Macerich Co (MAC) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Macerich Company third quarter earnings conference call.

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

Following today's presentation, introductions will be given for a question and answer session.

If anyone needs assistance at any time during the conference, please press the star followed by 0.

As a reminder this conference is being recorded today, Wednesday, November 13, 2002.

I would now like to turn the conference over to [Mr.

Jan Palphy] from F.R.D. [INAUDIBLE] please go ahead.

Thank you.

Good afternoon and thanks to all of you for joining us for Macerich's third quarter conference call today.

If you did not receive a copy of this morning's 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 forward-looking statements which are subject to uncertainties and risks associated with their business and industry.

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

And also I want to remind everyone we are hosting a live web cast of the call and that may be accessed at www.ccbn.com, or again on the company website.

And having said all that, I'd like to introduce Art Coppola, CEO and President of Macerich Company.

And with that would like to turn the call over to Art for his opening remarks.

Please go ahead, sir.

Thank you very much.

With me today is Tom O'Hern.

I am going to be discussing some of the state of the mall sector in general, how our portfolio has been performing from a tenant sales and occupancy and leasing viewpoint, touch on highlights of our redevelopment activities, as well as the integration of the Westcor portfolio under Macerich.

The state of of the mall sector in general remains very good and strong especially compared to other real estate sectors and in general and to corporate America in general also.

Our sales levels have held in with recent somewhat positive news in the month of October as we've seen retailer sales begin to show some up ticks in the month of October .

Within the Macerich portfolio, in the third quarter our total tenant sales were up 1.8% which picks up the pace so that now our year to date total tenant sales are up 1.4%.

Leading the way within our regions is Northern California in the Pacific Northwest was up 5%, Southern California up 3.5%, Intermountain region up 1.8%, Central and Eastern regions down 2.6%.

On a comp tenant sales basis we were down 1.3% for the quarter.

And on a comp tenant sales basis we are down 1.6%.

Westcor as a region and that's the way that we'll be reporting to you is Westcor as a region with the exception that Broomfield Flat Iron Crossing will be included in the Intermountain region, but all of the other properties in Arizona will be report reported under the name of the Westcor region.

Total tenant sales in the third quarter for the Westcor region were up half a percent.

And for the year-to-date down about 1.7%.

Occupancy levels in our portfolio have remained very strong which is reflective of the quality of the portfolio and the fact that contrary to the reported weakness in tenant leasing that tenants still are very interested in taking space in high quality regional malls.

Our occupancy levels at the end of the third quarter are up to 93.6%.

So we're at 93.6%. at the end of this third quarter.

That compares to the third quarter of last year which was at 92.4%.

So we're pleased with our leasing activity, our occupancy levels and also very much pleased with our leasing spreads.

We signed leases under 10,000 feet in the third quarter of this year. 253,000 feet average new starting rents were at $43.63.

That represented a spread of 20% over expiring rents on comp space during that same quarter.

So we're pleased that we've been able to maintain a strong pace of leasing spread averaging in excess of 20% over the year we're at 24.5% year to date over expiring leases in this most recent year.

So we're pleased with that progress there.

Now I want to look to the redevelopment front.

What's happening there.

Some of our new development activities and then speak to integration issues with Westcor as well as the overall environment for acquisitions, dispositions, et cetera.

At Redmond Town Center, Bon Marche, a division of Macy's Federated has begun construction of 110,000 foot department store expected to be completed in August next year.

At our Lakewood Center, Target has demolished the former Montgomery Wards location and is rebuilding at their expense a new two story Target store expected to open in fall of next year.

Our Queen Center redevelopment continues very well.

Ground breaking took place in June and the project is on track with leasing going tremendously well.

Leases are actually signed for 53% of the expansion space and leases are out for signature for another 15%.

So given the fact that this project will be opening up in phases in 2004 with the largest phase in late 2004 and some into early 2005, we are very pleased with where we stand on that project.

It remains on track and on budget from a revenue viewpoint and a cost viewpoint to be an outstanding project for us.

Our recently acquired project in Thousand Oaks, The Oaks, which we purchased in late May.

We are under serious negotiations with all of the existing anchors as well as new anchors to come into the property.

We remain convinced this center which currently does in excess of $440 a square foot in sales per square foot is going to be one of our very top centers in our portfolio.

There are three new department stores that would like to be a part of this shopping center.

Two of them upscale in nature and we are very, very excited about the prospects for this particular project.

On the new development front.

We're under construction on a 600,000 square foot project that was in the Westcor portfolio in North Scottsdale.

It's 600,000 square foot power center which is expected to be opening in the year late 2003 on into 2004.

Our specialty center in Tucson, Lion Cantata, has broken ground in leasing as well as construction is proceeding pursuant to plan there.

We're guesstimating total new incremental costs to Macerich of roughly $70 million to complete these two projects with incremental returns on this investment of roughly 15% on the new money that we'll be putting into them.

We bought these projects when the land was already owned by Westcor and to some extent a lot of soft costs as well as hard costs had already been spent.

So at this point we're really dealing with incremental new costs and incremental new returns that we see on that.

As you know, this year has been a great year for us in the area of acquisitions with the completion of the acquisition of The Oaks as well as Westcor we completed acquisitions of roughly little bit in excess of $1.65 billion.

These acquisitions were circled back in May of this year and we're very pleased with the expected returns that we're going see on each of the significant additions to our portfolio.

The integration of Westcor is the big story for Macerich in this quarter.

We closed on the transaction in July .

From an operational viewpoint results in the third quarter are exactly in line with what we underwrote and they are reflected in the incremental returns and FFO that Tom will be discussing with you shortly.

The human integration has gone also extremely well.

The two teams between Macerich and Westcor are working interactively with each other, with Macerich people working now inside the Westcor region and Westcor people working on Macerich expansion projects throughout the United States.

We see a tremendous opportunity for the perspective opportunity for these groups to work together and to deliver great redevelopment as well as new development opportunities to our companies.

So that is really the huge dividend to be delivered besides the cash flow dividends from the properties of Westcor that we are very confident are going to be delivered over the years to come.

We're just now completing our preliminary budget for 2003 for Westcor.

Integrating their budget system into ours.

I am pleased to report that our preliminary budgets for the year 2003 are exactly in line with the results that we announced upon the acquisition of Westcor which is that we anticipate an 8.5% unlevered portfolio return on the Westcor portfolio in the year 2003.

We're look at a number of possible dispositions.

Both within the Westcor portfolio and within the pre-Westcor or Macerich portfolio.

Back in August we announced that you could anticipate that we might dispose of as much as $300 million worth of real estate.

What we discovered as we have gone about exposing some of the non-mall, non-core Westcor assets to buyers is that there actually is a portfolio discount in exposing a large number of non-mall assets to buyers and that we will maximize our results by treating the disposition of selective Westcor as well as Macerich assets on a one by one basis.

That is the approach that we are going to take.

We're in discussions with the number of parties about various assets both within the Westcor portfolio and the non-Westcor portfolio and given sensitive nature of those discussions we're just not in a position to be more specific about exact dollar amount or timing of those dispositions.

But we remain confident that the opportunity to dispose of assets that we believe are non-core within Westcor, Macerich in this environment is very attractive.

Over the last year and in particular over the last four or five months there have emerged a very long list of buyers and really a new list of buyers.

Even new buyers that are not currently public companies that have shown a lot of interest in retail properties at very, very attractive returns from a seller's viewpoint and we intend to go ahead and to tap into that market place and to use this environment to prune our portfolio keeping the most productive of our assets and the assets that are geographically clustered and work synergistically the best with each other.

On the acquisition front.

Again we're very pleased with the acquisitions that we've made.

We've monitored the activity since the consummation of the Westcor transaction.

And other than further consolidation of positions within our existing portfolio through the purchase of outside partners interest in various properties with us and or building on our positions in markets that we currently have a presence, we consider ourselves for the foreseeable future to be a net seller, to be a seller of non-core assets and to be using that capital to pay down our debt levels and to increase the equity in our company.

We're are looking at a number of different alternatives in terms of raising the appropriate amount of equity to reduce our debt levels back to the levels we're accustomed to dealing with.

As we mentioned before those include the possibility of raising private equity in the form of joint ventures in existing assets, private equity in the form of selling of assets, and or public equity in the form of issuing stock.

We have found that since we acquired the Westcor portfolio that the opportunity of bringing in private equity in the form of joint ventures has got to be even deeper and more attractive from our viewpoint.

Going back four to six months ago there was really a glass floor to the returns the unlevered return that major pension funds were willing to accept on joint venture investments of something close to 8%.

But we have seen those floors drop dramatically.

We've seen major institutional investors willing to accept returns even down into the 7% range and even below that on major shopping center transactions.

Recently we see the opportunity of bringing in private equity in the form of joint venture to be even more attractive today than it was only three months ago.

The opportunity to bring in private equity in the form of pruning our portfolio both within the Westcor non-mall assets as well as some of the Macerich assets that we owned before Westcor, Macerich assets that, given our acquisition of Westcor, are no longer as synergistic or key to us as they used to be, has only strengthened as the market has gone on in the last three to five months with the debt markets continuing to be strong, interest rates continuing to drop, and the number of buyers continuing to emerge for some of these non-core assets, we're very confident in that form of being -- of opportunity to raise equity to go ahead and reduce our debt levels over the relatively near future.

Finally, the third component of the opportunity and possibility of issuing stock.

We've obviously heard tremendous amounts of interest from investors to get involved in that particular activity with us.

We are weighing all three activities.

Right now we're focused very much on the opportunity of bringing in private equity through dispositions and/or joint ventures and we cannot and will not be more specific about how the dollars will break up amongst those three alternatives because at least two of those alternatives the joint venture discussions as well as the disposition of assets are in very private negotiations and we would disadvantage ourselves vis-a-vis either the investor would be a joint venture partner or the buyer who would be a buyer of an asset should we commit ourselves to a time frame.

But I can assure you the markets are coming in our direction in order to enable us to bring our portfolio back to the debt levels that we're accustomed to.

To reducing our floating rate debt as we've committed to you and that Tom will elaborate on and to going ahead and continuing to bolster our portfolio and to prune the non-core assets and the focus on the core assets including the Westcor portfolio that we've acquired.

We are very, very bullish on the capital market right now.

We're not complacent about what we see happening.

There are a significant number of transactions that we have been working on with at least two major transactions that Tom will be talking about in his discussions with you.

And at this point Tom I'd like to turn it over to you for discussions regarding those and other matters.

Thank you, Art.

I will focus on results of operations for the quarter as well as the balance sheet.

It was a very good quarter for us.

Overall the portfolio metrics were positive if not improving.

The results for the quarter exceeded consensus estimates but were in line with our previous upward guidance to you.

During the quarter same center net operating income including JV at pro rata was up approximately 2% compared to the third quarter of '01.

Included in that was a 571,000 dollar decrease in lease termination revenue.

Which dropped to $1.2 million in the third quarter of '02 compared to $1.75 million in the third quarter of '01.

Consistent with prior quarters we have had an increase in minimum rent attributable to CPI increases.

In the third quarter of '02 that was approximately $366,000 greater than in the third quarter of '01.

And we expect that trend to continue as we convert more of our leases to the CPI format.

We saw another strong double-digit growth in same center temporary tenant leasing which grew 15% for the quarter up to $5.1 million compared to $4.4 million in the same quarter last year.

Net income during the quarter was $11.7 million or 32 cents a share.

That was up $18.5% from 27 cents per share in the third quarter of last year.

But at nine months ended September 30, net income rose to 27.7 million or 77 cents per share compared to $22.5 million for the nine months ended September 30, 2001.

Focusing on funds from operations.

FFO per share diluted was 83 cents per share in the quarter.

Up 15% from the 72 cents a share that we recorded in the third quarter of '01.

In terms of the Westcor impact on that increase, Westcor which closed in late July , so we had about 2.2 months worth of Westcor results in our numbers that added approximately 7 cents a share to FFO and the FFO increase.

Interest rates again moved our way.

The average portfolio interest rate during the quarter was 6.08% compared to 6.9% in the third quarter of '01.

The interest coverage ratio for the quarter was 2.03 times.

Also noteworthy we just increased the dividend on November 4.

The board of directors declared an increased dividend of 57 cents per share per quarter.

Annualized that's 228 and based on recent pricing that's about a 7.9% dividend yield.

If you use the 2003 street estimate that's a 68% pay out ratio.

Macerich has increased its dividend each year since becoming a public company in 1994.

Looking now to year 2002 guidance for the remainder of the year.

In August we revised upward our 2002 guidance with a range of 314 to 325 that was up from 311 to 318.

We are again revising 2002 guidance upward to a range of 320 to 327.

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

Reasons for the wide range include but are not limited to: Uncertainty as to the size and timing of selling non-core assets, the seasonality that we see many the fourth quarter on percentage rent and temporary tenant leasing throughout the portfolio, as well as the rate and timing of planned refinancings including the convertible debt ventures which are due December 15 of '02 but callable prior to that time.

Because those are convertible those are very dilutive to earnings and can have a one month differential in the outstanding period there can have a significant impact on the fourth quarter results.

At this point and time we are not giving 2003 guidance.

Within the next few weeks upon completion of our tenant by tenant final property level budgets for 2003 we will be giving our estimated range.

That guidance will also highlight our major assumptions including capital assumptions .

Focusing now on our balance sheet.

We have previously spoken in detail about the Westcor financing.

Post Westcor we had total debt of 3.7 billion with an average interest rate of slightly over 6%.

As of September 30, 37% of our debt was floating.

That compares with our historical levels that are at or below 20%.

We did make a major step in October to reducing that floating rate debt when we refinanced Chandler Mall.

Chandler had been on a $160 million floating rate construction loan.

We had the ability to extend that construction loan and continue to take advantage of floating rate debt.

But instead we took the opportunity to put a 10-year fixed rate loan for $184 million on that property.

We hit interest rate as at low that we haven't seen since 1958 when we locked that rate.

We got a rate of 5.48% on that ten-year financing.

There's a very good financing and it was demonstrative of our commitment to continue to reduce our floating rate debt.

Post Chandler financing, our floating rate debt is now down to 33 percent of our total debt outstanding.

Another transaction, which reflects our commitment to reduce the floating rate debt we keep on our balance sheet is the Queens project.

The queens project is a $280 million expansion of that very dominant property.

We have negotiated a very unique financing on that.

It is a ten year financing.

The first two and a half years are for $225 million which will be drawn as construction progresses in the fashion of a construction loan.

During that two and a half year period the rate will float at 250 basis points over LIBOR.

After two and a half years subject to certain events that loan will then convert to a fixed rate permanent loan at 7% for a term of 7.5 years and can be sized up to 250 million.

This is being done with two very large financial institutions.

It was a very creative transaction and allows us to fix a rate in the future and take some uncertainty out of that project.

You will continue to see us through the coming quarters gradually reduce our floating rate debt as we sell non-core assets or have other capital events.

Before opening up to Q & A I do want to take a moment and remind everyone on December 5 we will be show casing our recent Westcor acquisition by hosting a tour of the Westcor Phoenix assets for institutional investors.

Please contact me if you have an interest in joining us on that tour.

And 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 polling process please press star 2.

You will hear a three tone prompt acknowledging our selection and your questions will be polled in the order they are received.

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

One moment please for the first question.

Our first question comes from Mr. David Schutman Please state your company name followed by your question.

Hi guys.

It's Dave Schulman.

How are you doing.

Good.

First question is you gave two numbers on same center sales versus comp tenant sales.

So on a same center basis they were up 1.8% on the quarter but on a comp tenant basis down 1.3 is that correct.

Yes.

Okay.

So on a comp tenant basis.

So basically increase in specialty leasing at the centers and maybe some additions that are adding the center sales?

Occupancy gain would go into total center sales.

Right And occupancy gain as well.

Right.

Next question.

Do you have any comments on the Caldman Simon potential transaction that was in motion right before you went on the air?

I have already called David and thanked him for doing that a few minutes before we started.

Other than that I have no comment. [ Laughter ]

Okay well okay.

The next question is on the Queens financing, by having the forward at 7 when you just financed Chandler at 5.5, why did you decide to fix the forward now rather wait until two and a half years from now?

Well the primary influence was the fact that we have substantially more floating rate debt today than we've ever had.

And historically if you look back over the last ten years a 7% long term fixed rate financing has always looked pretty good.

So we could have gambled and hoped to have gotten luckier or greedy and got an lower rate but given the amount of floating rate debt in our balance sheet we felt very comfortable with that.

And we also were able to structure that transaction so we get the benefit of short term interest rates due the construction period.

How much have you drawn down that on so far?

We are in the final stages of documentation.

So, you haven't drawn anything.

Nothing has been drawn yet.

So, therefore over the next two years you have $220 million floating rate paper that is self-financing, self-funded that will start to show up on the balance sheet starting probably in Q1 next year?

It's construction loan.

As a construction loan it will show up as a construction loan, right.

Yes.

But it will show up as floating rate financing on the right hand side of the balance sheet?

With an asterisk there.

With a take out -- with a two and a half year take out later?

Exactly.

The take out is obviously with the construction lender itself, with the group of construction lenders.

Okay.

And if I heard you right, on looking at re-equitizing the company, it looks like to me the order of priorities would be first sale of non-strategic assets would be first.

J. V. existing assets would be second.

Either Westcor or original core Macerich portfolio.

And public equity offering would third, that. would be the order of priority to re-equitize?

David, you are not off by much and that very well may be the road map that is pursued and we may never get to the third base.

May never end up with public issuance of equity.

But given the fact there are today some very private but significant negotiations going on regarding private equity whether it be joint venture equity and/or disposition dollars, we would be disadvantaged if we were to give a heads up to the people that we're negotiating as to the priority of where we're raising equity and how and when we're raising equity.

As a general statement because obviously if a market window opened up in the stock market you might look at public equity if your stock was 34 tomorrow which you would be very happy about you might think about it a little bit more than if the stock was 29.

Aside from something like that.

You know all three possibilities of raising equity as a form of reducing our debt are possibilities for us.

They're all something that could be pursued in the last three to four months.

As I indicated the private equity alternative either in total or as part of an overall plan has gotten to be much more attractive than we even guesstimated it would be three or four months ago.

Terrific.

Thank you so much.

Thank you, David.

Thank you, sir.

Our next question comes from Mr. Robert Belcher.

Please state your company name followed by your question.

Hello yes.

Forgive me.

I was half-way preparing for your call and I got a little distracted if you have gone over some of that stuff.

Did you indicate same center comparison and in your prepared comments?

Same center NOI, Robert?

Yes.

Yes.

Up two percent.

And I take that it excludes Westcor?

Yes it does.

Did you indicate what Westcor may have contributed?

Did you get a handle on that at all?

Yes, Westcor contributed 7 cents to the FFO growth in the quarter.

And how about on the same center basis, was it above or below your portfolio comparison?

Well we didn't get into that evaluation.

There are some significant pieces of Westcor that were not same center such as Chandler which came online in October of last year.

And also Prescott, so the same center evaluation there wasn't particularly meaningful for us.

Okay just moving on to the portfolio comparisons in your press release.

The 93.6% occupancy, does that include Westcor?

Yes it does.

And it includes The Oaks.

That's why we gave another statistic which we said the same center occupancy.

And that was excluding Westcor and Oaks and that was 93.3 percent.

Okay.

And then your total tenant sales would include Westcor, the up 1.8%?

No, that same center tenant sales does not include Westcor.

Okay great.

That's all my questions today, thanks.

Thanks.

Operator?

Again if you have any additional questions, please press the star followed by 1.

We have our next question coming from Greg Andrews.

Please state your company name followed by your question.

Thank you.

Greg Andrews, Green Street Advisors.

I think our operator got distracted by the Simon announcement too. [ Laughter ]

I know you are not ready to jump onto that.

But just a quick question GNA was down sequentially from the second quarter where as it might have gone up, given Westcor.

What's going on there?

Greg, GNA is really the over head to run the REIT.

So Westcor really didn't have an impact on that.

And that can fluctuate a little bit quarter to quarter.

If you look at it year to date we're pretty much on track with where we were last year through nine months.

Okay.

Great.

Thanks.

Thank you, sir.

Our next question comes from Rich Moore.

Please state your company name followed by your question.

Hi guys.

McDonald investments.

When do you think is the plan with ventures at this point?

Well I liked David Shulman's suggestion a few minutes ago when the stock price hits 34.

That would be good, yeah.

But in the case it doesn't, what happens?

Rich, that's part of the reason we have a range on that guidance is that we can call those today the earlier we take them out the more earnings friendly it becomes.

Because although the coupon is 7.25 because they're convertible the cost to us is more like 11%.

But on the other hand should we see a pick up in share prices those are convertible at 31.8 and it would be fine with us if that was the situation those converted.

So, we will probably be evaluating week to week on whether we go ahead and pay them off before the 15 or whether we wait and see what happens with the share price.

In any event we have capacity earmarked under our newly structured line of credit to take those de-ventures out.

Thanks.

As far as percentage rents go from Westcor is that roughly similar to an percentage basis to which you have guys have now?

Or I am guessing it's probably more given they don't have the same lease structure?

Actually I think as a percentage of the total it's less, Rich.

And we could go back and probably focus on historically what they've had based on the AKA that was filed post acquisition.

But I think they do not have a very significant amount percentage rent compared to us.

Okay.

Good.

And what do you guys seeing at the moment in terms of the holiday season?

I mean can you give us a thoughts on your expectations for the holiday season?

That's really a guess.

You know you'd like to take some cautious optimism from the October results, October results were generally better for tenants than were expected.

So you would like to take some optimism from that.

But you know we are really -- to try and be a predictor of of holiday sales at this point and time of the year, if I could do that frankly I think I'd change my business.

Okay.

And as you look at 2003 who are you seeing that is -- that are adding stores?

What tenants are you know are adding stores in your portfolio?

Really the same tenants that have been.

The Gap talked about pulling back and then now they're talking about cautiously jumping back in.

You know right now it's -- there's such a diversity of tenants in our portfolios and our portfolios are not that different than anybody else's.

There's no one tenant or group of tenants frankly that is driving growth of any of our occupancies.

We're all out there releasing space well in advance of upcoming expirations and we're very optimistic that we'll be able to maintain our occupancy levels and we're also very cognizant of the fact that our tenant mix will an evolving and ever changing thing as it has been been for 30 years.

Okay.

And last thing for me, how quickly do you guys think you'll make decisions with regard to the Westcor assets and potential joint ventures, that kind of thing?

There are significant and numerous conversations that are being had about quite a few of the assets within Westcor.

And really to talk about specifics would put us at a disadvantage vis-a-vis those conversations.

But again I want to reiterate that the possibility of monetizing those assets either through joint ventures or through dispositions today is far more attractive than we thought it was even three months ago.

Okay good.

Thank you, guys.

In terms of the dollars that we'll generate, it's far more attractive.

Great.

Thanks very much.

Thank you.

Thank you.

Gentlemen there appear to be no further questions.

We thank you for joining us on this call.

We are very pleased with the operating results that we have here in the third quarter.

The integration of Westcor into our company in the third quarter came in exactly as expected.

The results of adding Westcor to our portfolio next year and the years to come is exactly as we had expected.

And that is that it is a transformational and very accretive and attractive event.

And we look forward to continuing to report to you on that as well as other matters in quarters to come and hope to see a lot of you in Phoenix over the next few weeks.

So thank you very much for joining us.

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

If you would like to listen to a replay of today's conference you may dial 800-405-2236 or 303-590-3000 and enter access number 503595.

The number again is 800-405-2236 or 303-590-3000.

Access number 503595.

Thank you for your participation.

You may now disconnect.