Macerich Co (MAC) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Macerich first 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 today's presentation.

It's now my pleasure to turn the floor over to your host, Georganne Palffy.

Ma'am, the floor is yours.

Thank you, and thanks to all of you for joining us for the Macerich first quarter conference call.

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

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 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 the SEC 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 home page under the section "Recent news."

And having said all of that I would now like to introduce Mr. Art Coppola, Chief Executive Officer and President; and Mr. Tom O'Hern, Chief Financial Officer, and with that turn the call over to Art for his opening remarks.

Please go ahead, sir.

Thank You, Georganne.

We want to welcome you to this call.

As we have this call we are marking just recently the 10th anniversary of our going public.

I can't help but remember that just prior to the time that went public, one of our long-term insurance company partners expressed a concern that going forward our company would be driven by short-term quarterly earnings results, and that we would lose our long-term vision.

In fact, just the opposite has occurred.

Over the past ten years I think that our maintenance of our long-term view of our business and our view for doing the right thing for our real estate and our tenants over the long term while letting short-term earnings take care of themselves has shown the success and the vision of that vision.

Our quarterly earnings have shown consistent growth over the past 40 quarters since we've been public.

And Tom will be looking to get into some of the specifics of our results over the past ten years in his portion of the commentary.

We had a very strong quarter.

More importantly we have a very strong outlook for the future.

In this section I'll be reviewing sales results, occupancy trends, acquisitions, what's going on with Mervyn's, Dayton Hudson corporation, and more importantly our redevelopment activities and our new development activities.

Sales in the first quarter were extremely strong.

Total tenant sales in our portfolio were up 7.9%.

That was led by southern California being up 9.5%, northern California was up 10.3%.

Our pacific northwest region was up 14.1%.

The inter-mountain region was up 9.2%.

Our central and eastern regions were up about 1%, and our Phoenix and Arizona region was up 10%.

That's on a total center sales basis.

So that's a terrific result.

On a comparable tenant sales basis we're up 6.8%.

So we are for the first time ourselves, as well as our mall companies, beginning to see significant traction in the area of tenant sales.

Early results on April appear to be very good, so we're very optimistic about the future for our retail tenant outlook.

Our rolling 12-month sales figures have been approximately $368 a square foot compared to $361 a square foot that was in place as of 12/31/2003.

Occupancy levels at the end March 31, 2004, were at 91.8%.

That's down a little bit from last year, primarily driven by some tenant bankruptcies that Tom will address, particularly some of the turnover that we experienced with KB Toys.

But our outlook for our occupancies remain strong.

In our last call I believe we talked about our occupancy levels on a quarter-by-quarter basis over the last 40 quarters, and, again, we've had a range of 91% to 93.5% over the past 40 quarters and we anticipate staying within that range as we go forward and we see a very strong outlook for our occupancy levels.

The combination of strong sales in our portfolio, strong sales trends, and strong occupancies have led to very good leasing activity.

During the quarter we had 459,000 square feet of space signed with average new starting rents at $37.77 per square foot.

When we ex exclude new development properties from that number, we have comparable average new starting rents of 34.39 per square foot.

Average expiring rents during the first quarter were $28.66 a square foot.

So we saw approximately a 20% spread on new leasing on comp tenant basis.

Average rents per square foot in place in the entire portfolio at this point in time are $32.19 a square foot, so we continue to see strong leasing spreads.

Turning to acquisitions, during the quarter we closed on the acquisition of Inland Center, which is approximately a million-square-foot four-anchor mall located in San Bernardino.

It was purchased at a total price of $64 million.

The loan in place was 54 million at 4.64% this is a great center in the Inland Empire.

Occupancy levels are only at 82%.

We're already going to work on improving those occupancy levels.

Sales are at approximately $450 a square foot.

Sales in the first quarter at Inland Center were up 12.7%.

All of the Inland Empire, Riverside County, San Bernardino County, are experiencing extremely strong sales trends.

This property was bought at a very attractive going in NOI return to our position which was approximately 8.5%.

It was purchased in a 50/50 joint venture with our partner.

Going forward we are focused on the Inland Empire as an opportunity for future acquisitions for us, and we do anticipate that we will have more activity in that region as time goes on, as well as we anticipate that we will have more activity in the west and in particular in California as this year goes on.

One of the major new announcements that took place during the course of this quarter was the fact that Dayton Hudson was going to be disposing of potentially Marshal Fields as well as Mervyn's.

We have two Marshal Fields in our portfolio, one in Sioux Falls, South Dakota, one in Fargo, North Dakota, and we anticipate they will each be replaced by one of the department store operators that will most likely end one Marshal Fields.

In looking at Mervyn's, we see this as a very significant opportunity for us.

We have 18 Mervyn's stores in our portfolio.

That's a very significant number for Macerich as compared to other mall companies.

I believe only one other mall company has more Mervyn's stores than we do.

That's a function of our presence in the west, in California in particular, which is where Mervyn's started.

Of those 18 stores, we have approximately 1.6 million square feet of minimum rent is being generated from those stores and approximately $278,000 of percentage rent is being generated from those stores, so we don't get a lot of rent from those stores, they're all basically fee-simple or ground leases and don't generate a lot of rent.

We've gone through and identified opportunities should we be able to recapture those stores and have identified either one or two new anchors or uses for each and every one of those stores that we think would be a significant improvement over what we have today.

We're very proactively working on those opportunities and on identifying replacements for Mervyn's should we be fortunate enough to recapture that space.

In our last conference call, I believe on Q and A, we were asked a question about Mervyn's and we stated at that time that we'd be happy to take back every one of them, and at this point in time that remains our feeling 100%.

Looking to redevelopment and development, the big story for us right now is in the redevelopment sector with the opening of the first phase of Queen Center.

We'd announced guidance earlier that we anticipated Queens would be open in May.

We were able this year to get a vast majority of our 176,000 square feet in Phase I is going to be leased during the the end of the first quarter, with the opening on March 26th of this year, 55% of the Phase I space is opened, which we're approximately two months ahead of schedule.

We see balance of the Phase I space opening here in the second and third quarter.

Again, significantly ahead of schedule.

J.C.

Penney has opened their new store.

All indication are that it's a huge winner for J.C. Penney.

They've already said to us that it's quite possible that this will be the highest volume J.C.

Penney in the entire continental United States.

So, we're very, very happy with the fact that Queens Center is definitely ahead of schedule.

Our rents are above pro forma, our cost is below pro forma.

Going way back when, we announced that we anticipated an 11% return on a $275 million cost.

We are currently anticipated that our return on our cost is going to come in around 12%, and we're talking about at the end of this year upon completion.

We're not talking about three or four years from now at some supposed stabilization date.

This is a center that's opening up really ahead of time, and above budget on income, below budget on cost, and the early results are just fabulous in terms of shopper traffic, our parking garage income is more than double what it was last year at this time.

And the tenants are just elated.

Other development projects that are underway right now include Scottsdale 101, the power center at the we're building in north Phoenix.

Demand there remains -- it's extremely strong, and that is coming along very, very well.

La Encantada in Tucson continues to perform well.

We're continuing to open that up in phases, which is normal for a high-end lifestyle type of center.

As we announced last quarter our entitlements on the expansion of Thousand Oaks continues well.

We anticipate that this expansion with the addition of Nordstrom and the possibility of an additional specialty anchor will open up in 2007 and 2008, tenant demand has been extremely strong for this center and we see this as being one of our next great projects.

Our Boulder project continues to make significant progress.

We have renamed that project 29th Street.

If you'd like more information on that project it is actually on our website, the Macerich website, or you can go directly to www.twentyninthstreet.com.

Again, we anticipate getting our final entitlements of this project this summer.

We're going to be essentially -- we're completely recycling 850,000 square feet of retail space into a combination of retail, office, and potentially residential.

We are purposely not coming out with our guesstimated total cost and our guesstimated total returns until we get our full entitlement from the city of Boulder.

Once we have that full entitlement, which we are hopeful of getting this summer, then we'll be in a position to come out and to talk more specifically about those returns later this fall, probably in August.

The project is clearly more than $100 million project.

We've always stated that in project of this nature, we anticipate and we have a hurdle rate of double-digit returns, meaning 11 to 12%, and we do anticipate that we'll be able to accomplish those kinds of returns on this project.

So we see this as being a fabulous project and a great complement to our Broomfield FlatIrons Crossing project, which is just ten miles south of this.

We have an exciting development that is opening up next week at out Valley View center in Dallas.

We have an AMC theater that is opening up on a newly created third level of the center above the food court.

It's a 3300-seat theater, 16 screens, 74,000 square feet.

AMC is projecting that this could be the number one theater in the Dallas Fort Worth metroplex.

They are anticipating that they are going to generate approximately 1.6 million new theater goers per year to this new theater that's being opened next week, so we see that as a great traffic generator for Valley View.

Valley View, as you know, is in the north Dallas marketplace which is significantly overretailed, but in spite of that Valley View enjoyed almost a 6% total sales increase in the first quarter.

We anticipate that the addition of this theater is going to really ignite our sales and our leasing at Valley View, and are extremely optimistic about the results of that.

Our big story at this point in time is in the development area.

When we bought the West Core Company two years ago, we talked about projects that were in our development pipeline.

We talked about three projects.

One was Gilbert in southeast Phoenix, one was Goodyear in the West Valley, and one was Paradise Ridge in north Scottsdale.

Last week we had a media day with media in the Phoenix marketplace and our West Core subsidiary.

Rolled out an additional two projects.

One is Cactus Lean Ranch in the West Valley, and another is North Black Canyon in north Phoenix.

We now have projects that are part of our Phoenix 20/20 vision.

We've labeled our development activities in Phoenix 20/20, and that means that we have a clear vision for what's going to happen in the development world of Phoenix in the year 2020.

Again, as we indicated two years ago and today, the population of Phoenix is going to double from 3 million people to 6 million people by the year 2020.

We intend to take advantage of that population growth and to plant our flag in the path of development and to make sure that we are the ones that are able to mine that growth.

Our Gilbert property in southeastern Phoenix is already under construction with a half a million square feet power center.

Sam's, Wal-Mart are already beginning to take space and have taken down land.

We're going to be building in total a half a million square feet that will be opening up later next year.

The total project cost on that, it'll be a power center which is normal for us on these large projects to build the power center first, will be in the low 30 millions with anticipated returns of 11 to 12%, and we own approximately 50% of that project with the landowner being our partner.

On the regional mall pipeline front in Phoenix marketplace, in our media day we announced that we felt Gilbert and Goodyear would be the next two malls that would be built in Phoenix.

We announced that we felt the construction at those projects would commence in the years 2006 and 2007.

We have significant department store interest, mall store interest, specialty store interest, and mixed use interest for each of these products.

Our gut feeling at this point would indicate that Gilbert will break ground on the regional site first, probably in the year 2006, with Goodyear following in 2007.

These are very large, underserved marketplaces with the Gilbert trade area being almost 900,000 people.

We're very happy to be able to announce these project moving forward.

We're not at this point in time picking a particular break-ground date on either project, but we are unveiling the fact that our development plans for these project are definitely moving up ahead of anticipated schedule.

We bought West Core in 2002, we talked about the three projects of Gilbert, Goodyear, and Paradise Ridge, which is north Scottsdale, being built in the long term horizon of five to ten years.

We're now talking about breaking ground on Gilbert, roughly four years after the Phoenix West Core acquisition, and Goodyear roughly five years.

So this is reflective of tenant demand.

Tenant demand is what is driving us to go ahead and move forward with these projects.

We are also very bullish on the fact of being able to begin to get our arms around two new major retail developments in the Phoenix marketplace, namely being the North Black Canyon in northern Phoenix, and the Cactus Lane Ranch in the West Valley geography.

So we're very bullish on our redevelopment opportunities.

They're going to be driving our growth, namely Queens, and the Oaks, and Boulder, and Valley View over the next two to three years.

As we look further down the line we're looking at new development opportunities with Gilbert and Goodyear breaking ground roughly two to three years from now, and other redevelopment opportunities that we intend to mine within our existing portfolio.

So with that, I would like to turn it over to Tom to talk about our operations and financial results.

Thank you, Art.

For the quarter, FFO per share diluted was 90 cents, that was 7% increase compared to 84 cents per share for the quarter ended March 31st of 2003.

EPS diluted was 31 cents a share for the quarter, and that compared to 37 cents for the first quarter of 2003.

The primary reason for the decrease in EPS was the increased depreciation expense related to SFAS 141 business combinations relating to acquisitions that have been done recently.

Looking at some of the components that are in that FFO number, included in FFO for the first quarter '04 was 2.5 cents relating to SFAS 141, that compared with 1.5 cents in the first quarter last year.

Also included in FFO for the first quarter of this year was two cents from the gain on sale of peripheral land, and that compared to a penny last year, so a penny differential both in SFAS 141 as well as gain on sale of peripheral land.

During the quarter same center NOI including JV's at pro rata was up 1.7% compared to first quarter of last year.

That's also up from a 0.5% growth rate in the fourth quarter.

There was about a $500,000 decrease in straight lining of rents for the quarter, at 600,000 compared to 1.1 million for first quarter of 2003.

Lease termination revenues were virtually flat at a year ago at 900,000.

Strong quarter for specialty tenant leasing which grew at a 36% rate, compared to last year.

Also included in our growth for the quarter were CPI increases of approximately 580,000 greater than the first quarter of 2003.

At this point about 30% of our leases now contain CPI provisions, and approximately 90 to 95% of all the new lease signings contain CPI rent bumps rather than fixed rent increases.

So this benefits us in two ways.

Number one, if and when we get inflation, the CPI increase will help provide a hedge, and secondly, subject to certain restrictions with CPI increases, it does it not require straight lining of rent.

So with that most of the leases we're signing will show rent growth throughout the entire term of the lease rather than a straight line effect.

As Art indicated, occupancy was down a little bit this quarter, and in terms of the P and L effect, if you look at it on a same-center basis excluding acquisitions, which pull the occupancy number down a little bit, the occupance level at March 31, on a same center basis, was 92%, and that compared to 92.4% at March 31st of 2003.

The biggest differential there was really that KB Toys closed 16 stores, that was 56,000 square feet, and that accounted for over half of the decrease.

That being said, in the first quarter of this year we only had bad debt expense of $282,000.

That was down dramatically from a year ago when we had roughly a million dollars of bad debt expense.

In fact, if you pull the bad debt expense out of the recovery rate, or out of the expense portion of the recovery calculation, recoveries were at 97% of shopping center expenses, and that compared to 96.5% last year exclusive of the bad debt expenses.

Other than that we see no significant impact from bankruptcies.

We've got a number of tenants that we're watching closely, but the biggest impact was KB Toys, which we have already felt.

Net income for the quarter available to common stockholders was 18.1 million, or 31 cents a share.

Again, comparing to 19.4 million a year ago.

Interest rates in the portfolio decreased slightly to 5.6% compared to 6.1% in the first quarter of last year.

The average maturity of the debt is 4.2 years.

Given the interest rate volatility has we've seen over the last 45 days or so, looking at interest rate sensitivity, after some current refinancings that are in place, or in process today, we will have about 900 million of unhedged or swapped floating rate debt.

In addition, on most of those floaters, we have selected a six-month LIBOR option or one-year LIBOR option, which also reduces volatility even on that floating rate debt.

Over the past year, we've mitigated much of our floating rate debt exposure by moving to fixed rate loans.

In addition, we have very little exposure from our fixed rate maturities in '04 and '05.

In fact, in '04 we only have 7 million of debt maturities, in '05 we have 85 million.

In fact, the 85 million that rolls in '05 is at 6.67%, which gives us quite a lot of room for rates to move without being negatively impacted when it's time to refinance those maturities.

In this morning's press release, we reaffirmed our guidance.

That guidance is a range of 378 to 388 for FFO per share for 2004.

We will obviously continue to monitor that closely given the interest rate environment.

To reiterate our previous guidance and assumptions, we'd assume that the LIBOR rate would increase to 2% by the end this year, so at this point that still seems reasonable, but that's something we'll be assessing as the year goes on.

On April 29th we declared our quarterly dividend of 61 cents per share to shareholders of record on May 20th.

Based on midpoint of of our guidance for 2004, this yields a very healthy FFO payout ratio of 64%.

As Art indicated, March 9th of 2004 was our ten year anniversary of becoming a public company.

During that period of time we've enjoyed a very strong total shareholder return of 17% on a compounded annual basis.

This goes through December 31st of 2003, rather than March 31st of 2004 for obvious reasons.

FFO per diluted share increased from $1.55 in 1994 to $3.58 in 2003, representing a 10% compounded annual growth rate.

Our dividend in each of those ten years has increased from initially a $1.60 in 1994 on a pro forma basis to an annualized rate today of 244.

We've had an increase in our total market capitalization from 800 million at IPO to approximately 7 billion today.

Correspondingly we've had an increase in asset base from 10.6 million square feet of gross leasable area at IPO to over 58 million square feet today.

Taking a look now at the balance sheet, as of quarter end we have 3.8 billion of debt.

After the fixed rate financing of North Ridge Mall which is pending and expect to be closed this quarter, 26% of our debt will be floating, that's unhedged, unswapped floating, and 14% of our floating rate debt compared to total market capitalization.

Our total debt to market cap is at 54%, and our interest coverage ratio's a very healthy 2.46 times.

In terms of that 3.billion of debt, approximately 1 billion is at the joint ventures, with 900,000 of that being fixed and about 100,000 -- excuse me, 165,000 being floating .

At this point, I would like to open it up to questions.

Thank you.

The floor is now open for questions.

If you have a question, please press star then 1 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 to provide optimum sound quality.

Once again to ask a question, please press star then 1 on your touch-tone phone at this time.

Our first question is coming from Lou Taylor of Deutsche Bank.

Please go ahead with your question.

Yeah.

Hi, good morning, guys.

Congrats on the quarter.

Art, can you expand a little bit on your acquisition comments surrounding Inland?

I mean, is there much on the market, and, you know, just kind of what's the flavor in terms of just stable, or things that need redevelopment.

Regarding inland in particular, we have had fabulous success obviously in southern California and northern California in the metropolitan areas.

We've also had terrific success in central California, namely Fresno, Modesto, and awhile back we really began to focus on the fact that we were completely nonrepresented in the Inland Empire, which is also a terrific growing area.

We were fortunate enough to be invited to come in and co-invest into Inland Center by our partner, Walton Street Capital, which we took advantage of and became a 50% partner.

As we further dug into the Inland Empire and saw the opportunities there, we have identified at least one other opportunity in that trade area that we anticipate hopefully making an acquisition of sometime in the next quarter or so.

It's a property that is openly on the market through a broker, so I can mention it because of the fact that it is on the open market, and it's in Victorville, which is a very fast-growing community just north of San Bernardino, again, in San Bernardino County, and in the Inland Empire.

We are hopeful to be able to make an acquisition of that property and to expand our holdings in the Inland Empire.

In terms of overall acquisition of view points, we've been extremely selective in terms of what we have bought after the West Core acquisition in mid-2002, we didn't make another acquisition until almost two years later in the fall of last year.

Each of those acquisitions has been very strategic with Biltmore in Phoenix, and North Ridge, Salinas, and now Inland.

We're going to continue to be extremely focused on our acquisition opportunities.

We do anticipate having a further presence in the Inland Empire, hopefully up in Victorville.

There are other properties on the open market including one in Santa Barbara that we're interested in.

There are other properties that are going to be coming on the open market, including one in the San Francisco Bay area, Stonestown Galleria, that we happen to manage, and other properties in our trade areas and our sphere of influence are going to come in through the GM portfolio, which we are hopeful of being able to tap into.

There's no guarantee that we're going to be able to tap into any of that, but we certainly know this trade area, and we certainly have a tremendous amount of influence and leverage in this trade area, and we believe that our growth should be disciplined and extremely focused.

It has been and we are hopeful that we're going to continue to be able to tap into some external growth through some strong acquisitions going forward this year.

Secondly, can you talk a little bit about the Mervyn's, I guess, store closures/divestitures?

What kind of rights do you have as a landlord?

Is it similar to the Lord and Taylor situation with May Company where you have the right to approve the replacement?

Lord and Taylor is a little bit different at Broomfield, because we have an absolute operating covenant from them, so we're in a very strong position, vis-a-vis May Company there.

Mervyn's is a little bit different situation.

We have virtually no operating covenants left with them, but of the 264 Mervyn's stores in the chain, roughly 30% of them are in malls, and typically the mall owners have got agreements with Mervyn's that are significantly stronger than the typical lease that Mervyn's would have in a strip center.

We do after lot say over what can happen with the building.

It is clearly our hope that if Mervyn's ends up in another person's hands in terms of ownership that it directly ends up in our hands.

If it ends up in an intermediary's hands, whether it be a new operating company or really estate liquidator, then we do have significant rights under our reciprocal [inaudible] agreements over what can happen in those stores.

We're optimistic that the Mervyn's situation is definitely an opportunity for us.

And again as I mentioned, we've got anywhere from one to two to three alternative uses and/or users identified for each and every store in our chain, and each of those uses, we feel, is an upgrade to what's happening at the real estate today.

Last question.

I mean, would being part of the -- let's call it the real estate liquidator entity pool, etc, would that have any appeal to you guys?

If that's the way to get direct control of our real estate, yes.

Okay.

Thank you.

Thank you.

Our next question is coming from Matt Ostrower of Morgan Stanley.

Please go ahead with your question.

Hi.

Could you -- Tom, you commented a little bit about guidance.

Is it safe for me to say that despite the outperformance this quarter, your reluctance to increase guidance is just tied to your uncertainty about interest rates?

Is that too strong of a statement?

Matt, I think that's right.

We broke out a couple components of the difference between what may have been out there in a street estimate, part of it was SFAS 141, part of it was gain on land sales which is, for us, fairly hard to predict, and obviously we got a tremendously uncertain interest rate environment today which is causing us to be cautious.

Okay.

Great.

Thank you.

Thank you.

Our next question is coming from Craig Schmidt of Merrill Lynch.

Please go ahead with your question.

Yes.

I was thinking about sales.

You had a very strong sales gain, obviously, in the first quarter.

But there's some general thoughts out there that sales might be coming in and being a little less strong as the year wears on.

What are you hearing from your retailers and what are they expecting for the next nine months of the year?

I tink that they're very happy with the results year to date, Craig.

April, all indications are good, and I think the anticipation on a macro basis is that that word inflation is creeping back into the environment, and when inflation comes back one of the first things that get impact are retail sales.

So do you think you can be close to the same 7% gain, or say a 3 to 4% gain?

If I knew how to predict sales, I wouldn't do what I do.

I'd sit at a computer screen and figure out a way to trade commodities.

Are you hearing any of your apparel tenants express concern about the quotas lifting off --

Yeah, that is a concern.

It has been a concern for sometime, so, you know, on the other hand, they've been dealing with that situation for quite some period of time, but it's clearly a concern for them, but I think that they're also -- it's not news to them.

Right, right.

Okay.

Thanks a lot.

Thank you.

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

Please go ahead with your question.

Good morning.

First question is, on your developments, you've said that you're going to develop some of the West Core portfolio, and then you're also talking about acquiring Inland Empire.

Can you just walk us through is developing your preference where you already own land and if you don't already own land, then you're more apt to acquire?

Can you just take us through that?

Development would be our preference, predominantly raw land development in the Phoenix marketplace.

It is an extremely high priority for us in the Phoenix marketplace, and we intend to plant our flag in any location in Phoenix that makes economic sense and to take advantage of the fact that we're basically having a new Phoenix being built there in the next 16 years with another 3 million people being added.

In other marketplaces, and frankly in any marketplace, the easiest way to get into a market is obviously acquisition, given the fact that new development has got such a long lead time.

Some of these development opportunities that we've identified such as North Black Canyon and Cactus Lean Ranch we're talking about projects that are more than ten years away in terms of buildout but, on the other hand, we want to be out there and to ride the wave of growth.

So acquisition and subsequent redevelopment and repositioning of existing centers remains our core business, but on the other hand, the new development opportunity pipeline that we bought with West Core was certainly a significant jewel and we're finding that that jewel has even got more luster than we anticipated, as we are beginning to go ahead and to mine the opportunities in the Phoenix marketplace, but we're not actively looking at raw land development opportunities outside of Phoenix as a primary situation.

Okay.

And there was a news item that mentioned sort of a 2.5 billion in aggregate between the retail properties that would be developed in that Phoenix area and the retailers and the city improvements.

How much of that would you say is potentially your share?

That's hard to predict.

Just as an example, Gilbert, for example, in southeastern Phoenix area, that's a 600 acre development.

The mall section, the core of that 600 acres that we had the option to take down, is only 120 acres.

The other 480 acres is going to be developed by a variety of users.

For example, we sold land recently to Sam's Club and a Wal-Mart Supercenter.

All we did is sell the land.

Now they'll go and they'll build the building, and the buildings will cost what they'll cost, 30, 40, 50 million dollars.

So in terms of that 2.5 billion I think that that really is more reflective of the total economic stimulus and investment that will be made at these sites over a very long horizon without really pinpointing anything per site or per location or per owner.

But, you know, obviously, clearly the regional sites within each of these five core sites we're talking about in the hundreds of millions of dollars for each project.

Okay.

Switching to your debt schedule, you said you had about 900 million or so of unhedged variable debt and I'm assuming that that includes your pro rata, the JV.

Yes, it does.

When you say unhedged and the hedged portion, what part of that involve interest rate caps and where those caps currently set?

No, it doesn't -- it's only considering swaps, Alexander.

We do have some caps but they're out of the money and not really relevant to the conversation.

The 900 represents floating rate debt that is either not swapped or in the case of Queen Center, we have a construction loan, but we have a fixed take-out at 7% on that built into the construction loan, so for our purposes we consider that to be fixed.

Okay.

So Queens you fix at 7.

Okay.

It's built into the construction loan at completion of the entire project it converts over to a 7.5 year, 7% fixed rate loan.

August of next year, August of 2005 it goes to 7%.

Great.

Thanks.

Thank you.

Our next question is coming from Robert Belzer of Prudential Equity Group.

Please go ahead with your question.

Yeah.

Hi.

Just a couple of questions.

With regard to the Queens loan, can we anticipate an outstanding balance on that in the 250 range?

When it converts?

That will be when it converts.

It -- it's 225 through completion and stabilization, and then we have an election to take it up to 250 at completion.

Okay.

And just one other question.

Are there any -- are you anticipating any dispositions activity in the near term?

Yes, we are.

We'll definitely continue to dispose of assets that we do not feel are core .

We're actually going in the market here in the next week or so with a group of ground leases that surround one of the shopping centers in the Phoenix area, which are basically ground leases and are really not core to our business.

So it's land surrounding Metro Center in the Phoenix marketplace.

Great.

That's all my questions today.

Thanks, Robert.

Thank you.

Our next question is coming from Paul Morgan of FBR.

Please go ahead with your question.

Good morning.

Art, I don't know if I'd been misinterpreting some of the earlier quarters commentary about acquisitions and being net sellers, but the commentary about Stonestown and Victor Valley and the GM portfolio, is it -- what's your view of current pricing and are these assets particularly interested because they're in California?

Is that why you're willing to go back into the market?

We have been in the market, and we have been in the market, and we have bid on virtually every property that has been on the market in the last two years.

So we don't sit back and say, okay, we're going to go on the sidelines because we don't like pricing and then jump in because we like pricing or we like the property.

That's not the way it works.

The fact that we have not bought anything between June of 2002 and fall of 2003 is indicative of the fact that we didn't like the price that the properties traded at, otherwise we would have been the buyer.

We are clearly going to be more aggressive in markets where we have a tremendous sphere of influence and where we have a vision for what can happen to a property, given our experience in the trade area.

Inland, for example, we think has got a great future.

If we're fortunate enough to buy Victor Valley, we think that there's a great expansion opportunity there.

We're intimately familiar with Stonestown Galleria because of the fact that we have managed it for the last two-and-a-half years.

So, we may or may not be involved in those properties but they are clearly in our sphere of influence, clearly markets that we know well, clearly properties that we know well.

On the other hand, we also are going to be sellers of property, so if we were fortunate enough, for example, to buy Victor Valley in Victorville, the disposition of land around Metro Center that we're going to be putting on the market here soon, the equity that's involved basically would be cycling out of the disposition of the land around Metro Center into Victor Valley, and likewise, we'll see future dispositions of other assets that we feel are non-core, either by property type or geography type or productivity type or just future up-side type in order to take advantage of opportunities that we think have got better up-side than stuff that we own today.

And then with respect to the new Phoenix project that you had your media day about, could you describe what types of projects, I don't know if I missed this or not, but what types of projects those are?

Are those malls or . . .

There're many, many variation to the theme.

The Gilbert project is 600 acres.

We're already under construction on a half a million square foot power center that'll be anchored by a Sam's Club, Super Wal-Mart, your typical linens, electronics, etc, movie theaters type of use.

As time goes on, we anticipate breaking ground in '06 or '07 at Gilbert on the 120-acre regional town center core of the project.

That will most likely involve at least two department stores in the beginning.

It will be built most likely in a modular way that will accommodate future expansion of department stores users or uses as time goes on, which I think is very much going to be the wave of the future, the days of building -- of announcing a new mall and on day one having four or five new department stores and a new two-level enclosed middle opening up all on the same day are pretty much behind us in most markets.

While we have not identified the exact use or configuration or concept behind a Gilbert or a Goodyear, it's clearly going to be flexible, it's going to be modular, it's going to be anchored by traditional types of anchors, probably at least one or two or three in each of them, but we'll also have other uses that will be involved.

They'll each be truly town centers that will encompass hundreds of acres with the core being the regional project.

We have not announced the exact design or concept behind any one of them, but we are putting forth the fact that we are definitely moving forward on Gilbert and Goodyear in the next two to three years.

Thanks.

I was actually -- that's great.

I was actually referring to the Cactus Love Ranch and North Black Canyon that you mentioned.

Those are, as I mentioned, 10 to 15 years down the road so that's still early on.

And then finally, you briefly mentioned on the last call something about an opportunity to expand or redevelop a property in Marin, I guess one of your two.

Is there anything going on there?

Yeah, there's a lot going on.

We're studying it, we're coming up with some thoughts.

Actually, the disposition of Mervyn's, Mervyn's is one of the anchors of that center, it's one of the lowest performing Mervyn's that we have in our entire company.

It only does roughly 11 or -- does it 11 or $12 million, $13 million in that location, where we have a Macy's doing close to $50 million.

Entitlements are scarce in more Marin County.

Mervyn's itself has been pretty much a bottleneck in terms of future expansion opportunities there.

If we were able to successfully to get back to Mervyn's store, it really opens the door to redeveloping that site.

We are studying turning it into open air project; we're studying what we would do if we were able to get back the Mervyn's store.

We have not come up up with a specific concept or design, but we certainly anticipate that over the next 6 to 12 months, we definitely will be announcing what we're going to be doing there, and we see great opportunities there.

Great, thanks.

Thank you.

Thank you.

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

Please go ahead with your question.

Hi.

Good afternoon, Art.

I'm here with Jon Litt.

Hi Ross and Jon.

Art, there was recently a, I guess, a bomb scare, a terrorist theat in Los Angeles, and I guess two questions.

One is just trying to get a sense of the negative impact on traffic that that kind of a situation has.

Not just that day but in the days following.

Then I guess the second question is, I know you're close to what's going on in the mall industry and the efforts on the safety front.

If you can give us an update on what you're seeing and hearing.

Sure.

We were contacted by the FBI and the Department of Homeland Security.

I believe Tuesday or Wednesday of last week.

And we were told that the -- that there was a -- anonymous, a telephone tip that had come in, there was an anonymous threat to attack a Los Angeles shopping center that was in proximity to the Federal Building in Westwood.

One of our properties, West Side Pavilion, clearly is in proximity to the Federal Building, Century City is in proximity, Beverly Center's in proximity, The Grove is in proximity, so there was clearly heightened security that was put into place.

We worked closely with the mayor, as well as the local police departments, the FBI, and the Department of Homeland Security to have heightened security on that day, as well as the days before and days after.

The Department of Homeland Security and the FBI, I believe, in public press releases after the fact said that did it not come from a credible source.

As a matter of fact, on the day of the threat it came out that it was not coming from a credible source, and it was pointed out that there had been over 40,000 of these threats in the last year.

Just as a -- as a point of reference.

I've been in this business 28 years and going back 28 years ago, there was hardly a week that went by in any one of our shopping centers that we didn't get a bomb threat.

As a postscript to what happened last week, a fellow by the name of Zameer Mohamed, a Tanzanian national, was recently arrested, charged with making false statements with respect to that tip, he explained that the reason that he made the tip is that his girlfriend was trying to cross the border from Canada, so he told the FBI that she and a couple other people were going to try and carry out an explosive attack in L.A.

He's been arrested.

And in terms of any initiatives that the industry has on the safety front is there anything new to be updated on?

Just the fact that they are on going, have been for quite some time.

Our shopping center industry in particular, I think, works at least as closely with the Department of Homeland Security as anybody and in a particular local level.

I think each of the publicly operated mall companies, we all work together in formulating strategies and in making sure that we're in very close contact with our law enforcement agencies, so that when something like this happens we don't have to go and search for somebody to talk to.

Thank you.

Once again to ask a question, please press star then 1 on your touch-tone phone at this time.

Our next question is from Rich Moore of Key/McDonald.

Please go ahead with your question.

Hi.

Good afternoon, guys.

You have a number of community centers now and I know that most are in the Phoenix area.

And I'm curious how you guys look at that property type at this point?

Will you add to that portfolio?

I realize you're building a couple.

But would you buy any of those?

How do you view your community centers?

We really view them as part of our dominance of the Phoenix marketplace and that is where we will be owning power and/or community centers either today, or building them in the future as part of really controlling the major retail growth in that marketplace.

To go out and buy a community center one-off, we're not going to do that.

If there was one that was attractive across the street from one of our regional malls, and we saw a way of integrating its operations with one of our regional malls, we would do it.

But the community centers that we own in Phoenix are generally part of the urban village concept that West Core initiated 20 years ago that was expressed in developments such as Paradise Valley, Chandler, and now is being expressed in our Gilbert development, where we're taking a 600 acre project and we're having a 120-acre regional core with power centers, big boxes, neighborhood convenience, every form of retail and other uses on the other 400 acres surrounding us.

So it's really an outgrowth of our Phoenix 2020 strategy and is not a strategy to own community centers as an adjunct to our core business.

Okay.

Art, is that the same group of people that does the leasing for both property types?

No, we have different people lease different property types in that region.

Okay.

So no thought of expanding to make better use of that group of people to expand the community center concept outside of Phoenix?

Those people feel that they're being used pretty well so far.

Okay.

So they're busy.

Okay.

When you look at acquisitions, obviously part of that is debt, and part of that is equity.

What are your guys' thoughts on whether you might need equity this year, how you would raise equity, in an obviously very difficult capital environment for equity at this point?

From our viewpoint the primary source of raising equity for us over the past 18 months, and over the course of the next year will be selling real estate.

Okay.

Great.

Not selling common equity.

I gotcha.

Then any thoughts on Valley View now that Jordan Creek is just about on line?

I think you've got a non sequitur there.

Did you just say Valley View?

I meant the -- I'm sorry, I meant the Des Moines mall.

That property will be -- is a very underperforming property as it is.

It does low $200 a square foot.

It is as far from Jordan Creek as you can possibly be.

It is in probably the poorest area of Des Moines.

Jordan creek is in the wealthiest area of Des Moines.

There are two other malls in Des Moines, in west Des Moines: Valley West Mall and Merle Hay Mall which are much closer to Jordan Creek.

I am from Des Moines, and I can tell you that Southridge can't get hurt much worse than what it already is.

I think the other two centers, Valley West and Merle Hay are going to get hit very hard.

Whoever is shopping at Southridge today is not going to be shopping at Jordan Creek, and vice versa.

Whoever's going to shop at Jordan Creek is not going to shop at Southridge.

So are you doing anything special at Southridge at this point?

No.

Okay.

And then how about Boulder?

Any development there?

Yeah, there's a lot of development going on there.

We are plowing ahead with our entitlements, and if you go to www.twentyninthstreet.com, you can see the entire timeline of what's happened.

You have to spell out those words, and what's on the horizon, we expect those entitlements this summer, and breaking ground this fall.

Okay, great, thanks.

Last thing is on the Mervyn's.

Do you -- those 18 that you mentioned, those are Mervyn's that you own, is that right?

They are Mervyn's that are in our malls.

We own -- Tom, what do we own, seven?

We own 7 of the 18, Rich.

The others are owned by the anchor.

Which is typical.

Okay.

Yeah, that answered my question then.

Thanks.

Great.

Thanks, guys.

At this time there appear to be no further questions in the queue.

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

Well once again we want to appreciate you joining us.

We had a great quarter.

We have a great outlook for the next two to three years of visibility driven by our redevelopment activities as well as our new development activities that will be kicking in even after that, and we look forward to reporting to you further.

Look forward to a good convention in Las Vegas, and thank you very much.

Thank you.

That does conclude today's teleconference.

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