Macerich Co (MAC) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Macerich Company First Quarter 2003 Earnings Conference 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 session.

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

As a reminder, this conference is being recorded today, Tuesday, May 13 of 2003.

Now I'd like to turn the conference over to Miss Georgianne Palphy of FRB Webber Shandwick.

Please go ahead, ma'am.

Thank you.

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

If you did not receive a copy of this morning's press release, you may access it online at the company website, www.Macerich.com.

I would now like to introduce Mr. Art Coppola, CEO and President of Macerich Company and with that, turn the call over to Art for his opening remarks.

Please go ahead, sir.

Thank you, Georgianne.

I'm here with Thomas O'Hern, our EVP and CFO.

We will be discussing our first quarter results, recent capital transactions and our outlook for the balance of 2003.

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

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

During this call we will discuss certain non-GAAP financial measures as defined by the SEC's Regulation G. Reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in our earnings release for the quarter which is posted on the homepage of our website under the caption What's New.

I'd like to discuss current and recent tenant sales history, our leasing for the quarter, redevelopment activities that are under way right now and will be getting under way.

Our disposition activities as well as the acquisitions environment.

In looking at retail sales, our total tenant sales for the first quarter were flat.

In looking at total tenant sales throughout our portfolio, it varied from region to region, Southern California and our total tenant center sales basis was down 1.8%.

Northern California was up about 5%.

A lot of that was due to last year's renovation of our center in Modesto where there's been very significant new leasing and very strong sales growth.

The Inner Mountain Region for us on total centers basis was up .4%.

The Central and Eastern Regions was down about 5%.

A lot of that was due to sales decreases that we're feeling from the construction that's going on at Queens Center.

Many of you have been to our Queens Center project recently and you can see that there is very major construction going on there, but in spite of that, tenants are open, they're still doing very good sales volumes, but that dragged down some of the total tenant sales there.

Our Westcor Region, which we report on as a region, total tenant sales there were up 3.3%.

On a comp basis and comp is difficult to look at in the first quarter of this year given that Easter was later this year than last year, so you always have to pretty much look at March and April together but even with the late Easter this year, with the general weak economic conditions in general, and the War in Iraq, our comp tenant sales were down only 2.8% which, again, that's a difficult number to be looking at given all of the apples and oranges comparisons that we're looking at.

Looking at occupancy levels and leasing activity, our occupancy levels remain strong at 92.5% for the end of the quarter.

That's down a little bit from the end of the fourth quarter of last year, but that's typical -- typically in the first quarter, that's when your occupancies drop to the lower levels and build up again during the course of the year.

So we're very pleased with those kind of occupancy levels and those kind of occupancy levels have helped to drive another very strong quarter of leasing activity.

We signed leases of about 260,000 feet in the quarter on leases under 10,000 feet.

Average new starting rents were at $36.76, that represents a spread of 23% over comparable space and expiring rents on those leases.

I know there's been much talk lately about whether or not the mall companies and the mall sector can continue their positive leasing spreads.

We're very confident that we're going to be able to continue that.

If you look at our history, in 2001, our leasing spreads were 26%.

2002 our leasing spreads were around 20% and here in the fourth -- in the first quarter of this year, we're at 23% and the question is how can we continue to maintain those spreads in this environment?

The reason that we can continue to make those spreads is that we have a very strong portfolio in terms of sales productivity at 357 a foot, our cost of occupancy is still low with room to move at 12%.

We maintained high occupancy levels in our portfolio, currently at 92.5%.

There is very little new supply that's being built from a new construction viewpoint.

We have long-term leases with our tenants so that there is little rollover supply.

And we are also leasing, again, as we pointed out in previous conference calls in the last two or three quarters, against many leases that were entered into 10 years ago in 1992, 1993 when the economy, particularly in California, was still in a recession.

How long will this continue to last?

We're very confident that this is going to be able to continue to last.

We're always mindful of keeping our properties up to date and fresh, keeping them well-positioned through redevelopment and through re-merchandising and if you take a look at our expiring rents over the next five years, they average between 29 and $30 per square foot over the next five years.

So, we see very good visibility in terms of our leasing spreads going forward in spite of the fact that our retail sales have been flat for the fundamental reasons that I just outlined for you.

Looking at redevelopment, we're very excited about some new department store additions that are about to open up in our centers.

With the prototypical small store Bonmarchaeu, of 110,000 feet that's opening up in Redmond Town Center of July '03, that will be the first conventional department store that's being added to that mixed use project, which includes office, open air retail, grocery, a hotel that's under construction, so, we're very excited about that.

There are several old Montgomery Wards buildings that are getting replacements this year and next.

At Lakewood Center and old Montgomery Ward building has been demolished and Target will be opening a brand-new --they demolished it and at their cost, they built a new two-story store that is scheduled to open in the fall of this year, we're very excited about that.

We have a new Dillards department store in Davenport, Iowa in our IBM Simon portfolio.

That particular store was demolished by Dillards and later on this summer they will be opening up a brand-new Dillards which should be a real shot in the arm for that center..

Moving over across the river in the quad cities to South Park Mall in Moline, a Dillards is taking over an old Wards there, and they will be opening up that next year.

We're very pleased with that.

Many of you joined us on our tour of Queens Center recently.

Everything continues to be very much on track and on budget.

Target leases now are signed for over 75% of space and we are well ahead of our leasing schedule.

Construction's moving along extremely well, costs are being brought in online and on target, we're pleased with how that is proceeding.

I don't want to get into a lot of detail on it, but in Boulder, Colorado, we assigned our Westcor new development team to that project.

They are making excellent headway in the City of Boulder with a new open air project there.

Again, our income at Boulder bottomed out about a year ago and so it's really only up from here in Boulder.

Our two new development projects in the Westcor portfolio, Scottsville 101, La Encantada remain on target and on budget.

We're pleased with those, they're moving along very nicely.

We recently sat down and reviewed the new major redevelopments that we'll be looking at for the next two to three years.

As you know, we bought the Oaks, Thousand Oaks here in the Los Angeles area, San Fernando Valley a year ago, virtually almost today.

We're looking at a very major expansion of the Oaks with the significant addition to small store square footage there and the addition of a new department store, a new specialty hire and department store.

That's shaping up very well.

We don't have any numbers to share right now, we're still looking at being probably 2 to 3 years away from any opening of a redevelopment there.

But that's very promising as well as other redevelopments that we're looking at including a very significant potential expansion of our Washington Square project.

So, each of those are currently powerhouses and we have the opportunity we think to even turn them into better projects.

On the dispositions front, in late 2002, we gave guidance that we'd be selling roughly $150 million of assets over the course of this year.

We've sold $29.4 million Urban Village in the Phoenix area, Paradise Village Gateway, in January of this year.

And I think the last day of December, last year, we sold an old Montgomery Wards site at Ventura for $15 million.

We are also pleased to announce that we are entering into a new joint venture that will close tomorrow morning.

We're selling a half interest in the village at Corte Madera to a very major pension fund, the largest pension fund in the U.S.

That's being sold at a very attractive price from our viewpoint.

We're selling it at roughly a little over a 7% going in cap rate on NOI, but that property has above market debt on it of 7.75%.

So, the actual return on equity that we'll be looking at giving up is closer to 6.5% and we're pleased to be bringing in this major pension fund, who's also currently a partner and someone we will be looking to do a lot of new business with.

We're very excited about that and it will expand our platform with that new pension fund.

As we look forward to going to ICSC next week, I can't help but remember what it was like a year ago at this time.

A year ago, we were just in the throws of closing on the Oaks right around the time of ICSC, which we are very pleased about.

And we were bidding on the Westcor portfolio.

Last year, I don't remember much of the retail leasing meetings because I was tied up in hotel rooms, bidding, going back and forth with the brokers and the sellers really for four days, but the end of that, we shook hands on that deal and we made that deal, we were heavily criticized by some of our peer groups and some of our competitors as having overpaid for Westcor.

As we look back over the activities of the last year, between Westcor, the purchase of the Oaks and the purchase of a partners interest in the Westcor portfolio, we've acquired about $1.8 billion of extremely high quality real estate with sales per foot ranging from -- even some sales per foot ranging in excess of $500 per square foot.

Those are all acquired at an 8.5% going in cap rate.

In addition to that, we acquired a ton of vacant land upon which we will be doing development as well as development opportunities.

In retrospect, I couldn't be happier about that opportunistic purchase.

We were extremely pleased at the time.

We felt that the pricing that we had put on those assets was fair to both the buyer and the seller and activities in the acquisition marketplace, subsequent to our purchase of Westcor have very much validated our view on pricing on that particular acquisition.

We have always said we're opportunistic buyers and we're opportunistic sellers.

We've also said that we will always intend to maintain our financial discipline.

I think the fact that you have not seen us participate in certain recent acquisition activities is reflective of that opportunistic buying discipline, the fact that we are beginning to dispose of assets as we have indicated to you shows the opportunistic disposition side of it and also the activities that we have put to place on our balance sheet in terms of taking floating rate debt and converting it to long-term fixed rate debt I think also shows the financial discipline that really is reflective and has been shown throughout our entire10-year history as a public company and our 30-year history as a shopping center retail company.

With that, I'd like to turn it over to Tom O'Hern to share various operating results and balance sheet activities.

Thank you, Art.

The overall portfolio metrics were again good in the quarter in shared continued resiliency, especially given the current economic climent.

During the quarter, same-center NOI, including joint ventures at pro rata was up approximately 3% compared to the first quarter of 2002.

Included in that was about -- well, included in the operating results for the quarter were straight-lining rents of about $1.1 million, that is not in the same set of results that, is almost entirely attributable to the Westcor portfolio, which was acquired in July of 2002.

Offsetting that to some degree was a decrease in lease termination revenues of $336,000, they came in at about $900,000 for the quarter, compared to $1.25 million in the first quarter of 2003.

We had CPI increases in the quarter of approximately 350,000 greater than those we saw in the first quarter of 2002.

Specialty center leasing, again, remained a strong category for us and grew 13% for the quarter.

In terms of net income during the quarter, net income available to common stockholders was $19.4 million or 37 cents a share diluted.

That compared to $17 million in net income in the same quarter last year or 50 cents a share.

Keeping in mind in 2002, in the first quarter, net income was positively impacted by a net gain on sale of assets primarily Boulder Plaza, which netted a $13 million gain in increased EPS by 30 cents per share during the first quarter of 2002.

At the end of last year we adopted a statement of financial accounting standards number 141 on business combinations.

This is a new accounting pronouncement that requires all acquisitions after September 2001 essentially look at the net present value of the difference between in-place rents and market rents.

That's been capitalized and amortized into income over the remaining term of those leases.

During the first quarter we recorded about $1.1 million of the additional income as a result of this accounting change.

It increased EPS by 1.5 cents per share, a penny and a half a share, and in accordance -- and this is a change from the fourth quarter where we took a more conservative view, but with the SEC's new regulation, Regulation G, we must now use NAREIT definition exactly of FFO.

Which would include, including SFAS 141 as well as a gain on a sale of land out-parcels, which we have periodically it doesn't tend to be steady or predictable and we had about 524,000 of gain related to those out-parcel sales during the first quarter.

Looking at FFO per share, FFO per share was 84 cents, up almost 21% compared to the 70 cents in the first quarter of 2002.

If we exclude SFAS 141, in the asset sales FFO was up 17%.

The growth, strong growth was driven by same-center NOI growth.

It was also fueled by the Westcor acquisition as well as the benefit of lower interest rates.

The average portfolio interest rate during the quarter was 6.09% and that compared to 6.81%, excuse me, in the first quarter of 2002.

The interest coverage ratio for the quarter was a very healthy 2.36 times.

On April 30, we declared another quarterly dividend of 57 cents per share to our shareholders of record on May 20 and that is payable on June 10.

In November we gave 2003 FFO per share guidance in the range of $3.42 to $3.50.

In this morning's press release, we revised that 2003 guidance as well as provided 2003 EPS guidance, moved the FFO guidance per share up to $3.48 to $3.56, increased the range.

And that was primarily to take into account the inclusion of SFAS 141 into FFO there.

There was a small amount of gain on sale that was included this quarter, less than a penny a share and we have not factored in additional land sales as they are hard to forecast and very uncertain as to timing, price and the amount of the gaines recognized.

Shifting out of the balance sheet, we have approximately $3.5 billion of outstanding loans at quarter end that includes the JVs at pro rata.

Our floating rate debt is about 33% of that total debt.

That's down from 36% when we acquired Westcor.

In addition, a majority of the remaining floating rate debt has been fixed from 6 to 12 months to further reduce the interest rate sensitivity.

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

In our continuing efforts to reduce our floating rate debt, in an orderly manner, we have reached agreement with one of our largest lenders to do a $200 million, 10-year fixed rate loan on Flatiron Crossing.

The loan will fund in late 2003 so we have the benefit of short-term floating rates for about another 5 to 6 months but we have the benefit of a fixed 5.23% 10-year fixed rate that we'll fund later this year.

When that loan funds, our floating rate debt will drop to approximately 27% of our total debt and about 15% of our total market capitalization.

Also, as we sell assets or have other capital events, we will continue our efforts to reduce our floating rate exposure.

It is obviously a great time to be a borrower.

We have long-term interest rates that haven't been this low since 1958 and we're taking advantage of the opportunity to refinance.

In other balance sheet activity, today, we funded a $250 million four-year extendable to five-year unsecured note at libor plus 250.

The proceeds from this unsecured note will be used to pay down our line of credit.

This will give us in excess of $300 million of capacity on our line for future use.

This also helps us manage our maturity schedule by putting this five year piece of debt in place.

As part of that we are also considering swapping this debt to fixed at least for a two to three year period similar to interest rate swap spreads are at a all time low today.

At this point I would like to open it up for 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 the 1 on your push-button phone.

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One moment, please, for the first question.

And the first question is from Paul Morgan.

Please state your company name followed by your question.

It's Thomas Weisel Partners, good morning.

I -- could you comment on what the decision process would be about going ahead and swapping out the $250 million note?

And what would make you go one way or another there.

I missed the first part of your question.

About the $250 million note as of today, what would drive you to swap it, fix it or not?

Paul, historically we have not used a lot of floating rate debt and have not used a lot of derivatives.

That being said and looking at this debt, it lends itself to some extent to an interest rate hedge because it is long-term in nature and as a result can be structured as such that the accounting treatment as a hedge rather than a mark-to-market instrument.

And we're considering it, the pricing is fairly attractive, a two-year swap is in the 34 basis point range.

Something we need to evaluate internally and make a decision on.

So, would that decision be made in the near-term?

In all likelihood.

Can you talk about the impact -- or how it's been about the Kohl's openings in Los Angeles on your sales, particularly down in Lakewood, Shredoes or out in Ventura?

Well, they haven't had any real impact on small store sales.

The department stores antidotally are feeling some impact as I understand it, I think May company is feeling it probably the most.

But I -- there certainly has been no observable impact on the small stores at this point in time.

I wouldn't anticipate that, either.

Would you anticipate any fallout among the anchors over the course of the next year or two because of Kohl's entering the market?

Not over the course of the next year or two.

If you observe where markets where Kohl's has entered, the tenants, the department stores and anchors that they might impact the most are financially strong enough that they're all still there.

Some of the less financially strong anchors maybe felt their impact greater, but, they are factored.

But you have to understand, they have 30 some stores here and they've entered an economy that southern California is the eighth largest in the world of its own economy.

This is a big market.

Is there any impact about -- from the announcement of the Simi Valley Mall on your plans for the Oaks redevelopment?

Actually, it's positive because given the additional square footage that May Company and/or Macy's may end up with there, then they're going to be more willing to consolidate down to a smaller location.

One of the functional points of obsolescence that we have at the Oaks when we bought it is it is a five-anchor mall, but four of the boxes are occupied by two department stores, May Company and Macy's.

Between those two department stores, they have roughly 250,000 square feet each of space.

So, the real opportunity at the Oaks is to recapture square footage from those two anchors and get them to be right-sized maybe more closer to 200, 220,000 feet each, by down sizing them and Simi Valley really helps us to do that because it gives them additional square footage in the market.

We can right size Macy's and/or May Company to convert that space to small store space.

It really is what has driven the opportunity now to do a dramatic expansion at the Oaks.

Would you try to open up the mall?

Or would you --

It will definitely remain enclosed.

There is a very large open field of parking to the east of the Robinson's May Home store that we very -- that we are definitely exploring, some open air concepts there.

That's what I meant, yeah.

But we're looking at -- that particular expansion has got the opportunity to convert that center, which today does $445 a square foot, through the addition of converting one of the department stores, the small store space, and running the mall through that and adding a new, higher-end department store, which I'm not at liberty to discuss right now, that center could very easily be doing between 5 and $600 a square foot.

Within our shop, we already have the new name for it, it's North Coast Plaza.

Okay.

And last question about La Encantada and developments of that type in general.

How is it leasing and -- is it -- do you have any perspectives, opportunities, for further development of that genre?

The Westcor theme was really under construction on that when we bought Westcor.

Leasing is coming along moderately well.

It 's going to be opening up in phases, some later on this year, and being an open air project it lends itself to doing that.

So, it will be opening up some in the fourth quarter of this year and some in the first quarter of next year, during tourist season there.

We are looking at different opportunities in certain selected markets, the Westcor team has a name for that type of development.

They call it a silver bullet.

And there are markets that are definitely amenable to that type of project, but we're going to clearly get this one under our belt, see how it performs before we would really be breaking ground on anything else exactly like that.

We've identified several other markets with our Westcor development team for possible projects of that nature.

Is the Crossroads one of them?

Your new plans or proposal for the Crossroads redevelopment?

Crossroads In Boulder?

Yeah.

That's a possibility, but probably not.

There's not enough population in tourist traffic to support the types of tenants that we're going to be putting into La Encantada.

Okay, thank you.

Thank you.

Thank you.

Our next question comes from Stuart Alexrod.

Please state your company name followed by your question.

Hey, Lehman Brothers.

Talk about what looks like slower leasing volume.

You signed 250,000 feet and I think you had out 1.3 million expiring this year.

Just talk about the progress in dealing with those expirations?

Yeah, part of that would be due to the fact that some of the leases that expire this year were signed last year.

It's relatively normal leasing volume.

It compares to about the exact same amount of leasing space that we signed in the first quarter of last year.

So there's really no acceleration or deceleration in pace.

Really on these quarterly lease signings, you really have to look at them on an annual basis and not get caught up with either the spreads or the square footage on a quarter by quarter basis.

Okay.

And talk about, Tom, I just -- the JV refinancing, you have $185 million of debt, JV debt that's coming due.

Is there expected savings on that?

What are the plans?

Well, Stuart, that's on the IBM portfolio, our joint venture with Time & Property Group and that was a tranche of debt that matured in '03, the balance of that debt matures in '06 and so we're in the midst of finalizing a financing on that now, roughly the same terms.

It was a fairly tight spread.

I think that piece was about 40 over libor and I think that is similar pricing to what we're finalizing.

We'll just take that piece and make it coterminous with the rest of the debt in 2006.

Okay.

At a level about the same pricing.

All right, and on Crossroads again, you mentioned there is some feedback from the city.

Are they going to fund any of the infrastructure costs on that project?

And any sense of timing?

No, they're not going to fund any of the infrastructure costs and I don't have any sense of timing.

The Westcor team is actively working with the planners in Boulder and if you read the local press, the local press and local officials would say that the Westcor team is bringing in significantly better ideas than the Macerich team brought in.

Okay, great, thanks.

Thank you.

Our next question comes from Ross Nussbaum.

Please go ahead and state your company name, followed by your question.

Hi, Smith Barney.

Tom, just wanted to confirm a couple of numbers.

The same store NOI figure that you gave of 3%, that excludes Westcor?

Yes, it does.

Do you have any statistics for the Westcor portfolio in term of NOI or occupancy?

The occupancy level at Westcor was slightly higher than our portfolio average.

If you excluded Westcor from our occupancy it would have dropped from 92.5 to 92.

So, I think Westcor came in around 93% or so.

In terms, Ross of the NOI, the NOI has been tracking right along the lines of where we underwrote the portfolio and it's meeting if not exceeding our expectations.

Okay, so, buyback Westcor out of your 92.5% portfolio occupancy, your core Macerich malls were flat year-over-year on the occupancy line at 92?.

Yes.

Okay.

Looking at your earnings guidance, I think you said you excluded land sales going forward.

I'm just trying to get a sense of which malls will potentially have outparcel sales besides say Chandler, La Encantada and Scottsdale?

We, from time to time have outparcel sales at one of our joint ventures, West Acres, but we own the 19% interest there.

We don't manage it and it's very tough to predict.

And those are the type of outparcel sales, when we have an opportunity, we will sell them, but it's very hard to predict those and give guidance on those.

As you know, Ross, we have historically taken the more conservative approach and excluded those from FFO.

Under the new rules, we don't have a choice, we've got to include that and as we have more certainty, we will provide guidance, but at this point in in time, without that, we will exclude those from our guidance.

Okay, but it's fair to say you may have a penny or a couple of pennies during the remainder of the year?

No, I can't say that!

Okay.

Well, I can, but I can't say that.

I hear you.

A question for ICSC.

How are you approaching it in terms of leasing it from a brand perspective.

Is Westcor going to have their own booth and their own meetings exclusive of Macerich?

No, no, no.

That team is fully integrated.

Actually, we used the Westcor brand, we've maintained it in Phoenix for obvious reasons, it's a fabulous brand.

It's extremely well-accepted.

We used the Westcor name in Boulder because we needed a new name in Boulder, so, they're making good headway there.

But we have, for example, the person that's in charge of the leasing activities in Phoenix right now is a Macerich employee that we moved into Phoenix.

So, there's been a lot of cross fertilization back and forth.

We've got Westcor employees that are now Macerich employees working on Macerich properties outside of Phoenix.

So, it's really -- it's extremely a team effort, very much a team effort.

Which I think you got a sense of during our meeting in Phoenix recently.

Absolutely.

Tom, final question.

GNA expense, do you have a forecast for the year?

At this point, Ross, I would just annualize the first quarter that's going to be fairly close, obviously that fluctuates a little bit with the share prices we have to mark-to-market our restricted stock plan and our board phantom stock plan, but we are $2.3 million for the quarter and that's going to be a fairly realistic run rate for the rest of this year.

Thank you.

Thank you, our next question comes from Patrick Bayfac.

Please go ahead and state your company name followed by a question.

Invesco Reality Advisors.

Art, first question for you, you talked a little bit about Macerich wanting to continue to be opportunistic in both buying and selling.

That implies, then, in the current cap rate environment that you're going to be more inclined to be a seller and continue JV activities than be a buyer.

Yes, I mean I think that our actions speak pretty loudly about that ever since Westcor was purchased almost a year ago, other than buying a partners' interest out of one of the properties in the Westcor portfolio, we haven't bought a thing.

We bid on virtually everything that's been in the market, but bid on it at prices that we feel are attractive from our viewpoint and we've been significantly outbid on most every one of those situations.

And we have shown that we are definitely willing to sell.

We said that we will do noncore dispositions both inside the Westcor portfolio and outside and we will also do joint ventures, joint ventures in the case of Corte Madera, that's very much a core asset, but it's also a very good use of their capital and our capital to go head and pursue activities like that.

So, I think when we gave guidance last June, when we on the road selling stock in November and December, we gave guidance and I think we've signaled that throughout the last conference calls, a couple of conference calls, at least, that we are "a net seller."

Our activities confirm that.

I think we're going to be opportunistic both on the buying and selling and we're going to maintain our discipline.

Okay.

Thank you.

And Tom, this question for you.

When you're all done fixing the balance sheet, what will it look like?

Well,Pat, today we're at about 58% or so debt to total market cap.

I think we made great strides on the balance sheet, if you look at the debt we just placed today, that really frees up our line should we care to use that, we have over $300 million in capacity, which is a fair amount of capacity.

We will, in an orderly fashion, convert this floating rate debt to fixed and I think we'll end up with something less than 20%, which is where we have historically operated.

Fairly unique situation today where there's actually an inverted libor curve, where the one-month libor is 130 and the one-year is 125.

It's creating great opportunities, not only on the short end of the curve, but also on the long end, where 10 year treasuries have been as low as 360.

We will take advantage of that where we can, Pat, in the case of Flatiron Crossing, we worked with one of our largest lenders to create an interesting structure where wer're basically getting a six-month forward type commitment and locking the rate based on the rates today and to get a fully leveraged deal for a 10-year fixed rate to fund six months from now at 523 I think is a tremendous financing.

We will pursue those where we can and continue and drive that floating rate debt down to ultimately in the 20% range.

Okay, thank you.

Just as a follow-on to that, Pat, I would emphasize the word that Tom used, which is orderly.

We had a significant amount of floating rate debt that was within the Westcor portfolio when we bought it last year and in an orderly fashion we have converted that floating rate debt to fixed rate debt.

The other thing that we have not done is we have not used the current very low interest rate environment to rationalize acquisitions at prices that today are extremely robust.

So, I think, again, discipline is the watchword for how we've been conducting our business historically and certainly over the last year.

Okay.

And one last question.

Paradise Valley, you sold that.

I mean I assume that there's some other assets, Westcor assets that are in the pipeline to be disposed of?

How come we haven't seen any of those yet?

I'm sorry, you repeat that?

The Westcor portfolios, you sold Paradise Valley, just wondering why we haven't seen any more of there -- the noncore Westcor assets being disposed of yet?

Because we do it on an opportunistic basis and not on a regular basis.

Paradise Village Gateway, by the way, was the actual name of the center that was sold.

It was a community center.

We also happened to own a regional mall called Paradise Valley Mall about, a block away.

But there are other noncore assets in the Phoenix area as well as noncore assets that Macerich has owned for 20 years that you will be seeing sold and sold at prices that, if we sell them, that we feel are attractive and very attractive from our viewpoint.

So, you will continue to see that.

And it will be on an orderly basis, but again, the keyword is opportunistic.

Okay, thank you.

Thank you.

Thank you.

Our next question comes from Lou Taylor, please state your company name followed by your question.

Thanks, good morning, guys.

Just a follow-up on the acquisition team.

Is there much on the market right now or much that you're interested in that the pricing has got away from you?

Or just overall volumes just down?

There's been a huge amount of acquisition activity post Westcor, if you look at it there's been a significant number of properties at some pretty significant prices that have been bought by people other than Macerich that have either been announced or are about to be announced.

Lou, we looked at virtually every one of them.

The only one we didn't look closely at because it made no sense for us whatsoever was St. Louis Galleria, because we had no presence in that marketplace, but the Glendales of the world, the Balamas of the world, the Albuquerques of the world, we look closely at all of those things and, you know, we just were not in the ballpark in terms of the pricing and the terms that the sellers were able to get from certain other people.

There are other opportunities that are out there.

I think that given the robust pricing environment in order for us to tap into those opportunities, they're going to have to be extremely attractive from the viewpoint of what we think we can do with the properties and I'd say the number of opportunities that we'll be looking at over the next year or so is very limited.

Okay, next question is just for Tom, on SFAS 141.

Is that number burn off as we get two and three years out?

Or is that number going to be relatively flat for the next couple of years?

Lou, it does burn off.

It's amortized over the remaining life of the leases, but it will be a slow burnoff, unfortunately, over a fairly long period of time.

I think on average it's probably about a five-year life, so that will gradually burn off, but for modeling purposes, Lou, I'd use the number we had for this quarter and annualize it and we'll probably go with that for the next couple of years.

Then you will gradually see that reduced but it could be replaced by further increment on new acquisitions.

Okay, and second question or next question is on capital expenditures for new leases.

Are they coming down?

Are they flat?

Are they going up in this environment?

What are you -- what are the trends there?

Well, I mean statistically if you look in the press release, we do provide some information there, in fact we've typically been on the forefront of that kind of disclosure.

In the first quarter of this year compared to last year, TIs are actually down from $2.5 million to $1.5 million.

So, we're spending less money than we did last year and I think we anticipate that we will spend a little bit less.

Historically, we've always been stingy with the TI dollars.

Leasing costs tend to be pretty stable in terms of our cost, the cost to get the deals done and TI's is really where it fluctuates.

I think the numbers that you see for leasing costs in the press release of $3.1 million for the quarter are pretty consistent what I'd expect for the next three quarters, in terms of the TAs, the kind of allowances that can bounce around and we do have guidance in our 10K as well, historical information, anyway, regarding the amount that we've spent over the last two or three years on those things and I think last year TAs came in at 16 million for the year and I would expect that to be less this year.

I was more thinking in terms of just competitive market right now, whether the per square foot costs are relatively stable or because of the economy and the tougher sales environment that they're trending upwards?

We haven't been throwing dollars at the tenants, and again, Lou, for us, we don't tend to pay a tenant allowance per square foot of space out there that has to be leased.

Tenant allowances for us are always an exception basis.

We literally have to make an exception.

Most of our tenants take the space as is and they pay to improve it.

Lou, I'm confident that if you were to go poll the top 20 retailers in the United States and ask them who the stingiest landlord is in terms of tenant allowances, I'd be shocked if they didn't say Macerich.

Okay, and last question,Tom, as you guys explore the redevelopment expansion of Thousand Oaks just from an accounting perspective, will that asset come out of service at all or will the element come out of service?

Or will it be in service the entire time?

I don't think the existing mall will be disrupted, Lou.

If it's not, it will continue to stay in service as an operating same center.

If we were to go in like we did in Pacific View where we basically gutted it and rebuilt it, that's a different story, but in the case of the Oaks, I think we'll keep the existing center up and operating and that would be include and considered to be an operating property.

Great, thank you.

The expansionary, Lou, that we'd be building into, the primary expansionary would be cutting the mall through the eastern May Company building that's currently owned by May Company.

It's not on our operating books and a further expansion outboard of that.

So, it's -- the disruption at the Oaks for that expansion is going to be much less than just the dust and fluff that you are seeing at Queens today, for example.

Okay, great, thank you.

Thank you.

Thank you.

Our next question comes from Craig Schmidt.

Please state your company name followed by your question.

Craig Schmidt, Merrill Lynch.

I had a question.

It seems like you're going to be taking specialty shops upscale at the Oaks given the possibility of a new fashion anchor and I notice you share a leasing person with Scottsdale Fashion Square there.

If I'm right at that, how high would you be taking that up in terms of maybe some of your other malls?

Oh, I think you could -- it all depends on who the anchor or anchors are.

If the anchor were somebody like a Nordstroms for example, you clearly would be seeing the leasing be taken up to a level of a Broadway Plaza, Corte Madera and Scottsdale Fashion.

Scottsdale Fashion, we're currently beginning to take that leasing further up another notch.

So, I would say at a bare minimum, you'd be looking at something that would very much resemble the breath and depth and price points of the tenants that you see at Scottsdale Fashion Square.

Great.

And the second question here is just broader-based.

Given the poor performance of the anchors and the same stores for the department stores, are you getting any pressure in terms of sort of the way you approach the mall business in terms of the inline shops paying higher rents and the lion share of the insurance, taxes and anchors given their weaker drawing position over time?

Well, the end result, at the end there's always pushback from tenants on all points.

They always want more tenant allowance, pay less rent and have moderate recovery clauses, but it all comes down to, Craig, as you know, cost of occupancy as a percentage of sales.

If you're sitting there doing $500 a square foot as a landlord and there is nothing else available for that tenant to go to in the marketplace and they want to be in the marketplace, then the landlord has the upper hand and I think that our leasing results over the last several years reflect the fact that we've got highly-desirable locations that retailers want to be in.

But there's always pushback from the tenants at all times, as they should.

Okay, thank you.

Thank you.

Thank you.

Our next question comes from Robert Belzer.

Please state your company name, followed by your question.

Hello, Robert Belzer, Prudential Securities.

A few questions today.

First, could you indicate the total consideration of the sale of the JV interest and the percent interest you're selling?

Yes, the Corte Madera joint venture interest that we're disposing of?

Right.

Yes. $66 million, it's the half interest. interest.

And that includes the percentage of debt, is that correct?

Yes.

Okay.

The total valuation is $132 million and we're selling a 50% straight-up interest in that for $66 million.

Okay.

And then could you just moving over a little to the -- just your -- what you may be looking at doing as far as asset sales are concerned, have you changed your intention regarding the shopping center portfolio?

Or are those assets still marked for sale?

Or have you determined that you may want to keep some that of portfolio?

Robert, when you say shopping center, do you mean non-mall?

Right, the strip shopping centers?

No, if anything certainly within the Macerich portfolio, prior to Westcor, all of our shopping center properties, of which really is only a couple left, are for sale, will be sold.

Within Westcor, we're going to be very opportunistic, there's a very high degree of interest from various parties to buy several of those assets and it's going to be opportunistic and orderly, but not predictable.

Okay.

Then is it fair to say you still may be targeting $150 million to salvage, you haven't excluded that in your guidance?

Well, to date, Robert, we have sold 111, so, we're well on our way to the 150.

We sold Paradise Village Gateway for 30.

The Wards parcel and Pacific View for 15.

Although that was late 2001 it was subsequent to our guidance -- excuse me, late 2002.

And then 66 share at Corte Madera.

So we're at 111.

And as Art said it is realistic between now and the end of the year we would hit or exceed the 150 through sale of other non-core assets.

And if I understand you correctly, you have no asset sales in your guidance, no additional asset sales, and that would include Corte Madera.

Corte Madera was factored into that guidance.

Okay.

And could you indicate the expected cap rate on the asset sales at this point?

On Corte Madera or on future asset sales?

Just what you may see on additional sales.

The level of interest that we've seen in the nonmall assets ranges between 7% and 9% cap rates free and clear.

Okay.

Great.

And then just a couple of other questions on your guidance.

I'm looking at your prior assumptions on your guidance, you had EBITDA growth at 2% in 2003 and live wire increases to 3% by the end of 2003.

Are those assumptions consistent your current assumptions in your guidance?

We have not changed those other assumptions at this point in time.

We had one quarter here where we had the same center NOI of 3%, but one quarter does not make a year and we do get some fluctuations from quarter-to-quarter.

So, really, the catalyst and the reason for the change in the guidance, Robert, was the fact that we are now required to include the impact of SFAS 141.

And just one more question on your historical outparcel sales rate.

What had you historically seen as far as gains on outparcel sales?

Very, very small, again, pre Westcor, from one of our joint ventures, we'd maybe see 200 to $400,000 a year.

Okay, great, that's all my questions today.

Thanks.

Thank you.

Thank you.

Thank you.

Our next question comes from David Shulman.

Please state your company name followed by your question.

Lehman Brothers.

Good morning, guys.

Good morning, David.

Art, could you tell us what your perception is as to what the board is thinking about dividend policy later in the year?

Well, generally, historically, we review our dividend -- we review changes in our dividend and they've all been upward changes and I anticipate that to continue be the case.

During our fourth quarter board meeting, which is generally in late October, early November of every year, the reason we do it at that point in time is because at that point in time, we have three quarters of results from the year under our belt.

We've got very solid operating budgets for the upcoming year, so, we know what we believe our growth is going to be in the upcoming year.

And then as you know, historically it's been our policy to pass on approximately 1/3 of our growth back in the way of increasing dividends and retain 2/3 of our growth for corporate purposes and to reduce our payout ratios and increase our dividend coverage.

Okay.

A follow-up now for Tom.

Where do you estimate your taxable income to be right now?

Well, we're -- today we're at about a 65% payout ratio and then absent asset sales, which changes the taxable income number dramatically, that point at which we'd have to accelerate the dividend payment is about 55% payout.

Okay.

Thank you.

So, it's two to three years away assuming no asset sales.

Thanks lot.

Thank you, David.

Thank you.

Our next question comes from Richard Moore.

Please state your company name followed by your question.

Good afternoon, guys, Rich Moore from McDonald Investments You know, Art, when you guys acquired Westcor, I was under the assumption, and maybe it wasn't accurate, that you had a lot of interested potential JV partners out there.

Should we look for more JV deals later this year like Corte Madera?

They're possible, but it's clearly there are none of those in our guidance.

It's possible.

But it's certainly not in our numbers.

I mean are you seeing the same kind of strong interest that -- at least it seemed you were indicating at the time of the Westcor acquisition?

I mean it's a many times-fold interest.

The level of interest for co-investment of pension funds with us as well as other high-quality mall operators, is extremely high today.

It is even higher than it was a year ago and there are even new very major players emerging that want to co-invest into this sector with public operating companies.

So, the level of interest is the highest that I've seen in many, many years and the quality and the long-term nature of the type of investors that want to co-invest with us, like a Kalper's, for example , is extremely high.

And so the fact that we have not done more of that is not reflective of anything at all.

It's just reflective of the fact that it may or may not have made sense at the time.

The reason that we elected to do Corte Madera and I don't think I mentioned their name, it will come out that it is Kalpers, is that for a number of years Kalper's had identified Macerich as being an operating partner they wanted to do business with.

By buying Westcor, we started our relationship at Scottsdale Fashion.

We've come to the conclusion that we want to extend that platform significantly beyond Scottsdale Fashion, so, The Village of Corte Madera is one step towards expanding that platform together.

But, as far as this year goes, you don't see anymore of that kind of thing?

It's not in our guidance, but that doesn't mean it won't happen.

Okay, great.

And another thing, looking at Westcor, one of the things we talked about is the possibility of cross-fertilizing tenants between the two portfolios.

Could you give us some examples?

Are you seeing that, first of all?

And can you give us a few examples of tenants you crossed between the two?

Sure, I think Craig Schmidt observed that we already have got -- we created a new upscale leasing team with Westcor employees as well as Macerich employees handling properties like Scottsdale Fashion and Broadway Plaza and Corte Madera and the Oaks and we're beginning to move tenants, especially, west coast was particularly good at making deals with good sit down quality restaurants, people like PF Chang's, Blooms, things like that.

They're helping us there.

They're helping us even with tenants like Tiffany, for example, that we haven't previously done deals with.

We're looking at a Tiffany deal right now at one of our west coast properties.

And then on a mundane basis, Westcor has historically had an issue with a very fast-growing retailer, a junior apparel retailer, called Forever 21.

And Forever 21 and Westcor just decided they couldn't do business with each other and so Forever 21 was not represented in the Westcor portfolio.

I think we recently inked deals with Forever 21 to take almost 30,000 square feet of space in Phoenix alone in various centers of Westcor.

That's meaningful.

That rent probably exceeds a million dollars.

Okay, great, thanks.

And how much leasing have you guys finished?

How much of the 2003 leasing would you say you finished at this point in the year?

A very significant amount of it, but we still have plenty to go.

We do it that way on purpose.

I know there's been much talk amongst others about I'm all done with my 2003 leasing, working on '04 and '05, we don't do it that way, we do very much forward leasing.

We target tenants 18 months in advance to start talking to them about things.

We will go to a tenant six years before their lease expires if we want to downsize them or upsize them.

It's not as much of a manufacturing line as others maybe would lead you to believe, but we're very well along our way in terms of whatever renewals are going to be done and we're very pleased with the current status of our leasing at this point in time.

Okay, okay.

And Tom, where does the SFAS income come in on the income statement?

The 141?

There are two spots, Rich, it is going to come in in minimum rents on wholly-owned assets.

And to the extent it's coming from joint ventures, it comes in on the line item that is equity and joint venture.

Equity and joint venture.

Okay, good, thanks.

And last thing is tenant reimbursements for the quarter were up or at least they appeared to be one running a little strong.

Is that a pretty good run rate?

How would you look at the line.

Rich, you really have to look at that in correlation to the expenses because they're directly related and I think last year for the first quarter we're running a 96% recovery rate.

This year we're at about a 94 and I think 94 is a pretty good run rate to use for the rest of this year.

Okay, great, thanks, guys.

Thank you.

Thank you.

Our next question comes from Michael Mueller, please state your company name followed by your question.

Hi, JP Morgan.

A couple of questions for Tom.

First, in terms of TIs and leasing commissions, how do they stay flat to down despite having a full year Westcor on a year-over-year basis?

Mike, the leasing costs are actually up a little bit.

Then, again, you've only got one quarter of data, but I think it was up about 15% or so.

In terms of TIs, again, for us, we, frankly, are probably stingier with TI's than the Westcor guys were historically.

We don't do it just based on an available space basis, we do it on an exception basis.

And this year we haven't been making as many and we don't plan to.

So, that one is not going be a function of the square footage we have expiring.

It's just going be more of a function of the type of deals we're really after and the type of tenants we're willing to reach for at any given point in time.

Okay, the second question looking at the K, the renovations of center bucket for Cap Ex, can you talk about what goes in there versus the development, redevelopment, et cetera?

Bucket.

And is it possible to get a range in terms of expectations for how much will be spent this year?

In terms of the range, Mike, I would point you to last year's 10K, which talks about that.

What goes in that category is the stuff that really is the lightning and brightening type activity.

Where typically in a given year we'd have one or two of those and they range from $2 million to $5 million.

Sometimes those are done in conjunction with a big redevelopment, but from time to time we will have one that doesn't, for example, we redid Modesto recently and I think that was about a $5 million cost and that was a lightning and brightening.

So, that's what's going to go in that category, rather than the development, redevelopment, which would be more along the lines of Queens Center for example.

Gotcha, thanks.

Thank you.

Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 at this time.

As a reminder, if you are using speaker equipment, you will need to lift the hand set before pressing the numbers.

One moment, please, for the next question.

Gentlemen, there are no further questions at this time.

Please continue.

Okay, thank you very much for joining us.

We're pleased to be reporting to you our progress here, we're very pleased with our progress.

Our visibility through the balance of this year and frankly over the next three to four years is very good and it causes us to be extremely optimistic about our future.

So, thank you for your support.

We look forward to talking to you again soon.

Thank you, sir.

Ladies and gentlemen, this concludes the Macerich Company First Quarter 2003 Earnings Conference Call.

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