Macerich Co (MAC) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Macerich Company's second quarter earnings call.

At this time all participants in in a listen-only mode.

Following the formal presentation, instructions will be given for a question and answer session.

If anyone needs assistance at any time during the conference call, please press the star followed by zero.

As a reminder, this conference is being recorded today, Monday, August 12th of 2002.

Now I would like to turn the conference over to Miss Jan [Slappy], Vice President of FRB Weber-Shandwick.

Please go ahead, Ma'am.

Thank you.

Good afternoon.

And thanks to all of you for joining us for Macerich's second quarter conference call today.

If you did not receive a copy of this mornings press release, you may access it online at www.Macerich.com.

I'd now like to read a brief Safe Harbor.

During the course of the call management will be making some forward-looking statements which are subject to uncertainties and risks associated with their business and industry.

For a more detailed description of those risks, please refer to the press release.

And I did want 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 website.

Now having said all of that, I'd 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 Jan.

I'm going to be talking about our sales, our occupancy levels, our leasing activities, redevelopment activity, the consummation of our significant acquisitions here over the past three months, and then turn it over to Tom to talk about operating results and balance sheet matters.

From the sales viewpoint, sales remain relatively flat in our portfolio in the second quarter.

Total tenant sales were up 2.9% in our portfolio.

Comp tenant sales in the quarter were down 0.9%, so just under 1% for the quarter.

Those comp tenant sales year to date are down 1.8%.

So, obviously they were down a little bit more in the first quarter of this year.

In terms of geography, Southern California total tenant sales were up 2.9%.

Northern California and the Pacific Northwest was up 5.1%.

Innermountain region was up 3.4%, and the Central and Eastern regions were up 0.8%.

We've been able to maintain good occupancy levels even in these relatively difficult economic times.

Our occupancy level at the end of the second quarter was at 92.1%, compared to 92.4% as of June of 2001, and 92.3% as of June of 2000.

So, you can see that we've maintained steady occupancy levels.

And we've done that with very good leasing activity and good leasing results.

Our average starting rent during the second quarter on new leases was $35.74.

That compares to average rent in place in our portfolio of $29.31.

The first year new rent versus expiring old rent on spaces that were exactly comparable, our leases were up 31% for the quarter.

So, you can see we're making good pros on the leasing front and pain tang our occupancy levels and keeping our centers healthy with sales per foot at $3,351 a foot.

And these occupancy levels, our tenants are making money and our occupancies remain strong.

Turning to redevelopment.

The major redevelopment activity that we have underway is the predevelopment activities and preleasing activities at our Queens project.

Leasing there continues to be just fantastic.

We have signed 44% of the space that has actually been signed for the expansion area.

We have another 22% out for signatures.

So, we have roughly two-thirds of the space actually either signed or out for signature at this project.

This is a project again that opens up the expansion area in mid 2004, with completion in late 2004.

We have signed a guaranteed maximum price contract, and given the status of our leasing and our construction contract, we remain very, very convinced that this project, which totals about $275 million, will definitely deliver returns in excess of 11% upon completion and stabilization.

So, we're very bullish on that.

Obviously what dominated this quarter was the acquisition activity for our company.

Stepping away from Westcor for the moment, a story that got a little bit overlooked because of all the hoopla in and around Westcor was our acquisition of the Oaks Shopping Center in Thousand Oaks here, which was completed in June of this year.

That is a center that is 1.1 million square feet.

Sales are $437 a square foot.

We're convinced this is going to be just a real flagship property for us.

We're already in negotiations with our existing anchors to get them to consolidate and expand their locations.

And we're talking to at least one and possibly two additional new stores of a more upscale nature than the Robinson's, May and Macy's and Penney's stores that we currently have.

And we're convinced again that this property is going to be a real flag ship for us.

We have no question that this property will be a property that will be generating in excess of $500 a care foot over the next several years.

Obviously the big story for the quarter was the announcement and then successful completion of the acquisition of Westcor.

That transaction closed on July 22nd.

The integration with the people of Westcor and the people of Macerich has gone much better than expected.

We already have got a lot of cross fertilization that is happening between the two companies.

We have several of their people working now on projects that we are underway on.

We have several of our people working on projects that they have under development, construction.

And we think that's again going to be again a terrific platform for growth for us.

The transaction was again completed in July.

There were a significant number of OP units that were taken by the entrepreneurial owners of the company, roughly 40% of the equity that the individual owners here stood to receive, they elected to take in OP units.

So, that was a real vote of confidence in the company as they elected to invest in Macerich as part of the transaction.

We have a lot of things to do inside the portfolio at Westcor from a balance sheet nature to shape it to the point to bring it to maximum optimization.

We are going to be reducing our floating rate debt at Westcor.

There is a significant amount of floating rate debt, due to the fact that they're coming off of the completion of three major construction projects.

We're going to be extending our debt maturity schedule as construction loans roll over, and we put in new fixed rate loans to replace those.

We're currently under negotiations and discussions to sell a significant amount of assets out of the portfolio, either in the manner of joint ventures or complete dispositions.

As much as 20% of the total value of the portfolio could get disposed of through the balance of this year.

We are in continuous discussions with numerous parties about the possibility of bringing in new joint venture partners, both at Westcor as well as at existing properties in Macerich to help finance this transaction.

As Tom will talk about, in terms of the debt that we've put into place to finance this transaction, we have a significant window of time to put all of the pieces into place to really take the story and to put it in its best possible light.

We've got at least 18 months under the debt facilities that Tom has put into place before we would have to consider doing anything significant, either on a disposition, a joint venture or an equity transaction.

So, we're very patient here, but we do have numerous pieces to to the puzzle that we are putting in place right now.

We have a clear roadmap in terms of how we intend to get from where we are right now back to debt levels that we have historically operated at.

But given the fact that that roadmap involves negotiations with third parties, either for financings, for dispositions, or joint ventures, we cannot get specific about the specific elements of roadmap at this point in time, but we are very, very bullish and positive about the fact that over the balance of this year, that as we put the pieces together, that the balance sheet of Westcor itself and of Macerich will be put into a much stronger and long-term nature than currently exists.

There's been a significant amount of interest from investors and analysts who have property tours of our Westcor portfolio.

We'll be circling a date for you later on this fall, but most likely it will be just before the [NEREIT] Conference out in San Francisco.

So, put it down tentatively on your calendars that there may be a property tour and showcase of the transaction in the Phoenix area on November 4th or 5th.

But we'll give you plenty of notice of that as time goes on.

At this point I would like to turn it over to Tom, so he can discuss results of operations.

Thank you, Art.

In looking at the second quarter, the overall portfolio metrics were improving and did show some very positive signs, given the current economic climate.

The results for the quarter were in line with our previous guidance to you.

During the quarter we had same center NOI, including JV's at pro rata, up approximately 2% compared to the second quarter of last year.

Included in that there was about $100,000 reduction in straight line rents for the quarter.

Going the other direction, we had CPI increases during the quarter of $371,000 greater than those that we incurred in the second quarter of 2001.

We expect these increases to continue as we convert more and more of our leases to CPI.

Based increases currently about a third of our leases have been structured with CPI increases built in.

Also, during the second quarter, we recognized about $1.6 million of lease termination revenue, down slightly from the $1.7 million we recognized in the second quarter of 2001.

Looking at the temporary tenant leasing activity, the temporary tenant income grew 20% for the quarter to $4.7 million, compared to $3.9 million in the second quarter of 2001.

Shopping center expense was $27.7 million.

That compared to $27.8 million for the quarter ended June 30th, 2001.

If you look at the income side of that, the expense recovery rate, excluding the management company expense, was 100% of the expense compared to 103% in 2001 for the second quarter.

And that was primarily due to having higher nonrecoverable expenses in the second quarter of 2002 than in 2001.

There's usually some quarter to quarter fluctuation in that recovery rate.

But for a frame of reference, the full year 2001 recovery rate was 101%.

So, that fairly closely approximated what we incurred in the second quarter of this year.

As indicated in our press release, we have written off Merchant Wired.

We wrote off about $1.3 million of that technology investment in the first quarter, and we wrote off the balance of the investment, which was about $9 million, in the second quarter.

We had been absorbing quarterly losses of about $500,000, or a penny a share, from Merchant Wired over the past couple of years, so that will not be a factor going forward.

This was a joint venture, so accordingly it's been reflected on the line item on the income statement entitled income or loss from unconsolidated entities.

And that is the primary reason the unconsolidated entities show a loss for a quarter compared to a $6.6 million gain in the second quarter of '01.

There were three other small technology investments that Macerich had participated in.

Those were also written off in the second quarter of '02 in the amount of $3 million in total for those three investments.

We currently have no remaining technology investments on the books.

Looking at net income, primarily as a result of the write-off of Merchant Wired and the other technology investments, there was a loss in the quarter of $1.3 million, or 4 cents a share.

That compared to net income of 20 cents a share in the second quarter of '01.

Looking at the six months ended June 30th, 2002, there was net income of $16.1 million, or 45 cents per share, up from 39 cents per share for the six months ended June 30th, 2001.

Amounts from operations diluted for the quarter were at 67 cents per share.

That compared to 66 cents per share the second quarter of '01.

Keep in mind this increase would have been even larger, but it was diluted by the 2 million share common stock offering that we did in February of this year.

The proceeds of that offering have been earmarked for the Queens expansion that Art spoke of previously.

We were also negatively impacted by the sale of Boulder Plaza late in the first quarter.

Those events together combined for a negative impact of about 3 cents per share for FFO on the quarter.

In terms of the interest rate, the average portfolio interest rate during the quarter was 6.5% compared to 7% last year in the second quarter.

At quarter end, we had about $2.4 billion of debt outstanding, including JVs at pro rata with an interest coverage ratio at a very healthy level of 2.11 times.

The company and the Board unanimously agreed on a change in accounting policy relating to stock options effective January 1st of this year, '02.

We will be expensing stock options granted under the employee and director incentive plan.

The company will record the expense over the vesting periods by using the fair market value of the options at the date they're granted.

We don't expect this to have a material impact.

Based on history, it would be running about a penny a share on an annual basis.

The year 2002 guidance is being revised.

We previously provided 2002 per share guidance with a range of $3.11 to $3.18.

We're revising that guidance upward to a range of $3.14 to $3.25.

There are many reasons for the change, primarily the acquisition of Westcor.

The reasons for the wide range include but are not limited to uncertainty as to the size and timing of selling non-core assets, and the rate and timing of planned refinancings.

Also included in that are the timing when we would retire our $125 million of convertible debitures.

Looking at the balance sheet post Westcor, Westcor was purchased for $1.475 billion.

That included the assumption of $733 million of debt, and the issuance of $72 million of preferred OP units.

Those units were issued at a price of $36.55.

The balance of the purchase price was funded with an acquisition loan for $380 million.

That has a term of up to 18 months, and an interest rate of LIBOR plus three and a quarter, an average rate.

These also a term loan for $250 million with a term of three years, extendable to five years.

That loan bears interest at LIBOR plus 2.75 to 3%, depending on Macerich's overall leverage level.

We also added as part of that transaction a new line of credit.

We sized up our line of credit from $200 million to $425 million.

The interest rate on that facility, there's an interest rate grid from LIBOR plus 1.75 to LIBOR plus 3% based on the company's overall leverage level.

It's a three-year facility, extended to a fourth, and this gives us the capacity to retire the $125 million of debitures that mature on December 15th of '02.

Post-Westcor, we had a total debts of $3.7 billion.

That carries an average interest rate of approximately 6%.

Of that debt, 37% of that debt is floating, but much of that is covered by interest rate caps and swaps.

Historically we have operated our business with less than 20% floating rate debt as a percentage of total debt.

Some things that we're planning to do to reduce that level of floating rate debt, including the refinance of Chandler Mall from floating to fixed, which will reduce floating rate debt by about $200 million.

We're further evaluating interest rate caps and swaps as a way to mitigate our floating rate interest rate risk even further.

You will gradually see us reduce that floating rate debt over the next 18 months.

At this point I'd like to open it up to questions.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question and answer session.

If you have a question, please press the star followed by 1 on your push button phone.

If you would like to decline from the pulling process, please press the star followed by 2.

You will here a three-tone prompt acknowledging your selection, and your questions will be pulled in the order they are received.

If you are using speaker equipment today, you will need to lift the handset before pressing the numbers.

One moment, please, for the first question.

Our first question come from Mr. Stewart Exerdolf.

Please state your company name followed by your question.

Yeah, it's Lehman Brothers.

Just first in regards to the leasing volume of the quarter, 225,000 square feet.

It seems like a little lighter than some of the previous quarters.

Just comment about the outlook of the rest of the year and as it relates to the '03 opens.

Stewart, hi.

How are you?

Good.

The pace is down a little bit from last year at this time.

You know, it's just a function of normal lease expirations.

I think that over the course of this year pre-Westcor, we normally have roughly 250,000 square feet per quarter, or a million square feet per year, that is rolling over.

And there's really nothing to be read into that one way or the other.

From the viewpoint of occupancy levels, we've been able to keep our occupancy levels up while maintaining good spreads.

So, really nothing out of the ordinary one way or the other.

But you're correct in observing that second quarter of '02, there were fewer leases signed in terms of square footage, roughly 30% less than second quarter of '01.

Okay.

As it relates to the Scweens project, you mentioned phases of the opening through '04.

Can you just put some color on that in terms of how far you think you are in the leasing?

Well, the way that the project will open up is that J.C.

Penney is scheduled to build a new store and to open that store in spring of 2004, roughly I think March 8th of 2004.

At that point in time about 170,000 feet of the expansion area will open with J.C.

Penney, and then we go back into the old J.C.

Penney building and convert that to mall shops and deliver that to mall tenants.

And those tenants are anticipated to open up in probably November of 2004.

So, that's the phasing, in terms of how it works, In that the second phase of the expansion is as we redemise the Penney building.

Okay.

And then in financing, the Westcor acquisition, you mentioned the 20% of total value could be potentially disposed of in the balance of the year.

That's in addition to the new joint venture partners that you may be bringing in?

Yes.

That would be a pure disposition of assets.

And does it relate to the community center portfolio or malls?

The most likely assets that would be disposed of over the balance of this year would be some of the non-mall assets.

Okay.

And the $3 million write-off for other technology investments, what were those?

Those were three small investments, Stewart.

The only one that would probably be familiar to you is Project Constellation.

Okay.

Great.

Thanks.

Thank you.

Thank you sir.

Our next question comes from Mr. Matt Ofstour.

Please state your company name followed by your question.

Hi, it's Matt Ofstour from Morgan Stanley.

A couple questions.

One, did you notice any difference in sale trends in the Westcor assets this quarter versus the rest of your portfolio?

They were a little bit weaker, which is really a function of the fact that Phoenix itself, not that this quarter is necessarily much of a tourist quarter, but post-9/11, Phoenix itself got hit a little bit harder than the balance of the country given the high degree of tour its activity there.

But we anticipate that by fall of this year, certainly compared to last year, that things will be picking up.

But if we were down 0.9% comp sales, I believe that the second quarter in the Westcor portfolio was down about 2%.

Great.

You [INAUDIBLE] to stabilize by year end?

I expect the fourth quarter for Westcor versus Westcor to be very good for Westcor, because the fourth quarter of last year, you know, any trade area that has a high degree of tourist traffic was hit hard no matter where that is in the United States.

And clearly Phoenix-Scottsdale is a high tourist area.

So, we do anticipate -- we're looking forward to significant new hotel openings coming in Phoenix over the balance of this year, and we do anticipate things to pick up, because one for thing, you were comparing it against weaker numbers last year.

Okay, great.

And then Tom, if you could just spell out a little more on your $3.14 to $3.25 guidance, maybe focusing on the bottom end of that range.

Would that assume a near-term sale of 20% of the assets that Art was talking about earlier, as well as some other JVs?

ANd then, I guess on top of that, I guess some additional refinancings?

Can you give us a sense of what kind of volumes you're talking about for that number?

There could be a number of things that go into that, Matt.

For example, the earlier you sell the JVs, the more dilutive it is, and it drives you towards the bottom end of that.

Also, we're looking at taking some floating rate debt that has interest rates in the 3.5% range and putting some long-term financing there.

So, it depends how quickly we do it and how far out the curve we go.

Chandler alone is $200 million, so you can see what a fairly sizeable impact that would have depending on our timing.

Another big factor is when we take out the debentures, with the stock price hovering fairly close to the conversion price on those.

We've been in less of a hurry to take those out then we may have previously been, and the actual cost on earnings from those debentures is about 10%.

So obviously, if we used our line of credit, we'd be taking those out with debt that's much less expensive.

So, the longer we hang onto the debentures, the harder it hits earnings and moves us towards the lower ends of that range.

Does your -- just one last question on the $3.14.

Does that, in any of your scenarios, does that include an equity offering?

There's room in that range for an equity offering, yes.

Okay.

Great, thanks so much.

Thank you, sir.

Our next question comes from Mr. Ross Nusenbaum.

Please state your company name followed by your question.

Hi guys.

It's Ross Nusenbaum at Solomon Smith Barney.

Hey Ross.

A question on the Oaks.

Was the floating rate mortgage there already in place, or was that something new that you went out and got?

We went out and did that as part of the acquisition.

And the reason that we want wanted to go floating instead of long term fixed there is that we have a very significant redevelopment plan there, so we need to keep flexibility at a property level to finance the expansion, the scope of which has not been approved by the city. because we haven't submitted it to the city, but it is quite significant, the expansion that we're looking at.

And in order to properly finance that expansion, we wanted to keep some floating rate short-term debt and then go ahead and finance the expansion and put more permanent debt in place.

Ross, Another point on that is that we were also able to hit a financing window that was very attractive.

We got about 70% leverage on that, and were able to get a 115 spread over LIBOR, which is tremendously competitive pricing.

So, it ended up being a very effective financing.

Sure.

In terms of the Westcor portfolio -- actually, you know, your overall portfolio.

Refinancing Chandler looks like it would get you down to maybe 30% floating rate debt.

What else can you do to get it back down to the 20% range?

Well, Ross, obviously to the extent we sell assets and that generates cash, that would go to pay down floating rate debts, the acquisition debt.

Okay.

On the acquisition front, is there anything else going on, or do you have your hands full?

Well, there are numerous activities that are going to happen within Westcor itself.

So, I mean, there are some dispositions of positions that we own in Westcor that most likely will happen.

It is possible, given the fact that a significant number of the assets that Westcor owns are in partnership, that some of those disposition proceeds could be recycled into buying out partners.

So, there could be some internal acquisition.

There is a single asset out there that we have some interest in right now, but I would say that at this point in time our hands are pretty well full, and our focus right now is on reducing floating rate debt in total, extending our maturity schedule, and then reducing our department levels as they relate to total capitalization.

Okay.

And I know, Art, you had mentioned in past calls potentially a redevelopment at Santa Monica.

Is there anything going on there that we didn't know about?

Just that it's received a tremendous amount of support from the City of Santa Monica, the mayor in particular is very supportive of that.

It is a real long shot in terms of what the mayor is thinking about doing with us, because he's talking about -- our two parking garages are owned by the city, he's talking about the possibilities of the city basically demolishing and rebuilding those parking garages subtereanian, and then allowing us to go ahead and build retail and residential on top of that.

And all that would be done, the new parking garages, at the city's expense.

So, they're showing a lot of willingness to talk about working with us, but it is a very ambitious project, and would be probably at least two years in the environmental impact review process and the coastal commission review process.

So, you know, it's a long shot.

But if it happens, it's going to be terrific.

Okay.

And I guess the other side equation.

What's going on with Crossroads these days?

Any improvement there?

Well, we're obviously in a much different negotiating position with the City of Boulder, now that we own the major retial down the street in Broomfield.

We've got -- frankly, we've taken some of the Westcor development team and we've gotten a set of fresh eyes and hands looking at our development plan there.

And they're really starting on rethinking that redevelopment from scratch.

I believe over time that something will work out with that city.

But as I've said in the past, you should not model any assumptions that anything good ever comes in terms of our negotiations with them.

But I think that the city is beginning to feel the pain that that property is throwing off from the viewpoint of lack of activity.

And I do believe that we'll get an entitlement there that will be very profitable for the company, and will also be a great redevelopment.

But don't hold your breath.

Okay.

And Tom, we appreciate the additional CAP-X disclosure this quarter.

I just want to be clear, since this is the first time you put this out.

You broke out redevelopments in expansions versus renovations.

How do you define each of those?

Expansion and redevelopment would be something like Queens, something where we're adding space.

A renovation would be what you'd consider a lightening and brightening, roof, tile, paint, parking lot, things like that.

Great.

Okay.

Thank you.

Thank you, sir.

If there are any additional questions, please press the star followed by 1 at this time.

As a reminder, if you're using speaker equipment today, you will need to lift the handset before pressing the numbers.

Our next question comes from Mr. Robert Belzer.

Please state your company name followed by your question.

Hello.

Robert Belzer of Prudential.

Just a couple of questions.

First, can you comment on how the leaseup of Prescott is going, and what you may expect by year end?

Leasing is improving there.

We would anticipate that that property will be 80% leased by the fourth quarter of this year, with full stabilization happening towards the middle or the latter part of next year.

And then, just on the two properties in development in Cantada and Scottsdale.

What do you expect on your share of the cost for those two projects?

Our share of the cost of finishing off those two projects is roughly $75 million.

And can you give us an indication on what you may expect for yield?

Incremental return on those dollars should be in the area of 14 to 15%.

That does not include our total investment, which also included a somewhat arbitrary allocation of land value to the projects.

But in terms of total new cost to the company to finish the projects, and these projects were somewhat under construction when we closed, is roughly $75 million.

And you should anticipate that those projects will be stabilized by the mid to latter part of 2004.

Okay.

Great.

That's all my questions today.

Thanks.

Thank you.

Thank you, sir.

Gentlemen, at this time I don't show any further questions.

Please continue.

Okay.

Well, thank you very much for joining us.

We look forward to reporting to you over the balance of the year as we shape out this portfolio, and as we complete the integration of Westcor.

Again, it's a fabulous transformational event for the company, and the deeper we get into it, and closer we get to the deal, and as we now own it, the more enthused we are.

So, we look forward to talking to you, and hopefully seeing you all in Phoenix later on this year.

Thank you.

Thank you, sir.

Ladies and gentlemen, this concludes the Macerich Company second quarter earnings conference call.

If you'd like to listen to a replay of today's conference, you can dial 1-800-405-2236 or 303-590-3000, and enter the pass code of 489028.

The number again is 800-405-2236 and 303-590-3000, with an access number of 489028.

Thank you for your participation.

You may now disconnect.