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Operator
Good afternoon, ladies and gentlemen, and welcome to the Macerich Company's fourth-quarter earnings call.
At this time, all participants are in a listen-only mode.
Following today's presentation instructions will be given for the question-and-answer section.
If anyone needs assistance at think time during the conference, please press the star followed by the 0.
As a reminder there are conference is being recorded Thursday, February 13, 2003.
I would now like to turn the conference over to Mr. Georgianne Palphy.
Georgianne Palphy - President and CEo
Thank you, good afternoon and thank you all of you for joining us for Macerich's fourth-quarter conference call today.
If you did not receive a copy of this morning's press release, you may access it on-line at WWW.Macerich.com.
I would 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 more detailed description of those risks, please refer to the press release.
And I also wanted to remind everyone that we are hosting a live webcast of the call, and that may be accessed at www.ccbn.com, V-call.com or the company web site.
And having said all of that, I would like to introduce Arthur Coppola, CEO and President of Macerich Company, and with that, turn the all over to Art for his opening remarks.
Please go ahead.
Arthur Coppola - CEO and President
Thank you, Georgianne.
I am here with Thomas O'Hern and Ed Coppola.
And I will be discussing results of the tenant sales for quarter in the year, the leasing in the quarter in the year and upcoming year, the growth prospects through our redevelopment activities, a little update on disposition activities and on the Westcor integration and acquisition.
On a tenant sales front, tenant sales for the year in our portfolio on a total to same center tenant basis was up 0.8%, roughly 1 percent.
That was broken out geographically between Southern California up 1.6%, Northern California and Pacific Northwest was up 3.6%.
The Intermountain region up 1.4% and Central and Eastern regions for the year were up -- were down 2.1%.
Most of those trends are generally in line with exactly what happened in the fourth quarter with one major difference being that separate from these numbers, the Westcor portfolio in the 4th quarter of 2002 was up 3% and year-to-date, the Westcor portfolio was basically flat.
On a comp tenant basis, without Westcor, our portfolio for the quarter was down 1.6%.
Likewise, year-to-date, down 1.6%.
Comp tenant sales in the Westcor portfolio were down 1.5% for the quarter and year-to-date down 2.2%.
Total Mall sales per square foot for the rolling 12 months we are at $355 a square foot versus $350 a square foot.
And, of course, the reason that those numbers would be up, even though some of the comp numbers and the total tenant numbers were either flat or down a touch is that that's a function of replacing less productive tenants with more productive tenants, which an ongoing process in our portfolio and something that we focus on every day.
Occupancy levels remain extremely strong.
At the end of the year, our total portfolio, including Westcor, our occupancy levels at 12/31 were 93.9%.
That compares to the end of 2001 where occupancy levels were at 92.4%.
So occupancy is good.
Leasing has been strong.
Excluding the Westcor portfolio and The Oaks which we also acquired during 2002, the occupancy level of our portfolio was at 93.6%.
So occupancies remain strong.
And leasing remains strong.
From a leasing viewpoint, the fourth quarter continues to be active and we signed leases under 10,000 feet in the fourth quarter of 276,000 square feet.
Average new starting rent on leases signed during the quarter were $40.54.
That was up 17.3% in the fourth quarter versus expiring rent.
For the entire year of 2002, we signed a million 1.122m feet of new leases at average rent, new starting rent at $38.90.
That was up 24.4% over previous -- over expiring rents.
In comparing 2002 lease signings to 2001 lease signings, in 2002, we signed leases at $38.90 a foot.
In 2001, we signed leases at rents of $37.25.
So we are continuing to improve average starting rents in our portfolio as we get rid of less productive tenants and replace them with more productive tenants, and maintaining our leasing spreads.
We have good visibility in the 2003, in terms of our leasing spreads.
We are looking at 2003.
We have average rents in place on expiring leases.
In 2003 of $26.27.
We have already signed and renewed roughly one-third of the leases that are expiring in 2003.
We are -- have lease renewals in process on another third.
The leasing pace that we have for 2003 and the outlook we have for 2003 is very bright.
In looking at our portfolio, I went over the leasing spreads with our leasing people this morning to look at where those increases were coming from, and out of our more than 50 centers, we have 28 centers that over the past several years and going into the next year that the rents are still so low compared to the sales that we are seeing very, very significant rent spreads in well over half of our centers.
Those also represent probably a great degree of the bulk of the leasing that gets done during the year because your most productive centers are the ones you have the most activity in, that tenants will be the most active in wanting to come into.
We have very good visibility on our rent spreads and if you look at our history over the last several years, we have been able to maintain strong spreads.
And, again, that's a function of constantly seeking to replace less -- less productive tenants with more productive tenants and that's one of the ways that we are able to maintain strong spreads, even with -- with top tenant sales being basically flat.
That's an important thing to note.
In any very productive portfolio with strong leasing focus, you are able to attain those kind of results.
The redevelopment picture is extremely strong.
Redevelopment -- the major redevelopment stories in our portfolio, of course, the Queens expansion.
The new expansions and developments that are happening in Phoenix, Tucson, Scottsdale 101 and La Encantada.
Queens, groundbreaking took place in June.
The project is on track for completion, on time and on budget.
At the end of the third quarter of 2002, we have leases signed in place for 53% of the space.
At the end of the fourth quarter, we have leases signed in place for 69% of the space.
So at this point in time, even though a significant amount of this space is more than 18 months away from opening, leasing remains extremely strong, interest is extremely strong in this project and it is still shaping up to be one of most exciting redevelopment and expansion projects certainly that we have ever been associated with.
The expansion of The Oaks and the remodeling of The Oaks and addition of a additional department stores to The Oaks Mall in Thousand Oaks remains extremely strong and interesting.
We have a couple of new department stores that are talking extremely seriously, upscale bankers to come into the center with us.
We are looking at an expansion of the Center.
We are looking at consolidating May company from two buildings into one building.
And that is shaping up to be a terrific opportunity for us.
That Center completed the year with sales in ex-he is of $440 per square foot although we have not had a chance to do much to the property yet.
We have been working very closely with the city of Thousand Oaks and with our department stores, and that expansion is shaping up to be one of the most exciting expansions that we have ever done in California.
It is an extremely productive property with $40 a square foot today.
I have no question in my mind that properly expanded that this Center will show dramatic returns and will exceed $500 a square foot in sales upon completion of the expansion.
We are not in a position to discuss dollars or timing, but the pace of the negotiations with the anchors and with the city of Thousand Oaks feels very good.
The interest level from new tenants to be here is very good.
So we are very excited about that.
The new developments of Scottsdale 101 are on time and on budget and the same with La Encantada in Tucson.
We announced in the fourth quarter of last year that we would be selling our net dispositions of non-core assets during 2003 of about $150 million.
We sold Paradise Village Gateway in early January which was located close to our Paradise Valley Mall in Phoenix.
That was sold for a price of $29.4 million.
Outside of the Westcor portfolio, we sold a former Montgomery Wards site that we had reacquired from the bankruptcy court located in Ventura.
We sold it to Lowe's Home Improvement center for $15 million and recognized a gain of $12 million.
So like we gave guidance before on non-core position, those disposition also take place both within the Westcor portfolio, as well as within the Macerich's portfolio.
And I am confident over the course of the year on a run-off-base is we will dispose of at least $150 million, pretty much ratably during the course the year in terms of doing your modeling.
As we look back on 2002, our decision in March of 2002 when Ed Coppola and our team sat down and figured out where the growth opportunities were going to be and get extremely aggressive that the point in time couldn't have been better.
As we look back on the year we completed between the acquisition of The Oaks and Westcor just over $1.6 billion of acquisition.
We completed them at an extremely attractive rates of return.
The budgeted net operating income that we are going to see on that entire portfolio between Westcor and The Oaks for 2003 is roughly an 8.5% return, which is exactly the guidance that we gave when we purchased Westcor back in July of last year.
So the integration of Westcor has gone exactly as we had hoped it would go and even better.
Our expected returns with our very detailed budgeting process that has just been completed over the last two months for the Westcor portfolio are exactly where we said they would be, which is 8.5% net operating income for the year.
When you look at what we bought within that portfolio, we ended up with some real powerhouses.
Between The Oaks, Fashion Square, Chandler Mall in the Phoenix area and FlatIrons Mall in Broomfield, Colorado, you are looking at centers that average sales per square foot in excess of $440 per square foot.
You have two new centers in there, Chandler and Flatiron, each of which is pumping up against $400 a foot with Chandler just completing its first full year of opening, and Flatiron completing its second year.
Over 70% of the valuation that was included in that 1.6 billion dollars of acquisitions rests within these four malls, The Oaks, Scottsdale Chandler, and Flatiron and people are familiar with these properties well understand these are tremendous powerhouses.
There has been much talk over the past few months and evidence that there has been significant compression of cap rates and certainly when you look at powerhouses like those four malls, it would not be unusual to expect significantly lower cap rates in terms of valuation than the cap rates that we were able to buy them at.
So we are extremely thrilled with the value we have created both through the acquisition process and the assimilation process in these assets.
We are going to continue to move toward disposing of some of the non-core and weaker assets that we have either in Westcor or outside of Westcor.
And we see this upcoming year with tremendous visibility in terms of the leasing activity that we have got, the redevelopment activity that we have got, and we see both of those activities driving our growth over the next couple of years.
So we are very thrilled with what we were able to accomplish in 2002.
We were very thrilled with the properties we were able to buy, with the timing that we were able to accomplish with the properties, with the people we were able to add to our team, and with the valuations that we were able to add to our company making some very strategic and opportunistic acquisitions.
And again as I mentioned we will now start to begin pursuing some opportunities for disposition which have already occurred land continue to occur during the balance of the year.
With that I would like to turn it over to Tom and open it up for questions later.
Thomas O'Hern - CFO, EVP, Treasurer
Thank you, Art.
Focusing now on the results.
Financial results of operations for the quarter, the overall portfolio metrics were improving and did share some very positive signs during the quarter especially in light of the current economic climate.
Same-center net operating income including joint ventures of pro rata was up approximately 1.4%.
Compared to the fourth quarter of last year.
There was about 1.4 million increase in straight lining of rents during the quarter compared to the fourth quarter of '01.
That was partially offset by a decrease of $631,000 in lease termination revenue during the fourth quarter of '02 compared to fourth-quarter of '01.
Minimum rent attributable to CPI increases in the fourth quarter of '02 was about $320,000 in excess of what we achieved in the fourth quarter of '01.
Same center, especially tenant leasing continued to be a strong income line item for us.
It grew 16% for the quarter on a same-center basis, excluding Westcor.
And if you include Westcor, the specially tenant leasing grew at a 44% pace compared to the fourth quarter of last year.
Net income during the quarter available to common stockholders was $33.2 million, that equated to on the new share count 75 cents a share diluted.
That compared to net income of $35.5 million or 94 cents a share in the fourth quarter of '01.
The decline is primarily as a result of the net income per share in 2001 being positively impacted by the net gain on sale of assets.
And that was primarily Villa Marina Marketplace sold in the fourth quarter of '01 for approximately a $25 million gain.
That increased EPS for the fourth quarter of last year by 42 cents and for the year by 55 cents per share.
That compared with the net gain on sale of assets, less writedown of assets in 2002 of about 18 cents per share on the fourth quarter, and that related primarily to the sale of the Montgomery Wards location that Art commented on a few minutes ago, and this resulted in 44 cents per share of gain for the year ending December 31, 2002.
During the quarter, we adopted the new accounting pronouncement statement of financial accounting standards number 141 entitled "business combinations."
This is a new pronouncement that requires all acquisitions after June of 2001 that the net present value of the difference between in-place rents and market be capitalized on the balance sheet and then amortized into rental income over the remaining terms of those leases.
This did have the impact of increasing rental revenue based on the positive differential between market rents and in-place rents when we acquired Westcor and The Oaks.
We did record in the fourth quarter approximately 1.9 million of additional income as a result of this accounting change.
It increased EPS by about 3 cents per share for the quarter.
However, we did not include the impact of SFAS-141 in FFO or FFO per share.
We took the conservative approach here, and also feel that to include this earnings pick-up in FFO is inconsistent with the intent of the NAREIT's definition of FFO.
Looking at FFO for the quarter we came in at 1.07 per share.
That was up almost 13% compared to 95 cents in the fourth quarter of last year.
For the year FFO per share was $3.26.
This came at the top end of our guidance range.
It was up almost 10% from the 2.97 of FFO we recorded in 2001.
Of that increase, Westcor clearly had a significant impact in the fourth quarter that added about 7 cents per share of FFO.
The NOI that was generated from the Westcor portfolio in the fourth quarter was approximately $35 million.
Given that we have a fair amount of seasonality in the fourth quarter, it typically amounts to about 27% of the total annual NOI.
So if you take the $35 million that was recorded for Westcor, that comes up to an annualized number of $126 million, which is about exactly where we underwrote the transaction.
For the total purchase price of $1.475 billion for that portfolio, we allocated about $70 million of that purchase price to land and development deals.
The remaining result is that you have a return on cost or a cap rate in excess of 8.75.
If you base it on the entire purchase price, disregarding any amounts allocated to land, that still shows an overall return on cost of 8.5%.
Looking at interest rates for the quarter, obviously they went our way.
Average portfolio interest rate for the quarter was 6.25%, and that compared to 6.86 in the fourth quarter of last year.
At quarter-end, we had approximately $3.3 billion of debt outstanding including the joint ventures at pro rata.
The interest coverage ratio for the quarter was a very healthy 2.55 times.
For the year the coverage ratio was 2.28 times.
Once again, we increased our dividend during the year 2002.
November 4, we increased the dividend to 57 cent per share per quarter, and we have increased our dividend every year since we went public in March of '94.
In the press release, we commented on our year 2003 guidance.
We are confirming the previously issued guidance range of $3.42 to $3.50.
Given the positive results for the fourth quarter, in the interest rate environment, some people are questioned why we are not moving that guidance up, and I will remind you we did a very large equity offering in the fourth quarter, and we actually sized up the number of shares issued from 10 million to 15 million.
It was an upsizing of 50%, and that obviously has diluted effect.
It counterbalances the lower interest rates that were initially had forecast.
Focusing in on the balance sheet, on November 21, as I mentioned, we filed for 10 million share offering in the neighborhood of 300 million of equity.
We embarked on a full road show.
Something that has been seldom done in the last two years.
Although we could have easily done sizable overnight offering, we knew we had a very compelling story to tell and decided to reach out to the investment community.
Through the course of the road show, the investor support for the transaction became very apparent, and the offering was upsized initially to 13.2 million shares, and then due to very strong demand on this oversubscribed deal, the underwriters overallotment was exercised and we ultimately issued 15.2 million shares.
The net proceeds from that offering were approximately 420 million, and that capital was used to pay off the acquisition debt incurred in the Westcor acquisition.
After the offering, we have about 3.37 billion of outstanding loans, including JVs.
Our floating rate debt has been reduced from 37% of our total debt down to 29%.
And if you look at our floating rate debt in terms of total market capitalization, it is approximately 17%.
In addition, the majority of the remaining floating rate debt has been fixed for 6 to 12 months to further reduce interest rate sensitivity.
Historically we have operated our business with less than 20% floating rate debt.
One example of our move to reduce the floating rate debt was in October.
We refinanced Chandler Mall from a floating rate loan to a very low interest to a ten-year fixed rate of 5.84%, $184 million loan, and that was used to primarily pay off floating rate construction debt.
That transaction did show our willingness to convert short-term footing rate debt to fixed, even at the detriment of earnings.
You will see us gradually reduce the floating rate debt percentage as we sell non-core assets, we will have other capital events.
In other major balance sheet activity, we have finalized our Queens construction financing.
This is a very unique ten-year loan.
The first two years or so are floating at LIBOR plus 250.
Then upon completion of the center and lease-up, it will convert to a 7% fixed rate loan for the remaining term over ten years.
This allowed us to take advantage of short-term floating rate debts that exist today,.
It also gives us the certainty of a fixed rate loan in a couple of years.
Total debt-to-market cap today is about 58%, and that takes us very close to where we were before the Westcor
Operator
Thank you, sir.
Ladies and gentlemen, at this time we will begin the question-and-answer section.
If you have a question, please press the star followed by the 1 on your push-button phone.
If you decline from the polling process, please press the star followed by a 2.
You will hear a three-tone prompt acknowledging your selection.
The questions will be polled in the order that they are received.
If you are using speaker equipment, please lift the handset before pressing the numbers.
One moment please while we compile the Q&A roster.
Our first question is from Paul Morgan.
Please state your company name followed by your question.
Paul Morgan
Thomas Weisel Partners.
Do you have the number -- you gave the increase in specialty leasing income.
Do you have the absolute number in the fourth quarter and for the full year?
Thomas O'Hern - CFO, EVP, Treasurer
The -- the fourth quarter specialty leasing was 11.2 million.
For the year, 25.4 million.
Paul Morgan
Okay.
And then -- what do you think going forward the type of growth you can get out of that now that you have sort of implemented a lot of the programs in the Westcor portfolio.
Thomas O'Hern - CFO, EVP, Treasurer
We are just starting to do that, Paul.
I think we still can see some very strong growth in specialty tenant leasing from the Westcor portfolio.
Even though now our Macerich portfolio, this program is mature, we have had it going for five years now, we are still putting up about 14% to 15% growth year-over-year.
We have a great group of professionals working on that and something we are progressive with and we think we can roll that out with quite a bit of success.
I think when you put Westcor in, you should see growth well in excess of what we have seen in the last couple of years which is 15%.
I expect that number north at 20%.
Paul Morgan
Okay, great.
Would it be accurate to that your guidance for the year would reflect the $150 million asset sale target?
And if I read your comments correctly, a similar large amount of refinancing activity?
Thomas O'Hern - CFO, EVP, Treasurer
Well, I think we have done a lot of the refinancing already, and it has been factored in.
I think when we looked at the guidance and reaffirmed it, we consider that interest rates had remained low, lower than our initial assumptions, but conversely, that was somewhat offset by additional dilution by issuing 5 million more shares than originally anticipated.
Paul Morgan
So do you have -- you don't have a target for fixing any additional debt?
This year?
Thomas O'Hern - CFO, EVP, Treasurer
Ah, we may do that and it has been factored into the range.
There are a number of properties that lend themselves to potentially doing that.
In particular, some of the construction loans, although they are relatively small.
The biggest amount of that floating rate debt, Paul have really on our lane of credit and term loan that we incurred when we acquired Westcor.
Paul Morgan
Last question, do you have a dollar volume of redevelopment activity in place for '03?
Arthur Coppola - CEO and President
I'll answer that.
Well, the most significant redevelopment is the overall redevelopment of Queens, which is a $275 million project, and which started in, you know, June of 2002, and will be roughly completed in fall of 200 -- late 2004.
So we don't really look at that as being completed during the year, but it will certainly be ongoing during the year and funded by that construction loan.
We have the two new developments that are taking place, Scottsdale 101 and La Encantada and the other redevelopment is the remodels could met particular and expansion of Fresno Fashion Square at a cost of $10 million or $11 million.
Paul Morgan
Thank you
Operator
Our next question comes from Stuart Alexrod; please state your company name followed by your affiliation.
Stuart Alexrod
Lehman Brothers.
You said 1.4 for the quarter, is that below the 2% guidance range for next year or just the seasonal issue or --.
Thomas O'Hern - CFO, EVP, Treasurer
Yes, Stuart, that's seasonal.
For the year we came in around 2%, slightly higher and that was I think right in line with the guidance we had given for '02.
So that had been factored into our thinking when we gave the guidance.
Stuart Alexrod
Okay.
And any discussion on -- in terms of bankruptcy risk, talk about perhaps the Eddie Bauer exposure in the portfolio?
Thomas O'Hern - CFO, EVP, Treasurer
The Eddie Bauers that we have in our portfolio, fortunately, are in very good locations in terms of where they are located in the Malls.
And we have looked at that and with what they are paying, if they were -- if we were to get those spaces back, we are very confident we can improve those rents dramatically.
Stuart Alexrod
What is the aggregate rent exposure there?
Thomas O'Hern - CFO, EVP, Treasurer
Pardon me.
Stuart Alexrod
The aggregate rent exposure from them?
Arthur Coppola - CEO and President
I don't have the total dollar amount for Eddie Bauer.
Thomas O'Hern - CFO, EVP, Treasurer
Relatively small, under 1%.
Stuart Alexrod
Okay.
And any other tenant -- tenant issues?
Arthur Coppola - CEO and President
Well, usually you are going to have shrinking of the music business, the record -- the music sales business in our malls, so that's clearly going to happen this coming year, but, of course, that's been ongoing, and the same way that, you know, we used to have two or three book stores in each mall and consolidated down to one where we have got two or three music stores in any given mall, we will be consolidating that generally down to one over a course of time.
The average rents that we are getting from our major music tenants are in the range of about $23 or $24 a foot which is still considerably below our portfolio average of rents in place, and certainly below our portfolio average of new signings.
The productivity of our music tenants is relatively low at around $230 a square foot.
So getting back those spaces and doing some consolidations we think of the remaining music store should be able to raise their sales per foot.
We found that in the book business, and we think that clearly we will be able to raise the productivity of those locations as we consolidate them and get them back over time.
We don't see any of that happening immediately.
Stuart Alexrod
Okay.
Moving on to Queens.
You mentioned obviously you are phasing in through '04.
Can you give us some color in terms of the quarter there are terms of the add-on to the small shop space and the JC Penney and Macy's store through the year '04?
Thomas O'Hern - CFO, EVP, Treasurer
Most of that will be in the second half.
Because of the timing, the way we have got to do it, we can't even get act of coring through the old Penney building until the new Penney building is open.
So about half of the shop space will open in the third quarter be-- beginning of the third quarter with the balance being at the end of the year '04.
It is really an '05 event and some income '04 but the real impact will be in the first quarter of '05.
Arthur Coppola - CEO and President
As you know, Stuart, a very complicated construction so we tried to give guidance to 2005 really is when that will hit.
Stuart Alexrod
Okay.
And lastly, just on the floating rate issue, you mentioned you had some swaps in place covering you for six to 12 months.
Give a little more detail in terms of, you know the thought process of 6 to 12 as opposed to a longer time frame with the swaps.
Thomas O'Hern - CFO, EVP, Treasurer
Actually, Stuart, we didn't use swaps, longer term LIBOR elections with the vendor rather than counterparty swap.
We have considered that and we continue to car swap as a possibility, but the existing loans have six-month LIBOR options or one-year options, and we are going at it as long as we can under the terms of those loans.
Stuart Alexrod
Okay, great, thank you.
Thomas O'Hern - CFO, EVP, Treasurer
Also to answer your question on Eddie Bauer, the total minimum rent from Eddie Bauer is about $3 million and it's $22.50 a foot.
Given they have good location we see a lot of upside there.
Stuart Alexrod
Thank you
Operator
Next question comes from Ross Nussbaum.
State your company name followed by your question.
Ross Nussbaum
Salomon Smith Barney.
A couple of questions.
First, the acquisition of the remaining interest in flatIron, is that still on track?
Arthur Coppola - CEO and President
Yes, it is.
In fact, we -- we just closed on that.
Ross Nussbaum
Okay, was the price still the $158 million?
Arthur Coppola - CEO and President
As disclosed in the prospectus with the equity offering, the yield did not change at all.
Ross Nussbaum
Art, you had run through some same-center sales numbers at the beginning of the call.
Northern California Pacific Northwest seemed to be significantly stronger than Southern California.
I am just curious why.
Arthur Coppola - CEO and President
Well, the -- you know, they are both up, so they are both -- you know, that's a good sign.
Northern California, we generally -- and the Pacific Northwest, we have some real powerhouses up there and those were total same-center tenant sales, so, you know, when you look at a quarter there at Broadway Plaza doing $5 50 and $650 a foot and you look at a Washington square doing north of $500 per square foot.
If you look at centers like that, the way we run our business is we are constantly seeking to find the tenants that are doing $200 to $300 a foot, get rid of them and replace them with guys that will do $600, $700 a foot.
When you have extremely productive centers, you can generally have much stronger same-center sales increases.
Ross Nussbaum
The down 2.1% in the Central and east, that -- the majority the IBM portfolio?
Arthur Coppola - CEO and President
That's the majority of it, yes, yes.
Ross Nussbaum
Okay.
You had also given some occupancy comparisons.
You threw out a number I think was 93.6%, excluding Westcor and The Oaks, was that the year-ago?
Arthur Coppola - CEO and President
That was the year-end 12/31/02.
Ross Nussbaum
12/31/02.
Arthur Coppola - CEO and President
12/31/02 excluding Westcor and The Oaks was 92.4.
Ross Nussbaum
Got it.
That's all I have, thank you
Operator
Thank you.
Our next question comes from Craig Schmidt.
State your company name followed by your question.
Craig Schmidt
Merrill Lynch.
Hello.
Thomas O'Hern - CFO, EVP, Treasurer
Hi, Craig.
Craig Schmidt
Hi.
I was wondering given the strength and retailers' appetite for the leasing of Queens Center, if you might be looking harder at doing something similar to say a Washington Square or a Broadway Plaza, high sale, high productivity but not a lot of inline space.
Thomas O'Hern - CFO, EVP, Treasurer
Well, at Queens, we are increasing our inland space from 160,000 to 400,000 feet.
Craig Schmidt
That's what I mean --.
Thomas O'Hern - CFO, EVP, Treasurer
When we roll that type of program out to Washington Square.
Craig Schmidt
Seems like you are getting such a positive response to Queen Center.
Maybe what you thought was a difficult space to add on to with Broadway Plaza or something at Washington Square now becomes more attractive.
Thomas O'Hern - CFO, EVP, Treasurer
I am sorry.
I understand your question now, Craig.
Essentially what we did at Queens, if you think about it, we had a 600,000-square-foot center sitting on about five acres of land.
Okay, so a very urban center.
We were able to buy about seven acres of land from the City of New York.
And that -- so that's what has allowed us to almost double the size of the center.
By comparison, let's take Washington Square.
We have got a million three or 400,000 feet on 80 acres of land.
The idea of expanding that would require something similar like assembling another 40 or 50 acres next door which is extremely hard.
We are looking at Washington Square and the city is working with us to allow us to add what appears to be about 120 to 140,000 feet of square feet to Washington Square.
Now at Walnut Creek, we got a different situation.
Walnut Creek, the growth is fairly well constrained there from a zoning viewpoint and there really is no contiguous land you will be able to buy.
But clearly where we have these extremely productive centers, and you get these high rents, you can afford high land costs, you can afford parking decks, and we are clearly looking at expansion at these centers.
And Washington Square clearly fits into that program.
Thousand Oaks, The Oaks, clearly fits into that program, but Queens is a very unique situation because we basically more than doubled our land area by buying that parking lot across the street.
Craig Schmidt
Okay, fair enough.
Thanks.
Operator
Thank you.
Our next question comes from Louis Taylor.
Please state your company name followed by your question.
Louis Taylor
Thanks, guys.
Congrats on the quarter, guys.
Let's see, Tom, Art, talk about the dispositions.
Do you have anything on the market right now and can you give us a sense of timing when they may fall within the year?
Arthur Coppola - CEO and President
Well, actually, the properties that have been sold to date were privately negotiated deals.
With people that we felt were the proper buyers.
And there are other privately-negotiated transactions that are happening right now without brokers.
There is another one in the Phoenix area that could close in the next 30 days.
There is another one in the Phoenix area that could close in the next 90 days.
Again, I would assume it is ratable over the course of the year and it is going to be done basically very -- we are dealing from a position of strength, so we are not going to go out there and give an exact time line or dollar amount because that could work against us with sellers -- with buyers if they saw that we were announcing we will do X amount of dollars by the end of the first quarter.
So for modeling purposes, I make the assumption that the balance of the disposition would say happen just ratably during the course of the year.
Louis Taylor
Okay.
Tom, just in terms of the quarterly breakout for FFO, 37% in Q4, how do you see the breakouts falling this year?
Thomas O'Hern - CFO, EVP, Treasurer
The -- the rest of the quarters are fairly equal.
Most of the seasonality falls in the fourth quarter, given percentage rents and the accounting rules that came into play last year where most of the percentage rent is deferred into the fourth quarter and that's where we get our big pickup from specialty tenant leasing shop the other three quarters are fairly even.
Louis Taylor
Great, thank you.
Thomas O'Hern - CFO, EVP, Treasurer
With the first quarter being slightly less.
Louis Taylor
Okay, thank you.
Arthur Coppola - CEO and President
Thanks, Louis
Operator
Thank you.
Our next question comes from Robert Belzer.
Please state your company name followed by your question.
Robert Belzer
Hello.
Prudential Securities.
A few questions today.
First, with 20% leasing spreads and increases in occupancy, your same-center comparison seems a little low.
Is there something pressuring that number?
Thomas O'Hern - CFO, EVP, Treasurer
the recovery rate -- the overall expense recovery rate is down a little bit.
Part of that is the function of Westcor which has a lower recovery rate than our core portfolio, but that is slightly lower, maybe 2% lower than it was a year ago and has some impact.
And also, I think when you look at occupancy, you have got to be somewhat cautious because some of that space is the not necessarily high rent paying space.
We did fill some big spaces this year to go into that number.
You know Michael's, for example, at Kip South Place, we filled some big spaces at Lakewood.
Some of that stuff came on mid quarter, late in the quarter so you don't get the economic benefit of that until the following quarter.
Robert Belzer
Okay.
Then just a specialty leasing numbers you gave, does that include your JV pro rata share?
Thomas O'Hern - CFO, EVP, Treasurer
Yes, it does.
Robert Belzer
Okay, just so that I understand you correctly.
You said that currently 29% of your debt is variable rate debt.
And if I am understanding you correctly, that number may stay the same by the end of the year?
Thomas O'Hern - CFO, EVP, Treasurer
Well, I think we've indicated that there's going to be asset sales, Robert, to the extent there is capital transaction like asset sale, pretty good possibility we will retain down some of that floating rate debt.
Robert Belzer
Absent the asset sales, you may not refinance any of that?
Thomas O'Hern - CFO, EVP, Treasurer
Well, we may.
We have some of that factored into our thinking, and that's why we have a range.
Robert Belzer
How low could that number go?
Thomas O'Hern - CFO, EVP, Treasurer
It would move down gradually.
Wouldn't see it drop from 29 to 20 I don't believe we will see this year based on the assumptions we've got but you can easily see that to 25.
Robert Belzer
Do you intend to take that below 20% eventually?
Thomas O'Hern - CFO, EVP, Treasurer
I think you have to look at how we historically operated and handled our balance sheet, and we have historically been 20% or below.
So I think we indicated that over time we would gradually move toward that.
Robert Belzer
Okay.
And then you have a $92 million SGGD loan due in 2003.
Can you tell me what you are going to do with that loan once it mature as soon as.
Thomas O'Hern - CFO, EVP, Treasurer
We are out now getting proposals right now, Robert, I will be in a better position to tell you on our next call, but we are evaluating the opportunities there.
And obviously that is a joint venture with Simon so it is a joint division -- decision.
Robert Belzer
A possibility you may fix that debt? 13.
Thomas O'Hern - CFO, EVP, Treasurer
Sure it is a possibility.
In all likelihood -- the balance of that debt on that portfolio goes through in '06.
Whatever we do, we will probably make it co-terminus whether it be floating or fixed.
We are just evaluating, you know, the possibilities and the pricing and the efficiency of going either way.
So the decision has not been made yet.
Robert Belzer
Okay.
And then moving on just to the acquisition of FlatIron.
Can you disclose a cap rate on that?
Thomas O'Hern - CFO, EVP, Treasurer
No, we can't, but I can guide to you statements that we made back in July when we acquired Westcor where we said that the cap rates on the Malls range from a low of 8% to a high of -- north of 10% with an average of 8 and three quarters percent.
We certainly as we allocated valuations, as we attributed valuations to a property like flatiron, we considered it to be one of the most valuable type of properties in the portfolio.
Robert Belzer
Just on the asset sale of Paradise, can you indicate a cap on that as well?p
Thomas O'Hern - CFO, EVP, Treasurer
We have not, but it was -- roughly 9%.
Robert Belzer
Okay, great.
That's all my questions today.
Thanks.
Thomas O'Hern - CFO, EVP, Treasurer
Thank you
Operator
Our next question comes from Richard Moore.
Please state your company name followed by your question.
Richard Moore
Hi, McDonald Investments.
Congratulations on a great quarter, guys.
G&A I noticed for the quarter was up to $3.7 million, a little higher than usual.
Do you have the thought, Tom, on the run rate for that.
Thomas O'Hern - CFO, EVP, Treasurer
Yeah, on that one, Rich, it could be a little lumpy so look at the year.
For the year it came in at 8.3 up from 6.7, 6.8 last year and part of that had to do with fluctuation share price, because it flows through the G&A line.
A lot -- our directors take all their compensation in the form of stock and that gets mark-to-market, a lot of the executives get a big piece of their compensation in stock that vests over time that is mark-to-market.
I think a good run rate for next year would be something in the neighborhood of $9 million on an annual basis, 9 to 10 million on an annual basis.
Richard Moore
Great.
As far as when you look at the Westcor portfolio now that you have had it for few quarters, have you been able to make beyond specialty leasing any improvements, you know, like introducing some new tenants from the core Macerich portfolio or any other improvements to the general assets?
Arthur Coppola - CEO and President
Yes.
And we see great opportunities there.
There's one tenant in particular that was not in the Westcor portfolio with I was one of the better junior tenants for over 21 that could end up occupying as much as 40,000 to 50,000 square feet in the Westcor portfolio.
They are currently not represented in the Westcor portfolio.
And with our focus on taking existing assets and making them better and with Westcor's focus and taking ground and building new centers on them, we are finding -- and we are teaching them a lot of the things that you need to do to find tune and to -- fine tune and go ahead and get the last few percent and the last few dollars of return out of a property.
So we are going back into the existing properties that are sitting there and looking for opportunities to raise revenue with the same skill set that we built over time with our redevelopment and remerchandising history, finding a lot of opportunities.
So it has been -- you know, the opportunities that we found are even greater than we had hoped for.
Robert Belzer
Okay.
Thanks.
And as far as -- as far as the Mall in Boulder goes, have you guys made any program guess -- progress with the city there.
Is there any change in the status of that?
Thomas O'Hern - CFO, EVP, Treasurer
We have made progress with them that they are beginning to feel the pain that we felt and they are beginning to come around.
Richard Moore
I gotcha.
Thanks.
Last question, the acquisition environment.
Can you comment on what you are seeing throughout just in general?
Arthur Coppola - CEO and President
Well, we are seeing some individual opportunities that we may take advantage of.
We are going to be extremely selective and opportunistic.
We are not on a programmed acquisition program.
We went for a couple of years before May of 2002 without buying anything.
We looked at a lot of stuff but didn't buy anything.
Very opportunistic.
The standards are very high, but we do see properties in markets that we are very strong in, including Southern California and Northern California and Colorado that we see some one-off -- run-off opportunities to add to our portfolio, some pretty interesting properties.
So we are not currently modeling any acquisitions into our guidance, and -- but we are certainly looking principally at several opportunities.
Richard Moore
Okay, great, thank you.
Operator
Thank you, our next question is a follow-up question from Louis Taylor.
Please go ahead with your question, sir.
Louis Taylor
Hi, thanks.
Tom, you had mentioned earlier in the call with the CPI rent being around 320,000.
What do you expect the ramp of that to be as you roll more leases to CPI and just assuming that the CPI stays fairly modest or low as it is now.
Thomas O'Hern - CFO, EVP, Treasurer
Louis, we have been seeing about -- as we have rolled this out the last three or four quarters, we have been seeing 300 to 350,000 dollar pick-up at about the same CPI levels as you mentioned and I would expect that to continue.
The Westcor portfolio, it was really built with fixed bumps, not CPI, so that's going to stretch out the period of time it takes to get everything converted.
I think we probably have about 40% of the Macerich portfolio on CPIs, and we have almost nothing on the Westcor side.
We can probably continue to see that kind of pickup as we move forward over the next few years.
You know, it should grow, but it will be fairly gradual, Louis.
Louis Taylor
Okay, great, thanks.
Operator
Thank you.
Our next question comes from Matthew Ostrower, please state your company name followed by your question.
Matthew Ostrower
Morgan Stanley.
Just a couple of questions.
Tom, give us a guidance on the recovery rate.
It came down a little bit, I think you mentioned snap sort of a run rate for that number?
What would you expect for the year?
Thomas O'Hern - CFO, EVP, Treasurer
for the year, if you take JVs and you put them all together, we end up coming in at 97% recovery rate versus expense, and I think that is a reasonable level, Matthew.
It dropped a little bit partly because of the structure of the Westcor leases.
Their recovery rate wasn't quite as high as ours.
And there is, you know, some pressure from tenants put in cam caps and limits and things like that that has a little bit of pressure and that's really sector wide, not just us.
If you take the fourth-quarter run rate for modeling purposes, you should be fairly close.
Matthew Ostrower
Okay.
Did you mention there was a writedown in the fourth quarter as well as a gain?
Thomas O'Hern - CFO, EVP, Treasurer
No, the only writedown that happened this year was a writedown of the investment in Merchant Wired and I believe that happened in the second quarter.
Matthew Ostrower
Okay.
What would you be expecting in terms of sort of magnitude of gains given the $1350 million in sales, what would you be expecting for gains in '03.
Do you have any sense?
Arthur Coppola - CEO and President
Most all of the properties that will be disposed of will have gains.
But at this point in time, we cannot disclose the magnitude of the gains.
We can reiterate what we have said before which is that especially the non-core assets that were purchased within the Westcor portfolio, we are finding that on a one-off-base is there is significantly higher valuation being put on these properties than when we did when we bought them.
So we will report the gains as they happen during the course of the year.
Matthew Ostrower
Okay.
And just to be clear, the $150 million of asset sales, that would bring you down to around the 20% in terms of variable rate.
That would bring you down to around 20% of total debt?
Thomas O'Hern - CFO, EVP, Treasurer
No.
No.
I -- what I was commenting on -- I believe it was Robert's question.
It will bring it down, but it will be very gradual and I wouldn't expect it to be 20% absent any major capital events beyond the assumptions we have given for a while.
If all the cash from those transactions was used to pay down debt, you know, we would move down in a 26%, 27% range.
Matthew Ostrower
Right.
I guess -- can you sort of -- just in terms of your thinking on this, I know you have other peers in the group that are notorious of keeping very high variable rate levels.
And this seems like it is even above that, to some degree.
Why not a little more urgency in terms of fixing this stuff?
Thomas O'Hern - CFO, EVP, Treasurer
Well, I think as I mentioned before, Matthew, a big piece of this is on our line of credit term loan, and they don't lend themselves for being fixed.
You can go out and buy a derivative and swap that out for a few years and that's something we are considering but not something you can go out and put a ten-year mortgage on.
The property specific debt, some of those properties, such as Prescott, have recently been developed.
Though we love where long-term interest rates are right now, that asset isn't particularly ready just now.
So you will see us go into market with those.
On the IBM portfolio, we have 132 million maturing this year.
As we talked about, and that's a candidate, but, again, that's a joint decision between ourselves and the Simon property group.
So we don't have the unilateral right to fix that particular financing.
That's really the biggest one and then the remaining large property specific loan that is floating is Flatiron and something we are considering and in discussions right now with a lender and you may see us do something where we float to late this year and then have an agreed-upon rate that we flip to on a fixed rate loan.
There is a lot of things in the works.
We are certainly not sitting back being comfortable with this level of floating rate debt.
We never had it.
I do think that we are now down to a level where we are not out of the range of the sector.
Our floating debt rate-to-total market cap is 17% and I think the sector rain San Jose probably between 10 and 20.
Arthur Coppola - CEO and President
The other thing just to further expand on that answer is that as we do our financings, we do them at -- the timing of what is happening at the property has a great deal to do with the timing of the financing also.
If this was you think secured corporate debt, you could just push the button and go ahead and lock it in, and be done with it.
But each property has a different story.
Three of the loans that have floating rate debt are construction loans within the Westcor portfolio and to go ahead and lock them into permanent loans until they are fully stabilized and until rent levels are where we want them to be would end up financing the properties at significantly lower levels than we could upon stabilization.
So every property has got a story.
The only property outside of the IBM partnership with Simon really on a stabilized basis today that is float something FlatIron.
As Tom mentioned we are currently looking at that.
The loan matures anyway next year and certainly something that we are looking at right now.
Matthew Ostrower
Great, thanks very much.
Arthur Coppola - CEO and President
Thank you.
Operator
Thank you.
Ladies and gentlemen from there are any additional questions, please press the star followed by the 1 at this time.
If you are using speakerphone, you will need to lift the handset before pressing the numbers.
One moment please for our next question.
The next question is a follow-up question from Paul Morgan.
Please state your question.
Paul Morgan
One other question.
Are you seeing any greater divergence in the -- kind of the -- the ease or difficulty of leasing in more productive versus less productive centers these days?
Arthur Coppola - CEO and President
That's been an ongoing trend.
If you sit down with, you know, any tenant on a portfolio review, they are pretty smart too, and they can sit there and their view is that if they want to open up ten stores with you, they go to your ten most highest -- highly productive centers.
But as I mentioned before, the highly productive centers which we have, which -- which we have now, which are, you know, well over half of our portfolio, sitting there north of $400 per square foot, give or take, those portfolios and those centers generate tremendous interest.
Clearly centers that are secondary and tertiary and our sales per foot are revealed in our public filings but centers under $300 per square foot, generally much more of a struggle clearly.
Retailers have got fewer stores generally that they are opening, so they want to make sure that those that they open are going to be proven winners, and for that they are willing to pay more rent.
Paul Morgan
So what type of strategy -- if this train is accelerating.
Any strategy you are looking to adopt or just trying to do the best for every center.
Arthur Coppola - CEO and President
It is not accelerating.
It is just ongoing.
It is not accelerating.
Paul Morgan
Okay, thanks.
Arthur Coppola - CEO and President
Thank you.
Operator
Thank you.
Gentlemen, at this time, there are no further questions.
Please continue with anything else that you may have to say.
Arthur Coppola - CEO and President
Okay.
Well thank you very much for joining us.
Obviously 2002 is a entrance formational year for us.
Again, the integration of Westcor has gone terrifically for us.
We are extremely thrilled with the work that we have done in terms of bringing our balance sheet much closer and almost very close back to the levels that it was at prior to the acquisition.
We think that from a value of creation viewpoint, the pricing with which we bought Westcor and The Oaks is extremely attractive, certainly looking backwards from six months from today's point of view it is extremely attractive.
Again, our visibility over the next two or three years is extremely good.
The lease thing is still strong.
Clearly challenges at time as we already are continuing to increase our leasing pace.
Even ahead of last year's spread.
We anticipate we will remain consistent with previous years, and as we bring these redevelopments on line such as Queens and the new developments on line, we see significant drivers of growth that are very clear and very visible over the next two to three years.
We look forward to reporting to you over the several quarters to come.
And, again, thank you for joining us
Operator
Thank you, sir.
Ladies and gentlemen, this concludes the Macerich Company's fourth-quarter earnings call.
If you would like to listen to a replay of today's conference, dial 1-800-405-2236 or 303-590-3000 using the access number of 516810.
Once again, if you would like to listen to a replay, dial 1-800-405-2236 or 303-590-3000 using the access number of 516810.
This replay will be available until Friday, February 28, 2003.
We thank you for your participation.
You may now disconnect.