it's amazing what these energy management systems and how efficient they've become in these new remodelings that we've done. So that's a significant portion of it as well.

And have you moved a lot of your leases to fixed CAM? Could that be also impacting it?

We are moving in that direction. We have made significant gains in that respect.

But I don't think -- I mean so far, I don't think you'll see that in '04. You'll start to see that more in '05 and going forward because it's really just starting to be a factor now.

But if we take that to your guidance, which seems overly conservative and I don't know why you've hesitated not to include lease term fees or out-parcel as gain sales, when they have been for the longest time, a recurring part of your business and that potentially, I guess, could add about $0.15 to your numbers. Is there a reason why you don't want to even put out numbers?

I can't comment on the $0.15 cents. I can comment on the fact that we basically think that's sort of a non-reoccurring type of situation. Granted, historically we have seen those increases and we've done those specific things, but historically -- and our budgeting process is based upon what we actually know and we don't want to take into consideration fluctuations and so on as that. It's —- we agree that it's a conservative approach to the budgeting and so on and we apologize if it makes your job more difficult, but I think from running this Company and taking the reasonable approach and knowing what we can budget and feel comfortable and confident of counting on, that's been our approach and I don't foresee us changing that approach anytime in the near future as such.

And then your guidance only assumes, I guess, 5% growth at the mid-point. Just the numbers sort of don't add up from where you are in the fourth quarter and I know that there was a bunch of one-time things that you went over but there's a lot of recurring things in terms of the acquisitions building up for the year. It just seems -- and look, we can do the job; I can add $0.15 into my number for the lease term fees and the gains, but it just seems that even core operations are going to be stronger than expected and these numbers are going to come in higher next year. Substantially.

Well, I think from our budgeting process and what we have done, our budgeting process is a very detailed process with the involvement of the leasing teams as well as operations and I think that we are comfortable with those numbers. We had some very successful year this year with regards to our sponsorship and specialty leasing in the fourth quarter that added significantly to it. In fact, I think even our team that does that specific area was pleasantly surprised at the results that we saw and so it's a difficult thing to see what's actually going to happen. Acquisitions, as we pointed out and did, in trying to show you where the differences were between what we projected and what we actually did, were results of acquisitions and those acquisitions include a lot of management approach to these specific areas of the company, such as, specialty and sponsorship income.

How much for the full year of ‘04 do you have in sort of the sponsorship area in terms of total earnings?

About $5 million.

How much are you forecasting for next year?

$6 million.

The last question I had is just on sort of the development pipeline past ‘05, there does not seem too many projects in your supplemental. Can you give us a little bit of color on things that you may be working on that we can start seeing pop up that would affect your ’06 and ’07 growth?

We do not really want to announce specific projects until they are real, just because there is so many factors that can affect a new development. But I will say that we have got a good pipeline of projects for ’06, ’07, more on the open air community center side, than on the enclosed mall side, and we are hoping that we will be in the similar range that we were last year and this year in terms of new developments in those years. There is a lot of interest by retailers, a lot of expansion opportunities out there, and our development teams are busy getting our share. I see that continuing.

Now, the community centers that you would build, you would flip those into Galileo or are you going to try to keep some of those on your books?

I do not think we necessarily —- as you know our transaction with Galileo is that if we decide to sell centers, we can sell those to them. We are not under any obligation to do so. And I think a lot depends upon the lease up on those particular projects and what we see as far as future growth in those projects and things such as that.

And, also, how we would use the capital. I think we are looking at recycling the capital and getting the best return on it. So, if by selling to Galileo, we can invest it in something and have more upside, then that is definitely something that we would do.

And, in addition to that, Galileo has been a very accretive with their acquisitions, and I think that we would anticipate that that would continue. Neil has done an excellent job working together with us in making some major acquisitions. So we see Galileo continuing to grow with, or without, the addition of our community centers to it.

We’ll go next to Jay Leupp, RBC Capital Markets.

I’m here with David Ronco. Could you talk a little bit more about what your redevelopment returns looked like in 2004, what the capacity is for redevelopment in your portfolio, and what your outlook is for that type of activity in 2005?

I think that we maybe need to define what redevelopment is for you. In our minds, redevelopment where we can actually show a return would be similar to what we are doing in Fayette Mall, which Stephen alluded to in his comments. There, we basically would see that, that is an expansion where we are adding another big box user that will attract additional people to it as well as small shops. That is budgeted on stabilization fee like a 9 to 10%. It should open in the range of 9% and upon stabilization should go to about 10 or 11%, which does not include any seasonal or specialty income as well.

So, I think that if that is what your question is, basically on remodeling, where we are just spending money to remodel and update the centers, we really do not project any return on that. We do see some minimal returns, but we also see that it benefits the dominance of the center and its market area. We also see that ultimately we can see some changes in the tenet mix, which improves it. As an example, in Madison, Wisconsin, we were able to bring in Pottery Barn and Williams Sonoma as a result of the remodel. But if you actually penciled it out in our pro formas and our budgets, we really do not show that it will do anything. It does increase mall shop sales, as such, but as far as an actual return on capital spent, other than what you get back through cost recovery, it is minimal.

But, given the spread that you are seeing over your current acquisition cap rates, between 7.5 and 8%, do you see this becoming a larger part of your external growth mix going forward, external meaning non-core re-leasing, re-teneting?

I think there is a lot of opportunity. I think in the acquisitions, there is opportunity that we look at, and that gives us more of a pipeline. There is definitely more of an emphasis today on adding new restaurants to the malls. We just added a person in our leasing area, and his focus will be adding restaurants and restaurant districts to the malls. And, also, expanding the malls to allow for space for some of the lifestyle oriented retailers, who are active on the expansion front, is something that we are focusing on as well. That will translate into redevelopment opportunities. It has already; we are under construction, like I said, here in Chattanooga, with that type of project and similarly in Monroeville, Pennsylvania, in the mall we bought. That expansion was under construction, with a Barnes and Noble, a couple restaurants, and about 40,000 square feet of other shops. So, that will be a continued focus. Those projects can average anywhere from $10 million to $25 million to $30 million, so they are not 100 to $150 million projects for the most part, but they will add up across the portfolio.

Included in your guidance that you discussed earlier John, can you discuss a little bit about your expectation for occupancy growth given you are at the 94% level now overall, and also your outlook for leasing spreads that is actually built in to that guidance?

Yes, I think we have anticipated minimal increases in the occupancy gains, and as far as internal increases on the spreads, I think what we have been historically seeing is where we think we are going to end up. What is occurring is, to continue to provide the market dominant mall and the market dominant retailers for these malls. You will not see as much spread growth as such, but we think that, that in turn, precipitates more specialty leasing and more sponsorships and other areas that we can see where we gain growth in our NOI, as such. We think it is a very positive situation.

Last question just on the financing strategy given your success in the fourth quarter of raising non-rating preferred. Is it safe to assume going forward that your capital market strategy is going to include a combination of non-rated preferred and specific property mortgages as opposed to anticipating -— are you receiving a debt agency rating going forward?

Yes, I think that our strategy with our balance sheet has proven to be very effective and efficient for us. I would not anticipate that we would go for any ratings changes. I think that the ability to refinance a number of our projects and to realize additional capital from that will be our strategy for next year. We do not see the need for raising any equity in the common markets, as such, and I think that what we did with the perpetual preferred just indicates and further solidifies the strength of our Company and its acceptance by many of the investors. So, we were very pleased, excited, and happy with that. In the short term, in ’05, it will have an adverse impact because, needless to say, 7.375 is much higher than what we can borrow on a short term basis, but it basically was just in addition to our capital structure, an indications to our banks and our shareholders that, we do have that capacity and ability to access that market.

We’ll go next to Craig Schmidt, Merrill Lynch.

My question is on page ten of your supplemental, the leasing spreads. The second group of numbers, the comparable stabilized mall leasings, if I look at the percent changes of 33 minus 14, I am having a hard time understanding how you would come up with a higher percent change for the weighted average total of the two at 38.

There was an Excel error so we have updated that schedule on our website, so the totals should now match up.

Then, if I go down below, you have vacating a square footage of 1 million, and, then, you are comparing it to a lease square footage of 2.6. Do you have what the vacated space that was re-leased, what that spread was?

That’s the comparable chart that’s above that is -–

Actually below it. What I’m looking at when I focus stabilized malls let’s say year-to-date. You’re showing lease square footage at $2.3 million at $26.23. And then you’re showing vacated space. What I’m wondering is just the vacated space, what was the gain that was re-leased.

If you look at them in the comparable chart that will show you -– that’s the same space. So that will be the vacated space that was re-leased. So it is on a same space comparable space basis. You have to look up at the charts that’s at the very top of the page.

I guess I’ll have to look at the one on the website, but it looked like fourth quarter spreads were weaker than year-to-date. Is that true?

That is correct. Yes.

We’ll go next to Ian Weissman, UBS.

You guys touched a little bit on the consolidation wave that is sweeping through the department store sector and in addition to the May and Federated, Sears and Kmart I think there has been a lot of speculation that other department stores concerns will continue to rationalize their real estate such as Dillard’s and Saks. I understand while these stores are not major revenue contributors to the mall they’re obviously important components. Maybe you could just touch on what the long-term implications are of continued consolidation in the department store sector. What’s the tenant demand for call it 150,000 square foot boxes and where your portfolio currently situates in this situation?

Well, so far we’ve had very good success in the area of filling the department stores that we’ve gotten back. Our strategy has been to split the spaces in a couple of situations. We have some of the Mervyn’s buildings where we are working on that. One of the Mervyn’s buildings in Burnsville Center outside of Minneapolis, which is about 125,000 square feet, and that will be divided up with a couple of boxes. We’ve worked with Dick’s Sporting Goods on several situations. They’ve been a great addition to the malls in terms of complimenting the anchor tenant–mix, bringing in something different. We’ve done several deals with Steve & Barry’s who’s a real up and coming popular priced apparel store who has taken some portions of mall Anchor spaces and done tremendous sales volumes. And we have continued to see good demand from different types of retailers. And from our point of view, if we can bring in a different type of retailer to the mall, add entertainment and bring in higher, more productivity it’s a real positive. Another example in Springdale -- in Mobile, we took the former Dillard’s store and did a Sam’s Club. Now, that center’s a little different because we converted that from basically, what had been a conventional mall to a power center over the 5 plus years that we’ve owned it. But the real estate quality is really what the most important factor is and we’re very confident that with the good real estate that the anchors have that we’re going to continue to see demand by the boxes, by other types of retailers, by theaters and other entertainment type uses.

What about Costco, Kohl’s, Target, Wal-Mart the likes? What’s the demand there for space at the mall?

It depends a lot on if they’re in the market. In some situations if they’re already in the immediate vicinity then they are not a player. But we were just at a Costco last week, meeting with their senior management and looking at where their growth focus is and where our portfolio is. And we’re constantly in communication with Target and Kohl’s and the other majors and I think that they’ve become much more flexible over the past couple years. If they want to get into a market they’ll work with us on the space and the considerations as opposed to forcing a cookie cutter approach like they might have done four or five years ago. Even Wal-Mart has gotten much more flexible in that regard.

And finally just touching on the department store consolidations, do you think that if this wave continues do you anticipate further call it store closing announcements or consolidation in the sector? And do you think somewhere down the road -– and I’m not going to put a timeframe on it but that the traditional department stores becomes less of an important component at the mall especially within your markets?

We believe in the conventional department store very strongly. And we think that it will continue to be a strong component in our markets. The sales volumes that the department stores do are tremendous and the draw that they provide. We’re encouraged by what we’ve seen out there and by what Federated has been able to achieve with improving their merchandise strategy and improving their attractiveness, the way they have re-invented themselves in the market. We are encouraged by what Dillard’s has accomplished in the past year. I think the department stores have responded well. Look at JCPenney, I mean what a great success story in what they’ve been able to achieve. There will continue to be rationalization, no question. Situations where department the stores have too much square footage in a mall, we’re working with them to figure out a way to re-allocate that. But that’s a good thing. That’s opportunity for us. I really think that the department stores are going to continue to be an important factor and a positive for our properties.

Okay, thank you. Good quarter.

We’ll go next to Ross Nussbaum, Banc of America Securities.

A couple questions. Did I hear correctly that the leased committed percentage at Imperial Valley is just above 80%?

That’s correct.

Is that where you think it is going to open or that is where it’s at today?

That’s where we think it will open.

Is that a little behind what you had originally expected?

That’s a little slower. We were thinking originally we would be probably in the 85% range. But we’re not concerned; we think the mall is going to have a great opening. There is a lot retailers that we just don’t have commitments that are in the active cultivation phase and it’s -- the amount of GLA in that mall is roughly 220,000 square feet. So we didn’t over-build the GLA and we think that we’ll get up to the 90 plus range very quickly.

Ross, retailers are to certain extent are sort of waiting and see on border towns what we have evidenced and experienced in other situations and as they will see with this mall with two new department stores opening in the market area, they are going to see great, great opportunities here. Two -- we are going to have four department stores here; two are already in the market area and two new stores are being added to the market. You add that to the million plus right across the board and the pent up demand, the excitement for this pick of project is really going to be sensational and we think it’s an outstanding opportunity for us. We are -- needless to say, we’ve love to open 100% but we’re not concerned about the fact that as these retailers see the results that these new guy’s are coming in and experiencing that they are going to be on the band wagon very quickly.

Changing a bit to the acquisition environment, can you touch on what’s out there in terms of assets for sale and kind of how that compares to what you’ve seen over the last six to twelve months? Is there enough out there for you guys to grow at the rate you’ve been growing at?

There’s defiantly less out there today than there has been over the past couple of years. We still see that some opportunities for one-off acquisition, but there is more lower-quality assets out there than in the past few years and not as much in the quality range. I think we’re defiantly cautious about what this year is going to bring on the acquisition front. I mean that’s really the biggest reason why we don’t like to -- or we don’t include new acquisitions in our numbers. Because we don’t want to have a budget of x hundreds of millions of dollars that we feel like we’re forced to have to meet and then we have to lower our standards and so that’s really -- you know, being selective like that is really critical to us.

Ross, I think that our currency, i.e. our special common units, has proven to be a valuable commodity that had attracted a number of people to do the acquisitions with us that we think are very favorable cap rates to us. I think that ’04 was a banner year for us -- $960 million of acquisitions, almost $1 billion. You know, it would be hard to keep up that same pace in ’05 and we’re going to continue to be selective and disciplined with regard to the approach and when we see the opportunity to see a chance to use our operating partnership units at a premium, like we have in the past, we’ll do so. And if you talk with people who’ve taken our units in the past I think that they are our greatest advertisement and they’re our greatest proponents.

Final question, can you just give me an update on when your next Board meeting is?

It’s in May.

The beginning of May.

The question is, is that when you’re going to revisit a stock split?

Well I think you know that’s always an open for discussion type of approach you know. We have -- in light of Sarbanes-Oxley, we have Board calls with our Board members more frequently and so on, and I think that whatever our Board members and management feels will enhance shareholders’ value and total returns to our shareholders, it’s always an open matter of discussion and our directors are not reluctant to call this to our attention, nor are we reluctant to call it to their attention as well so.

Thank you.

We’ll go next to Jim Sullivan, Prudential Equity.

Hi John. Just to drill down a little bit more on the same store forecast for ’05, can you just clarify in the fourth quarter what percentage of the portfolio is actually in the same store pool and in the assets that were not in that pool, why they were not in the pool?

Hold on one second, Jim; we’re flipping through pages to find the answer. Ask another one, and we’ll come back to that one.

In terms of looking at ’05 then, your comments earlier about occupancy I noted and the operating cost recovery rate, so is it fair to say that the primary source of same store NOI growth in ’05 that you’re expecting is in the leasing spreads?

No, I think it’s a combination of all the elements as we’ve seen in the past. I mean, you know sponsorship, specialty and so on are important items and I think you know rollover leasing will be an important item. But you know to just say it’s going to be one specific thing is not necessarily the case. It’s a case-by-case, mall-by-mall, tenant-by-tenant, type of approach that our guys do to take -- to try to maximize the returns that we can get, so I don’t think it’s just rollover leasing that’s going to produce those NOI growths that we projected.

And in terms of the specialty leasing, has that been an area of especially stronger focus recently? Your comments earlier suggest that your gains there were perhaps greater than they had been. Or is that primarily because you’re getting more specialty leasing in connection with acquired assets?

Well part of it is definitely the acquired assets where we’ve had real good success in picking up specialty leasing over what the prior owners were. I think comparable specialty leasing gains were roughly 10% this year so that’s a real strong number. Obviously it gets harder and harder as we build on that but, you know our team has just done a great job of being creative and finding new sources of income in the common areas. And I think with the traffic in the malls and the interest on the part of people in marketing and advertising in taking advantage of that traffic that we’re going to continue to see good increases there.

And when you -- just to make sure I have this clear, when you characterize a tenant as a specialty tenant, obviously kiosk tenants fall in that category and I guess temporary tenants do as well. Do you at any point bill them something with respect to other charges that gets -- that ends up in the tenant reimbursement line or do you intend to just gross bill them?

It’s a gross billing approach.

So they wouldn’t contribute to the higher operating cost recovery rate?

No, no they wouldn’t and it’s also -- it’s retailers who have less than a 1 year lease term agreement. So kiosk, in a lot of time -- in a lot of cases will have more than 1 year, so it’s mostly the push carts and the RMUs and those both types of units in the malls. And then sometimes vacant space in line inbetween permanent tenants will lease on a temporary basis to a user and there’s income from that.

Shifting focus quickly to the out lot sales activity, can you tell us, do you have a group that’s actively marketing the out lots? And if you do, can you give use some idea of what kind of inventory of lots you have for sale?

Yes, we do have a group. Rusty Phillips, who is Vice President of Peripheral Properties, heads it up, and he’s got three individuals that work for him and their full time is devoted to leasing or selling the out parcels. A lot of the inventory is driven by the new developments. The reason ’04 was a little bit less than ’03 was because a lot of Coastal Grand out parcels were done in ’03. You know ’04, we were starting on Imperial Valley and South Haven and that’s a big factor also. We’ve put more focus on ground leasing out parcels in the past few years so we don’t look to have a lot greater in terms of the gains on sales of the out parcels. If we can ground lease that’s our preference because then we’re able to have it as reoccurring income over a 10, 15, even 20-year term in a lot of these cases and it’s a big focus. As far as the inventory amount, you know, it varies but, you know, I’d say it’s in the $60 to $70 million range. You know, that’s a pretty rough ball park number.

Based on what you said before it sound like that’s not much of a difference year over year.

I think we anticipate it being stable or even a little bit less than we’ve achieved in ’04, in the past year.

This is a question for John regarding financing. The level of variable rate debt you currently have is a little bit higher than what you have had historically, and I just wonder if you are comfortable at level or if your plans are reduce that percentage over the course of the year?

We’re comfortable at that level Jim but as we see the markets and if we see opportunities to refinance, we’ll definitely jump on those. We recognize that needless to say, term loans at these interest rates today are basically accretive to us, but that’s not the game we play. And as we see these malls basically stabilize so we can maximize the amount of the loan on that, then we will definitely jump in and put permanent loans in place and fix those interest rates. We don’t think it’s our job to guess what’s going to happen to interest rates but we in turn, also want to continue with our philosophy of maximizing the financing on as few assets as possible so we have a pool of encumbered assets. I think we’ll stay consistent with that and as we see those opportunities, which we think will occur in the year 2005, we’ll jump on those and take advantage of those.

Okay, the final question from me really raises or focuses on the department store strategy. Obviously there is a lot of concern about store closings. I’m just curious, in light of all the rumors of conversations taking place, are you finding that in talking with department stores about opening new locations that they have less interest generally? Or, in fact do they continue to have the same level of interest as you have seen historically?

I think we’ve seen the same or even more, you know, depending on who you’re talking about. I mean J.C. Penny definitely has more today than they've had the past couple of years. I think the Federated, the May Company and Dillard's are looking at new stores; they're just being more flexible about the formats. They recognize that they're not that many four department store malls that are out so they are looking favorably at the centers like South Haven where we've got Dillard's and J.C. Penny. Belk who we have a real strong relationship with has continued to be active in again not just retail malls but a lot of open air centers. So I think those department stores recognize that if they just stay still that they're going to continue give up market share and give up their position in the market place, and they've got to continue to expand. They've got to be out into the growth areas of their communities with new stores and be a viable force in the business.

We'll go next to Tony Howard, Hilliard Lyons.

Good morning and congratulations on a very good quarter. Most of my questions have been answered but I do have a couple of balance sheet questions. Year over year your development in progress line item has increased, but sequentially it's gone down from like 102 million down to 78 million but I can't equate how many projects that were completed -- that were in development completed in the fourth quarter.

Basically, two things that have impacted that. One is Coastal Grand which is our mall in Myrtle Beach as well as the renovations and remodels, so I think that has impacted it. Charter Oak and some of these community centers that we've built and developed, as they're finished they come off of that, or as we sell those into Galileo or maximize those returns that's what happens.

Okay, what was the number of developments though that were completed in the fourth quarter? I don't see that anywhere.

Let me get back to you on that one Tony. We'll get you that number for you.

Yes, because you talked about -- there was like 9 new ones in 2004.

There was about 1,854,000 square feet which was about 8 or 9 projects. Correct.

The second balance sheet question is the further clarification on the preferred offering that was done in December. I'm not too sure that I see the proceeds, how that heads up flow and already onto the balance sheets.

It's shown as paid in capital and then as a result of that it was paid down on the credit lines as we pointed out.

So it's already been used as paid down on the credit lines. Okay, I was wondering because I didn't see a significant increase in cash or other equivalence.

Well, we try to get paid down debt as much as possible -- as quickly as possible.

My general question now is on the preferred, it is fairly expensive debt considering your quality rating, your quality of company. This issue does refer to recall over prefers; I'm not sure what the maturity date is on some of the other preferreds and is this something that you consider as part of your capital structure?

I think we're always going to attempt to maximize what we can do as far as--The next earliest call that we have will be June 14, 2007, and it's approximately $100 million, and it's at the $50 per share issuance price. Then in 2008, we have another $115 million, so I think--we'll look at that as each opportunity presents itself, what we can see as far as return as capital to our shareholders.

Final question, you've spent a lot of time talking about the consolidation of retailers. Can you spend some time talking about the consolidation of retail [reap] and how that's affecting your outlook on future growth prospects?

I mean I don’t think we--I think you will continue to see it over time. You know obviously if any opportunities come our way we'll look at it just like we do with anything on the acquisition front, but it's been a clear trend over the past few years. I think when you're looking over the long-term, you'll continue to see that. I don't really know what else to say about that. We'll be opportunistic like we have been in the past, and if something comes along that makes sense then we'll definitely take a look.

I think you'll probably see it more on the power and community center side then you probably will on the regional mall side but that's not to say something couldn't happen and so on, but I think that any board or any management team has got to look at what they can best do for their shareholders and I think that's the focus of our board as well as our management team.

We'll go next to Greg Andrews, Green Street Advisors.

John, you've mentioned some of the differences between your previous guidance and where the numbers came in, and one of them that you mentioned that I didn't quite understand was kind of a surprise in terms of what you earned on some of the license agreements at the new malls. Can you just help me understand what you're referring to there?

What we're talking about is sponsorships, incomes. Those are the short-term approaches such as selling our information booth--the advertising revenues within the mall and so on. That was about, I think, $5 million for this year and we're projecting in our budget to get it up to $6 million. What we've done there, Greg, which we saw such a significant increase in is that we were using some national firms in the past and we basically took that back in-house, and our marketing and management teams at our malls have done a sensational job of being aggressive with regard to that and getting us some significant increases as a result of that.

It looks like same-store sales for the quarter weren't as good as they have been in prior quarters. Do you have the numbers for the 4th quarter, and is that a little bit of concern to you?

I think you know--they were not as good--needless to say, they're never as good as we'd like them to be. I think that we did see--it wasn't as strong as we'd hope to. I think what occurred was pretty typical. People shopped later this year as such versus what they've done in the past, and maybe we didn't get through to them as quickly as we should have.

I think the 4th quarter number we were up 1.2%, Greg, and as you know the holiday season was a real roller coaster, started off strong, and then settled down, and then that last week was just packed was unbelievable in terms of how many last-minute shoppers there were that week. That's where things picked up at the end there. We also went to a gift-card program and we rolled that out at about half our malls in the fourth quarter. We sold about, I think about $25 million in gift cards just in the holiday season and our partner in the gift card program is American Express and we've been real pleased with that so far, and that will be rolling out to the rest of the malls in the first quarter of this year. We see that being a real good driver of sales going forward as well.

One last question on numbers. In your supplemental on page--oh, I'm sorry in your results on page 6, you give some supplemental FFO information including the gains from partial sales and the gains on sales on non-operating properties and that adds up to about 7.7 million. When I looked at what actually shows up in FFO, the gains on real estate less the part that you're not adding back to FFO is a slightly smaller number about 5.6 million.

It's basically the unconsolidated centers that you add back into it to get that number. They're in the equity number.

Oh, I see. Okay.

They are in the equity number.

Will go next to Carey Callaghan Goldman Sachs &Co.

Hi, it is actually Dennis here. Just curious on your’04 acquisitions you guys quoted a 7/7 cap rate. I am just curious what you think you can grow that yield to over the coming year and how that might compared to what you have been able to do historically with your acquisitions.

We’ve typically picked up a hundred basis points over the first 18 months to 2 years. And sometimes it happens in the first year and sometimes it happens further out. Part of it depends on what time of year. In Monroeville, for example, when we bought the mall the expansion for the village was under construction, so that is obviously going to help our yields when that opens. So, I think that hundred basis points over the first 18 months to 2 years is a good range for you to use.

In terms of renewal leasing the 1.3 million square feet that you did at the comparable stabilized malls. It looks like the straight line went down slightly you know among that 1.3 million square feet there, and if you assume that the average lease term is 5 to 7 years, then I would expect you to be able to at least move those in line with sales growth of inflation over that period of time. I am just wondering, you know, why do you think it sort of lagged inflation there?

Yeah, I mean some of those are shorter term. Some times also if a tenant is paying percentage rack they don’t want to put the whole percentage rent into the new effective rent. So, we will be continuing to get percentage rate from those tenants in our net if our effective grant will be greater than what they were paying before. They will just be an adjustment as part of the renewal. So, we are always pushing to get better results on that and we are hoping to improve on those numbers.

Excluding the impact of potential acquisitions what do you expect to collect in terms of fees from Galileo in ’05.

That is a question we would have to ask Neil because it all depends on how fast the acquisition pipeline heats up or whatever. You know what we have basically seen this year, maybe not as much in the acquisition fee line but asset management and management fee income should right in that same range, maybe pickup just a little depending upon acquisitions.

Lastly with Imperial Valley coming online in your two recent border acquisitions I was just curious if you could comment a little bit on the differences between your traditional middle market malls and these border malls in terms of merchandising and economics.

We are seeing demand from some more fashion forward retailers. For example, Gap is opening at the grand opening of Imperial Valley Mall. That is actually the first guest that we have in the portfolio and I think in some of the other border malls we see a very strong demand in the junior category, in the fashion, and the food performs very well. And we have built our food court a little bigger in Imperial Valley Mall to allow for that. So, there are some definite differences, you know nuances, that we work into the leasing mix at the border malls.

Will go next to Joseph Dazio J.P. Morgan.

Most of my questions have been answered so I just have two questions here. Following up to Ross’s question earlier it seems like we are seeing more and more instances where instead of buying A malls company’s are buying B malls with free development opportunities. Is that the kind of opportunities you guys might consider, you know given the scarcity and price of A malls these days?

I guess it depends on how you define A and B malls. I think what we have acquired on the dominant malls in those market areas and what we would really say about our portfolio is that we have A malls in the markets that they serve. As far as acquiring --maybe malls that haven’t — where the returns have not been maximized or the developer basically is not going to be as aggressive as we are with regard to certain aspects of management. Those are the type of malls and the type of acquisitions we like to make because we think we can definitely add value to those.

And in turn, as I mentioned earlier, where a party is taking our special common units or common units as a currency, they likewise like to see our ability to maximize the return to re accent what can be done to those particular properties. So, I think that we review every mall as market dominant or we intend to make it market dominant if we are going to acquire it.

Lastly, do you guys have a G&A sort of range in your’05 budgets.

I think probably about the same range that we have been running, that we showed for this year. It should be in about that same area. Hopefully there will be some saving with regard to Sarbanes but will also have some increases in salaries and things such as that so it is probably going to shake out about the same. That assumes, you know, that we don’t make any major acquisitions and staff up significantly but G&A was impacted by state taxes and forms such as that. So, it should stay in that same range.

We will go next to Rich Moore KeyBanc Capital Markets.

Congratulations on an absolutely terrific quarter guys. The first question I have for you is occupancy at the end of 1Q, what do you think that ends up?

It should trend down. I think that what you have seen trend wise for some of the past couple of years should basically stay in that same range. You know, it should be in like 93% because it normally trends down because all the holiday and everything such as that, and we are a seasonal business as such.

Thanks John and then one thing that I thought was interesting when you look at the revenue stream. I mean you had all of your revenue items looked like they showed strong growth both year over year and over the third quarter and then when you look at the operating expense that actually feel from the 3rd quarter level, even though it was up over last year. So, the result was this substantial increase in the operating margin, actually it was your best operating margin I have in the model going back to 1995. I am curious, you know, is there any special going on in that operating expense line, should we anticipate continued strong operating margins you think?

I think what we pointed out our recoveries should stay in that 100% range. And the big driver there was like about $2 million $2.3 million of that was the efficiency of the utilities. And we think historically it has been running in that same range, as you get bigger you will see that effectiveness pass through to the other malls as well. So, in ’03 it was like $1.5 million, it is like 2.3 this year. So, I think utilities will be a significant thing and I think we get more efficient and more effective in how we manage those.

So you think operating expenses should continue to stay down John?

Yeah, I think we should see, I think you should see that.

The last question I have is on new concepts by retailers. I mean could you give us a few examples or what you guys are seeing out there in terms of new concepts and how much interest from retailers and new concepts for the malls there is?

Yeah, I mean we are still seeing a lot of new concepts. When I was out in San Francisco at Gap in November they were talking a lot about there new concept for women in the over 35 range. Some of the concepts, they are not necessarily new names, but they are continuing to expand in our markets like J. Jill, Ann Taylor Loft, which has been such a huge success and Cold Water Creek. Abercrombie has their rules division, which from what we have heard has had good results so far and they are going to be expanding that. Aeropostal which has just been on a remarkable run, has a concept. So, Gymboree has Janeville, which again is oriented towards the apparel market. Anthropology, which is Urban Outfitters, there are a lot of good new names out there that we are working to attract to our markets, and one of the things that we have seen is that typically they will start out in the big markets, but once those concepts are successful, they will look to come into our malls, and into the non-major metro markets. We are seeing good demand from those concepts.

We have a follow-up question from Michael Bilerman.

Where are the gains on out parcels and the gain on non-operating property on the income statement, the $1.2 million and the $3 million?

Michael, it’s Katie. The gain from out parcels and the non operating properties – it’s in the gain of sale in real estate and then there’s the unconsolidated piece on out parcel sales shows up in the equity earnings line item.

How much of that is in each?

1.2 million in unconsolidated.

How much for the full year, ’04? Is that 3.4 million?

2.2 million.

There appear to be no further questions at this time.

We would like to thank everyone for joining us on this call. Like I said earlier, we are really happy with the results that we have been able to post for the quarter and for the year. We would love to have you join us at the Imperial Valley grand opening, with the charity gala on March 8, and the grand opening on March 9. We promise a fun time for all! Thank you all very much!

This does now conclude today’s call. Thank you for your participation. You may now disconnect.