Macerich Co (MAC) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Macerich Company fourth 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 turn the floor over to your host, Georgianne Palphy of the financial relations board.

Georgianne, the floor is yours.

Thank you, good day, and thanks to all of you for joining us for Macerich fourth quarter conference call.

If you did not receive a copy of this mornings 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 detailed description of these 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 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's website under the section "What's new" and also under the section "For Our Investor's."

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

Please go ahead, sir.

Thank you Georgianne, and welcome to our fourth quarter conference call.

I'm here with Tom O'Hern and I'll be going over sales trends in our portfolio occupancy trends, leasing activity, redevelopment activity, and development activity in the portfolio as well as recent acquisitions that the company has completed and then turn it over to Tom for results of operation, balance sheet issues, and also reaffirmation of our guidance for 2004.

Sales in our portfolio held up well in the fourth quarter of 2003.

Total same center tenant sales in the fourth quarter were up 2.6% excluding our Westcor region which is not in there because it was not in for a full year before.

Our Westcor region was actually up 6.9% in the fourth quarter of 2003.

Comparable tenant sales without Westcor were up approximately 1% in the fourth quarter and comparable tenant sales, including Westcor for the company, would have been up approximately 2% for the fourth quarter.

Total mall sales per flick rolling 12 month basis were up to $361 a foot from $356 a foot the year before.

Looking at particular regions in the country on a total same center tenant sales basis in our Northern California and Pacific Northwestern region was up 4.9%.

Southern California was up 1.7%.

Our Intermountain region was down 1.3% and with Central and Eastern regions were down about 0.7%.

And again the highlights for the quarter came from the Westcor region which were up approximately 6.9% in the quarter.

With those kinds of strong sales, we've been able to maintain our occupancies at strong levels.

We finished the year out at 93.3% occupancy in our portfolio.

In looking back over the last 16 quarters of our company, our occupancy levels have ranged between 92.0% and 93.9%, so it's been a very consistent level of occupancy maintained in the portfolio affecting adversely the occupancy levels in our portfolio at the end of the year were a couple of large spaces that we got back from a grocery store, Westside Pavilion, which we are currently in the process of making a deal with Macy's to put a home store in there as well as a couple of cafeterias that we got back during the quarter.

But, overall we're very pleased with our occupancy levels as well as the sales levels and the sales trends in the portfolio.

As a result of that, we had another good quarter in leasing.

We signed 331,000 square feet of space during the quarter at average new starting rents of $38.13.

That's an 18% releasing spread over expiring leases on a comp space basis.

So, once again we maintained a very strong level of leasing in the quarter as well as for the year.

For the year, we signed leases of 1.33 million feet at average starting rents of $36.96 per square foot which was 19% over the expiring rents.

And as you look back and remember our operating results over the last many quarters, those are the types of leasing spreads that we have been able to consistently maintain within our portfolio.

Looking forward for 2004 and 5 and 6 at our expiration schedule, you'll see in our public documents and 10-K's that our expirations for 2004, for example are at roughly $29.62 a foot ranging up to approximately $30.00 to $30.50 a foot in the next three or four years.

So, once again we're coming up against leasing expiring rents that we feel very good about having positive spreads on new leasing given the strength of our occupancy levels, the strength of our properties and the strength of our sales, so we expect this trend that has been a very consistent one for us over many, many quarters to continue given the strength of our portfolio.

On the redevelopment front, we have 2004 is a very bright year for us as we begin to bring long-awaited expansion of queen center online this year.

Leasing remains very strong for the expansion and the preview of the expansion is still scheduled to take place in late March when JC Penney opens a new store and we can fully anticipate that we'll be able to reach the levels of occupancy levels that we gave to you in our guidance before which was roughly 55% of the new space that's being built will be online by May of this year with the balance of it coming online in November of the end of this year as well as into the early part of next year, so we are very, very bullish on where that stands.

We are very happy with where we stand on our ground up development projects.

In Phoenix Scottsdale 101 and in Tucson La Encantada Between these three developments we are looking at a total new investment by the company of roughly $350 million into queens La Encantada and Scottsdale 101 all of which will be coming online in phases during this year with pretty much full stabilization on that investment into 2005.

Overall new returns on costs for those three investments should easily exceed 12%.

So, as you can see that bodes very well for us as we look forward into 2005 and this year in particular is going to be a very exciting year.

Given the very expensive acquisition environment, these redevelopments and developments that we are pursuing are probably the best possible way that we can create value for the company so we are continuing to examine and work on entitlements at various properties in the company.

We are, as we announced in the last call, we are about to embark on the entitlement process on a very major expansion of the Oaks Mall in Thousand Oaks with that coming online in 2006 to 2007 we are looking at a major investment there north of $100 million and what we do not know exactly the form that the entitlements will take.

We do have a commitment from Nordstrom's to come to that center a new 144,000 square foot store so that is a great opportunity for us as we look forward.

You may have seen and there's been some writing about the fact that we are making progress on our entitlement process in Boulder, Colorado, and that is true.

We are probably three or four months away from getting final entitlements on the project we expect to be hopefully presenting this to retailers for leasing in May at the ICSC .

Our Westcor development team that is handling that and took over that development for us going back 18 months ago is doing a great job for us.

Tenant interest is very, very high.

Leave it to say that for right now we are optimistic that things are moving forward there and hopefully by the next conference call we'll be able to give more guidance in terms of levels of investment as well as incremental returns but we fully anticipate that levels of investment at Boulder will exceed $100 million of new investment and that our incremental returns on those new investments will be double digit.

We are also going through the portfolio and examining other opportunities such as Northgate Mall in Buring County as well as our newly acquired Biltmore Fashion Square in Phoenix for opportunities for significant redevelopments.

Because we think that by reinvesting in our core portfolio and taking these properties to the next level, that that's the best possible way that we can create value for our shareholders.

On the disposition front we gave guidance a year ago that we would be selling $150 million worth of assets during the year and that's exactly what we did.

On the acquisitions front, we have two recent acquisitions that have closed since we spoke with you last.

One was the Biltmore Fashion Center did close at the end of the year in December all in the terms that were previously discussed.

Biltmore, by the way, is also enjoying good sales increases that are up roughly 6% for the year so we are very, very excited about the opportunity to go ahead and to combine that with Scottsdale Fashion Square in terms of leasing and operating synergies.

We now own all of the good properties that you would want to own in the regional mall sector in the Phoenix marketplace.

We are very bullish on our portfolio that we have there as well as for the new development opportunities that we continue to work on.

Just a few days ago, we closed on the purchase of Inland Center in San Bernadino in a 50/50 joint-venture with a private investment company.

The terms of that were disclosed upon the acquisition, roughly a $63.3 million acquisition price.

Inland is doing just over $440 a square foot, it enjoyed a 10% increase in small store sales in 2003 over 2002.

It's anchored by Sears, Robinson's May, and Macy's, and Gadzooks's and between those four anchors they do roughly $130 million to $140 million of total business.

So we are very pleased to be able to make that acquisition with a new partner with Walton Street Capital Number Four.

We are very pleased to have completed that as well as our Biltmore acquisition.

The Biltmore acquisition by the way was done in joint-venture with a large institutional Pension Fund which is also our institutional partner of Scottsdale Fashion Square.

So, you can see our acquisitions remain very, very opportunistic.

We are very selective in what we buy.

Biltmore fit perfectly into our Phoenix portfolio, Inland fits very, very nice with our Southern California portfolio.

Each of them obviously have very strong sales per square foot and we are very pleased to add them to our portfolio.

During the year we also made great strides on reducing floating rate debt on our balance sheet and at this point in time I'm going to turn that over to Tom to discuss the strides we made there as well as in operations and guidance affirmation.

Thank you, Art.

In looking at the fourth quarter of '03, we're comparing that to a very highly leveraged fourth quarter of '02.

We closed on our $1.5 billion acquisition of Westcor on July 26 of '02.

And that entire acquisition or $1.4 billion of that acquisition was done using debt and about half of that was low interest rate, floating rate bridge loans.

The capital structure looks dramatically different today, because in November of 2002, approximately $420 million of that acquisition bridge financing was replaced with equity.

The impact of moving from acquisition bridge financing at approximately 4.5% interest rates to permanent equity created about a 5 cent per share increase in FFO in the fourth quarter of '02, that was entirely attributed to that higher than normal leverage level.

FFO per share diluted for the quarter was $1.04 compared to $1.05 per share for the quarter ended December 31, 2002.

And for the year FFO was $358 compared to $306 for the year ended December 31st, 2002.

That is after reflecting the recent accounting rule changes and the FFO definition changes discussed in the press release this morning.

In compliance with the Securities and Exchange Commission Regulation G relating to non-GAAP financial measures, the company has revised definition of FFO as of January 1st, 2003 and for all periods presented, to include gain on loss and sale of peripheral land.

Previously we took the conservative approach and did not include these gains, but as a result of Reg G, we are now including the gain on land sales in the FFO numbers for both years.

Also included is the impact on rental revenue resulting from the acquisition of acquired below market leases in accordance with FSAS 141.

The company also restated 2002 FFO to reflect the write-off of technology investments.

Additionally GAAP changed effective January 1st, 2003.

Previously a loss on early extinguishment of debt was considered under GAAP to be an extraordinary item.

GAAP was modified and as a result a loss on early extinguishment of debt is no longer considered extraordinary and therefore by definition is run through FFO.

The changes were outlined line-by-line on a per share basis for the quarter in both years in this morning's press release.

For the fourth quarter after reducing fourth quarter of '02 by about 5 cents for the accretion due to the higher leverage, that resulted in FFO per share diluted increasing 4% compared to the fourth quarter of last year.

For the full year 2003 compared to 2002 exclusive of FSAS 141 in the impact of the technology write-off's, the FFO per share diluted increase was about 8.3% for the year.

Some of the things adversely affecting growth year-over-year in FFO were the financings, the moving from fixed rate -- to fixed rate debt from floating debt.

Flatiron Crossing, for example on November 4 th that was refinanced ten-year fixed rate basis at 5.23% and we paid off the existing floaters were at about 3.2%.

The 200 basis point negative swing but, again an advantage for our balance sheet, was something that we committed to when we closed on Westcor acquisition.

Likewise we swapped out of $250 million of unsecured debt from floating to fixed on November 13th, and that increased our interest rate by approximately 85 basis points on that $250 million of debt.

Together these financings transactions had a negative impact on EPS and FFO of about a penny and a half per share.

During the quarter same center and a line including JV's at pro rata was up 0.5% compared to the fourth quarter of 2002.

Year-to-date same center, at a line growth, was up 2%, which was in line with our guidance.

Some of the things facts impacting that growth were straight lining the rents down slightly for the quarter at $1.6 million compared to $1.8 million in the fourth quarter of '02.

Going the other way, slight increase in lease termination revenues to $1 million in the fourth quarter of 2003 compared to $800,000 in the fourth quarter of 2002.

G&A expenses lower for the quarter primarily due to timing differences.

But, for the year if you look at G&A that was at $10.7 million, roughly 11 million compared to $7.4 million in 2002.

The increase is primarily due to director phantom stock plans, being marked-to-market to reflect the increases in share prices over the year.

Also affecting the G&A increase year-over-year is a significant increase in D&L insurance in the impact of having Westcor in the numbers for a full year.

Looking at the run rate on average for G&A and again it fluctuates quarter to quarter but on an annual basis we expect that to run $12 million next year.

Net income for the quarter, net income available to common stock holders was $25.5 million or 44 cents a share diluted, compared to net income of $33.2 million or 75 cents per share in the fourth quarter of '02.

Positively impacting net income in '02 was the gain on sale of assets primarily the Montgomery Ward site in Ventura.

Those gain on sales generated $12 million upgain and increased EPS by about 18 cents per share for the fourth quarter of last year.

There were no similar gains on sale in the fourth quarter of 2003.

Interest rates also had a bearing on the results for the quarter.

The average interest rate during the quarter was 5.7% compared to approximately 6% in the fourth quarter of 2002.

The average maturity date of the debt at year end was 4.2 years.

In this morning's press release we reaffirmed our guidance for 2004 FFO per share.

That guidance is in the range of $378 to $388 per share and there are no major changes in our assumptions there.

On October 30th, we again increased our quarterly dividend for the company to 61cents per share to shareholders of record on November 15th of '03.

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

It also marks the ninth consecutive year which we have increased the dividend.

We did increase the dividend every year since going public in March of 1994.

Based on the consensus estimates for '04 FFO debt annual has dividend yield represents a very healthy FFO payout ratio of approximately 64%.

Looking now at the balance sheet, we've made tremendous progress on our balance sheet over the course of the year specifically reducing our floating rate debt levels.

At December 31st, 2003, we have approximately $3.7 billion of debt of which 21% is floating assuming we factor in the commitment we have for fixed rate financing on Northridge Mall scheduled to close in April.

Our floating rate debt to total market capitalization is only 11%.

Our total debt to market cap is 52% and our interest coverage ratio is a very healthy 2.6 times.

Looking at the JV component the numbers I just gave you were total debt.

Included in there is prorata JV debt of $1.027 billion.

Average interest rate of 6.12% on that debt in $163 million of the joint-venture prorata debt is floating.

Some of the recent financing activities include the refinancing of Flatiron Crossing which I mentioned before.

Great financing $200 million fixed for ten years and an interest rate of 5.23%.

We also have a commitment for an $85 million fixed rate loan on Northridge.

It's a five year loan fixed at 4.63%.

This is a rate we locked about four months ago and had the luxury of locking the rate and being able to float and take advantage of the short term floating rates for six months.

That should close in April.

Additionally during the quarter in mid-November we entered into an interest rate swap agreement we are essentially fixing for two years our unsecured $250 million corporate loan.

We swapped from LIBOR to fixed rate at 1.9% for two years.

A lower cost us more today versus today's LIBOR rate it has been very effective in reducing our floating rate debt.

With these financings, we have knocked our floating rate debt down from a high of 38% at the time of the Westcor acquisition to 21% today.

With that we have taken an earnings hit but we put our balance sheet in excellent shape and we feel that we are really in position to grow going forward.

At this point, Ashley I'd like to open it up for questions.

Thank you.

The floor is now open for questions.

If you have a question, please press the number 1 followed by 4 on your touch tone phone at this time.

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

We do ask that while you pose your question that you pick up your handset for optimum sound quality.

Once again to ask a question, please press the number 1 followed by 4 on your touch tone phone at this time.

Our first question is coming from Ross Nussbaum of Smith Barney.

Please go ahead with your question.

Hi, good afternoon, guys.

Tom, a question on the expense side.

It looks like the recovery rate was down slightly from 2002 and I look at operating expenses as a percentage of minimum rents, that was up.

Can you address both of those?

Ross, the occupancy -- excuse me the recovery rate for the quarter was as wholly owns was down slightly was at 88% as a percentage of shopping center expenses down from 89%, but if you look at it for the year it was 93% versus 93% for the full year last year.

The JVs were off slightly.

The JV recovery rate was about 80% compared to 87%.

Oh, if you look at an annual basis, the recovery rate was right in line with 2002 at 85%.

So that can fluctuate a little quarter to quarter.

The big difference on JV's was we had a higher bad debt expense in the fourth quarter of 2003 than the prior year and that threw that comparison off slightly.

But year-over-year basis we're virtually exactly where we were last year.

And can you address that real estate tax situation in California and where it stands and what you expect to happen over the next year or two?

Hi, Ross, it's Art.

At this point in time, there has been a bit of a trial balloon that was floated way back when Schwarzenegger first really began running for office by Warren Buffet and that got shot down pretty fast.

Prop 13 is pretty much a part of the economic religion in California.

The business community, California Business Property association has not even begun to mobilize yet because it's still considered to be remote.

In looking at our portfolio, if you were to look at what would happen if there were a significant change in the commercial property taxation, i.e. a split tax rule.

We have presently roughly $22 million worth of real estate tax expenses in our California portfolio we took a look out at and said what would happen if you were to increase all of the properties up to market value or our assessment of what market value would be and a lot of those properties have already been brought up to market because they were either recently acquired or recently redone and the total impact per square foot on a small store tenant we felt might be approximately 50 cents to 60 cents per square foot.

So given the current occupancy levels that we have here and costs and cost of the occupancy as a percentage of sales, it's very manageable.

Most people think if a split tax were enact, what would happen would be the assessor would have the opportunity to go ahead and to take you to full evaluation basically every year as opposed to only when there is a sale of property or when there is a major renovation or expansion to a property.

It has not been mentioned yet but there would be a split millage rate and, again, at this point we view it as fairly remote.

Real estate taxes as a percentage of sales for our tenants in California are extremely low compared to other parts of the country and we just don't see our exposure as being even as having any exposure to speak of at all.

If it does appear that the split tax role is going to be pursued heavily, then the real estate community in the business property community is going to mobilize very fast here in California and I just don't see it happening.

Okay that's helpful, thanks.

Two final cleanup questions.

One, is Westcor in the same store numbers?

Westcor is in the same store numbers for the fourth quarter but not for the year.

Okay and what was the occupancy cost for the full year?

We don't have that number final, Ross, for the year yet.

It's not going to change dramatically.

We closed last year at 12.1% and we're going to be in the ballpark in that this year.

Thank you.

Thank you.

Our next question is coming from Matthew Ostrower from Morgan Stanley.

Please go ahead with your question.

Good afternoon.

Just on same store NOI, Tom, I think last quarter it was a somewhat lower number also.

The growth rate was 0.9%, I think, and you attributed that last quarter mainly to burnoff of straight line.

It looks like that burnoff isn't as material this quarter.

Is it being caused just by the vacancies that Art mentioned, the cafeteria and the grocery store?

And you may have articulated this before but could you, just given in light of the number of bankruptcies that we've seen in the tenants from all tenants, what are you expecting for '04?

Okay, Matt.

Yes, there was a decline in the third quarter in terms of same center NOI.

We averaged 2% for the year.

I believe we are at 0.9% or 1% in the third quarter and then down again this quarter and a lot of that was driven by the occupancy losses.

Again we're at 93.3% so that's still extremely good but it's down from 93.9%, and that was a big driver for the decline in the reduction in same center NOI growth.

Bankruptcy did have some impact on that.

We had bad debt expense for the year of about $3.5 million.

That was up from $1.7 (million) in 2002 and in terms of our guidance for 2004, bad debt expense and bankruptcies are a little tough to predict, because even when they go bankrupt, they don't necessarily go out.

We don't necessarily lose money, but we've also factored in about $4 million of bad debt expense in our '04 guidance.

So we've tried to consider it based on historical levels, but, again that's just an estimate.

And so just in general for '04, assume 2% or 3% NOI increases.

Yes, we reaffirmed our guidance, and in the guidance we gave 2.5% to 3% same center NOI growth and at this point in time we see no reason to change that.

Okay, great.

And then just on your -- the Cap Ex numbers, the tenant allowance deferred leasing, looks like the combined number went up a bit, sequentially.

Am I looking at that right and if so what caused a $4 million, I think, sequential uptick?

It's not unusual to have a large percentage of the annual tenant allowances paid in the fourth quarter because typically tenants sign leases in the middle of the year and then they race to get open by Thanksgiving and that's when we typically pay the tenant allowances when they open for business.

So, it's not unusual to have it in the fourth quarter.

If I look at those two line items and we break out the detail in the press release if you combined tenant allowance and deferred leasing costs, in total for last year, we were at $32 million.

Total for this year $30.5 million, so, fairly consistent there.

And again we tend to be fairly stingy with the tenant allowances and we do it on an exception basis rather than in each instance.

So, I think those numbers are fairly realistic and fairly consistent between '02 and '03.

Okay, great.

Thank's very much.

Thank you.

Our next question is coming from Lou Taylor from Deutsche Banc.

Please go ahead with your question.

Thanks, good morning, guys.

Congrats on the quarter and the year.

Tom, Art, can you talk about your leasing spreads during the quarter and whether there was any geographic strength in one area or weakness in an area.

I think that the -- we don't have those numbers, I don't think, in front of us, do we, Tom, as far as leasing spreads by geography?

No, we don't look at it that way.

Intuitively I can tell you that generally the inner mountain region and the eastern region would probably drag some of those spreads down a little bit, but the reality is it's kind of large numbers and our spreads have just historically for many, many, many quarters now been 18%, 19%, 20% and that's really been across the board.

Some of the bright spots when you see sales really on fire in certain markets like Northern California and the Pacific Northwest, you tend to see very strong leasing increases there also, so at Fresno and Modesto, which we included in the northern California area, where sales have been very strong lately, with each of those centers approaching $450 a square foot from like the mid-$250s when we bought them four or five years ago, our leasing spreads have been very, very strong in markets like that as well as Phoenix itself.

We are beginning to picking up very good spreads there also on a relative basis versus the rest of the portfolio.

Okay, the second question pertains to Inland.

Let me just confirm, the purchase price gross was $63 million?

Is that correct, Tom?

Yes, Lou.

Okay, and what do you have for rehab renovation valued plans there?

The center has been operated by a non-owner manager for quite some period of time.

We think that current occupancy levels that are around 81% or 82% and there's been good sales increases at the center with sales now at $440 a square foot.

So, from our viewpoint, it's really just a situation of picking up the occupancy levels.

Going in cap rate on that deal is 8.5% so obviously going in day one given the financing that was put on it at $44 million at 4.63% and the going in return, is very accretive, but the real pickup there is going to be increasing the occupancy levels up from the 81% or 82% that is there today up to something in the lower 90%.

Okay, is there much incremental fees other than in your normal management leasing there?

Just normal management leasing but we do not expect any significant renovation capital to be spent there.

Lou, to elaborate a little further, occupancy cost as a percentage of sales are only 10.8%.

So for a mall doing that kind of sales level per foot, that's a very low occupancy level and we estimate market rents are substantially above in place for us at least in line with what we've been seeing if not higher.

Okay, last question pertains to just the Westcor portfolio and future developments.

Do you see any large mall starts in either '04 or '05?

Not '04 but clearly there are plans that are being drawn right now and that are being circulated, meetings that are being had with department stores as we speak.

So clearly it's at the proper place that the conversations need to be in order for something to be coming online in '07, '08.

There's a significant amount of power center development that we're pursuing in our Gilbert property which is southeast of Chandler and so that's happening as we speak with the big boxes Wal-Mart, Sams, and Target and things of that nature getting ready to go under construction.

But again, on the mall side, conversations are being had as we speak with the department stores beginning to identify where the next major mall should be.

Ground would not be broken on the mall itself this year but certainly peripheral development at Gilbert, for example, is occurring as we speak and that's the normal course of the way that Westcor has developed in the market is to do the power centers and peripheral development first.

Carve out the hole in the middle for the mall and then do the mall.

We're also at significant activity up in North Scottsdale, obviously with our power center at 650,000-foot center being built there and again conversations are taking place with the anchors at that site and frankly at many other sites in the marketplace for either mall, land or lifestyle, or power center developments in the trader.

Great, thank you.

Thanks, Lou.

Thank you.

Our next question is coming from Alexander Goldfarb from Lehman Brothers.

Please go ahead with your question.

Good afternoon.

First, just some accounting.

In one of the footnotes, there was a mention of a $9.5 million adjustment of depreciation.

If you can just walk us through, is that sort of neutral in its impact or did that have some FFO benefit?

No, that's all related to FSAS 141.

The methodology for calculating the allocation of purchase price on acquisitions as defined by FSAS 141 has been evolving.

We updated our FSAS 141calculation to factor in this new methodology and that's from in input on that methodology from the big four accounting firms and they read and as a result it changed the allocation of purchase price moving some of the purchase price from the building categories which had a 40-year life into shorter life categories such as tenant improvement, lease commissions, the value of in place leases, et cetera.

As a result there was a catch-up depreciation entry in the quarter which was that $9.5 million.

That does not have a bearing on FFO.

There was a slight adjustment to the revenue aspect of the FSAS 141 calculation which relates to in place rents below market which is amortized into revenue over the course of those leases.

And that increased by about a penny and a half a share during the fourth quarter.

So if you look at the break down we have on the press release, you'll see that we had 3 cents a share in the fourth quarter of FSAS 141 and about a penny of that was a onetime adjustment.

Okay.

So then going to the 3 cents, with the recent acquisitions do you expect that number to be more in the first quarter or what do you expect for the FSAS 141?

I would expect 141 to run about a penny and a half to 2 cents a share per quarter going forward.

Okay.

If you can just go over the economics of the Inland Center.

It looks to be 82 cap which seems to be attractive in the current environment.

Hi, Alexander, this is Art.

The cap rate is actually about 8.5 going in.

It is an attractive cap rate.

We do anticipate very strong growth in the NOI at that center.

We've got net operating income today generating that kind of return and we frankly see 5% to 10% NOI growth coming out of that property over the next 2-3 years as we take occupancy levels from around 81% to 82% today to something more comparable to our 93% or so percent average.

From the viewpoint of the cap rate, I'm agnostic on that.

It is what it is, it may have slipped under the radar screen with certain other players, but, we are happy with it.

It's obviously very accretive to us even for a very small investment going into it but it's a very nice property to add to our portfolio, the sales at $440.

At Sears there is a ton of business, well over $50 million.

May company does well over $30 million so I mean we're very happy to add that and we're very happy with our association with Welton Street on that aspect.

Okay.

So, if I heard you correctly the occupancy it's currently 81%?

Approximately, yes.

And you want to get it up to 93%?

Yes.

And this is your first Welton.

Well we want to get it up to 100%.

Obviously.

Just taking it up to our average we'll represent significant increases in NOI.

Okay, so it sounds like this wasn't a widely shopped deal.

Well, it was marketed but you know, you didn't see as many of the normal cast of characters as you would see in some of the more high profile deals.

Probably did not have a high profile -- probably because of the size.

Not being able to spend $500 million on asset maybe didn't catch somebody's attention.

Okay and final question on Crossroads, I know that you sort of hinted at a preliminary cost, is this a project that you would do wholly or would this be a JV?

No, this will be a wholly-owned project.

And we'll definitely be in a position to get more enlightenment on the cost and returns over the coming months depending on the final entitlements, but it's going to be quite significant.

We're looking at demolishing everything but the Foley's building there and then rebuilding approximately 900,000 feet of space back on the site.

And receiving great interest from retailers, theaters, restaurants and shops.

We're very, very excited about where we're headed on that front.

And the revenue part of that, would that be private developer or another REIT.

Right now we're looking to just getting the entitlement and that would definitely be a phase down the road.

Thank you.

Thank you.

Our next question comes from David Roncoe from RBC.

Please go ahead with your question.

Yeah, hi Dave Roncoe here with Jay Loop.

Wanted to ask you, Tom, I know you mentioned the total development pipeline is $350 million.

Wondering if you could give me a cost break down between Queens, Scottsdale 101, and La Encantada.

The Queens project is budgeted $275 million, although we are getting strong indications we may come in significantly underbudget on that one.

Then the other two projects are, one is a joint-venture, Scottsdale 101 is a joint-venture and our incremental cost on that is about $26 million.

La Encantada is wholly owned and our share of the cost on that since acquiring that as of since when we bought Westcor is about $53 million.

Okay.

And then as a follow up to that question, I know you mentioned a blended average return of 12%.

Is it pretty much 12% across the board or is the Queens return that much more attractive?

No, actually historically we have been given guidance to Queens targeted returns there are 11% and the targeted incremental returns on Scottsdale 101 and La Encantada are 15% on our new cash, so we feel very comfortable at this point in time that that $350 million investment will deliver in excess of a 12% weighted average return to us in '05 as it comes online in '04.

We are actually cautiously optimistic that our '05 numbers from Queens are actually going to exceed 11% but we're not prepared to put that number out there yet.

Okay, great.

I know you guys haven't changed your guidance in this regard, but can you go over what your 2004 disposition assumption is?

In our guidance we're at a net zero in terms of dispositions and acquisitions.

In fact I do anticipate there will be dispositions and I do anticipate there will be acquisitions certainly to the extent that we find attractive acquisitions it would accelerate the disposition of some non-core assets but at the end of the day for guidance purposes, we're making the assumption that there'll either be no dispositions and no acquisitions or a lack amount of each.

My prognosis is that there will definitely be some dispositions and some acquisitions but you should assume they are neutral in terms of dollars.

Okay in terms of the cap rate spread on those acquisitions and dispositions, ideally what would you guys want to achieve there.

Well, we'd like to sell at low cap rates and --

That's the game plan.

Actually for some of the access that we're looking at selling at, it's actually possible to do better in terms of some of the dispositions than even the acquisitions because some of these single tenant net lease properties that we own and ground leases in Phoenix but we're going to expose to the market, some of the interest levels are sub7 in terms of cap rates.

So, certainly from the viewpoint of recycling money from one type of an asset into more of a core asset, I think we're in a great market to be pruning and tuning in that regard.

Great.

And then final question, you know, your thoughts with regard to more refinancing activity in 2004 and then kind of as a follow-up to that, you know, balance sheet flexibility in terms of additional acquisitions without dispositions at this point?

Well, at this point, we have a number of things lined up.

We have just an encumbered Salisbury Mall, Green Tree Mall, and Crossroads Mall, so they are all candidates for properties, specific mortgages.

The Northridge financing will happen in April and then it will go to pay down our line of credit.

So, with just a couple of financings, we could end up with, you know, available capacity on our line of credit of $300 million or $400 million or so.

We've got a lot of capacity on the balance sheet we don't a lot of near term maturities coming and the reality is our balance sheet is probably in the best shape it's been in many, many years.

Great thanks.

Thank you.

Our next question is from Andrew Rosivach of Piper Jaffray.

Please go ahead with your question.

Hi, good morning, guys.

I just want to make sure when I'm running the model I got this right, when your were quoting spreads in same store especially in light of FSAS 141, are those numbers cash or GAAP?

Those numbers are cash.

There's no 141 in there and there is no straight lining the rents.

The spread is expiring rent on the old lease, which is it's highest cash level, which is higher than the straight line level, compared to the starting cash on the new deal.

Got it.

And that implies, since I'm guessing, some of the leases have gotten increased because of FSAS 141 that the GAAP same store might be a little bit lower than that?

Yes, it would be.

It would be lower if there's any straight line component in that expiring lease at all, the straight lined rent would be lower than the rent at expiration.

So if we did the spread on a GAAP basis, it would be substantially higher than the 19%, you know, we saw for 2003.

Okay.

And then just a couple more questions on the balance sheet, Tom.

I know you've already turned out a lot.

Are you attempted just because the old curve is so darn flat to maybe even do some more, like take out those two year notes even further?

Just opportunisticly, a lot of other rates have been heading in that direction.

Well, I mean, we've been pretty active, as you know, over the last year in moving from floating to fixed and we are opportunistic.

We kind of created this structure where we'll go in and lock a rate today and we won't actually fund the deal for six, seven, eight months.

So, to the extent we can be opportunistic, we certainly will and we have been over the last year or so.

So, no promises there.

We did get our floating rate debt down to the, exactly the level we said we would when we bought Westcor.

But, if we see some good opportunities, we're going to take advantage of it.

Got you.

And three house keeping questions if you've got them around, Tom.

If you happen to know what for the quarter capped interest was.

If you do have any loan premium amortization, I don't know if that's running through your numbers and if so, how big it was, and also what the loan fee amortization was and interest expense for the quarter.

Okay, in terms of amortization of premium, there is really very little of that, it's immaterial.

The capitalized interest for the quarter, including joint-ventures, capped interest was about $3.7 million for the fourth quarter.

And, I'm sorry, Andrew, the other two components of your question?

Oh, just what was the loan fee amortization that would be running through your interest expense?

I do not have that readily available.

That's fine.

I'm just trying to cheat ahead of the 10-K.

Thanks guys.

And I'm sorry you had one other question, interest expense or?

No, it was just three.

Those were the three.

Thanks, guys.

Thank you.

Our next question is coming from Michael Mueller of JP Morgan.

Please go ahead with your question.

Thanks, hi guys.

You mentioned single tenant buildings in Phoenix, I was wondering if you could just give us a ballpark dollar value?

The things that have been identified that are really ground leases and tenant, triple net tenant type of leases range total dollar value of somewhere between $50 million to $75 million that would be candidates for disposition along those lines.

Okay.

And going back to Inland one more time, I know you mentioned it's third-party managed but looking at the sales of over $440 a foot, is there anything else specific as to why occupancy was down to the very low 80s?

From my viewpoints, no.

We clearly believe that occupancy should be in the 90s and we intend to get it there.

Okay.

And last question for Tom, just if you're looking at land sale income for '04, what is baked into guidance already?

Mike, that's a tough one to predict.

If you look at our results for the full year '02 and '03, we had 2 cents in '03, we had 4 cents in '02.

We do have land parcels that -- it's possible that could sell in '04 so in our guidance on the low end, 2 cents on the high end, 4 cents and that's based on history more than anything, Mike.

Okay, thanks.

Thank you, our next question is coming from Robert Belzer of Prudential.

Please go ahead with your question.

Hello, yes.

I have a few questions today.

First, can you detail a little bit what you may be expecting as far as store closings from Gadzooks and Kaybee?

Yes, in terms of Kaybee , Robert, we have 30 stores.

Initial indications are that they will be closing 19 of those.

From our standpoint, they are generally pretty well located and don't pay a lot of rent per foot, so we think they should be relatively easy to replace.

They've got 11 stores that they're going to -- try to continue to operate.

So that's 19 stores, that's about 68,000 square feet that we think we may be getting back.

And what would the gross rent be of those stores closing?

The minimum rent, pro rata share of minimum rent is about $1.1 million.

Okay.

And then in terms of Gadzooks's, they generally got excellent locations within the mall, we have 13 Gadzooks's, 33,000 square feet of rentable area.

In total they are paying about $700,000 of rent, that's our pro rata share.

Again, we think they'll be fairly easy to replace should we get those back.

Have they indicated what number of stores they may be closing at this point?

Not at this point.

I mean, we're negotiating with them but at this point, you know, we're not sure how many.

We are prepared to get them all back, if need be.

Yeah, but corporately they're talking about closing initially over the first six months 20% to 25% of their total stores.

And how do you anticipate this will affect your occupancy this year?

Well, it may impact during the quarters, but given the timing of what we are looking at here, we would expect to be able to release that space by year end.

So you expect occupancy to be relatively the same by the end of the year?

Yes, in our guidance for '04, we had stable occupancy and we don't see anything here that's going to change our view of that.

In my opening remarks, you may remember over the last 16 quarters, our absolute low point corporately is 92.0% and our high point is 93.9% and today we're at 93.3%.

So, and we've been in a fairly tight range in terms of occupancy levels.

And secondly while Gadzooks's and Kaybee are taking up some attention, because we have had a couple of years where we have not had, say high profile specialty tenant bankruptcies.

In any given year we get back that kind of square footage unexpected at all times and certainly nothing that is unmanageable here whatsoever.

Something that's very manageable.

The real estate is generally well located and the rent should be easy to replicate.

Okay, moving on leasing spreads your releasing at $38 a foot, and your rollovers this year are $30.

I'm calculating, you know, if you continue to lease at $30, that's a 30% spread?

Could something affect that otherwise?

Well, for the year our total new rents for 2003 were just under $37 a square foot.

Given the fact that the expiring rents and the new rents come in different locations throughout the country, it's hard to be specific by quarter, but if you look at our track record for the fourth quarter of '03, we had an 18% spread for the year.

We had a 19% spread and we had similar results from the last 3 or 4 years and we anticipate that we're going to be able to continue to put up strong releasing spreads against relatively mediocre rents that are on the expiring side.

Okay.

And moving on to your investment, when you, you know, detail that you'll be selling stuff and obviously reinvesting, are you anticipating recycling, capital recycling plan for the year with no incremental net increase in investment or do you anticipate, you know, possibly some net increase here?

Our guidance has no incremental increase in acquisitions.

I'm speaking outside of your guidance, Art.

At this point in time I'm neutral because the acquisition side is very, very tough these days.

So, I am neutral to that.

If we're fortunate enough to be able to find some attractive acquisition opportunities, that's going to trigger some disposition activities.

Okay.

Just one house keeping item, on the $9.5 million and depreciation catch-up.

How much of that is one time in nature?

The entire $9.5 (million) is one time.

Okay, great.

Excuse me, $85 (million) of it is one-time.

Okay.

Great, that's all my questions today, thanks.

Thank you.

Our next question is coming from David Schullman of Lehman Brothers.

Please go ahead with your question.

Good morning, guys.

Art, this is for you.

Again on the Inland deal, did you find the deal and bring in Walton, did Walton find the deal and bring you guys in, or did you go in together?

We were competitors.

We bid on the deal, they bid on the deal, we bid on it separately from them, completely separately from them.

They were awarded the deal, after they were awarded the deal we had pre-existing conversations about other situations and we continued those ongoing conversations and I think each of us suggested the other that maybe it might make sense for us to do something to own that jointly since they do need an operator in anything they buy anyway and so we both agreed that it made sense to buy it in a 50/50 joint-venture.

It's 50/50 straight up JV aside from your management leasing, right?

Exactly.

Okay, thank you.

Thank you.

As a reminder, if you do have a question or a comment, please press the number 1 followed by 4 on your phone at this time.

Our next question is coming from Rich Moore from McDonald Investment.

Please go ahead with your question.

Hi, guys.

Just taking a look again real quick at bankruptcies.

I know you can't obviously predict 2004, but how would you characterize this being bankruptcy season the outlook for bankruptcies, I mean, compared to last year, let's say?

First of all, the bankruptcies that happened we all knew were coming.

Kaybee Toys for example has been on life support for quite some time, so, no surprise there.

At this point in time, usually you would have already had the announcement by now so we seem to be generally at this point in the year when you get past January, you are generally past the bankruptcy announcement phase.

I think that there's some concern amongst some of the shoe retailers that there's something could happen there, but I think in general history would tell you that by the month of February you're pretty much past the bankruptcy announcement season.

Okay, so would you say, Art, that this year is lighter than last year?

Pretty flat.

Pretty flat, okay.

And then looking at retailer outlook in general, I mean, what are you hearing from the retailers?

How would you characterize their store opening situation and their general condition?

Given the fact that there's really no new quality supply coming online and the fact that a lot of these successful retailers are constantly coming up with new retail concepts, demand is good and that's, I think, obviously what's driving us being able to keep our occupancy levels up as well as keeping our leasing spreads high.

Okay.

And specifically in Phoenix, what do you guys think is going on there?

You mentioned that sales are good, lease spreads are good, I mean why is Phoenix doing so well, do you think?

Well, first of all, you've got 10,000 people from California moving there every month so that doesn't hurt them.

Right, right.

Secondly, you got, you know it is the fastest growing large city in the U.S.

And thirdly, you've got a tremendous number of new hotel rooms have been added to the market in the last year or so.

I think it's something like 3,000 or 4,000 rooms have been added and tourism is coming back. 2001, 9/11 obviously had a major impact on any market that was tourist-driven and we felt that all the way through 2002.

And I think by 2003, people, the tourist market began to pick back up in Phoenix.

I think it's the combination of local economy continuing to grow as well as tourism coming back.

Okay.

Great.

And then when does Westside Pavilion, when does that actually, the renovation actually begin there?

The redo of Westside Two which is what we're replacing and moving over that large independent art film theater landmark will happen next year.

We're also working on a home store deal with Macy's that would happen conceivably as early as fall of this year.

Okay, great, and last thing.

Tom, when do you anticipate putting out the 10-K?

It'll probably be two to three weeks, Rich.

Okay, great.

Thanks, guys.

Ladies and gentlemen, there appear to be no further questions in the queue at this time.

I'd like to turn the floor back over to the presenter for any closing remarks.

Okay well thank you again for joining us.

We are very, very proud of our results for the year.

We are very optimistic about 2004, 2005, 2006 given the strength of our expansion and new development and redevelopment program.

We've got great growth here that we're going to be able to put up without doing any new acquisitions, any new acquisitions would simply be a plus and on that side I think you can see we've been very, very disciplined and have been extremely opportunistic in the acquisition activity that we have engaged in.

And we look forward to discussing our prospects with you in the next couple of months and inviting you to see our preview of our opening of our Queens expansion in late March early April.

So, thank you very much and look forward to talking to you again soon.

Thank you.

That does conclude today's teleconference.

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