Macerich Co (MAC) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Macerich Company second quarter 2003 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 session.

If anyone needs assistance at any time during today's conference, please press the star followed by the 0 on your push button phone.

As a reminder, this conference is being recorded today, Thursday, August 7th, 2003.

I would now like to turn the conference over to Miss Georgianne Palphy.

Please go ahead, ma'am.

Thanks.

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

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

Please go ahead.

Thank you, Georgianne.

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

During this call we'll be making some forward-looking statements.

For a more detailed description of those risks, please refer to our press release and S.E.C. filings.

During the course of this call, we will also discuss certain non-GAAP financial measures as defined by S.E.C.'s Regulation G. The 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 home page of our website under the caption "What's New?"

I'm going to be discussing sales trends for the first two quarters of this year, our occupancy levels, leasing spreads, the progress of our various recent developments and new developments and disposition activity that has occurred year to date.

On the sales side, sales remained strong with total tenant sales up 1.5% in the second quarter of 2003.

Looking at geographic regions, Southern California was basically flat, northern California and the Pacific northwest for us was up 3.4%, the intermountain region was up 0.7%, the central and eastern regions were down 2.6% and our Westcor region, which is basically Arizona, and we also include Bloomfield in that, was up 4.4%.

The eastern region, basically the reason for sales being off 2.5% there was the construction that's going on at Queens where we've had a significant amount of redo in the existing mall with sales there being down single digits, but being down 7, 8% year to date.

Top sales without Westcor being included are basically flat at down 0.3% for second quarter, and comp sales including Westcor are up 0.2%.

I believe one of the highlights on the sales front is our Westcor Division with strong sales trends at the newly-opened Chandler Fashion Mall, as well as our flagship Scottfield Fashion square.

Occupancy levels at the end of second quarter remain strong at 92.4%.

If you take a look at our occupancy levels over the last 16 quarters, you'll find the range of occupancies at between 92%, which generally occurs in the first quarter of the year, to a high of about 93.9%, which occurred at the end of the fourth quarter of last year.

So, on the occupancy front we've had very stable and steady occupancy levels for quite some time now, and the prognosis for our occupancy levels going forward remains very good as a result of the strong performance of our portfolio and the high productivity of our tenants.

All that has led to very good leasing activity in the second quarter of this year.

Leases signed under 10,000 square feet were up 17% on first year rent versus expiring rent with average new starting rent of $34.26 per square foot.

We signed a significant amount of space in the second quarter with 396,000 square feet of new signings in the second quarter this year.

That compares to last year's second quarter of 224,000 square feet.

And really that's a function of the fact that we had about another 40 to 50% leases rolling over this year as compared to last year.

Year to date our average leasing spread is up 19.4%.

So, results there remain very strong.

On the redevelopment front we've had a couple of new department stores open at Redmond Town Center.

Bon Marche opened another 110,000 square foot store in July with very good results.

Dillard's opened a new store in the old vacant Montgomery Wards location at Davenport.

They tore that store down and opened a brand new store there last week with tree results.

At Lakewood Center, Target will be opening a new two-story Target store replacing a former Montgomery Wards store in October of this year.

On the redevelopment front, Queens Center remains on budget, on targets.

Leases are signed now for 80% of the new space that will be opening next year with 91% of the leases signed for the first phase and roughly 75% of the leases signed for the second phase.

So, we remain very optimistic about the progress there.

A big key to that opening and the phasing of that is when J. C. Penny opens their new store, and they are now making excellent progress and on target to get opened in spring of next year.

On the new development front, our Scottsdale 101 power center remains on target and on budget and La Encantada in Tucson is also making very good progress.

We mentioned in the last conference call that we are targeting the Oaks in thousand oaks as being our next major redevelopment.

We're making very good progress there and hope to be able to announce a new fashion department store anchor to be added to that center in the near future.

The first two quarters of this year have really been a period of pruning and tuning in our portfolio.

As we mentioned earlier in the year in our guidance of last year, we viewed ourselves as being a net seller for the year, and we viewed that we would target about $150 million of dispositions during the course of the year.

Through this particular point in time we have disposed of $153 million of assets.

The community centers that have been disposed of and the strip centers, Bristol center gaining here in the Southern California area, that closed on August 4th.

Ganey Village in the Scottsdale area closed last month.

And as previously discussed, Paradise Village Gateway, a strip center in the Westport Village area closed in January of last year.

We also brought a partner into our Cortamadera center.

We sold 50% of that to an institutional partner in May.

We made very good progress on the growth opportunities that Westcor has afforded us has given us the opportunity do did a significant amount of pruning and through selling maturities on our debt, through converting floating rate debt to fixed rate debt even though in doing so we're going to higher rates.

We've had significant progress, as I mentioned, on the redevelopment front as well as the new development front.

We're just coming up on the one-year anniversary.

We've just finished first 11 months of operations in the Westcor portfolio.

And you may remember when we announced acquisition of Westcor, we indicated that we anticipated an 8.5% unlevered return on the first 12 months of operation.

And we are exactly on track with that.

We reviewed that matter for our Board and for the period of September of '02 through June of '03 we were within 1% of our original acquisition budgets, which is really quite a performance feat as well as quite an underwriting feat when you look at the brief amount of time that we had to underwrite Westcor and the sketchy information that was available in the underwriting.

So, we're very happy with where we have brought that portfolio and with the results that have been achieved from that portfolio.

At this point in time, I'd like to turn it over to Tom to discuss operation results as well as various balance sheet situations.

Thank you, Art.

The overall performance of the portfolio on the company in the second quarter was good.

We continue to show resiliency, especially given the current economic climate.

During the quarter we had same center net operating income increase at a 4.5% rate compared to the second quarter of '02.

Factored in that was a $1.3 million increase in straight lining of rents.

Excuse me.

The straight line of rent increase is primarily due to the Westcor acquisition.

So, it was not in the same center numbers.

It did affect our growth and net operating income in total in FFO, however, that was offset by a decrease of 1.1 million in lease termination revenues compared to the second quarter of last year.

Lease termination revenues came in at 548,000 for the quarter compared to 1.6 million recognized in the second quarter of 2002.

In that statistic is an indication that we have not seen an unusual number of store closures this year compared to a normal year and certainly down compared to last year. [ INAUDIBLE] Attributable to CPI increases in the second quarter of '03 was approximately 503,000 greater than those recognized in the second quarter of '02.

During the quarter same center specialty leasing grew 16%.

Gross margin for the quarter, including JV's of Prorata improved to 63.7%, up from 62.6% in the second quarter of last year.

G&A expense was up during the quarter at 3.7 million versus 2.1 million in the second quarter of 2002.

This was primarily due to additional costs relating to director and employee stock incentive plans and the effect of the rising share price and marketing the director phantom stock plan to market.

In terms of net income during the quarter, we had net income available to common stockholders of 28.5 million, or 57 cents a share diluted.

That compared to a net loss of 4 cents a share in 2002.

During 2003 second quarter net income per share was positively impacted by the net gain on sale of assets.

And Art spoke of some of those assets sales.

We recognized about 18 cents per share of gain for the quarter ended June 30th, 2003.

And that compared to a net loss on sale of assets or writedown of assets last year of about 27 cents per share per quarter.

That was primarily due to the write-off of merchant wire.

Late in 2002 we adopted SFAS 141, the accounting for business combinations.

This new accounting pronouncement required us to takes the net present value of the difference between in place rents and market rents at the date of acquisition, to put those on the balance sheet and amortize those into rental revenue over the remaining term of those leases.

This had the impact of increasing net rental revenue to the extent of 1.3 million for the quarter or approximately 1.7 cents per share.

Looking at funds from operations, we had a very strong quarter as evidenced by the growth in FFO.

FFO per share grew 27% to 85 cents per share compared to 67 cents in the second quarter of 2002.

That growth was really fueled by the growth in same center NOI.

The contribution from the Westcor and Oaks acquisitions which had minimal impact in the second quarter of 2002.

We closed on the Oaks in June of '02.

We closed on Westcor in July of '02.

We also had the positive impact of lower interest rates during the quarter.

For the six months ended June 30th, 2003 FFO was up 24% to $1.69.

That compares favorably for the six months ended June 30th, 2002.

Interest rates during the quarter were at 5.97 on average compared to 6.5% during the second quarter of 2002.

On July 30th we declared another quarterly dividend of 57 cents per share to shareholders of record on August 20th and payable on September 10th, 2003.

Our current payout ratio based on the consensus earnings estimate is a very healthy 64%.

In our press release this morning we gave year 2003 EPS guidance and revised that to reflect the gain on sale of assets that occurred in the second quarter, and we reaffirmed our FFO guidance in the range of 3.48 to 3.56.

This range factors in a host of factors, including asset sales to date plus refinancings that are either completed or planned, which will have the effect of converting floating rate debt to fixed and also increasing interest expense.

Looking at the balance sheet, we have approximately 3.4 billion of loans outstanding at the end of the quarter, and that includes joint ventures at Prorata, giving effect to the recently negotiated deals, our floating rate don't has been reduced to 14% of total market capitalization.

If you look at our floating rate debt, and this is after the Flatiron refinance, and the Chandler refinance, which I'm going to discuss in a minute, our floating rate debt is 24% of our total debt, and that's down from 36% when we acquired Westcor.

In addition, the majority of the remaining floating rate debt has been fixed for six to 12 months to further reduce our interest rate sensitivity.

The interest coverage ratio for the quarter was 2.43 times.

In specific balance sheet activity, we negotiated a refinance of the Flatiron mortgage.

We're going to be putting in place a $200 million, 10-year fixed rate loan at 5.23%.

That loan is planned to fund in early October.

In addition, we renegotiated three smaller fixed rate loans on Greeley Mall, Chandler Gateway and Chandler Festival.

The latter two were floaters that we inherited in the Westcor acquisition, and the Greeley refinancing is going to take that debt from the current fixed rate of 8.5%.

That's a '03 maturity.

The interest rate for these three financials is approximately 5.4% and we expect them all to close within the next quarter.

Also in May, to show the strengths of the capital markets, we had a very strong interest by our bank group to step up and do a $250 million 4 year unsecured note.

We put that debt in place and used the proceeds to pay down our live credit.

As of quarter end, we have approximately $350 million of capacity available on our line.

This also helps us manage our maturity schedule of 5 year debt and we were able to push that out much further than expected.

At this point, I'd 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.

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

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

If you're using speaker equipment, we ask that you lift the handset before pressing the numbers.

One moment for our first question.

Our first question comes from Matt Ostrower.

Please state your company name followed by your question.

Good afternoon.

Morgan Stanley.

A couple questions.

First, on same store NOI, Tom, you gave some description of some of the offsetting factors there.

I guess I'm trying to reconcile the 4.5% growth with the slight decline in occupancy, which I guess is partly because of the where he is core being in those numbers -- Westcor being in those numbers.

Can you just sort of reconcile that?

Well, the slight occupancy decline, Matt, was almost exclusively attributed to some big boxes that we got back.

We got a gross restore back at Westside Pavilion, an office space at Greeley, a at Desert Sky.

The average rent for those three tenants is about $10 a foot.

So, we feel very strongly that we're going to be able to see some substantial increase there.

And as a result of getting that space, that did not really have a negative impact on our performance for the quarter because that was not very high rent-paying space.

On the other hand, we had great releasing spreads on deals signed last year that flowed through the numbers this year.

We had CPI increases that came through.

We had a very strong quarter.

And that's what's reflected in the 4.5% growth in same center NOI.

same store NOI?

Yes.

Okay.

And just a detail I didn't get.

You said there was a $1.1 million decline in lease termination revenues.

You said that was offsetting something else.

Is that the $1.3 million in straight line rents?

Well, as it turned out in the quarter, those numbers were comparable.

The 1.3 increase in straight lining rent is primarily attributed to Westcor.

As you know, we switched a few years ago to writing our leases with CPI bumps rather than fixed bumps.

So, at the time we acquired Westcor, we had very little in the way of straight lining of rents.

They, on the other hand, did factor in fixed bumps into their typical lease.

So, with that acquisition we inherited some straight lining of represents.

For the quarter it was about 1.3.

But going the other way was a significant decrease in lease termination revenue.

Gotcha.

And the 1.1 was included in same store NOI?

No, it was not, Matt.

Okay.

So, you have a negative impact from the $1.1 million decline in lease termination revenues?

Correct.

As it relates to same store NOI?

Correct.

And Tom, do you know what the outstanding variable debt was at quarter end when you sort of correct for, you know, hedging activity whenever swaps are in place?

Before you factor in the Flatiron refinancing and the other transactions, Matt?

Yeah, I guess so.

We'll layer those on separately, I suppose.

After those there's 840 of floating rate debt.

Okay.

Fine.

I can do the rest.

And some of those are subject to out of the money caps.

Okay.

Caps but not swaps?

Correct.

Okay.

Great.

Thanks very much.

Thank you.

Thank you, sir.

Our next question comes from Lou Taylor.

Please state your company name followed by your question.

Thanks.

Good morning, guys.

How are you?

Tom, just a little bit more on the financing.

In terms of the May financing, what was the interest rate on that?

That's a floating rate unsecured corporate loan, Lou, at 250 over LIBOR.

Okay.

Now, you had mentioned the average rate of 5.4 on the mortgage.

This is the 82 million that you had of mortgages that you're gonna redo, correct?

Correct.

Okay.

Now, on the Flatiron, in the text of the press release it mentioned a $180 million loan.

That's the loan that's gonna get paid off with the $200 million loan?

Correct.

Okay.

The next question pertains to just the dispositions.

What was the average cap rate on the assets sold?

Hi, Lou.

It's Art.

On the non-mall assets it was in the 8.25 to 8.5 range.

It varied from asset to asset.

Okay.

Art, how's the leasing going at Scottsdale 101 and Lan Cantada?

Scottsdale 101 is going great.

We've actually got several tenants.

It's a power center, and those types of tenants open in various stages.

Several tenants are already open.

And at Lan Cantada we're on track to have our first phase open this year.

Leasing is going good.

We're pleased with where we're at.

We've got that project lined up to open in phases, basically with the first phase later on this year and the next couple of phases throughout of balance of next year.

In terms of leasing levels at Scottsdale, are you 50%, 80%?

Where do you stand on a percentage basis?

We're in excess of 75 to 80% leased and ready to go on the tenants that are going to be opening up in November, in excess of 60% overall.

Okay.

And how about at Lan Cantada?

That was Lan Cantada.

How about Scottsdale, then?

That's a power center, and it's being built in phases, as well.

But that's 72% leased out today.

And then the last question is, Tom, give me your disposition volume to date.

Do you have anything left on the market for sale?

Lou, we have sold 153 until assets today, which closely matches the guidance we gave in November.

Obviously, as you know, we're an opportunistic seller, and to the extent that we could continue to sell non-core assets today in this environment at attractive cap rates and redeploy that capital, it's something we're certainly willing to entertain and consider.

In terms of anything actively being marketed today, we tend to take a specific, rightful shot approach to our marketing rather than do a broad-scale marketing effort.

So, at this point in time we're not revising that guidance of 150.

But it wouldn't be out of the question if we had an opportunity to dispose of a non-core assets set that we would do that.

And obviously with that, Lou, if we were to do something like that, we'd also give new related earnings guidance, as well.

Okay.

So, do you have anything that you're considering selling right now, or are you pretty much done for the year?

Lou, this is Art.

We've been approached on a couple of assets at prices that are pretty interesting.

But we've elected not to pull the trigger on those dispositions to date.

Should we be successful in finding an asset to acquire that would be an attractive place for us to redeploy the capital from an asset that we would consider selling, then we would accelerate the disposition side of it.

There are numerous assets that we own that we consider to be non-core, many of which fit into the urban Village portfolio at Westcor that we could dispose of.

But at this point in time, given that we're reached our goal of disposing of $150 million of assets for the year, we're not going to pull the trigger and accelerate that disposition process other than in the context of redeploying the money into a new acquisition opportunity.

Okay.

So, just staying with that for a second, there's not much on the market that either is interesting, you know, at your price range or just simply not on the market.

For us to buy?

Yeah.

There's several assets that are interesting to us.

It will remain to be seen if we're successful in buying them.

You know, we looked at all of the assets virtually that have been offered to the marketplace since mid-point of last year, and obviously we have not bought any of them.

All right.

Super.

Thanks.

Thank you.

Thank you, sir.

Our next question comes from David Shulman.

Please state your company name followed by your question.

Good morning, guys.

Lehman Brothers.

Hi, David.

Hi.

The question is aside from selling, after Westcor you spent a great deal of time discussing the possibility of joint venturing several of those assets.

So, away from out and out sales, can we expect to see any kind of joint ventures in the second half?

I would not count on it.

Okay.

Next question is in terms of your debt, at 840 million, which is what I guess -- correct me if I'm wrong, but that's essentially the adjusted debt allowing for the forward transactions that will be floating as of year-round as we sit today, is that right?

Well, we're also exploring further refinancings, David.

We don't have a lot of project-specific floaters left.

The Oaks happens to be one of those properties, and we have obviously, as Art elaborated on, we've got the opportunity to expand that.

So, we are exploring refinancing that $108 million floating rate loan and potentially doing a loan about we can bifurcate the expansion area off the security and do a fixed rate loan.

And we are currently negotiating, and that is a possibility.

That's one of the few remaining large project floating rate loans that we've got left in the portfolio.

So, if I hear you, that number, the 840 could be down to in round numbers, say, something like $700 million at year-end?

Right.

Okay.

Could you tell us what -- update us on two things near and dear to your heart in Colorado?

First thing is what's going on in Boulder?

And secondly, is the what'sd status of the Lord & Taylor store at Flatiron?

Boulder, you can check the local papers and you'll see that there is a lot of good press being given to the plan that our new development team is beginning to very gingerly float in front of the planning department and the City Council and also, you know, the vibes that we're getting and the press that we're getting is that the new development plan that's being floated, and it is being floated in a very preliminary way, is being received well.

Lord & Taylor, you know, it's no surprise.

Frankly, it was just a question of time as to when that was gonna happen at Flatiron.

That particular retailer at Flatiron is the lowest sales per square foot retailer that we have at the entire shopping center.

I think when they announced the closure of all these stores, they indicated that the stores in general were doing around $100 a foot, and Flatiron was significantly below that.

So, you know, our view on that is that, you know, with a tenant that's doing -- actually, a retailer.

They're not a tenant -- doing that low of sales volume in a center that's so strong, getting them replaced will only be a positive in terms of traffic and productivity going forward.

Okay.

Thanks a lot, guys.

Thank you, sir.

Our next question comes from Josh Betterman.

Please state your company name followed by your question.

Hi, guys.

J. P. Morgan.

First thing, can you go own Queens Center, as to how it's going to fit in just sort of for modeling purposes, by quarter or however you can give it?

Yeah.

This is Art.

We are hopeful to be able to get the first phase of that open in late spring of next year.

But that is still very much up in the air.

And the guidance that we've given, I think, is don't model anything for Queens or any of these developments in 2004.

As we get closer to knowing exactly when we're gonna be able to get delivery of spice and when Penny is going to be able to get opened, which is the key trigger for all of the phasing at Queens, hopefully in November we'll be in a position to give much more specific guidance in terms of what the redevelopment activity at Queens as well as the new development activity at Tucson and Scottsdale 101, what impact that will have on our 2004 numbers.

But there's still am events on this project that are outside of our control.

And Queens in particular, it's primarily the J. C. penny getting their new store open for business.

But we are cautiously optimistic that they're going to hit their target date of getting open in late spring.

If they hit that target date, roughly half of the new expansion space should be open relatively concurrently with that, and then that would allow us to hopefully get the balance of the expansion space, which is the redemise of the old J. C. Penny building open by November of next year.

But we're on a very, very tight time frame on that development.

We're on target with our costs.

We're on target with our leasing, and we're on target with the work that's being done.

But you know, given that it is such a large number, we've cautioned people not to run that through their 2004 numbers yet.

Hopefully we'll be in a position by November to indicate that there will be a positive spry in terms of the phasing and that it will begin to hit our 2004 numbers.

Okay.

Great.

And one last thing.

Spreads you said were about 19.5% average spread for the first half.

Where do you guys see that going?

What are your expectations for the full year?

We've been averaging in the high teens to the low 20s here over the last several years.

And given the strengths of the leasing demand that we've got out there, we still to see certainly double-digit increases in leasing spreads.

We're running up against numbers from generally, you know, 10 years ago that were relatively weak with average rents on spaces that are expiring this year of $29.27 a foot.

And we have been averaging between 34 and 37 dollars a foot here for several quarters in a row and have no reason to believe that that will shrink.

Okay.

Great.

Thank you.

Thank you, sir.

Ladies and gentlemen, if you have an additional question, please press the star followed by the 1.

And if you're using speaker equipment, you will need to lift the handset before pressing the numbers.

Our next question comes from Robert Belzer.

Please state your company name followed by your question.

Hello.

Prudential.

Just a couple of questions.

On your JV income statement the management company expense was down by a million dollars.

Can you indicate what drove that number down?

Hello?

Yes, we're just -- Tom is pulling up the answer to that.

So, if you'll just Bear with us a minimum.

If you have another question, we can address that.

Thanks.

Just one other on the developments.

Can you just update us on the budget for Scottsdale and Cantada?

Yeah.

You may remember that we basically in our original purchase of Westcor we indicated that there was a significant amount of raw land in the 1.475 billion dollars of cost that was spent in acquiring the portfolio.

We see incremental costs on La Cantada and Scottsdale 101 to finish the projects.

Roughly, Tom, what is that number, $80 million between the two?

Yeah.

And we see incremental returns on that incremental cost of between 15 and 20% on those two projects.

So, they're definitely on target and on budget.

And that 80 million is your share of the cost?

Yes, it is.

Okay.

Robert, on your question on the management company expense, those expenses can tend to be lumpy throughout the year.

If you look at it year to date, it's off slightly but not too significantly.

And I would expect that run rate for the year to be about 1.5 million per quarter.

Okay.

Great.

That's all my questions.

Thanks.

Thank you, Robert.

Thank you, sir.

Our next question comes from Mr. Ralph Block.

Please state your company name followed by your question.

.

Hi, guys.

Hi, Ralph.

On tenant occupancy costs, where are they now and do you see those rising?

And should we be concerned down the road that we may see some tenant pushbacks if they get up another hundred basis points?

Ralph, our occupancy cost is as a percentage of sales is about 12%.

That's up slightly from the historical levels that were closer to 11 largely due to the acquisition of Westcor.

We have had a period of time where tenant sales have been relatively flat.

I still think that at 12%, though, we're at a very healthy level when you look at a portfolio that's doing $350 a foot in sales, a 12% occupancy cost, as a percentage even if that creeps up to 12.5 should be very sustainable and there should be a profit margin for a retailer that's doing $350a foot.

So, we feel that we're still at a pretty healthy level there and that there's room for growth both hopefully in minimum runs and in the -- to the extent it's control and.

So, we think in our portfolio we still have room for growth in.

And we're not at that point where we are getting to the top end of that occupancy cost as a percentage of sales.

Okay.

Just as a follow-on to that, Ralph, we really think that occupancy costs as a percentage of sales is relevant if you look at a specific tenant in a specific shopping center.

And that is clearly something that we measure every month as we're looking at our portfolio and we're asset managing our portfolio and looking for opportunities to recapture space from tenants that you can predict are either potentially going to fail or who need to be downsized because their occupancy costs are too high.

But to look at it on a portfolio basis, I know some other companies do that.

It's really a trailing indicator.

And if you were to see leasing spreads evaporate over a period of several quarters in a row, that might lead you to believe that you've reached the ceiling on occupancy costs overall.

But to us the leasing spreads are a much more relevant portfolio measure.

Occupancy costs as percentage of sales are clearly an important mesh our a property-specific basis and on a tenant-specific bases within a property.

But it's really a very hard business metric to use on a portfolio.

Okay.

And one other kind of a soft question.

Are you seeing any new signs of improvement in the efforts of the department stores to reinvent themselves?

I mean, is there anything positive coming out of what they're thinking about for the future?

They seem to be -- we've met with senior people, chief merchants at most all of the department stores over the last couple of months of the they're clearly paying close attention to their businesses.

They are trying to shed unproductive stores.

And you've seen some of that in particular with May Company and Lord & Taylor.

We see it as a group that, you know, you have to be careful with and you have to keep your eye on it and you certainly have to be ahead of the curve in terms of what they're doing.

But as long as you've got great real estate, our history for 25 years is that if one of our big retailers goes out of business we're able to replace them with somebody that's than more successful.

In particular with the Lord & Taylor situation, we clearly see that happening there.

We clearly saw that happening with Montgomery cap wards where we replaced several of those locations in our portfolio with great improvements over what we had before.

Is there any prospect for replacing any of the large department stores with small shop space?

We're not currently planning on doing that with any of our existing department stores.

We do have one or two Montgomery cap ward locations left over from when though went broke that we're considering dividing into -- one of them into an entertainment complex with a theater and a group of smaller shops as part of that.

But no, there's no big business plan to take departments store space and car of it up.

Okay.

Thanks.

And congratulations on other solid quarter.

Thanks, Ralph.

Thank you, sir.

Our next question comes from Richard Moore.

Please state your company name followed by your question.

Hi.

McDonald Investments.

How are you doing, guys?

Would you give us some insight into why operating expenses for the quarter jumped a bit more rapidly than base rents did?

Part of that is gonna be whether knees are recoverable expenses or not, Rich.

We tend to look more and compare more the shopping center expense to the tenant recoveries rather than to the minimum rents.

Obviously minimum rents you can only move when leases roll.

So, you're going to be able to roll those every six, seven, eight, nine years; whereas, recovery you can move that in most cases because most of our leases are triple net, you can move those immediately.

The overall recovery rate was consistent at 91% with the first quarter, slightly ahead of last year when we had some adjustments that moved that number down to about 88%.

But overall the recovery rate including joint ventures was 91%.

And that's consistent with -- consistent with what we've seen over the last two quarters.

Part of that is just the timing with when parking lottery pairs get done and other major expenses are incurred.

Okay.

So, you don't see, Tom, that absolute jump in operating expenses as anything unusual?

No.

Okay.

I mean, a lot of it, Rich, is as a result of absorbing Westcor and having that many more wholly-owned assets included in the numbers this quarter.

Okay.

And you talked about G&A.

Run rate going forward, what would you think of that?

Again, it's going to be dependent on what happens with the share price in any given quarter because we -- plans to market.

And I think probably on a regular basis it's going to be more like 3 million with the caveat that if the share price moves significantly, it could be more than that.

Okay.

And then as far as looking at the overall debt level, any thoughts on reducing that, or are you comfortable with the current level?

Well, the overall level is in the mid 50s in terms of debt to total market cap.

And we have very good coverage ratios.

And I don't think anyone here is really troubled with that amount of accident in terms of debt as a percentage of total market cap.

We are cognizant of the floating rate piece of that and the volatility and have been working our way down in that regard in an orderly basis since we acquired Westcor a year ago.

And that's probably the bigger concern today, such things as converting some of these loans, such as Flatiron's and possibly the Oaks from floating to fixed.

And even though it does require some earnings dilution to do that, that's really our focus.

We're not overly concerned with the amount of total debt.

Okay.

And then, as I recall, you guys were going to look at some more development opportunities possibly when you acquired Westcor.

Has anything come of that?

Has Westcor and the guys from Westcor come up with anything exciting on the horizon?

Nothing that we're ready to announce, but the pipeline that we see out there is deeper than we had ever anticipated.

Okay.

And last thing is do you guys have any perspective on the property tax debate that's going on out there in California?

The Prop 13 and all that?

At this point in time we don't anticipate that Prop 13 is gonna be changed.

That has been floated, but I really don't anticipate that that's something that's gonna be changed.

Okay.

Great.

Thanks, guys.

Thank you, sir.

We have no further questions at this time.

I would like to turn the conference back open to Art Coppola for any further comments.

Once again we appreciate you joining us.

I think if you look back on what we said we were gonna do this year back in November and December and you look at what we have done, we've done exactly what we said we were gonna do on the front of the disposing of non-core assets, on the front of delivering exactly the type of return on our investment at Westcor that we indicated some nine months ago that we anticipated we were gonna receive, and the arena of converting floating rate debt to fixed rate debt, lengthening our maturity.

So, if you look at what we basically gave guidance on in terms of what we planned to accomplish this year, we're really well ahead of pace on many of that's fronts and we look forward to sharing our operate will results with you again next quarter.

Thank you very much for joining us.

Thank you.

Ladies and gentlemen, this concludes the Macerich Company second quarter 2003 earnings call.

To listen to the replay dial 303-590-3000 or 1-800 405-2236, and you'll need to enters the pass code of 545708 followed by the pound sign.

Thank you and have a great day.