Macerich Co (MAC) 2003 Q3 法說會逐字稿

Good afternoon, and welcome to the Macerich Company third quarter earnings conference call.

At this time all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

It is now my pleasure to introduce your host for today's call, Georgianne Palphy of FRB Webber Shandwick.

Ma'am, you may begin.

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

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

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

For a more detailed description of those risks, please refer to the company's press release and the SEC filings.

During the course of this call management will also discuss certain non-GAAP financial measures as defined by the SEC's Regulation G. The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the earnings release for the quarter, which is posted on the company Web site under the section "What's New" and also under the section "For Our Investors."

Having said all that, I would now like to introduce Mr. Art Coppola, Chief Executive Officer and President of the Macerich Company and with that turn the call over to Art for his opening remarks.

Please go ahead, sir.

Thank you, Georgeanne.

As is our custom, I'll be reviewing sales trends, occupancy levels, leasing results, our redevelopment activity as well as the acquisition outlook.

We're pleased to be here to report to you our first nine months of results for 2003.

Through our first three quarters our FFO is up over 15%.

The third quarter itself, as you compare it to the third quarter of last year, you'll see was relatively flat, but Tom will be getting into the details on the explanation for that.

It's pretty much 100% related to the fact that we closed on the acquisition of Westcor in July of last year and financed that with 100% debt, of which half of it was short-term floating rate debt.

At that time we increased our debt level significantly to do the acquisition as well as increased our variable rate debt levels significantly.

That proved to be extremely accretive in the third quarter of last year.

And you may remember in the third quarter of last year we pointed out that our large increase in third quarter of last year, which fueled 7 cents per share by that floating rate debt of 100% debt acquisition, and we pointed out that we were going to be re-equitizing our balance sheet in the very near future through a combination of dispositions, joint ventures and other activities.

In fact, we did that shortly thereafter with a significant stock offering in November of last year, as well as over $150 million of dispositions over the last 12 months all in accordance with the guidance that we gave you.

Had we not had that 100% floating rate debt and 100% debt financing during the third quarter of last year our FFO again would have been 7 cents per share less in the third quarter of last year and the comp this year would look like about a 9 to 10% increase versus last year.

Having said that, and looking now to sales trends, occupancy levels and leasing activity.

Sales remain strong in our portfolio.

We had Southern California is same center tenant sales were basically flat.

Northern California and the Pacific Northwest was up 3.3%, our intermountain region was up 1.6%, central and eastern regions were down 1% overall for the company excluding Westcor because that's not a comp because it has not been there for the required amount of time.

Our overall tenant sales were up 1.9%.

Comp sales were up about a half percent throughout the company.

Westcor itself, in looking at that as a region, was the shining star for us.

And I'll be getting into what's happening in the Phoenix marketplace a little bit later in this call, but it was up 5.7% in the third quarter.

So, we're very pleased with those sales results and with sales holding up overall.

In looking at our occupancy levels, at the end of third quarter we're at 92.9%, which is up from 92.4% in the second quarter of this year.

It's off a little bit from the third quarter of last year, and that's primarily due to the loss of a couple of big boxes at a couple of our centers, about 60,000 square feet, which we're confident that we're going to be able to re-lease over the course of the next year.

Leasing trends remained very strong during the quarter.

During the third quarter we signed 351,000 square feet of leases under 10,000 feet.

That does not include any new development leasing, for example, at Queens or the other new projects that are underway.

Average new starting rents were at $39.08 per square foot.

That represents an 18% spread over expiring rents on a comp space basis so, we're very pleased with the leasing activity that we got.

And it has been a very strong trend.

Year-to-date re-leasing spreads have averaged about 19%.

So, we've been able to maintain those spreads as we had indicated that we felt that we would.

The big story right now for us and over the next two to three years remains the redevelopment story and the expansion story.

During the third quarter we had Bon Marche open up a new department store in our Redmond Towns Center, we had Target open up a new store in our Lakewood Center.

Our Queens expansion remains on track and on budget.

We have over 92% of the Phase I expansion space leased and ready to be delivered to tenants.

We are expecting that that will be coming online in the beginning of the second quarter of next year.

And this center again remains one of our most productive center throughout the company with sales just under $1,000 per square foot.

We've had fairly significant disruption in the center in terms of sales activity with sales being down about 8 to 10% because of the amount of construction work that's gone on inside the center.

Anybody that's been in the center, you've noticed that there's been a very significant amount of work that's been done there.

But frankly, to be able to maintain sales at that level with the amount of disruption that we've created for our tenants, we're very pleased, and it shows the strength of the market.

During the quarter we announced that we've made a deal with Nordstroms to come to the Oaks Mall in Thousand Oaks.

You remember that we bought that center about 15 months ago.

That expansion is planned to open up about two to three years from now, it's very complicated entitlement process.

But that, as we've indicated in the past, is looking to be a shining star for us as time goes on.

We're very pleased to be able to accommodate Nordstrom's and possibly one other specialty department store at this center.

It's a center that again, we bought 15 months ago.

It's currently doing over $450 a foot.

We have every anticipation that with the expansion and the addition of Nordstroms that those sales per square foot will take it into the $500 to $600 a square feet neighborhood, which will make it one of the most powerful centers on the West Coast.

Our construction work at our power center in Phoenix, Scottsdale 101, remains on time and on budget.

The project is being completed in phases, as is the norm for power centers and it will be completed in phases through the end of next year.

Likewise, at La Cantada, that center is moving along on time on budget, with about a third to a half the center coming online in April of next year and the balance coming online in October-November timeframe of next year.

But everything is moving along fine there.

We've completed the budgeted disposition activity for the year in the third quarter with the sale of a community center that we have here in the Los Angeles area, Bristol Center, which was sold for about $30 million at just over an 8.5% cap rate.

On the acquisition front, we took the proceeds from that disposition and rolled it into the acquisition of Northridge Mall in Salinas, California.

That's a center that we acquired on September 15th.

We're very happy to have bought that center.

We've been managing that center for a large insurance company for a number of years.

This is a center in the Monterrey-Salinas area.

We have centers in close proximity in Capitola, in the Santa Cruz area and we see a very bright future for that center, sales at around $340 a square foot.

This is a million square foot super regional mall, and we see it as having a very, very bright future.

Cap rates on that center as well as the previously announced Biltmore Fashion Center average about 7.25% between the two centers, and we see again, great opportunities for growth on the centers.

We announced in late August that we were going to buy Biltmore Fashion Center, and that closing is right now just undergoing rating agency approval for the rated debt that is on that property.

We anticipate closing that center.

The acquisition of that center in December of this year.

Biltmore really puts the finishing touch on our Phoenix strategy in terms of the consolidation of the retail marketplace there.

Biltmore Fashion Center has had very strong sales increases the last couple of months with September alone being up 20% and the center currently is at a run rate of around $460 a square foot.

It's located between four and five miles from our Scottsdale Fashion Center, which does in excess of $540 a square foot.

We anticipate buying Biltmore Fashion Center with our partner that we have at Scots Scottsdale, which is a large pension fund, and again that that closing would happen in December.

With the acquisition of Biltmore we now have six regional centers in the Phoenix marketplace with about 7.6 million square feet of total GLA that we have ownership interest in.

Those centers are extremely powerful and do composite weighted average sales per square foot of about $415 a square foot.

We've already had great leasing synergies between Biltmore and Scottsdale.

There's been a significant tenant tug-of-war between the two centers over the course of the years, a significant number of radius clauses prohibiting one tenant from going to the other center and vice versa.

And now that we've been able to put this center under contract, the shift has gone completely to the landlord in terms of being able to determine where the tenants are going to go in this marketplace.

So, we're extremely pleased with that acquisition.

It takes the acquisition of Westcor to the next level.

From the day that we bought Westcor, our first priority in the Phoenix marketplace was to add Biltmore to our portfolio, and we're very pleased to be able to announce that that now is going to be coming online.

We're very pleased to be able to do it in partnership with our partner from Scottsdale Fashion Square.

With that I'd like to turn it over to Tom to discuss operations and the significant amount of balance sheet activity that we've had over the past few months.

Thank you, Art.

As Art mentioned earlier in the call, we're comparing the third quarter of this year to a highly leveraged third quarter of last year.

To recap, we closed almost a $1.5 billion acquisition of Westcor on July 26th of '02.

The capital structure that we have in place today looks dramatically different than what we had in place a year ago.

That acquisition was done almost entirely with debt.

There was $80 million of OP units used.

The balance was debt, $1.4 billion of that $733 million was property-specific mortgages and the balance of $662 million was short-term floating rate debt.

In November of 2002, approximately $420 million of that short-term debt was replaced with equity.

And the impact of moving from temporary debt which as we indicated boosted FFO by 4 cents a share in the third quarter of '02 to permament equity makes the comparison between third quarter this year and last year look modest.

In fact, that was the motivating factor for us going to the equity markets as soon as possible after the Westcor acquisition.

The temporary debt with an all-in rate of about 5% was replaced with equity with an FFO yield of approximately 12%.

Year-to-date FFO per share was $2.54 compared to $2.21 for the nine months ended September 30th, 2002.

That's a 15% increase.

As we reported today, for the quarter FFO per share was 85 cents.

That compared to 85 cents last year.

There were some accounting changes, there was some gain on sales of peripheral land, one cent a share this year, excuse me, for this quarter compared to 4 cents a year ago.

Historically we had not included that in FFO but based on the Reg G we are now doing so.

But you net all that out, all the accounting changes in both quarters were 83 cents a share.

If you take off the impact of 7 cents a share from the temporary acquisition debt on Westcor, that brings last year down, and we show a growth rate of about 9%.

During the quarter same center NOI, including joint ventures at pro rata was up approximately 1%.

That compared to the third quarter of '02.

Year-to-date, same center NOI growth is up 2.75%, which is slightly ahead of the guidance we gave of 2 to 2.5% for 2003.

Certain things that adversely impacted the same center growth rate during the third quarter of this year was there was a decrease of $.6 million, $600,000 decrease in straight lining of rents for the quarter, and there was a decrease of $500,000 in lease termination revenue compared to the third quarter of last year.

If the effect of straight line rents and lease termination payments were taken out the same center calculation, same center NOI growth for the third quarter of '03 would have been 2.35%.

During the quarter specialty center leasing grew at a 6% rate for the quarter.

G&A expense was up compared to a year ago primarily due to marketing director phantom stock plans to market to reflect the increase in share price over the quarter.

Also affecting G&A is the increase in D&O insurance, that is an industrywide situation, as well as the impact of having Westcor in our numbers for a full quarter.

During the quarter net income available to common stockholders was $39.7 million or 69 cents a share diluted, up significantly from the third quarter of last year, which was $11.7 million or 32 cents a share.

The net income in the third quarter of 2003 was positively impacted by a net gain on sale of assets, primarily Bristol Center, which increased EPS by about 31 cents per share for the quarter.

That compares to no gain or loss on asset sales during the third quarter of last year.

Also this year, the Statement of Accounting Standards Number 141 on business combinations was adopted.

This new accounting pronouncement requires that for all acquisitions done after June of 2001 the net present value of the difference between in-place rents and market rents must be capitalized on the balance sheet and amortized into rental revenue over the remaining term of those leases.

This had the impact of increasing rental revenue based on this positive differential between market rent and in-place rent primarily related to the Westcor acquisition and the Oaks acquisitions of last year.

We recorded about $900,000 of additional income in the third quarter of '03 as a result of this accounting change, and that had an FFO per share impact positive of $0.012 per share.

Looking at interest rates, the average portfolio rate during the quarter was 5.7% that compared to 6% during the third quarter of last year.

The average maturity of our debt at September 30th is 4.4 years.

Focusing now on the year 2003 guidance, in this morning's press release we gave upwardly revised 2003 EPS and FFO guidance with FFO per share now in the range of $3.52 to $3.58.

That's up from the previous range of $3.48 to $3.56.

Some of the caveats of that guidance are mentioned in this morning's earnings release, and I would direct you there.

At this point in time we are not giving 2004 guidance.

That guidance will be forthcoming within the next month.

On October 30th we again increased our quarterly dividend, increasing it to 61 cents per share, to shareholders of record on November 15th.

That's a 7% increase over the prior dividend.

Macerich has increased our dividend each and every year since we became a public company in March of 1994.

Based on consensus estimates for 2004 FFO, that annualized dividend equates to an approximate FFO payout ratio of 65%.

During the quarter we made some tremendous progress on our balance sheet, specifically reducing our floating rate debt levels.

At September 30th we have about $3.6 billion of debt, including joint ventures at pro rata.

Today, after the FlatIron loan closes and the Northridge loan funds in early 2004, the floating rate debt will be only 18% of our total debt and only approximately 10% of our total market capitalization.

Our total debt to market cap is approximately 55% and our interest coverage ratio is a very healthy 2.4 times.

During the quarter we had a number of transactions.

I just mentioned FlatIron Crossing.

That was a very unique transaction.

We refinanced $170 million of floating rate debt, we closed on that loan today.

We put a $200 million fixed rate loan in place, 10 years, all-in rate of 5.23%.

And what was unique about this we were creatively structure this transaction so we could lock the rate six months ago and still benefit by floating that debt until we funded it today.

So we had the benefit of a short-term rate of about 3.5% for 6 months but we had the benefit of knowing we had a very attractive long-term 10-year fixed rate loan that funded today.

We structured a similar deal on Northridge.

Northridge we have an agreement for an $85 million loan, 5-year fixed rate deal at 4.63%.

We can fund that loan anytime within the next six months at our election.

Again, we enjoy the benefit of funding this off of our line of credit and essentially that's 3.5% debt and we have up to six months to fund the fixed rate loan.

Also during the quarter we put a $30 million fixed rate loan on Greeley Mall at 6.15%.

And in mid-September we refinanced two floating rate construction loans in the Westcor portfolio.

One at Chandler Festival and one at Chandler Gateway.

Lastly, We entered into a $250 million two-year swap agreement.

We have essentially fixed our unsecured $250 million corporate loan.

We swapped from LIBOR to fixed rate of 1.94% for two years.

That locks in our interest rate for two years at 4.45% on this specific piece of debt.

After you reflect the above transactions, our floating rate debt as a percent of total debt will be 18%.

And that is down from 36% when we closed the Westcor acquisition.

Also noteworthy for the balance sheet was the conversion of the Series B preferred stock which converted in the third quarter.

That's approximately 5.5 million shares that were converted from Preferred into Common.

Obviously that has a positive bearing on balance sheet ratios including the fixed charge coverage ratio.

So at this point, Stephanie, I'd like to open it up for questions.

Thank you.

The floor is now open for questions.

If you do have a question, please press the numbers one followed by four on your touch-tone telephone at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order they are received.

And we do ask that while posing your question, you please pick up your handset to insure proper sound quality.

Once again, to ask a question, please press the numbers one followed by four at this time.

Our first question today is coming from Matt Ostrower of Morgan Stanley.

Sir, please pose your question.

Good afternoon.

Just a couple of questions.

On 141, Tom, do you have any sense for what -- you may have said this, I may have missed it.

But do you have any sense what the ongoing impact on that's going to be considering the new stuff you bought?

Matt, we're still going through the calculations.

Northridge closed late in the quarter, so it didn't really have an impact for the third quarter.

But we'll go through the calculations on Biltmore and Northridge and we don't think they're going to have too much impact, certainly not a material impact in 2003.

During the quarter we recognized about $900,000.

That may go up, you know, a couple hundred thousand when we add the two acquisitions in.

But I don't think it will change things dramatically.

And then, of course, that number burns off over time, but it will increase to the extent there's new acquisitions where in-place rents are lower than market.

Okay.

And then on land sales, I guess the gain is a little bigger this quarter than I had expected.

Do you have any -- I know it's transactional, but is there sort of a reasonable either annual or quarterly run rate now that you look at your land inventory?

Well, we have some land inventory today certainly greater than we've historically had as a result of Westcor, but those tend to be very lumpy transactions and they're hard to model.

And when we give guidance within the next month, we'll try to give you an idea of the dollar magnitude we can expect to get.

It's going to be tough to pick the quarters and you may have noticed Matt, we had even a bigger number in the third quarter of last year, we had $2.5 million of gain on sale of peripheral land that took place at Redmond Town Center in the third quarter of last year.

Again historically, we had never, conservatively we had never included land sales in FFO.

But as a result of Reg G we have to do it now.

We did have a big slug in the third quarter of last year as well as a fairly big one this year, but I think that's more coincidental than anything.

Okay.

Thank you very much.

The next question is coming from Lou Taylor of Deutsche Bank.

Sir, please pose your question.

Thanks.

Congrats on the quarter, guys.

Let's see.

Art or Tom, could you just talk about the funding in a little bit more detail about the Northridge and Biltmore acquisitions?

Art, you had mentioned the same partner at Scottsdale Fashion Center.

Just kind of how much you expect as a percent of the transaction do you expect from that partner, how much debt are you assuming, et cetera?

Well on Biltmore, we're assuming $78 million worth of debt, the equity component of the transaction is about $80 million and we anticipate doing a 50/50 deal with the institutional partner who is also our partner at Scottsdale Fashion Center.

So our share of the equity component is around $43 million at Biltmore.

At Northridge, in terms of the equity component there, you're looking at an equity component of around $43 million over the new debt that we're putting into place.

And in my mind, I believe, and actually in fact, we had owned Bristol for quite some period of time and we had a large gain on that so we rolled that gain from Bristol into the acquisition of Northridge and then funded the balance of that acquisition just with cash on hand, which was a nominal amount of around 12, $13 million.

Secondly, with regards to just future acquisitions, is there much more on the market that you're finding interesting?

Well, I mean, as you've noticed, since Westcor we've been pretty quiet in terms of actually making acquisitions.

You know, again, as I mentioned previously in the call, we started working on buying Biltmore the day that we bought Westcor.

So, that's been ongoing.

Northridge was a property that we've managed for a long time for a large insurance company, and it's right in the middle of a trade area that has been very, very profitable for us.

It's really got more of the elements of the central valley to it than even the bay area.

We're going to be very, very strategic and we're going to look at mainly markets where we already have a strong presence.

While we bid on almost everything that's come on to the market with the exception of some of the East Coast stuff like the Mall in Maine, we've been outbid on virtually everything.

So, I would not prognosticate a lot of new acquisitions going forward, but we do keep our hand in the game.

If we see an opportunity to buy something that we can make money on from the viewpoint of ongoing growth and not just from the viewpoint of putting on cheap debt in order to achieve some spread investing, then we will go ahead and take advantage of those opportunities.

But I would anticipate that the levels are not going to be huge.

Okay.

Last question is, can you expand a little bit more on the Biltmore synergies?

Do you expect much on the cost side?

And with regards to eliminating some of those radius restrictions, is that something you think you can do rather quickly, or will that have to just occur over time with lease expirations?

That's something that we've already started doing.

We, you know, as an anecdote, we had a luxury tenant that we had at Scottsdale Fashion Square that wanted to expand with us, and the tenant basically threatened us with the fact that he could get a huge tenant allowance by going to Biltmore, and we needed to match that tenants allowance otherwise he was just go ahead and move over to Biltmore.

And when you have such formidable competition just four or five miles away and a certainly with a landowner there, a landlord there that has got a strong presence in the upscale and luxury tenant business.

Historically that's been quite a tension that tenants have tried to play one center against the other.

Even going back six, seven years ago, when Westcor was able to make a deal with Nordstroms, there was quite a fight between the two properties as to who was going to end up with Nordstroms.

So, from the day that we announced that we were buying this center, the idea of that luxury tenant at Scottsdale Fashion getting a large tenant allowance to expand at Scottsdale Fashion, that conversation came to an end right away.

And the strength that it's going to give us by owning the two best upscale and luxury sites in that marketplace is quite significant, and it's already being felt.

Thank you.

The next question is from Craig Schmidt of Merrill Lynch.

Sir, please pose your question.

Center NOI, I note some of you had mentioned the lease terminations trade line rents.

Are you still looking for 2, 2.5% into the fourth quarter in terms of same center NOI?

Craig, when we gave guidance, we gave guidance for the year of 2 to 2.5, through the third quarter at 2.75.

It does fluctuate a little bit quarter-to-quarter.

And obviously we feel pretty good about the guidance we've given as we've tightened the range to increase the range so, we're still comfortable with that level.

Great.

And I guess just to return to the acquisition question, we're hearing more and more of the REITs, that they want to step back a little bit.

Does that mean that you could start to win some of these bids, or are you seeing the private bids high enough that they would still go to other players?

That's hard to predict, Craig.

We have our own discipline in terms of how we go about buying properties, and we pretty much maintain that discipline day in and day out.

And we don't really turn on the lights or turn off the lights in terms of the way that we approach things.

We're really agnostic to other people's views.

We participate in virtually every transaction.

If we end up being the successful bidder, then it reflects the fact that the price that we put in there is the price that we feel that we can create a lot of value, make a lot of money at.

So, we're really agnostic to the views of our competitors in that light.

Having said that, obviously prices have gotten expensive.

The amount of deal flow that you see in the marketplace does seem to be shrinking a little bit.

But we'll see.

We're agonistic, I don't anticipate the next year to be a huge year for acquisitions.

But then again, I said that in March of 2002, and look at what happened in 2002.

One last question.

Does traffic in the malls look like it's sustaining in October?

Should we expect in October same-store sales to be as pleasant as the September was?

Traffic is holding up.

We have traffic counters, actually, in the malls as I'm sure most of our peers do.

And traffic is up a couple of percent overall in the malls.

Again, the big story for us is the Phoenix marketplace has really been on fire the last couple of months.

Great.

Thank you.

Your next question is coming from David Shullman of Lehman Brothers.

Sir, please pose your question.

Good morning, I guess, in the case of you guys.

First question I have is, do you know what the average base rent is right now in the portfolio?

Hi, David.

How are you?

The average base rent is $31.25 compared to $30.66 at year-end. $30.66 at year-end?

Okay.

What's the status of the Paradise Ridge Mall?

Things are moving along well there and we're continuing to work on our entitlements there.

And frankly, you know, buying Biltmore is just one more situation where that is going to potentially even accelerate the pace with which we can move forward on that opportunity.

It's still several years off from opening, but you'll begin to see things in the press about the entitlement process moving forward.

But again, we're still looking at several years off.

It sounds like a what, an '07 opening, something like that?

At best.

At best? '07 at best?

Yes.

Okay.

Next question --

But that's subject to change.

In the acquisition of Biltmore, there were actually some significant radius restrictions with one of the department stores that would have affected that development.

We'll see what happens.

Now that we own it and control it, we could potentially even move that development up.

But it certainly puts us in the power position in terms of what happens in that marketplace.

Next thing is, is Art, when you did the Westcor transaction, you talked about there's all kinds of interests coming from institutional partners, both the pieces of the Westcor portfolio and pieces of your existing portfolio.

We haven't seen a whole lot.

Are those discussions going on or have they stopped or what's happening?

It's even more so than before.

You've seen in May of this year we announced I believe, that we brought in CALPERS as a partner in our Cordo Madera Town Center in Marin County so we did that.

The list of people that have approached us to be partners with us of specific assets within the Westcor portfolio as well as assets in the Macerich portfolio and generally assets in the western part of the United States, it's as long a list as we would want it to be.

And it's a who's who in terms of the pension players.

With the acquisition of Biltmore you'll now see that that will be our third joint venture that we will have with CALPERS.

So, the level of interest there is really quite significant.

A lot of the big players have decided that they really want to increase their direct real estate investment in malls, and their focus seems to be the western part of the U.S.

Okay.

And our friend, David Simon, on his conference call noted that he's seeing more opportunity to do power centers, lifestyle centers, open centers as opposed to the traditional closed mall.

Do you share that philosophy?

That's a trend that clearly is emerging, the idea of doing open air centers with fewer department stores.

You know, the idea of doing a four or five-anchor, enclosed regional mall, you know, there just are very, very few situations that would justify that type of development.

On the other hand, if you're got a in-fill location that's got that kind of an anchor lineup that also is going to attract very significant interest because of the power that it's got.

But, I mean, clearly the trend has been towards fewer anchors, a little bit smaller projects and open air throughout the U.S.

And I'd say that David is clearly on track and out there on the front with others in terms of where he sees the business going, as they always have been.

Does that mean that the existing asset base is becoming obsolete?

No, not at all because these are centers that are being built basically in areas that formally were identified as potential regional sites.

But as you look at the lineup of the anchors that are available and the consolidation of the anchors, it just makes more money and more sense to do them with fewer anchors at times and in an open air environment at times.

Having said that, you know, in the Phoenix marketplace in particular I would not at all be surprised if we had a multi-anchor enclosed mall, one or two or three that we will build there over the next five to 10 years.

Thanks a lot, Art.

Thank you, David.

Your next question is coming from Jay Loop of Royal Bank Canada.

Sir, please pose your question.

Good morning, here with David Ronco.

In terms of your tenant base, could you talk a little bit further about any significant tenants that you'd be looking to replace in the next three or four quarters?

And on the flip side of that are there any significant tenants that you're currently pursuing that you'd like to see in your centers that you don't currently have tenants?

In terms of tenants that we're looking to replace, we just have a general philosophy that the minute we get a center basically fully leased, we then begin to pursue the relocation or the termination of the last productive tenants.

And that's the way we run our business.

A perfect example was Queens Center.

When we bought it seven years ago, it was doing $600 a square foot and we now have that center doing almost $1,000 a foot.

And the way that we did it is we targeted all of the tenants that were doing only $300 or $400 a foot, to get rid of them and replace them with tenants that are doing 8, $900, $1,000 a foot.

So that's just our general philosophy.

When a center is 100% leased from our viewpoint, that's when our leasing team really goes to work in terms of getting our of less performing tenants, and it's not chain oriented, it's really performance oriented So a particular operator for example may have great results in one geography with us and not so great in another geography.

If that's the case, then we're going to talk to them about downsizing or leaving.

In terms of tenants that we're adding, it's pretty much the same, I think, as the industry.

There are a number of retailers that have got new growth plans, like the Limited, for example, keeps coming out with operations where they target the top 150, 160 centers in the U.S. to roll out new concepts.

And there are a number of new concepts that are pretty much public knowledge that people are coming out with.

Again, it's really more of a function of identifying less productive tenants in a specific property as opposed to getting rid of wholesale chains.

As part of bringing in new tenants to our operation, for example, in Westcor, for example, there were tenants like Pac Sun and Forever 21 that that were really not doing business in the Phoenix marketplace, and we brought them in and did in excess of 50,000 square feet of new leases with Forever 21 alone.

So, there's a number of new concepts emerging as there has been, but there's no particular tenant that we're target targeting to get rid of at this point in time or that we expect failures from.

Okay.

And Tom, just a follow-up question on the guidance that you gave, the modestly upward guidance that you gave for the rest of the year.

Can you give us any color on which of the moving parts in your assumptions worked the guidance upward?

Was it occupancy, leasing spreads, a little more acquisitions or tenant recoveries?

No, Jay.

Actually by this point in the year most of the leasing has been done.

The big variables in the fourth quarter are specialty leasing because we tend to get 50% of our specialty leasing comes in the fourth quarter.

And I'll tell you that the feedback we're getting is that most of those spaces are spoken for.

Most of the specialty retailers have already purchased their inventory, which means they've got to get in there and open for business and sell.

And then the other variable is percentage rent because with the new accounting rules, most of the percentage rent is recognized in the fourth quarter.

So, there's a fair amount of seasonality to our earnings, and most of that seasonality falls through the fourth quarter, and that's the reason for the range.

Thank you.

Your next question is coming from Ross Nussbaum of Smith Barney.

Please pose your question, sir.

Good afternoon.

Art or Tom, can you discuss the same store pool in terms of which assets are or are not in there?

It looks like only about two-thirds of your assets are in that pool.

That is correct, Ross.

Obviously Westcor is not in there.

They hadn't been in there for a comp quarter yet because it was a partial quarter last year.

So, once they're in and the Oaks have been in, then they'll go in the same store numbers.

So, it's basically for the quarter any tenants that had been, excuse me, any centers that had been in for the full quarter in both periods.

It's a big difference we're looking at today is really Westcor.

So, they'll go in in the fourth quarter?

Yes.

Okay.

Art, can you give us an update on where the Boulder project stands?

I guess I've been reading in the local press that there's been some progress there in terms of putting the street map back together?

Yes.

And that is the case.

Our team is making good progress there in the city.

You know, I would not anticipate any economic impact to the company for at least a period of two to three years, but certainly as the final plans are approved and entitled in that city, then we'll go ahead and come out and give guidance on what we see in the way of incremental investment there and what w see in the way of incremental returns.

But clearly they'll be extremely positive as time goes on, but certainly nothing is going to hit our numbers over the next two years and maybe even three.

And Tom, can you discuss just from a modeling or an economic perspective the way that Queens Center is going to be handled in terms of bringing it on in phases?

What is the construction cost I guess of Phase I and Phase II, and will you stop capitalizing the interest on Phase I when that opens?

Ross, the way that works is as space comes online on a pro rata basis, you stop capitalizing interest.

So, you really match that up with the space as it comes online.

And when we give guidance in '04, we'll give more specific guidance as to how much of that development will be coming on in '04 and the approximate timing.

But we match up the expensing of interest with the space that comes online on a pro rata basis.

Okay.

And the final question is, the joint venture on Biltmore, is that a straight up 50/50 or is there a promote there?

It's straight up 50/50.

Our philosophy is to keep our joint ventures aligned the same way that we try and align ourselves with our shareholders.

So, straight up 50/50.

And management fees coming your way?

Market management fees.

Thank you.

Your next question is coming from Kenneth Campbell of ING Clarion.

Sir, please pose your question.

Just wanted to check in with you guys and see what's happening in Richmond, Virginia.

We've had two malls there open up there, one by Forrest City and one by Talman and what impact that's had on Chesterfield?

Yeah.

Traffic is down basically, and we have counters there.

But traffic since the opening of those two centers is down 3 to 5%.

Our September sales appear to be down high single digit numbers, but less than double-digit numbers.

We don't anticipate you know, both of those centers are targeted to a higher income demographic than is our customer base at Chesterfield.

So, we don't anticipate that it's going to be, have a serious impact on us there either way.

We've been pleased, frankly, that with that amount of square footage that our foot traffic has held up to the point that it has with only really a foot traffic reduction of around 3 to 4%.

That's very surprising, quite frankly.

Okay.

But longer term you're still satisfied with the results you're getting in Chesterfield?

Oh, sure.

That center is doing very well for us.

And we've done a great job in terms of the department store consolidation and reshuffling there without spending a lot of money.

You know, we've added a new Sears, a new Penny, each of which built their own store.

Hecht's expanded their store from 100,000 to 140,000 feet.

And then we helped to orchestrate the removal of Profits and Belex and the introduction of Dillards there.

So from an anchor lineup, you know, you've got all the right anchors for our demographic in that marketplace, and we're pleased with what we've been able to do there.

But that is a such a tremendous amount of square footage to drop into a market the size of Richmond in such a short period of time.

Thank you.

Thank you.

Your next question is coming from Robert Belzer of Prudential Equity.

Sir, please pose your question.

Hello.

I'm just trying to get a better feeling on what Queens Center may mean next year.

I take it that you expect a significant block of that project to be online in 2004 at this point and also that you may expect some accretion from the project.

Is that a correct assumption?

Yes, Robert.

This is Art.

Thank you.

I know that it's a difficult number for you to get your hands on, especially having, I'm sure you've seen it and been there, you recognize the complicated staging process that we have there When we put come out with 2004 guidance, which we anticipate coming out with over the next couple of months, we'll give much more specific guidance.

We know that you need those numbers, we're very aware of that.

But there are still some external factors that could be outside our control.

For example, the date that J.C.

Penney opens up in their new store.

Everything seems to be on track and on target for them to open up in their new store late in the first quarter, but if for some reason, and they're building that themselves, that they were to miss their schedules, that it could push all of our openings back a quarter or two in the year.

But we're well aware of the fact these are big numbers that effect our numbers in 2004 and 2005 quite significantly.

And as we are able to really get a complete pulse on exactly when some of these external factors are going to be put into place, then we will give that guidance and that is something that clearly should be able to be given before the end of this year.

Are you still anticipating a double digit return?

You had previously indicated 11, north of 11%.

Absolutely.

We're exactly on board to see an 11% return on our incremental costs, absolutely.

Is it going to be significantly higher than that?

That's a good number 11.

Okay.

Great.

And the reason we know the number is that we're 90-some percent leased on Phase I openings and 84% leased on the Phase II openings.

So I mean, we know what the numbers are going to be.

And our costs have all been set as well as our financing has been put into place, the long-term financing.

Okay.

Great.

That's all my questions.

Thanks.

Thank you.

Your next question is coming from Ralph Block of Bay Isle Financial.

Sir, please pose your question.

Good morning, guys.

Good morning.

Could you talk a little bit about occupancy rates, what you see for next year and is the 93%, is that pretty much the practical limit of what we can expect when things are going well?

Ralph, if you look at our occupancy trend over the last ten years, the low point was, I believe 1995 with 91.6%.

Then we've trended occasionally north of 93 but, you know, looking at, we go through detailed budgets on every single space in our portfolio and going through there, you know, we're really forecasting '04 to be fairly flat with where we are today.

Okay.

And can you talk a little bit about the leasing environment?

Is it pretty much the same as it was three months ago or are you seeing any more aggressive actions by some of the retailers in response to maybe a stronger economy?

Leasing is improving and the appetite is getting better.

We have such a large presence there in that Phoenix marketplace that it certainly doesn't hurt that sales are doing extremely well in that marketplace.

So things are going great there.

Again, it is geographic specific also and we happen to be doing business in geographic regions that tenants are doing well.

I think that with the view towards an uptick in the economy you've got a number of retailers that are trying to, that have got new retail concepts that they're going to be rolling out over the next couple of years.

I mean the reality is that over the last nine months of this year, our leasing spreads have been 18%, 19% and 20% respectively up over expiring rents.

So we're in a very healthy and strong leasing environment.

One last question.

Have you had a chance to talk with any of the people in Thousand Oaks yet in order to get a handle on how difficult it might be to get that Nordstroms and the other kind of restructuring done?

Yes.

We've started meeting with the officials of the city of the Oaks about three weeks before we closed on that transaction, on buying that transaction in late May of last year.

We have people that go to community meetings there, virtually every week.

We have a very good pulse on what's happening there.

There's a local developer here and not a public company who has been swearing for the last 15 months that there's no way that we would ever get approval to get Nordstroms to go to the Oaks and of course we announced jointly with Nordstroms just a month or so ago that they would come into the Oaks.

So we feel very good about where we are.

We handicapped the situation there.

It is complicated.

I mean, literally, you cannot touch an oak tree in that parking lot period without a charter amendment to the city charter.

But we've been through that, we've mapped out exactly how we're going to go through the expansion, we're working with local governments in particularly in the state of California is really possibly the strongest point that the Macerich Company has.

And it would be easy to view getting an expansion of the type that we're looking at getting in the Oaks as being something that's going to be extremely difficult, but we've been on board with the community from day one and feel very, very good about where we are, the community and local government officials are just thrilled about seeing Nordstroms come to the center.

So we're very optimistic that that will be fine.

Okay.

Good work, guys.

Thanks.

Thanks, Ralph.

Your next question is coming from Rich Moore of McDonald Investments.

Sir, please pose your question.

This is Rich Sweigard on for Rich Moore.

Can you tell me where you stand with 2004 lease expirations?

We're in very good shape.

We're not like others that say that they're already working on 2005, we don't think that that's prudent.

But the reality is is that we have our own way of going about in terms of forward leasing, sit down with tenants, you know, well in advance of when their leases expire and through the way that we've been able to work with them, our program works.

Like Tom said, over a 10 year period, our occupancy levels have averaged between 91 and 94% and our leasing spreads have been some of the highest in the business.

So, it's something that over the entire period of our public history, we've been able to maintain high occupancy levels and high leasing spreads that have driven well above average FFO growth.

We don't take as much of a forward-looking viewpoint in terms of re-leasing as some others announced that they do.

But clearly what we are doing works.

Okay.

And other income was up a little bit versus last year and last quarter.

What drove that?

That's odds and ends that go in there, Rich, that's vending machine income, that's advertising income.

To some extent it's just a volume of having Westcor in there and the Oaks and some additional sizes.

No one item that stands out as being a significant increase.

I think that's probably a pretty good quarterly run rate though to use for us going forward.

Okay.

And Tom, what would be a good run rate with the G&A?

G&A, you know, if you look at the average for the three quarters, Rich, it's probably running about $2.5 million per quarter and that's a pretty decent run rate.

Obviously, that changes a little bit to the extent raising stock-based compensation for our directors, that's going to move around a little bit depending on what happens with the share price.

But we're at $8.8 million for three quarters so if you use 2.8, 2.9 per quarter, you're going to be pretty close.

Okay.

Thank you very much.

Your next question is coming from Mike Mueller of JP Morgan.

Sir, please pose your question.

Hi guys.

I was wondering if you can comment on tenant allowance trends?

I mean just what you're disclosing in the quarter and year to date?

Do you expect that to pick up if you're at about $5.6 million year-to-date?

Mike, as you know, we have always been fairly stingy with our tenant allowances and that's just in our history, the Macerich over the last 10 to 15 years.

And in other situations where we have to be more liberal with the tenant allowances, that hasn't been the case this year.

If you go back and look through our 10-K, you'll see that we've historically disclosed that and the levels we're at now are, I think, are probably on the lower end.

We're going to range, if you throw JVs in there, we've been ranging between $5 million a year to 10 to $12 million a year.

Year-to-date we're at almost $6 million so, I think that's just where we are right now and Art alluded to it a little while ago, we're leasing, seems to be picking up a little bit, getting a little momentum.

We have to be, we can afford to be a little bit more frugal with those TIs.

Okay.

And deferred leasing costs, that looks fairly normal.

Is that correct at this point?

Correct assumption?

I'm sorry, the leasing spreads, MIke?

No, the leasing commissions at about $14 million year-to-date.

It looks like there are no---

Yeah, those aren't really commissions.

That's primarily internal staff which is the way the mall business is handled almost across the board.

Yes, so that's pretty stable.

Steady and predictable.

Okay.

Thanks.

Gentlemen, there appear to be no further questions.

At this time, I'd like to turn the floor back over to you for any closing comment.

Great.

Again, we appreciate your participating with us.

As Tom has mentioned he has given guidance here for the fourth quarter of this year.

We're extremely pleased with where we are as a company and balance sheet wise compared to where we were a year ago.

I think if you reflect upon the guidance that we gave back in November of last year in terms of what we were going to do on the upcoming twelve months, we gave some very, very specific guidance on what we were going to do to floating rate debt to our balance sheet in the area of dispositions and we've delivered exactly upon every point that we had given guidance on.

We look forward over the next couple of months in giving you guidance for 2004 but I think as you can tell from the sense of things that we are bullish about our prospects for '04 and '05.

And a great deal of that is going to be driven by the redevelopment engine of our company and as we bring on these new developments and expansions, Queens, La Cantada, Scottsdale 101 and then the Oaks a few more years out, those are going to be big drivers of growth over the next two to three, four years.

So, we appreciate your participating with us and look forward to talking to you again soon.

Thank you.

Thank you for your participation.

That does conclude this afternoon's teleconference.

You may disconnect your lines at this time and have a great day.

Thank you.