Macerich Co (MAC) 2002 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to your Macerich Company conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the program please press star, then zero on your touch tone telephone. And as a reminder ladies and gentlemen, this conference call is being recorded. I would now like to introduce your moderator for today's conference call, Ms. Georgeanne Palffy of FRB Weber Shandwick.

Thank you. Good afternoon. And thanks to all of you for joining us for Macerich's first quarter conference call today. If you have not received a copy of this morning's press release you may access it online at www.macerich.com.

And I wanted to remind everyone that we are hosting a live webcast of the call. And that may be accessed at www.ccbn.com, Vcall.com or again, the company Web site. And having said that I would now like to introduce Art Coppola, CEO and President of the Macerich Company and with that turn the call over to Art for his opening remarks. Please go ahead, sir.

Thank you, Georgeanne. During the course of the call we'll be making some forward-looking statements which are subject to uncertainties and risks associated with our business and industry. And for a more detailed description of those risks please refer to our press release.

As indicated in our last call, we anticipate that 2002 will continue with strong growth trend for our company. And our first quarter certainly indicates that that is exactly what has happening. As we talked in the last call, even during these still uncertain economic times we believe that the mall business in general and Macerich in particular is particularly well-poised to take advantage of significant growth opportunities.

We'll be talking about our sales occupancy levels, leasing results, redevelopment, dispositions and acquisitions activity and then Tom O'Hern -- I'll be turning it over to our CFO, Tom O'Hern to talk about specific results and our balance sheet activity.

During the course of the first quarter sales were off about three percent in our portfolio. On the plus side, northern California rebounded and was up 3.2 percent. Out most negative region was the Pacific northwest, which was hurt in the Seattle and Portland area was down 4.3 percent. Southern California, which is an important region for us was basically flat. And the Great Plains and midwest was down about two percent, with the eastern area down about 1.5 percent.

Our sales, however, remained strong at $350 a square foot. And with those sales levels we were able to maintain strong occupancy levels in our portfolio, even in spite of the fact that we still have got uncertain times. Store closings in the first quarter were down, which is a positive, obviously compared to last year and previous years. And we do not anticipate any significant store closings throughout the balance of this year. Our occupancy levels at the end of the first quarter were at 92 percent, which was down from 92.4 percent. At that level it's still basically flat compared to the year previous.

Our leasing activity remains strong. You may remember that over the last few quarters we're been pointing out that we're coming up against leases that were generally originally leased in 1991, 1992, which was a fairly soft economic environment. So over the course of this year and the next year or two we're going to be anticipating continued strong leasing spreads compared to the leases that are rolling over.

Leases assigned under 10,000 feet in the first quarter were signed at levels of $37.92 per square foot, which was up a very strong 26 percent over the expiring rent. So our leasing spreads are still continuing to be strong and leasing activity is continuing to be strong.

On the redevelopment front, we had a significant development that occurred during this quarter. We recently opened 110,000 square foot Macy's Department Store at our Capitola Mall in Santa Cruz. While that does not sound to be significant on its face, it is a very significant event in that the sales at this store were up 50 percent over the plan that Federated had for this store.

We've got about five or six different locations across our portfolio that we're talking to Federated about opening this new prototype of 110-120,000 store in smaller markets, markets that generally did not qualify in the minds of people like Federated for more of a fashion type of department store. And they're very bullish. And we're very bullish on the opportunities that are going to be created by this new program for them.

Another location that we've talked about in the past that is going to host one of these smaller department stores for Federated is our property in Redmond, Washington where Federated is going to build 110,000 foot store there. And again, we anticipate very good results there. And we're thrilled about having the opportunity to bring these smaller oriented fashion stores to more of the mid and smaller markets.

On the redevelopment front, our leasing at Queens Center continues to be strong. We currently have approximately 50 percent of the expansion area, either signed or in final lease documentation. And that's a very, very significant number because we are budgeting that the incremental minimum rent that's going to be derived from the expansion area of this property is in the area of $33 to 34 million per year of minimum rent that will be coming online in mid to late 2004. So we've got roughly half of that basically either under lease or in final lease documentation at rent levels that are above our performance. So we're very happy with that activity.

On the disposition and acquisition front, we disposed of a small community center in Boulder, Colorado called Boulder Plaza during the quarter. The sales price was $24.7 million. This was a property that was unencumbered. We realized a gain on the sale of the asset of $13.4 million. And we had these lease funds in escrow with a view to doing a 1031 exchange, which we anticipate will close towards the end of the second quarter where we'll be redeploying the equity from this community center into a significant single asset regional mall opportunity in the southern California area. Due to confidentiality agreements, we cannot be more specific about the target property at this point in time. But when we do close on that transaction we will have another release on that matter. And we're very bullish on the opportunities and the redeployment of that capital.

With that, I'd like to go ahead and turn it over to Tom to discuss the results of operations as well as our balance sheet and then to open it up for questions.

o'hern: Thanks, Art. The overall portfolio metrics were mixed this quarter, did show some positive signs, especially given the current economic climate. The results for the quarter were in line with our previous guidance to you and also met consensus. During the quarter

including joint ventures at pro rata was up 2.45 percent for the compared to the first quarter of last year. Included in that was a $400,000 reduction in

compared to the first quarter of 2001, as we continue to burn off the straight line rent receivables.

Offsetting that was CPI increases of about 254,000 in excess of those we saw in the first quarter of 2001. We expect those CPI increases to continue and our expectation is by the end of the year 2002 or the beginning of 2003 that the CPI increases will equal or exceed that amount of straight line rent that continues to burn off.

During the first quarter we had $1.2 million of lease termination revenue that was reported. That compared to about $425,000 that was recognized in the same period last year. Lease termination revenue results from tenants terminating their leases prior to the natural expiration.

Temporary tenant leasing grew at a six percent pace for the quarter to $4.3 million, compared to $4.1 million in the first quarter of last year.

For shopping center expenses there was an increase to $25.7 million for the quarter as compared to $24.1 million for the quarter ended March thirty-first of 2001. This increase is primarily due to our management companies, the Macerich property management company effective April first of 2001 became a taxable subsidiary. Accordingly, now it's a consolidated entity. And the results of that entity go into that line item on the income statement. It was about $1.3 million of additional expense related to that change.

Looking at the gross margin if you exclude the impact of the management company resulting from that change to a

the gross margin for the quarter was 66.2 percent compared to 66.9 percent in the first quarter of last year. The decrease, however, was due almost entirely to the sale of

Marketplace in late 2001.

had a very strong 77 percent gross margin. If you exclude

and essentially look at gross margin on the same center basis, it was virtually the same as the same period last year.

We declared a dividend of $0.55 per share, that's payable June 10, to shareholders of record, May 20.

Looking at funds for operations for the quarter, FFO Diluted was 70 cents a share, that compared to 65 cents in the first quarter of 2001, for a 7.45 percent increase. That was positively impacted by positive re-leasing spreads.

rent increases kicking in. The quarterly results were negatively impacted by the 40 basis point decline in occupancy that Art mentioned a few minutes ago.

We did benefit from average portfolio interest rates being lower this year, at 6.81 percent, compared to 7.32 percent in the first quarter of 2001. The sale of Boulder Plaza bolstered our results this quarter in terms of the net income. We recognized a $13.3 million gain on sale of assets in the quarter that give us net income per share diluted, for the quarter, of 50 cents. If you take out the gain on sale of Boulder, which was 29 cents per share, that left us with a net income per share diluted, excluding the Boulder sale, of 21 cents per share. A ten percent increase over the 19 cents per share we saw in the first quarter of last year.

Focusing on the balance sheet, in February we sold 1,968,000 shares of common stock. The use of proceeds from those equity issuances was to provide the equity needed for the Queen Center redevelopment that Art discussed a few minutes ago.

With $50 million of equity in that project, we've been able to attain some very attractive financing proposals. We expect that that redevelopment will be a highly accretive transaction for us and will result in great use of the equity proceeds. In the short term, the proceeds from the equity offerings have been used to pay down our line of credit.

During the quarter, we had $2.2 billion of debt outstanding. $712 million of that was at the joint venture level, and our

of joint venture debt. Average maturity was 6.7 years. We continue to use primarily long-term fixed rate financing. Floating rate debt at quarter end was $265 million, and that represents about 12 percent of our total debt. Interest coverage was 2.11 times coverage.

Looking out our guidance, we remain comfortable with the FFO guidance for 2002, which is in the range of 311 to 318. The quarterly split, however, will change as a result of the capital transactions discussed earlier in the call, including the temporary dilution from the equity issuance, as well as the sale of Boulder Plaza.

The quarter by quarter split of FFO, per share, is now expected to be approximately 21 percent in the second quarter, 24 to 25 percent in the third quarter, and 32 to 33 percent in the fourth quarter. At this point in the call, I would like to open it up to questions.

Ladies and gentlemen, if you have a question at this time, please press the one key on your touch tone telephone. If your question has been answered, and you wish to remove yourself from the queue, please press the pound key. And if you're on the speaker phone, please lift the handset before asking your question. One moment for our first question. Our first question comes from

from Salomon Smith Barney.

Hi, good afternoon. Art, Tom, question on crossroads. Any progress there during the quarter.

Hey

, if you read the press it appears that we're making progress with the city. We are very hopeful and cautiously optimistic that we're making progress with them. I would anticipate, as we've indicated over the last year and a half with this, you should assume that nothing ever happens there because that's a very difficult city to do business in. But, if we are successful there, we're convinced that it will be a very positive event for us given the high barriers to entry and the difficulty of doing business there. So, we're very actively and intensely focused on working something out with city.

We're working on a major entitlement process that will allow us to basically double the GLA that is involved there. And we're talking to the city about a very significant tax increment financing package where they would contribute a very significant portion of the sales tax increment that we would generate there back to our development. So, you know, we're hopeful. But we're still maintaining a wait-and-see attitude in terms of guidance. If we are able to work something out there, it'll be a very positive event, and, you know, the good news is that the pain that we've suffered so far is pretty well bottomed-out and it's up from here.

OK. This question may be a bit premature given the ICSC conventions next week, but what are you seeing in terms of 2003 leasing at this point, in terms of what retailers are thinking.

It seems to be a little bit more cautious, in general, than what we've experienced in the past. So I think that there is definitely a little more patience in terms of forward commitments on the leasing front. But, in particular, the Gap themselves is being significantly more restrained in terms of their expansion plans. But we anticipate that in this environment, given our high sales per foot, and reasonable occupancy cost, that we'll be able to maintain our occupancy levels throughout the balance of this year and into next year.

Our occupancies have been very stable, at the 92 to 93 percent neighborhood for quite some period of time. We don't anticipate any change there, and we also anticipate that our leasing spreads, in terms of increases, will remain strong.

OK. And finally, on the acquisition front I know you talked about -- you've got one mall in southern California. What do you think, you know -- in terms of the rest of the year, do you still have your eyes open in terms of adding to the portfolio.

Yes. We definitely are looking at the possibility of acquisitions going forward. There are some interesting opportunities out there, and at this point in time we really can't project any specific acquisitions. We're pleased, in particular, with redeploying the equity proceeds from a community center that we had pretty much maxed out into a regional mall opportunity that we believe has got significant upside.

Thank you. Great.

Thank you,

.

Thank you. Our next question comes from

from Roberts Stevens.

Hi guys,

here with

. I have a question about occupancy and

in our outlook in 2002. Following your Q4 '01 call, I know your original guidance was for flat occupancy and

growth in the 3 to 3.5 percent range. And I wondered whether following Q1, that was going to hold or whether you've revised those assumptions.

The same center of NOI growth in the first quarter was a little bit softer than the guidance we had given, which was 3 to 3.5, and it may end up being more in line with 2.5 to 3. On the other hand, interest rates were more favorable than originally forecast, so those two have somewhat offset and still keep us comfortably in the range that we had given you after that fourth quarter call.

OK. And in terms of occupancy, you still hoping for flat occupancy?

Flat occupancy would drive things more to the top end of the range. At the mid point we had factored in some 60 basis points or so of deterioration in the occupancy level, which is fairly close to where we are today.

And you guys -- are you disclosing your cap rate on the Boulder Plaza disposition?

It was sold -- it was a very favorable transaction for us. It was sold to an individual investor who lives in Boulder and the property, on a trailing twelve months, had generated just about an 8 percent return, so it was a very favorable cap rate for a property of that nature. There was definitely a private ownership premium that was priced into the purchase by the buyer, so we're very pleased with being able to redeploy that money.

OK, thanks a lot.

Thank you.

Thank you, our next question comes from

from Morgan Stanley.

Good afternoon, or good morning where you guys are. Give -- question Tom, I guess I'm surprised, if you'd done this equity issue and it's obvious the use there is very good, but I would imagine that it would be dilutive to earnings in the short term. Why do you -- what's changed that makes you still feel comfortable with your existing guidance?

o'hern: Hi Matt. Actually, there's a couple of things. We did move the quarterly split to factor in the dilution from the equity offering, because you're correct, in the short term it is dilutive. But when we gave original guidance, we did not factor in any acquisitions, and as Art indicated, we do have one that we expect to close mid year. So those two pretty much offset each other, Matt, and keep us very comfortable with the range we've previously given.

OK. And then, more on the detail front, you guys -- you did say that you thought store closing in the portfolio were down this year versus last year. Sort of the pace of them?

o'hern: Yes.

Yet you're saying that lease termination fees are 1.2 million this year versus 400,000 last year, how does that, how do you reconcile those things.

o'hern: Yeah, you really can take a look at one quarter on lease terminations. They get a little bit lumpy. Over the last few years we've averaged five million per year and you know it bounces around quarter to quarter. So it's really hard to predict the quarters. It may just come from one or two tenants. So you really can't tie that into the overall store closing outlet. They don't track directly.

OK. And you're still, you're still focused on the five million dollars year of lease termination as a goal. We're

as a goal but as a forecast.

We had -- I think we'd factor in, factored in something less than that in our guidance. Again that's pretty hard to predict what you're going to get in lease termination revenues. To some extent we rely on history, but we use that conservatively.

OK. So you're thinking about -- now that you've had more in this quarter, you're thinking that it may be higher pace this year?

Not necessarily, again it's very hard to predict. You can't take one quarter and extrapolate it. Again we're just looking at history and quarter and quarter can be pretty lumpy. We don't see a lot of lease termination out there on the horizon.

OK. And -- either of you, just thinking about -- going off of

question about acquisition. Can you tell me sort of -- can you talk conceptually about the idea of issuing equity to buy property for this point and time and sort of what you see out there in the market place. We all hear about a number of transactions floating around, without being specific about them. Do you believe that the current

that you're see from all assets do they justify issuing a stock at this point in time.

o'hern: Everything that we've looked at or are looking at if we we're to issue stock in conjunction with an acquisition it would be in a

absence. And again we have a very high hurdle in terms of quality of the assets that we're looking to buy in terms of the equity returns that we're looking to generate just as a point, an example. When we recycled the money out of the

property. We're generating about an eight and quarter percent equity return on our money from that single property asset. We anticipate that as we recycle that money we'll roughly double the return on our equity because they'll be some debt on the regional mall that we'll purchase. But we got a very high hurdle rate. We clearly understand that our equity is very expensive and that there has to be very attractive opportunity to deploy that money before we would issue equity in conjunction with an acquisition.

OK. Great, thanks very much.

Thank you.

Our next question comes from Stuart

from Lehman Brothers.

Hey guys. Talk about any of the TI's in the quarter as it relates to the volume of leasing. Any changes in that in what you're giving away.

as you know historically we are not a big TI pair. I think we average less than 10 million per year across the portfolio. This year has not been you know real unusual in that regard. We had about two million dollars that we paid out in the first quarter for TI's. That's slightly less than last year. So I would say it's normal if not even slightly down from a typical year.

OK, great. In terms of the a, the a buying of the converts that you had penciled in for the second quarter. Just update us on the time

.

I don't think we really had it penciled in for the second quarter because their not qualible until near the end of June. But we got a credit facility with our banker that is essentially ready to go if we choose to do that. We plan on doing something with those in the third quarter. And there's really nothing new or changed on that front other than the fact that we're a lot close to being in the money than the last time we spoke.

OK. In terms of the new leasing that you did at the Queen center, in terms of the rent that you were able to achieve. Is that net -- you gave 130

of square foot last quarter.

o'hern: Well the rents that we were achieving at Queens are not in any of our numbers, because that's a development project. Those rents -- your right -- good memory, they are in the $130 dollar neighborhood. They were not included in the leases that were signed during the first quarter, which I indicated were 265,000 square feet at $37.92 per square foot. Queens is not in there because those are development leases basically.

Right, but the.

Queens had a number of leases signed during the quarter on that expansion. There's a low of $123 dollars of foot and a high of 250 a foot. And the average is closer to 140 or so. But then again those are not in our cop numbers. So they are not influencing the 26 percent spread that we've got in our leases.

Right. And do you anticipate the FCC guidelines basically require reporting within a thirty day window. Do you anticipate any problems with that after the quarter?

No.

OK, great thanks.

Thank you. Our next question comes from

from Prudential Security.

Hello,

Hi Robert.

Yes, couple of questions. First, first on Queens Center can you indicate to us how much you have invested in the redevelopment so far?

Robert we got about 30 million invested today.

And you have indicated on prior calls that the return on that should be in access of 11 percent and possibly up to 14 percent. Could you indicate to us, give us an update on what you're expecting at this point.

We still feel comfortable that we're going to see double digit returns in eleven percent. It is obviously -- there's a lot more certainty at this point and time on the revenue side of the equation. Leasing activity is very strong and progressing very, very well. On the cost side of the equation there still out bidding on the contracts within the range of what we anticipated the cost to be. So we're still confident that we're going to be able to deliver this very, very significant redevelopment opportunity on time, on budget, both from the viewpoint of cost and revenue and that the return should be in access of eleven percent

.

And moving on to your perspective acquisition. Could you just give us an indication of the size of the transaction and possibly what you might be seeing in terms of acquisition yields out there?

o'hern: The transaction that we're working on is north of a $100 million in terms of the purchase price. The -- it's a very, very significant property in access of a million square feet generating in excessive four hundred dollars a square foot and we anticipate seeing returns on that particular transaction just under nine percent

and on a equity basis, obviously much more significant than that.

Are you going to acquire a hundred percent of this mall?

o'hern: The opportunity that we have in the pipeline is a hundred percent, yes.

Then just moving over to a broader question in acquisition. You mentioned your high hurdles on what your underwriting. Can you just provide a little detail on what those high hurdles may entail?

o'hern: Well were looking -- from a quality of the real estate view point we're only looking to buy you know dominant franchise types of properties. Properties that dominate their market place, whether it be a big market or small market, you know we like properties in strong economic environment from the west in particular and California. And, you know, in terms of returns we're looking for returns that are going to be acretive to us even if we were to issue equity in conjunction with the transaction which obviously the one that we are working on right now is just the redeployment of the sale proceeds from the community center into the purchase of the region mall.

I think if you look at the assets that we've acquired over time it gives you a pretty good foot print for the template that we're looking for in terms of returns in terms of quality and in terms of growth opportunities.

OK. Great that's it for me. Thanks.

Thank you very much.

Thank you. Once again ladies and gentleman if you have a question at this time please press the one key on your touch-tone telephone.

Our next question comes from

from Real Estate.

Good morning or good afternoon. You mentioned on the call and on several previous calls that your releasing spread should stay quite strong because you're kind of comparing against a tough economic period ten years ago back in the 91-92 area. And I'm just kind of wondering if you could contrast what you see from a retailers perspective and a mall perspective this economic cycle with the last one. Because right now

we're not in a recession technically but we are in sort of a week environment and it seems like retailing seems to be skating through this a little bit better. And if you could maybe refresh our memories on to what happen in the last cycle and how that's different.

Sure you know back in 1990 to 1993 in particular, you know we were in a very, very weak environment as you remember. In those days we had an over supply of real estate and we were -- and real estate in general was hit by a very big disequilibrium between supply and demand. Today, as we are in these uncertain times, whether they be recessionary, and how long the recession were to continue, our consumers are still hanging in there very strong. Our consumers, in terms -- in the early '90s, were faced with fairly high interest rates and had some real difficulty in terms of their disposable income.

They felt poor, because their housing values, particularly in the West, had gone down significantly. So their confidence was down significantly. We don't have that in the environment today. The consumer is still hanging in there. In fact, we have real wage growth that we're experiencing from our consumer in the first quarter and in general, going forward. So we anticipate that in this environment we're going to do much better than we did back in the soft environment, which was really a depressionary environment ten years ago.

If you look at the

that are in place on our expiring leases today, and over the next couple of years, they're actually down, the expiring rents, from what we had in 1998 and 1999, which were being compared to a much stronger period in the late '80s. So we anticipate that from a supply viewpoint there is a much brighter environment in terms of supply and demand, of just

in general, and clearly on the regional mall front, there is no -- virtually no new supply coming online.

So our mall retailers still have good results. They have -- you know, they're operating in a portfolio today with us, for example, that is doing $350 a square foot at occupancy levels of roughly 11 percent. So the barometer of health, which is really cost of occupancy as a percentage of sales, is much better today than it was 10 years ago.

And we anticipate being able to maintain those leasing spreads. We anticipate being able to maintain our strong occupancies over the next several years.

Thanks.

Thank you.

Thank you. There appear to be no further questions at this time, I'd like to turn the program back to you for any further remarks.

OK. Well thank you very much for joining us. And again, we see a very bright future for our company and for industry in general, and we look forward to talking to you in the near future. Thank you.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program, you may now disconnect. Good day.