Macerich Co (MAC) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Macerich Company second quarter earnings conference call.

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

It is now my pleasure to introduce (ph) George Ann Palthy with the financial relations board.

Ma'am, you may begin.

Thank you all for joins us for the Macerich second quarter conference call.

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

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

For 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 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 entitled "financial press releases".

I would now like to introduce Mr. Art Coppola, President and Chief Executive Officer, as well as Mr. Tom O'Hern, Chief Financial Officer.

And having said all of that, I would now like to turn the call over to Tom for his opening remarks.

Please go ahead, sir.

Thank you, George Ann.

During the call today we will be discussing the second quarter results, recent capital transactions and our outlook for the remainder of the year.

It was another good quarter with very strong tenant sales, good occupancy levels, although down somewhat from a year ago, excellent re-leasing spreads, significant redevelopment activities, and some very solid acquisitions that Art will elaborate on later in the call.

In addition, we continue to make outstanding progress on our development and redevelopment pipelines.

During the quarter we had strong growth in total same-center tenant sales of 6% in the portfolio, that compares to 7.3% year-to-date.

Looking at that growth by region, California and the Pacific Northwest was very strong with Southern California coming in, up 6 1/2, Northern California up 6.6% for the quarter and the Pacific Northwest up a very strong 10%.

The Inter-Mountain Region was up 5.6%.

Central Region and Eastern Region was flat and Arizona was up 15%.

Comp tenant sales for the quarter were up 3.5% and looking at total mall sales per square foot for the total portfolio, they came in at $375 on a trailing 12-month period, that compares to $356 per square foot a year ago.

Occupancy levels continue to remain high.

Looking at occupancy on a same-center basis that is, excluding acquisitions subsequent to June 30th of '03.

Occupancy was 92% compared to 92.4% at June 30th of 2003.

KB toys represented the bulk of these decreases during the first and second quarter they closed approximately 100,000 square feet of stores.

The total portfolio occupancy including acquisitions and excluding sales was at 91.7.

That compared to total portfolio occupancy a year ago of 92.4%.

Looking at the leasing activity, it was a very strong quarter again in the second quarter.

We signed approximately 367,000 square feet of leases.

That was about 194 deals.

The average new starting rent was 39.82, so just slightly below $40.

The positive re-leasing spread, and that's cash to cash, that excludes any straight-lining or rent which would have made that positive spread even wider, the average re-leasing spread on that basis was 38%.

Average expirations were approximately 28.75.

We expect the balance of the year to have expirations averaging about $29 per square foot so we expect to continue to see the strong double-digit re-leasing spreads that we have seen over the past four years.

Average rent per square foot in the portfolio increased in a June 30th, 2004 32.23 and that compares to 31.16 a year ago.

FFO per share diluted for the quarter was up 89 cents per share compared to 85 cents per share for the quarter ended June 30th, 2003.

EPS was at 29 cents per share diluted for the quarter and that compared to 55 cents a year ago in the second quarter.

Primary reason for that decrease in EPS was increased depreciation expense related to S FAS 141.

In addition, we booked a large gain on sale in the 50% interest in the Village at Corte Madera in the first half of 2003.

Drilling down into same center net operating income for the consolidated assets, that was up 2.66% for the quarter compared to the second quarter of last year.

The joint ventures on a same center NOI basis was down approximately .5%.

That decrease in the unconsolidated center NOI was largely a function of a 100-basis point drop in occupancy at the joint ventures and a large portion of that was due to the KB Toy Store closures.

There was about a 600,000 decrease in straight line rents for the quarter.

They came in at 700,000 compared to 1.3 million for the second quarter of 2003.

And that decrease was offset by an increase in lease termination revenues, which were up about 800,000 to 1.9 million for the quarter compared to 1.1 million recognized in the second quarter of '03.

Looking at recovery rates, if you exclude the management company expense that is now consolidated due to the accounting rule change, that became effective July 1st of 2003, the recovery rate was 97% of shopping center expenses and that was down from 100% in the second quarter of '03 on a same basis.

We do get recovery rates that fluctuate quarter to quarter as non-recoverable expenses or not incurred on a ratable basis throughout the year.

CPI increases for the quarter were 559,000 higher than in the second quarter of last year.

We continue to convert our leases to CPI bumps rather than fixed rent bumps and currently about 32% of our portfolio has been converted.

The average interest rate during the quarter was 5.52% and that was down from 5.8% in the second quarter of '03.

The average maturity of debt was 4.3 years.

In this morning's press release, we gave additional year 2004 guidance.

We raised the bottom end of the rage for 2004 FFO guidance to 382.

The range now stands at 382-388.

Focusing now on the balance sheet, as of June 30th, we had 2.9 billion of debt excluding the non-consolidated entities and our prorata share of debt from the unconsolidated entities is 1.1 billion for a total of 4 billion.

Our floating rate debt to total market cap is 13%.

Our floating rate debt is 25% of our total debt.

That's a level we're comfortable with.

We've typically been in a range from 20-25%.

Our total debt to market capitalization is 51% and our interest coverage ratio is a very healthy 2.4 times.

We continue to be extremely active in the debt markets, since our last earnings call, we have refinanced Redman Town Center, paying off the existing $58 million loan which had an interest rate of 6 1/2%.

We refinanced that with a $75 million fix the rate loan of 4.81.

At Northridge Mall in Salinas, California we closed on an $85 million fixed rate loan at 4.94%.

The proceeds from that financing were used to pay down floating rate debt on our line of credit.

In addition, we just completed an extremely successful upsizing of our line of credit.

The line was increased from 425 million to 1 billion.

The maturity was extended for two years to July of 2007 and in addition, we have an additional one year extension at our option.

Our borrowing spread was reduced by 100 basis points and at our current usage level, that equates to about 5 million a year in annual interest savings.

The new line was also used to pay off $196 million term note that was incurred in conjunction with the Westcor acquisition two years ago.

That note was bearing interest at LIBOR plus 275.

This new facility is not only in a substantially reduced rate, but gives us a very significant amount of capital capacity to use going forward.

At this point, I'd like to turn it over to Art for an update on acquisitions, development, redevelopment and also a reflection on our Westcor acquisition.

Thanks, Tom.

As you can see, we had a great quarter in terms of continued strong sales, another great quarter in terms of strong leasing, extremely strong leasing spreads which has been the theme for many, many quarters now.

Our redevelopments continue to perform well, as well as our developments and as Tom described, we have some great financing activity.

I'm going to talk about some of the recent acquisitions, some of our redevelopments are being completed as ones that are about to break ground, as well as the current status of our ground-up developments and the new ones that are about to take place.

First of all, though, I want to step back.

As we are here today, we are celebrating the two-year anniversary of the closing of our purchase of Westcor.

At the time that we bought Westcor, we were criticized by many pundants as well as peer groups for overpaying and some people even speculated that the cap rate on the transaction had been something around 7 or 7 1/2.

At the time we stuck our neck out and we did something that very few people do, which is to basically stipulate late to you all exactly what we felt the going end return was going be for the upcoming year, being the year 2003, and we said that on that billion five acquisition that we fully expected to see an 8 1/2 return.

In fact, in 2003, we did see an 8 1/2% return on those assets.

Based upon our results for the first two quarters of 2004, from the existing assets, we expect to see a 9% return in 2004.

So we expect to see about a 5% increase in our NOI from the Westcor malls, which is consistent with what we told you when we acquired Westcor, which is that we anticipated that the same-center growth of Westcor would actually be greater than the same-center growth of our core portfolio.

So at the time that we bought Westcor, almost immediately the acquisition environment and the mall sector changed dramatically.

Frothy would be a word that could describe it.

Cap rates dropped almost within 30 days from the 8 1/2 cap rate that we bought Westcor at, which also was similar to what the (ph) Rodamco transaction had been earlier in 2002 to cap rates of around 7%.

Then shortly thereafter they were in the 6s and now we're seeing cap rates on Class A properties sub 6, down into the 5s.

We decided after Westcor and the purchase of The Oaks that we had acquired just before Westcor, that we were going to be very selective, that we didn't feel that we could participate in that kind of acquisition activity.

We sat back on the sidelines while we observed the acquisition activity.

We sat back and we worked on our portfolio for the next 15 months.

Starting in September of '03 we saw some more opportunities that we felt would be appropriate.

Since September of '03 we have added another six malls to our portfolio.

Very highly productive malls that are averaging around $475 a square foot and that we acquired at going in blended returns of around 7 1/4.

The malls that we purchased over the last year include Northridge Mall in Salinas, which fits very well with our central California strategy and which we have done extremely well.

Biltmore Fashion that we acquired in December, which completed really the luxury ownership and control of the Phoenix marketplace.

Then Inland Center in January of this year, the Inland Empire and that's a market we had long wanted to get into it because it is one of the fastest growing areas of California.

Just recently we closed on the acquisition of Victor Valley in Victorville, LaCombra in Santa Barbara and in May of this year, we closed on the acquisition of North Park in Dallas, 50% interest in North Park.

Reflecting over the last two years, we're very happy with the acquisitions that we have been able to accomplish.

We have bought 16 malls in the last two years, totaling 21 million square feet for a total consideration of approximately $2 billion.

Malls that average in excess of $450 a square foot in productivity and the overall blended cap rate on all of that acquisition activity has been about 8 1/4.

So we're very, very happy with the acquisitions that we have made.

Turning to some of the specifics on the acquisitions that we've made in the last three months, going back to North Park, we bought that, a 50% interest in that center in May.

North Park is one of the top centers in the United States today.

It boasts the highest volume Neiman Marcus in the world.

A Neiman Marcus that does in excess of $150 million.

It boasts the number one productivity in terms of sales Foleys in the Dallas metroplex, the number one Dillard's and we've just broken ground and delivered a pad to Nordstroms, which we fully anticipate will be the number one Nordstroms in the marketplace.

The center does in excess of $550 a square foot and we are also embarking on with our partner an expansion of the center.

There is many, many luxury tenants that are one only tenants in the Dallas metroplex marketplace today and many more to come, tenants that are on the list to come include tenants such as Cousteau Barcelona, St. Johns, Burberry, Todds, Emporio Armani, Nicole Miller, Ferragamo, Bizarre and others.

So we're very, very happy with this center.

We think that it's going be one of the top three or four centers in the United States upon completion of the expansion two years from now.

This was a privately negotiated transaction.

Our total equity investment in the center will be $75 million and the impact on our FFO this year will be neutral and we expect that over the next two-- that next year it will be 2-3 cent accretive.

Because of the fact that it's a privately negotiated transaction, we're not going get into the details of cap rates because that would be violating the terms of our confidentiality agreement, but we can disclose to you the affect on our FFO.

We're thrilled with that acquisition.

After North Park last month we acquired Victor Valley in the Inland Empire, a very nice center that extends our Inland Empire ownership.

Sales at this center are literally on fire as they are at the Inland Center in San Bernardino.

Sales were up over 15% year-to-date at Victor Valley.

We have expansion plans there to expand our theater complex from 25 to 70,000 square feet.

We're talking to other department stores about coming into the center.

We also just recently closed on LaCombra in Santa Barbara, it's a two-anchor center anchored by Sears and Robinson's May.

We fully anticipate this open air center will be taken in a direction of life-style type of center and it will fit extremely well with our ownership in that part of the world of Pacific View and even Thousand Oaks.

On acquisition front though, however, as we were disciplined after buying the Westcor portfolio, we are also even going to be more disciplined going forward.

While we're thrilled with our recent activity and our activity over the past two years, we do not expect acquisitions to be a major driver of our growth in the near term, and we expect that over time it will become something that will become an opportunity for us to extend or external growth, but we are not counting on that at this point in time as being a major driver of growth for us.

However, we are extremely optimistic about our growth opportunities because we control them.

They are completely within our control, not within the control of sellers selling properties through brokers, through auctions that end up with ridiculous prices.

Our growth over the next five years is going to come from three major sources.

One is going be the sustained strong internal growth that is going to come from continuing strong leasing as has been evidenced over many, many quarters and is going be evidenced over quarters to come.

We're coming up against rents that are easily able to be exceeded by double digits and we fully expect we'll be able to continue to do that.

Our growth will be driven by continued strong profitable redevelopments.

As well as a very exciting new development pipeline.

On the redevelopment front, I want to first of all update you on the current redevelopments that are going on and then also talk to you about redevelopments that are about to break ground.

Queens Center, our poster child for redevelopment is going along extremely well.

It is on time, on budget and as I indicated on the last conference call we now expect this $275 million project to generate going in returns of approximately 12%.

If have you been to the center, you obviously are amazed at the traffic that is being generated.

The real impact of this center will begin to be felt in November of this year and then really in 2005.

We're right now, we are re-demising the old Penney's building, which is exactly in the middle between phase one and phase two of this center.

When that is completed in November, the entire center will be seamless and we're absolutely convinced it will be one of the most productive, if not, the most productive enclosed mall in the United States.

The new JC Penney store, they tell us, is tracking to be the highest bid JC Penney store in the continental United States, so we're very thrilled with that.

On the redevelopment front, projects that have just recently broken ground include Washington Square in Portland, Oregon area.

This is a center that does well over $500 a square foot.

We were confronted with a significant life-style center that was planned some seven or eight miles away from us and to combat that life-style center we broke ground recently on an 85,000 square foot expansion of Washington Square.

The 80,000 square foot expansion will cost us approximately $55 million and we expect to see around 11-12% return on our investment.

The expansion will come online in the fall of next year.

This was a joint venture property so we own 50% of this.

Tenants that we have signed up to come into the expansion include tenants such as Pottery Barn Kids, Chico's, Colehahn, Sephora, Williams-Sonoma, Tapir's, White House Black Market, so we're thrilled with that project and we think that it's going to be terrific for us.

In a similar vein we are in the current plans to do an open air life-style extension of our Fresno Fashion Fair project in Fresno, California.

Fresno is an example of a center where we have taken a B property and turned it into an A property and now we're ready to take it to the next level.

When we bought Fresno in 1996, it was doing around $290 a square foot.

Today the center is doing well over $450 a square foot.

As you know, we remodeled it last year and sales there are also on fire.

It's one of the highest volume Macy's store in the West Coast, one of the highest volume Penney's stores on the West Coast, as well as the flagship store for Gotshalk's.

We currently have plans to break down early next year subject to entitlements on a 90,000-square foot expansion in the front of the center it'll be open air.

We are targeting tenants for that expansion, the Pottery Barn, Z Gallery, Apple, Banana Republic, Anthropology, restaurants such as PF Changs and retailers such as Urban Outfitters.

We'll get into the specifics on that as the year goes on but we fully expect that we'll be able to break ground on that in January of next year, have it complete by fall.

Costs should be around $30 million and we fully anticipate returns in excess of 12%.

Continuing on the redevelopment front, The Oaks is still moving along well in terms of our entitlement process.

That's a center that we bought, remember, two years ago.

Two years ago it was doing approximately $430 a square foot.

Today it is doing approximately $500 a square foot.

So we're thrilled with what that is doing.

We think that's going to be really our next poster child, that's something that'll come online, the major expansion, sometime in 2007.

The next major redevelopment that we have coming online is one that you have heard about and we've talked about at great length recently, and we are thrilled to announce that we have finally gotten final approval from the city council two days ago of our Crossroads project at Boulder, Colorado.

We now call that, "29th Street".

We'll be starting demolition of that project in September of this year and we anticipate that that project will cost us something in the neighborhood of $130 million and we anticipate returns of approximately 12% on that project.

We're keeping Foleys as a department store there.

We'll be adding tenants such as Home Depot, a flagship Wild Oats store, large Century Theater store - century theater operation, as well as other retailers that we'll be adding, so we're thrilled with what's happening there and we're very, very pleased to be able to announce that that finally is going to take place.

The city council in fact gave it a very, very strong endorsement just two days ago.

If you go to the website you can find a lot of detail on 29th Street.

Go to that property and you'll see site plans and renderings.

We think it's going be a fabulous center for us going forward.

On the ground-up development front, when we bought Westcor, we had two projects that were beginning to break ground.

One was La Encantada in Tucson the other was Scottsdale 101.

Both are continuing online, on time, on budget and we feel that those will both be completed by fall of this year with earnings impact really coming through next year.

So we are very, very pleased with those ground-up development projects.

At the time that we bought Westcor, we pointed out there were three pipeline projects that we felt that would be something in the neighborhood of five to ten years out in terms of when we would actually break ground on them.

One was Gilbert in southeast Phoenix the other one was Goodyear in western Phoenix and the other was Paradise Ridge north of Scottsdale.

In our last conference call we talked about the fact that we had outlined for the Phoenix marketplace that we felt we could be breaking ground on Gilbert and Goodyear sometime in the 2006-2007 timeframe.

In fact, at Gilbert, since that announcement, tenant demand has been so strong that we have decided that we'll be breaking ground on our Gilbert project regional mall next year.

The projects will be 1 million square feet.

The breaking ground next year, we anticipate that we have commitments from Dillard's and May Company, Robinsons May and a large Harkins theater.

Those will be our primary anchors as we go into the project.

Of the million square feet, we'll have approximately 250 ,00 square feet will be enclosed mall area and approximately 250,000 square feet will be open.

So we're very thrilled with the tenant demand that we've had there and we anticipate that that's going be just a fabulous projects for us.

Further, on the Goodyear front, Goodyear was a project that we announced back in May.

We anticipate that that project also is going be moved up one year.

So we anticipate starting construction there in 2006 with completion there in 2008.

I also pointed out that last May that we had two other projects that we were putting under option and we have in fact put a very major piece of ground in north Phoenix under option, Black Canyon area, as well as another project in the far west Phoenix area, again, I categorized those two projects as being in the five-ten year timeframe, but given the growth of Phoenix as we indicated even two years ago on the three pipeline projects, I wouldn't be surprised if those projects came online sooner.

So we're thrilled with our development to pipeline.

We're thrilled with our development results, our redevelopment results, as well as our primary internal operating activities.

At this point, we would love it open it up to questions.

Thank you.

Thank you.

The floor is now open for questions.

If you do have a question, please press star-one on your telephone keypad at this time.

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

We do ask that while you pose your question that you utilize your hand set to provide optimum sound quality.

Once again, that is star-one on your telephone keypad for any questions at this time.

Our first question is coming from Jay Leupp of RBC Capital Markets.

Please go ahead.

Thanks, good morning.

With the strong leasing spreads at 38% and strong same-store NOI, could you give us some thoughts on your occupancy outlook through the back half of the year and into 2005 and also is it safe to assume that we'll see an acceleration of same-store net operating income growth gradually over the next few quarters given these strong numbers?

Hi, Jay.

It's going be really a function of the leasing activity in the third quarter.

We're down on a same-center basis about 40 basis points on occupancy.

We have seen some good re-leasing spreads.

We did get quite a bit of space back from KB toys in the first quarter and second quarter, but we do think things will pick up in the second half of the year in terms of the overall same-center results.

If you factor in the joint venture same center NOI growth was closer to 1.8%.

We do think that the JV's will pick up slightly, which is where we had the bulk of our occupancy loss, so we do see some pickup there.

A little too early to speculate on '05 right now.

Okay, and then on the redevelopment front, can you give us some idea of what your targeted redevelopment yields are on the new projects that you talked about this quarter and specifically, the 29th Street project that you just got the approval on and then maybe behind that talk a little bit about your financing strategy there.

Would we expect to see some either partial asset sales or joint ventures or maybe some whole asset sales to finance this activity.

Okay.

On the 29th Street project as well as the Washington Square expansion, as well as the Fresno expansion, we fully expect to see minimum of 12% return on our investments there.

And as I indicated our half of our investment in Washington Square is about 27 million.

Our investment in Fresno, we have not identified, but the ball park is 30 million.

Our investment in 29th Street is about 130 million.

I should mention, by the way, that that's really the, the base case for 29th Street. 29th Street is very much an expandable development and there are many elements to that projects that will be added over time, but the initial phases of that project will be about 130 million.

At this point in time, we'll use either cash flow can fund, for example, is funding the Washington Square development, and also increasing the size of our line of credit so that now we have unused capacity there of over $400 million, is also a very attractive source to fund these expansions as opposed to going out and getting construction financing.

So 29th Street is unencumbered at this point in time, so we want to use construction financing.

That's certainly a possibility, but I would anticipate using our line of credit as far as dispositions, that's also something that can be used to fund that or other activities such as acquisitions or new developments.

Thank you.

Thank you.

Our next question is coming from Paul Morgan of FBR.

Please go ahead.

Good morning.

About the Washington Square expansion, the-- did you say $55 million?

Yes.

And so a 12% yield on that would be, you know, $6 1/2 million in NOI.

Is-- can you just describe the expansion?

I guess that would seem to require pretty high rents or why the number is high for an 80,000-square foot expansion.

Well, we own the land, so that's--

I mean why it's $55 million for a relatively small expansion?

Oh, we're adding a parking deck.

We have to add a parking deck in order to support the expansion.

So the parking deck alone was fairly expensive.

We're also building a second level over the one-level shops for a future expansion even though it's not being occupied at this point in time.

Does the-- so the yield doesn't include anything about that future expansion?

The cost includes the shell for the future expansion.

There is no income from any-- there is no income from the second level included in the 12% return on the 55 million.

In the 55 million, there is the cost of building a large parking structure to support the new 80,000 feet of GLA that is being built.

There is the cost of 80,000 feet of GLA and then is a cost of a shell above that 80,000 feet that's being built.

After all of that, we're seeing a 12% cash on cash return.

Moving on, what's the outstanding line balance right now?

Currently, Paul, because as a function of closing on the new line of credit we also paid off $196 million term loan.

The current balance is approximately 525 million.

And you're comfortable with that, or any plans to take it down?

I'm sorry, what do you mean take it down?

Any permanent financing to lower the balance?

Well, we're always keeping an eye oh the swap markets to evaluate whether it makes sense to swap out of any of that, but keep in mind we just knocked the spread down 100 basis points.

So we're well positioned to probably absorb the next three or four fed increases and corresponding increases in LIBOR.

So we may not have swapped that, but on the other happened, we did go out and reduce the spread very substantially.

Right, okay.

Great, and then finally it looks like the Arizona malls are doing very well from a sales perspective is there anything going on with Biltmore since you acquired it?

Is that in the number?

And kind of what's been your strategy with managing both Biltmore and Scottsdale next to each other?

The sales at Biltmore are on fire.

They are up 15-16% year-to-date.

It's now tracking at over $530 a square foot.

We have some very, very exciting expansion plans at Biltmore that we're working on.

We're not ready to talk about them in terms of particulars, but it does appear that there will clearly be a luxury residential component that will be added to the east side of the center just across the street from us, we already have condominiums, 250 condominiums that were sold at prices between a million and 2 1/2 million.

Donald trump just across the street from us is trying to do a large project.

So we do see a market for luxury residential here.

We also see some relatively significant upgrades to the retail mix there that we're working on right now.

It'll take time, but we have some very, very high hopes for that.

We're already beginning to juggle tenants back and forth between Biltmore and Scottsdale.

We're releasing radius clauses, for example, to radius clauses that prohibited a tenant either from going from one center to the other now are no longer effective.

We're well along in our plans for the expansion of Biltmore.

We think that's going to be a real jewell for us especially in conjunction with Scottsdale.

Lastly, I saw some report about potentially a museum going in The Oaks expansion.

Any comment on that?

That's, that was a city - a citizen's hopes.

It's not in our current plans.

Okay.

Thanks.

That was a letter to the editor, type of thing.

Thank you.

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

Please go ahead.

Yeah, high, thanks.

Good morning, guys.

Good morning, Lou.

Art, can you expand a little bit on your rent growth for the quarter on your new leases?

Did any of that come, do you think, at the expense of occupancy or some tenants that just didn't want to pay the higher level?

No, I wouldn't say so, Lou.

I mean the activity level in terms of volumes was very comparable to a year ago, so there was not a big drop off in volume a year ago in the second quarter we did 390,000 square feet versus 367,000 in the second quarter this year, so it was off slightly, but I think, you know, we continue to see good demand, again, keep in mind over the next three or four years the rents that are expiring were done in the mid '90s when we had a relatively soft leasing environment and those, those rents are at about $29 a square foot.

So we continue to see that working going forward.

Also, I do want to point out that that re-leasing the new re-leasing rate does not include Queens Center.

Queens Center, obviously, would move that number up because Queens over $900 per square foot and we're getting some very high rents there, so that excludes Queens Center.

Okay.

Secondly with regard to Queens Center, how-- was there much FFO or NOI impact during the second quarter, or is it more that still just, you know, offsetting development costs or offsetting capitalized costs?

Lou, it was about a penny a share.

We had a couple things happening there.

Phase one did come online since some tenants opened in late March, but the bulk of the tenants were opening in the middle of that quarter, and then the other side of that was, as we moved into phase two, a lot of the existing mall tenants were closed down to be moved.

So we actually lost a little bit of the NOI that we typically see from the older center, the existing center.

So there is still transition going on there where we have really got completion targeted for the fourth quarter and going into early '05.

So we haven't seen the full benefit yet.

We should continue to see that increase in the third and fourth quarter and finally we'll get the full benefit of Queens Center in the first quarter of next year.

Okay.

Art could you talk about Washington Square a little bit with regards to that life-style center in a was going seven miles away?

I mean did your expansion basically prevent that center from being built or did you take those tenants or is that property still getting developed?

It's still getting developed and we just-- there were a number of tenants such as the ones that we signed up that would have otherwise ended up in that center.

So we just took some of the, the heart out of that center, but it's still being developed.

Okay, and last question, Tom, pertains to the Boulder return on costs at 12%.

Is that the all in costs from the beginning of that project and your, you know, ownership when it was an operating center years ago, is that all in or is that just on incremental costs?

Lou, that's incremental costs.

Okay.

All right.

Thank you.

Thank you.

Our next question is coming from Mike Mueller of J.P.

Morgan, please go ahead.

Hi, couple of questions, with respect to 29th Street, I may have missed it, did you mention an estimated target for completion?

Some elements of it-- yeah, I said fall of 2006, but some elements could open up as early as fall of next year.

So, for example, the Wild Oats and the Home Depot could get open as early as fall of next year, but really the first major completion of the 890,000 square foot redo we're targeting now fall of '06 and then, again, as I mentioned, that's really the initial phase of development with future phases to come yet as identified, but most likely to include a residential components in the far northeastern corner of the site.

Okay, and, Tom, I know you had talked about guidance and you raised the lower end of guidance.

Just wondering, prior guidance at the beginning of year didn't include acquisitions.

You have got the interest savings coming on, the line refinancing.

Why didn't the top end of guidance go up?

Mike, there is a number of mitigating factors in here, one of which is in the third quarter we're writing off fees relating to the term loan that was paid off and that's about a two cent a share negative impact on FFO.

Also we have had a slower same-center NOI growth rate.

The guidance that we originally gave was 3%.

We're closing to 2% today and to a large degree because of the, the decline in occupancy rate.

Those are a couple of the big factors that are offsetting the positive spread on the line of credit as well as the acquisitions.

Okay, and finally, on North Park, I think you said your equity investment was 75 million.

Disclosed at some point the associated debt along with that?

Would that be in the Q?

Yeah, that will be in the Q. The debt in place today is about 170 million at a property level.

Okay, and you'll have half of that?

Yes, correct.

Okay.

Thank you.

Thank you.

Our next question ising from Alexander Goldfarb from Lehman Brothers.

Please go ahead.

Yes, hi.

Just following up on the North Park, can you just let us know exactly what your, what your interest in North Park is?

50%.

No, but I mean legally.

We own 50% general partnership interest.

Okay, and so then you're responsible for all prorata financial obligations?

Yes, except that we do have a preferred return in the deal so that we see the first 7 1/8%.

So when you say we're responsible for all the financial obligations, if the performance is there, it could slow down on preferred return, but we do not anticipate that happening.

Okay, and that's preferred equity return, not IRR?

No, equity return, cash on cash, yes.

Okay.

And can you-- you commented that with the way Queens Center was going, the city seemed to be very pleased, that there might be potential for other New York-type developments.

Is there any update on that?

No, but we are looking at the possibility of further expansion even at Queens itself, but not-- nothing that we can talk about today.

Okay.

And I think you said your-- currently you're not marketing any properties for sale, correct?

I didn't say that.

We have one property on the market right now in Phoenix.

It's a series of ground leases that we anticipate going to contract on within a week or so.

Can you give a ball park price?

Some are between $40-60 million.

Okay.

Is that encumbered or not?

Basically free and clear.

Okay.

And Wild Oats, obviously they've had sort of a rocky quarter.

Are you concerned at all about their credit or any-- what's the terms of the lease?

Have they signed it or is it just in the discussional?

No, I'm not really that concerned about their credit because of the fact that the location that they will have, if they crater, any number of other markets or organic markets that would love to have it in a heartbeat.

So I'm not at all concerned about that.

And same goes for the office?

Yes, same goes for the office.

Okay, and on Thousand Oaks, there has been some press about zoning issues.

Do you have any comment on that?

It's a very vocal community.

It's a very high barrier to entry community with very vocal citizens.

It's a tough entitlement process.

We're highly confident that we'll get through it and when we get done, we'll have a project that's really irreplaceable.

Okay.

So-so far it's going, it's going according to your plan?

Yeah, and completely as suspected expected.

Okay.

They seem to be quite vocal out there in California.

We love-- we're masochists at times, but when you get through the pain you end up with properties that are irreplaceable.

New York also too has its share of pain.

Interesting any enough, New York was one of the easiest projects we've ever had.

When we had the city council vote on the projects, the vote was 42-0.

Okay.

And then your same-store sales, did you disclose that?

Tenant sales?

Same-store sales, not same-tenant sales.

The comp tenant sales were 3.5%.

Are we talking about same-center NOI growth?

Sure.

Same-center NOI growth for the entire portfolio was 1.85.

If you break that down between the wholly owned and the JVs, wholly owned were up 2.66 and the joint ventures were down .5%.

Okay, and I think you mentioned-- did you mention that I paid off the Westcor term loan?

Yes.

Okay.

Thank you.

Thank you.

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

Please go ahead.

Yeah, what's the length of the Wild Oats office lease at 29th Street?

I think with options, it's around 15 years, Craig.

And how big is the total office complex?

They are taking the old Sears building, so it's 80,000 square feet.

Okay, and do you have a sense of where occupancy might be by year end?

For our portfolio?

Yeah.

Well it, should be up-- historically on a seasonal basis, obviously the fourth quarter is generally our highest percentage.

What was the fourth quarter last year, Tom?

We closed last year at about 93.3%, Craig, and we think this year will be very close to 93%.

Okay, and in a year from now, do you have a sense of the 100,000 KB space, will that be 75% released, 80%?

Do have you a sense of where you might be with that?

Well, we think it will be, you know, at least 75% released.

They generally had good space and they were not paying a substantial amount of rent, so we should be able to better the rent and fill the space relatively quickly.

Great.

Thanks a lot.

Thanks.

Thank you.

Our next question is coming from Ross Nussbaum of Banc of American Securities.

Please go ahead.

Hi, good afternoon here with Amy Dillone.

Art, you mentioned that you're expecting 5% growth out of the Westcor portfolio I think in 2005.

Where is that primarily coming from?

Actually, Ross, by the way, they said you're with who again?

Congratulations on that.

Actually what I said is that the, the 2004 number will be NOI growth, NOI will be 5% as we can see it today over actual 2003.

Okay.

I'm sorry, so 2004 will be 5% higher than 2003?

Correct.

I didn't say anything about 2005.

Do you have a forecast for '05?

Not that we're going to give out today.

We don't generally give out guidance forecasts for property, but we're happy to talk about something like Westcor on an as-is consolidated basis as the results actually come in.

Okay.

In terms of La Encantada in Scottsdale, is the NOI from those assets fully on income statement right now, or is there any more lease up to do there?

No, it's not at all fully there.

It'll really be - 90% of it will be there by the fourth quarter.

La Encantada, you know, had a soft opening back as is fairly normal for life-style type of centers back in November.

You know, we're still in the summer months there, so we got tenants there that are actually even on percentage only, which was as planned.

Really by the fall of this year and spring of next year is when that becomes completely stabilized.

Scottsdale 101 is pretty much -the same story.

So you're not capitalizing any more costs on those two projects at this point?

Ross, we're capitalizing a prorata share of those costs.

To the extent it's completed, then that percentage is no longer capitalized to the extent it's still being built out and completed then we continue to capitalize a portion.

Okay.

So it sounds like the vast majority of the NOI still isn't on yet and you're still capitalizing the costs related to that NOI?

Well, Scottsdale 101 is probably about 70% built out.

That's a power center and those buildings are being built as the leases are signed, which is very typical of a power center.

Those are build-to-suit buildings.

And that's about 70% complete as of the end of the quarter.

And what-- can you just give us a sence of what the lease percentages are on those assets?

I'm sorry?

What percentage leased are those two assets?

Scottsdale 101 is about 90% leased today.

But 70% built out.

It's a power center that's getting built in phases.

Right, and La Encantada?

La Encantada is about in the 70% range with approximately 50% of that built out today.

Has that gone a little slower than you expected?

No, it's exactly as expected.

We had, again, a soft opening where we allowed the grocery store and some of the restaurants to open earlier on their schedules and Crate and Barrel also opened up earlier as they did.

Okay.

Again, the main thing is that you should think of both of those projects as we've always said, to be coming online in the fourth quarter of this year to be fully online in '05, which is what we said for over a year now.

Okay.

Final question, Art, you had talked about number of your assets where sales were, I think you said, "on fire", year-to-date.

Which malls are holding you down in terms of the portfolio average?

Is it the IBM Midwest assets?

Yeah, those are pretty depressing.

They-- they are very flat.

You know, California is extremely hot, Southern California is up on a comp basis 4% and on a total center sales basis, up 6%.

Pacific Northwest is doing good, Inter-Mountain Region is doing good, but you look at places like Texas, Oklahoma, the IBM portfolio is a little sloppy.

Phoenix itself is absolutely on fire.

It's up over 15%.

Is the game plan still to split up those assets with Simon when the time comes or is there kind of a, you know, complete exit strategy now entering your mind?

No, I think that the plan really from day one is pretty much what it will be today, which is that we'll split up those assets when the loan matures a couple years from now.

Thank you.

Thank you.

Thank you.

Our next question is coming from Gregg Andrews of Green Street Advisor, please go ahead.

Good morning.

Good morning, Gregg.

Could you talk a little bit about the timeframe as you see it today on north, the North Park expansion?

Yeah, well, we have delivered the partnership has delivered a pad to Nordstroms, so they will be getting started on construction later this year.

The total expansion will be complete probably in '06 sometime.

Is the expansion a, kind of wing, a Nordstrom wing?

I don't understand.

It's a large expansion.

It connects to Nordstroms and then it connects from Nordstroms over to Foleys, so it really creates a quadrant.

Okay.

And you mentioned the acceleration of the Gilbert mall project.

Is - is the potential for life-style centers to kind of get out of the ground quickly, part of what's driving you to move faster there?

I'm sorry.

Could you repeat that?

Is the-- you mentioned that you're going to start this Gilbert project.

Is the threat of new life-style centers partly what is accelerating your plans there?

No, no.

Tenant demand.

We, you know, we planned at the flag, announced our Phoenix 20/20 program in a big, big media splash in May.

We outlined for the tenants in the community, all of our development sites and projected timeframes.

We announced Dillard's and Robinsons May at Gilbert, that they would be coming to Gilbert back in May.

As a consequence of that announcement instead of it being on, you know, a future drawing board, it was put on a current drawing board and then the tenant demand became so great that we have decided to go ahead and to move up the breaking ground from what we set in May, breaking ground of 2006 to now we're going to break ground next year and we anticipate having it open in '07, even though some spaces could even open in '06.

We also, as I mentioned, have gotten more specific about Goodyear and we anticipate that Goodyear will come on the heels of Gilbert by approximately a year or so.

Okay, and then finally, I understand there is a mall or mall-type project that's planned for Simi Valley.

How does that relate to The Oaks?

Is that something that might take some of the share there or is that far enough away that it doesn't, shouldn't really have an impact?

No, it really won't have much of an impact.

It's got a Macy's and a May Company, but they are really junior anchors.

In terms of size, they are only 110,000 square feet each.

It'll be a very much middle market-type of mall.

It's a market that needs a little more retail.

It will not have an impact on Thousand Oaks to speak of.

Great.

Thank you.

Thank you.

Our next question is coming from Gary Boston of Smith Barney.

Please go ahead.

Good afternoon.

I'm here with John.

Tom, I just have a couple questions.

Then I'll hand it over to John.

The latest acquisitions you made in the quarter, any FAS 141, 142 impact from those?

Relatively small, John.

The two that were just announced happened after the end of the quarter, so it was really not, not a factor at all, and, yeah, there is Inland and North Park.

It's immaterial.

I was actually referring to the last two for the balance of the year, if you're expecting anything.

Sorry.

Oh, for the balance of the year, you know, we're finalizing those numbers, but I would not expect that they would be too significant.

Okay.

Perhaps a penny or two.

Right.

Just on the occupancy, you sort of touched on the KB situation.

Wondered if you could give an update kind of on where you are on releasing that space.

Well, there is a lot of notions under way.

Again, we just got our hands on about half of that space in the second quarter, about half of it in he first, so there is negotiations under way on virtually all of it, and we've probably got, you know, about half of it spoken for already, subject to finalization of the leases.

All right.

John, I think had some questions.

Yeah, I had a question on Washington Square and Fresno.

Can you talk about how you get to 12 yield?

Is that just new rent on new space over cost or is that some expectation that the whole center is going to get better rent?

No, no, no, we don't play that game, John.

It's actual rent from real tenants going into real space.

And it's the space that's being built and it's the income that's coming from that.

It's not increasing rents on the overall project type of thing.

It's none of that.

I mean 80,000 square feet at $55 million is like a $600 a foot number.

Well, we're also adding, we're really overbuilding additional parking.

In order to get the approval, we were fully parked on the site.

And in order to get approval from Nordstroms and May Company, Nordstroms and May Company are both sitting there doing over 100 million bucks and they didn't want their stores to be disturbed and parking to be impacted.

So in order to get their approval we had to build a large parking structure that was very significant.

That was a significant cost that we incurred.

We also built a second level shell over the building, a second level shell over the first level.

So--

Are those costs in the return then?

Those costs are in the costs, the 55 million.

But they are not in the 12% return?

No.

The 12% return is only from the first level retail shops.

So we built parking that really gets us overparked right now.

We actually built two decks, one to service May Company and one to service Nordstroms.

So we basically built more infrastructure than we needed for the expansion that we built.

And that's in anticipation of future expansion?

Yes.

And how much future expansion could you put on?

Well, we built a second level over the shops, so you know, another 40-50,000 feet up there, either there or elsewhere on the site.

That would still put costs at probably 450 a foot.

Is it reasonable to assume that you're getting in the 40s in net rents there?

Yeah, that's a very productive center, John.

That does close to $600 a foot in sales.

And similar on Fresno, it looks like it's about $330 a foot in costs.

Maybe you could just walk through how you get there.

Well, we have to completely redo the ring road around.

We're building out in the front of the parking lot, so we got to redo ring roads, utilities.

We're building a, you know, an extremely expensive common area in terms of open air landscaping area.

So I mean we're building an extremely attractive building.

And does the 12% include the new ring road or is the 12% just the box the tenants go in by their rent.

Okay.

The $30 million cost includes every penny that we're going to spend to have it be done.

Right.

Change the utilities, that means change the ring road, that means build the buildings, that means put in an extremely attractive landscaping system.

On that $30 million, we'll see about a 12% return from the rent that we'll achieve from the tenants that will take that space.

On the new 90,000 feet?

Correct.

And then just to get onto 29th Street, it's the 12% on incremental.

I don't recall what your basis is on that.

What would it be if you included your basis in that?

John, we haven't looked at it that way frankly.

Those are sunk costs to a large degree.

To the extent we bought out tenants, we factored that in to our evaluation, but we do not factor in the basis of the old buildings that were acquired in, you know, 1982.

If you added our incremental new costs to our historical book basis on that asset, at the end of the day two years from now, we'll be seeing about an 8% return on that.

That's good.

All right.

Thanks, guys.

That's after suffering all the pain that we have suffered at the hands of Boulder and you all.

Thank you.

Thank you.

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

Please go ahead.

On North Park, so just giving your disclosure so far we're safe to assume that your sort of price for your share at North Park was $160 million, or is there any other component of the capital structure I'd be missing there?

No, that's it, $75 million of equity subject to the debt.

You said your preferred return, I assume that only applies to a portion of your equity or is it for the whole equity?

For the entire equity.

okay.

Great.

Mervyn's, obviously did some incremental announcements there.

Do you have any reaction to that, does it change your thinking at all?

Do have you any idea what's going to happen to your location?

I mean-- yes.

All indications are that the group that's buying Mervyn's intends to operate the vast majority of them.

We are anticipating that they may close in certain regions.

I wouldn't be shocked if they were to close in Texas and we do have a store in Texas, but from all appearances, it looks like it's going to be business as usual.

Okay.

Great, and then, Tom, can you give a little-- can you refresh your guidance, I guess on G&A and can you tell us anything about land fills for the rest of the year?

Yes.

G&A could be a little bit lumpy quarter to quarter.

If you look at it for the six months combined, it's relatively on track for close to where we were last year.

I think the guidance we gave was on the G&A for the year, about 12 million and I think that's still relatively close given the fact that we're for the six months ended, we're at about 5.3.

So 12 is still good, a good number for the year, Matt.

Then in terms of land sales, we've got about another penny or so in our guidance for additional land sales for the rest of the year.

Okay.

Great.

And then I'm sorry, go back to North Park for one second, in terms of square footage, I don't recall from your press release.

Did you say what the inline square footage there was?

At North Park.

Yeah.

It's 500,000 feet there.

Okay.

I have in the directory, looks like the total square footage of the center is 1.6 million; is that right or is that too big?

It's actually about 1.3, 1.4 million right now.

Are there, outside of the inline square footage thaw gave us of 500, are there rent-paying mini anchors or anything?

Not really, no.

Okay.

Great.

Thank you.

Thank you.

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

Please go ahead.

Yes, hello.

I have a few questions today.

First, could you lose any incremental income due to the demolition at Boulder?

No.

We're down to zero.

Okay.

Next question, on your $40-60 million disposition, when could we expect that to close and what kind of cap rate are you looking at?

Year end and I'd rather not talk about the cap rate right now, but it's sub 8.

Okay, great.

And then just a few questions on your development activity.

First, what dollar amount-- could you be looking at for the North Park expansion and then again, the same question for the costs on Gilbert and Goodyear?

The North Park expansion really was under way when we bought into the partnership and the costs of that expansion is entirely being borne by the, our partner.

But it's in excess of $100 million, the cost of the expansion, but it's the risk, all construction risks associated with that expansion are with our partner.

What was the other question relating to Gilbert?

And when could the expansion be completed?

Where?

At North Park.

Most likely be in '06.

2006.

Still to be determined.

This all would be incremental costs in excess of the amount that you required the asset at?

Yes, but none of that would be borne by us.

And when it's completed, you'll fund it, I take it?

No, no.

Our total equity commitment to this project to North Park and for our total investment both today and with the expansion is 75 million period.

Okay, and then just moving to Gilbert, what-- and Goodyear, what, what dollar amount-- could you just give us an idea of the cost of those two projects?

Sure.

Typically, you know, a projects of that size is going to be something between 2 and 300 million as soon as we identify exactly what we feel it will be as we get closer to ground breaking, we'll clearly come out with specific numbers.

And how might you finance that?

Could finance it with our line of credit.

We could finance it with a construction loan.

Typically developers would finance a development of that nature with a construction loan.

Okay.

Great.

That's it for me.

Thanks.

Thank you.

Thank you.

Our next question is coming from Patrick (ph) Baytag of Invesco.

Please go ahead.

Just one question about North Park.

You delivered a pad for Nordstroms, so they are building a new space and you have Lord and Taylor there.

What's going to happen with Lord and Taylor?

Nordstroms is building new space.

Lord and Taylor closed quite sometime ago and the Lord and Taylor building is going to be re-demised into other tenants.

Okay.

Maybe more specifics, like other tenants, kind of other tenants?

In the Lord and Taylor space?

Yeah.

We're talking to people like Robb & Stuckey, the high end furniture store, people like REI.

There could be some small stores in there.

That's really been a moving target right now frankly.

The partnership is debating about whether or not to demolish the Lord and Taylor building and build fresh retail or to reuse it and that's still a moving target.

Okay.

Thank you.

Thank you.

Thank you.

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

Please go ahead.

Thank you.

My questions have been asked.

Thanks, David.

Thank you.

There appear to be no further questions at this time.

I'll turn the floor back over to you.

Okay.

Well, we appreciate your being on the call with us and we look forward to talking to you soon.

Thank you very much.

Thank you.

This does conclude today's teleconference.

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