Macerich Co (MAC) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

And welcome to the Macerich third quarter 2004 earnings conference call.

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

I would now like to hand the floor over to Georgiann Palthy, ma'am, the floor is yours.

Thank you.

And thanks to all of you for joining us for the Macerich third quarter conference call.

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

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

For a more detailed description of 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. As reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the earnings release for the quarter, it is posted on the Company's home page under the section entitled "financial press releases."

And having said all of that, I would like to introduce Mr. Art Coppola, President and Chief Executive Officer, as well as Mr. Tom O'Hern, Chief Financial Officer.

I will turn the floor over to Tom for his opening remarks.

Please go ahead, sir.

Thank you, Georgiann.

This morning we will be discussing the third quarter result, reason capital transactions and our outlook for the remainder of 2004 as well as 2005.

It was another very solid quarter for us.

Tenant sales were up, with strong year-over-year gains.

We had continued good occupy level, good releasing spreads, significant re-development activity, and we had several key acquisitions that Art will be elaborating on later in the call.

Looking at our portfolio operating metrics, they remain very positive, total same center tenant sales were up 5.5% for the quarter, and 6.4% year to date.

Looking at that by region, southern California was again strong, up 7.1% for the quarter.

Northern California and the Pacific Northwest was up 8%.

The inter-mountain region was up 4.2%.

Arizona was strong once again, up 7.7%.

With the only region, central and eastern regions being flat for the quarter.

Comparable tenant sales in the same space, same location, both periods were up 2.6%.

Looking at total mall sales per square foot for the rolling 12 months came in at 378, that was up 6% from 356 September 30, of 2003.

Occupancy level at September 30, 2004, was 91.8%.

That compared to a portfolio occupancy of 92.9% a year ago.

However, if you look at the occupancy level on a same center basis, that is excluding acquisitions, re-developments, and sales subsequent to September 30, 2003, the occupancy was 92% compared to 92.4%.

KB Toys represented the bulk of the decrease with some major closures in the first and second quarter totaling about 99,000 square feet in total.

Leasing activity for the quarter was again very strong.

We signed 404,000 square feet of leases.

The average new rent was 34.39, that gives an average re-leasing spread for the quarter of 19%.

Year to date, the positive re-leasing spread is 24%.

Average rent per square foot in the entire portfolio as of September 30, 2004, is 32.41.

And that compared to 31.55 at year-end.

FFO per share diluted for the quarter came in at 95 cents.

That compared to 85 cents for the quarter ended September 30, 2003.

EPS diluted per share was 29 cents for the quarter ended September 30, 2004, compared to 69 cents per share for the third quarter of last year.

Primary reason for the decrease in EPS was increased depreciation expense related to F FAS 141 and a large gain on sale of Bristol center during the third quarter of 2003.

Same center net operating income for the quarter was up 1.2%, that's compared to the third quarter of last year.

There was about 500,000 straightlining in rents for the quarter and that compared to about a million in the third quarter of 2003.

Lease termination revenues were at 700,000, very comparable to the 650,000 that we recognized in the third quarter of 2003.

CPI increases for the quarter were 540,000 higher than in the third quarter of 2003.

Interest rates impacting the portfolio at the average was 5.5%.

That compared to 5.7% at September 30, 2003.

Average maturities, 4.3 years.

Interest coverage ratio is a very healthy 2.4 times.

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

We raised our estimate to 388 to 395.

There were many factors resulting in the upward guidance, including low interest rates, and the impact of our recent acquisitions.

In addition, we also gave guidance for 2005, with FFO per share diluted in the range of 420 to 430.

It includes dozens of variables and assumption, including same center NOI growth projected at 2.5 to 3% and LIBOR rising throughout the year to 3% by year-end 2005.

We have not factored in any acquisitions or dispositions other than those that we already have under contract.

On November 29, we increased our dividend again.

We declared an increase, taking it up to 65 cents per share per quarter.

This is a 6.6% increase over the prior dividend.

And it represents our 10th consecutive year in which we have increased our dividend.

Based on the annualized dividend in the midpoint of the 2005 guidance, that leaves us with a very healthy FFO payout ratio of 61%.

Now, looking at the balance sheet, at September 30, 2004, we had 3.1 billion of debt, excluding non consolidated entities.

And our pro rata share of debt from unconsolidated entities is 1.2 billion for a total of 4.3 billion.

Our floating debt to total market capitalization is 12%.

Our floating rate debt of 1 billion is 23% of our total debt.

Our debt to total market capitalization is approximately 48%.

At this point, I would like to turn it over to Art.

Thank you, Tom.

I will be talking about recent acquisition activity.

Our re-developments that are in process and planned as well as new development.

And finally, the grand opening that is coming up in a couple of weeks on our Queens Center.

On the acquisition front, we previously announced that in the quarter, we did close on acquisitions in Victor Valley as well as Cumbre and Santa Barbara and we discussed the particulars of that I believe in our last call.

We are currently under contract to buy Fiesta mall in the Phoenix area, in Mesa.

Fiesta is a one million square foot center.

We will be closing on this in ten days.

We don't normally talk about acquisitions before they close but it's been in all of the local press and probably some of you have picked up on that.

The price on the deal is 135 million.

We expect to see a 9% free and clear return on our investment in the first year of ownership.

As is mentioned in the press release, we have our financing this with an $84 million mortgage at a fixed rate of 4.87%.

Sales at this center are $362 a square foot and are trending upward this year.

This center was one of the first two centers that were built in the Phoenix area and going back seven, eight years ago, it was the strongest center in the Phoenix area, back in the year 2001, it was doing in excess of $450 a square foot but it was significantly impacted by the opening of Chandler fashion center, which opened in November of 2001, which was anticipated at the time.

Sales now have begun to trend back up.

They are up 4 to 5% this year.

And we see the opportunity to blend into this into the portfolio at a very attractive return.

It's anchored by Robinson's-May, by Macy's, by Sears, and by Dillard's.

This now brings our Phoenix mall portfolio up to eight miles totaling 9.4 million square feet averaging well over $400 a square foot.

Sales in the Phoenix marketplace for us have been terrific.

In the third quarter, sales were up almost 8% on a comp basis, between 9 and 10% on a total sales basis.

Year to date, sales in the Phoenix marketplace for us are up 8% comp, and 10% total.

As you know, this is a huge marketplace, with Phoenix now at -- just over 3 million people, and expected to double in size over the next 15 years.

So we're looking at adding 3 million people in the Phoenix marketplace.

And we intend to capture that growth with the addition of five major new projects, two of which we will be talking about today.

To put that into perspective, California, as a state, is expected to grow by 5 million people in the next 30 years, so you can see that this is a very, very robust economy, and marketplace here in Phoenix.

And it's been a great, great addition to our portfolio.

Looking now to re-developments that are in process, we are in the final phases of getting approval on our Fresno expansion, with the city, and the department stores we're adding a 92,000 square foot open air lifestyle center to this property.

And it will be contiguous to the mall itself.

It's anticipated to open either in late 2005, or early 2006, depending on the entitlement process.

We've talked a little bit about returns on this investment in the previous call.

They now appear to be coming in somewhere in the neighborhood of 24 to 25 million of cost, and we anticipate 12% incremental returns.

We're proceeding well on our 80,000 square foot enclosed lifestyles expansion of Washington square in the Portland marketplace.

We've just completed a major new parking deck which creates the infrastructure for not only this expansion but further expansions of the center.

And the new 80,000 foot addition should be finished by the fourth quarter of next year.

I'm pleased to say that we have demolished the vast majority of the former Crossroads mall in Boulder, Colorado, and we are now going to begin the process of reconstructing that.

The mall will be rebuilt to be approximately 900,000 square feet.

It will be built in three distinct neighborhoods.

There will be a grocer anchored neighborhood, there will be a large retail format neighborhood, which will house Home Depot, and then there will be an entertainment and lifestyle neighborhood that will be anchored by Foley's, by Century Theaters, and by small store retailers.

Retailers that we are currently showing interest in the project include tenants such as Anthropology, Sirlatell, Lucy, Apple, Cold Water Creek, Sapporo, J Jill, so we are looking at this as being a very, very nice re-development and we are looking forward to rebuilding this project.

We are finishing up our new developments on Scottsdale 101 and La Encantada.

Scottsdale 101 is proceeding well, is now currently approximately 90% leased and the vast majority of it is open at this point in time.

La Encantada continues to open in phases.

We are now just in excess of 80% leased with another 10% of the space out for signature or in negotiation.

Key new tenants that have opened recently at La Encantada in Tucson include J Jills's, Saint John, Anthropology, Coach, Cohan, so, we're very, very pleased with this development, it's also coming in on plan, on budget, as is Scottsdale 101.

San Tan Village in Gilbert, we announced this project a couple of months ago and we are now in the process of beginning to solicit retail demand and to start to sign letters of intent, with retailers in this project.

This is a 500-acre development that will include up to 3 million square feet when it's fully completed.

The core of the project which we will own the mall component, is 120 acres, which we will be taking down in the very near future and which will open in the year 2007.

The balance of the land we are co-developing or selling off to pay for infrastructure with the land owner, and we will include a power center, large boxes, and other uses, including the possibility of free-standing department stores, such as JC Penny and Sears Grand.

The mall component which again will open up in 2007, will be approximately 1.3 million square feet.

It will be anchored by Robinson's-May, Dillard's, there will be a large theater, there will be a 250,000 square foot enclosed mall component and a large open air lifestyle component, as well as a possibility of other mixed uses on campus, including the possibility of a grocery store.

We also have announced our Goodyear project in western part of Phoenix.

This is scheduled to open in 2008.

This project will be about 1.5 million square feet upon completion.

It will include 400,000 square feet of department store space, 300,000 square feet of enclosed mall space, a large theater component, as well as a power center contiguous to it.

The big story that we have now in the development and re-development front is really Queens Center.

We broke ground on Queens Center in July of 2002.

We opened up the first phase of the expansion of Queens Center in March of this year, with the relocation of JC Penny from the existing mall to a new 200,000 square foot store, and the opening of 140,000 square feet of mall shops.

On November 19, we will be celebrating the opening of the redemised JC Penny store and the mall will now be seamless on all three levels at the project and 110,000 feet of new mall space will open or is open at the site as of November 19.

The project is currently 98% leased.

By year end, we will be 91% open for business, with the balance of 7% opening for business in the first and second quarter of next year.

This is a very, very important project.

It was a project that was extremely complex in terms of the building, in terms of the entitlement.

When we announced this project in early 2002, we announced that we felt it would be about a $250 million project at about an 11% going in return.

We announced that the opening dates would be late 2004, or 2005.

After we announced the project, we expanded the scope of the project, and ended up deciding to relocate the food court from the existing mall to the new expansion wing, and as part of expanding the size of the project, we announced that the cost of the project would be increased up to 275 million.

Costs are now in.

And we're coming in just under budget.

We are coming in exactly on time in terms of the opening of the project.

And instead of seeing an 11% incremental return on the project, we expect we are now seeing about a 12% return.

And again, this is important to note, that these are returns that are in place today, not in place three or four years after completion, as many developments are announced by others when they talk about stabilization being three or four years out.

So we're very, very pleased with this.

We now have a one million square foot super regional center that we expect will be, if not the highest sales per square foot producing shopping center, in the U.S., certainly one of the top two or three.

Sales at the center were approximately $1,000 a square foot out of 130,000 feet when we started construction.

We are anticipating sales to be in that neighborhood over the next couple of years.

So it's a fabulous project.

JC Penny is reporting to us that this is now their highest volume store in the continental U.S.

And Macy's has added a fifth level to the store and anticipate their sales to be increasing another 20% to something in excess of 120, $130 million.

So it's a very, very significant project for us, we took the chance of telling you what we thought it was going to cost, what we thought the returns were going to be even in spite of the fact that there were many uncertainties and we're pleased to report that it is now opening, it is open it's on time, it's on budget in terms of cost, and we've exceeded our returns.

I'd like to now open this up for questions and answers please.

Thank you, the floor is now open for questions.

If you would like to ask a question, please press star followed by one on your touch-tone phone.

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, please pick up your handset to ensure the best possible sound quality.

Our first question is coming from Paul Morgan with Friedman Billings.

Good morning.

Could you talk about the amount that you are planning on spending on development over the next year or two, so on an annual basis, say?

Development?

On mall development, yeah.

Well, on re-development, we're expanding Fresno.

We talked about that.

We just mentioned that that would be something in the neighborhood of 24 to $25 million.

On Washington square, we've talked about that in the past.

That's in the total area of 55 million, which our half is 27 million.

The Boulder project, we talked about that in the past, that's projected to be about $130 million over the next 24 months.

We have not discussed at this point in time or come out with numbers on the San Tan Village mall component.

That will be commenced construction components of it next year, with completion, some of the entertainment components in '06, the balance in '07, again, we have not discussed the total dollar investment on that we will put out numbers on that as we finish the scope of it, but that will clearly be a brand new mall development in excess of $200 million.

We are looking at the good year project, 1.5 million square feet, new mall, and power center.

To be open in 2008.

That will clearly be more than $200 million.

And then the final major product that we've discussed in the past is the expansion of the Oak Center in Thousand Oaks, and we have not put out final numbers because we don't have our final scope and entitlements there, that will be something that will be done over the next 24 to 36 months and that will clearly be in excess of $100 million.

Great.

And then on the acquisition side, and there is a lot of malls that have been talked about being on the market, what's your view on -- strategic view on sticking within -- I mean you made a lot of good acquisitions in your core markets but I know you've bid on a lot of others, thinking of malls outside the, you know, the western part of the country.

Well we're a national owner.

I mean as can be noted by the fact that we go from the west to New York City.

And you look at New York City, our Queens project is -- represents a huge component of our portfolio.

So I mean we're clearly a national owner with a lot of properties in the midwest and other parts.

You know, we're going to be opportunistic and as we see the right opportunities, we'll buy them, but clearly where we see opportunities that are in markets where we already have great synergies, they can be more attractive to us.

Okay.

Thank you.

Thank you.

Thank you.

Our next question is coming from Michael Billerman with Smith Barney.

Good afternoon.

You announced the potential re-development of Biltmore during the quarter.

Do you have a sense of the timing and the potential cost of that project?

Well, it will be a large entitlement process that will be required, which will probably take between 9 and 12 months.

No, we don't really have cost numbers at this point in time because we're not sure exactly how long it's going to -- exactly what is going to be approved and exactly what we're going to do, but my guess is that will be something that we'll be pursuing the entitlements over the next 12 months, and the buildout would happen probably over the next 18 to 24 months after that.

It wouldn't surprise me at all for the total re-development costs there, depending on the scope of it, to be something in excess of $100 million.

And I guess what would be the ideal re-development scenario for you?

And what do you think the return on that capital would be, and maybe talk about what the overall yield would be, including your acquisition and the re-development cost together?

You're talking about Biltmore?

Biltmore, yeah.

Well, the ideal result would be to get as high as possible return.

And to have the best possible project.

We are -- from an ideal viewpoint, from a use viewpoint, the project is screaming out for mixed use.

It is uniquely entitled in terms of height at that corner of 24th and Camelback.

We have the -- an entitlement to go higher than any of the other quadrants at that intersection, which is really probably the most valuable intersection in terms of office and residential in the whole Phoenix-Scottsdale marketplace so it is crying out for mixed use, residential is clearly very, very hot in that market, residential developers are selling units at -- in excess of 7, $800 a square foot.

The Trump organization is trying to build a mixed use project just across the street from us.

So mixed use is clearly something we are going to pursue.

It will be determined whether or not that -- whether or not we will sell those entitlements or participate somehow, but most likely we we would sell those entitlements and then we want to just reposition the retail component.

Again, from our viewpoint, when we pursue developments like this, our starting hurdle rate in terms of going in returns are generally double digit returns, and we've been successful in achieving those.

So it will definitely be mixed use.

And we anticipate very strong returns from the investment and we would anticipate that at the end of the day that the total investment between our original acquisition and the re-development dollars should be something in the neighborhood of 10%.

But really the scope is going to have to be determined and there will be many variables to it.

Okay, you talked about a potential press on the acquisitions your making in the fourth quarter, there has also been some press on potential sales.

Can you comment on what you may have helped sell?

We have a -- we have some ground leases that in the Phoenix marketplace that we put on the market a couple of months ago, and they're under contract right now.

I'm not going to talk about price.

I did talk about it in the last call, and I said that the price was between 40 and $60 million in terms of the sales price, and we do anticipate that that should close by the end of the year but you never know until it closes.

We had exposed another property that we own in Oklahoma City, Crossroads mall, to the marketplace, and if we get an attractive price on that, then we will go ahead and disclose it then.

And then just quickly on guidance, there was about 5 cent of this noncash FAS 141, 142 income in the quarter.

Is that what we should expect in the fourth quarter?

And is there 20 cents of that baked into next year's numbers?

Or does it dribble off a little bit?

Michael, it will burn off a little bit for the next few quarters, it will be in the 5 cent range but as those leases mature, you actually assign some of that value to each and every lease, so as it gets closer to its termination date, that starts to decline.

So for the next two, three quarters, 5 cents, probably appropriate, and then taking it down to 4 after that through the end of '05.

Okay.

Great.

Thanks very much.

Thank you.

Our next question is coming from Jay Leupp with RBC Capital Markets.

Hi, good morning, here with Greg Johnson.

Art, could you talk a little bit more about the Fiesta mall acquisition, the 9% going in cap rate and also what sort of heavy lifting you're going to have to do to make that number on a stabilized basis in the coming year?

The Fiesta mall acquisition?

Yes.

That's income in place.

Oh, it's income in place, okay.

Yeah.

There's no lifting at all.

No lifting at all.

So that I'm assuming that you're going into this one with some upside in mind with some repositioning.

Can you talk a little bit about what your plans are going forward and where you think you can take the stabilized return from that stabilized 9%?

That return will be relatively flat over the next couple of years.

You know, for a center that is doing 365 a foot, a million square feet in a marketplace like Phoenix, to be able to buy it at a 9% return, that is an extremely high going in return.

The reason we were able to buy it at such a good return is that other investors have tended to shy away from the Phoenix marketplace because of our strength in the marketplace.

And also as we build the San Tan Village mall which is nine or ten miles to the south/southeast of Fiesta mall, there will be some impact on that return.

So as the sales continue to go up over the next two or three years, income will go up modestly, but then it will flatten out for a couple of years after San Tan comes on line.

But, you know, we're able to buy that at a very, very attractive return, and you know, that's income that's in place so that one is really just blocking and tackling, and just doing day in, day out leasing.

The -- a similar question on queens, as you move toward the grand opening.

The 275 million, what do you anticipate that stabilized return is in the first 12 months?

And will there be significant upside over time over the next couple of years?

The actual return in '05 on that 275 will be 12%.

Yeah, we anticipate continued growth there.

When you have centers like this and you have such high sales per square foot, you have an opportunity to continuously re-merchandise the center.

With the leases in the existing center that will mature, that we'll be able to mark up, we anticipate some percentage rent coming from the center.

And then over the next couple of years, there will be recycling of tenants, there will be uses that will be put in there that don't work and we'll recycle them with more productive uses, you know, so when we bought Queens, it was 100% leased and we took the income from 9 million at that point in time up to 14 or 15 million, just by re-merchandising the center.

So when you have a highly productive center like this, there is a constant opportunity to recycle tenants that are not doing the mall average and bring in the more productive tenant, so we anticipate great upside from that center going forward.

And in any event, all of those leases were signed with CPI clauses so we are going to be seeing CPI increases, if nothing else.

Okay.

And last question for both you and Tom, do you anticipate a significant amount of 2005 disposition activity in any of your markets or anywhere in your portfolio.

We will be continually doing some pruning.

I wouldn't say it's going to be material in the financial sense.

But it will be material in terms of the pruning of the approval.

Thank you.

Thank you.

Thank you.

Our next question is coming from Lou Taylor with Deutsche Bank.

Yes, thanks.

And good morning, guys.

Good morning.

Art or Tom, can you just compare the rent growth for this quarter versus last quarter, you know, I mean the 38%, I know, was a huge number, back down to around 19.

Where do you see it going over the next four to six quarters?

Lou, as we have cautioned before, I think when you look at those leasing spreads, you really have to look at more than one quarter, because you can get some quarter to quarter anomalies.

So although it was -- you know, it was in the mid-30s last quarter, I think we cautioned everybody to look at a few quarters and not just grab on to that.

The expirations we see coming through over the next two to three years are in the 28 to $29 range.

Comparable to what we're seeing today.

And we do think that we can continue to see some fairly strong re-leasing spreads, you know, 20 to 25%.

You know, year to date this year, it's 24% and I think that's pretty indicative we'll probably hold up through the end of the year and I wouldn't be surprised, given the expirations for '05 and '06, if we don't see similar spreads in those years.

And how would the spreads break down regionally?

Your southern Cal, northern Cal, Arizona, et cetera, I mean, you know, plus or minus to that, call it average of 25?

Generally, I would say that, you know, the markets where you've got the best growth and sales growth are going to have the better leasing spreads, so clearly, the Phoenix marketplace, our southern California, northern California, central California, I mean we've done terrific in Fresno and Modesto.

In up in the Portland, Washington square, great growth.

The midwest has been more modest.

So I'd say generally it has been weighted toward the hotter markets as you would expect because I think at the end of the day, obviously, rent is a function of sales.

Okay.

And then last question.

Just as your development pipeline really starts to ramp from here, how do you look at your funding for that pipeline?

Do you think you're going to need to bring in JV partners or do you think you can fund it with, you know, some internal retained cash, some borrowings and maybe even some dispositions, or do you think you need to bring in partners?

I don't anticipate bringing partners in for our development pipeline.

You know from the viewpoint if you're looking at a 200 -- let's just say if you're looking at a $250 million new mall, traditionally a normal developer, private developer would probably go out and put a $200 million construction loan on it and put in some equity into it, and clearly with the amount of free cash flow that we have every year, our free cash flow enough -- alone is enough to go ahead and fund the difference.

Great.

Thank you.

Thanks, Lou.

Thank you.

Our next question is coming from Michael Mueller with J.P. Morgan.

Hey, it's actually Josh Peterman.

Two quick questions.

First thing, it looks like operating expenses were down in the quarter.

Can you guys talk a bit about what happened there?

Yeah, Josh, on the expenses, first, again can keep in mind that those are not necessarily incurred ratably throughout the course of the year, especially nonrecoverable expenses.

And then looking at that,.

On a comp basis, in the third quarter of last year, the Management Company operations are included in that particular line item.

Operating expenses.

And the Management Company last year had a loss of 3 million versus break even for the third quarter of '04.

So that was a big part of the differential.

Again, that can fluctuate quarter to quarter, so you really have to look at more than one quarter.

You've got to look at three quarters or a year.

You know, we do expect our gross margin on an annual basis to be more in line with 65, 66%, which is where we're at for the full-year 2003.

And view that third quarter as just somewhat of an anomaly that should average out in the fourth quarter.

Okay.

Great.

And then last thing, how much stabilized NOI from Scottsdale 101 and La Encantada were in FFO in the third quarter?

Scottsdale 101 is a joint venture.

And on that, we have a total cost of about 70 million.

Our half of that is 35 million.

During the quarter, we had probably about 600 or 700,000 or so that came through on that.

La Encantada is comparably sized and we had about 1 million to 1.25 million of FFO that came through on that one in the quarter.

Okay.

Great, thank you.

Thank you.

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

Thank you.

I was wondering, as you are working your way through the Thousand Oak entitlement, has the project changed in any way?

Not really.

You know, it remains to be seen.

We don't have our final entitlement.

The core of the project is the addition of Nordstroms and the consolidation of May company into one location and then the redemising of the May company store, the eastern May company store, so the scope of the project at this point in time is pretty much what it has always been in terms of size.

But the -- you know, we do not have the final entitlement yet.

Great.

And given the heightened interest in the underlying value of department store anchors, I wondered, is there anything you think that may be missing in people's analysis of that, or anything that you think that is an offtick and into the calculation.

I'm not sure quite how to answer that.

I mean --

Well, I just -- it's interesting that a company that doesn't have many regional malls, seeing an underlying value, I would say, in Sears, but I'm not seeing that from the regional mall companies per se.

Well, from our view point, you know, the department stores are obviously a key component to our ownership and to our properties.

From our viewpoint, actually owning the physical building of a department store is not at all something that is hugely attractive from our viewpoint.

From retailers viewpoints, and other users viewpoints, they have seen the value of department store real estate, and as department store real estate and operations have become available for sale, there has been great interest in that, because people realize that most of -- the way these department stores have locations in prime retail locations, or regional mall locations, that there is no shortage of other retailers that would like to be in those locations, given the strength of their real estate.

But getting into the real steal business of owning department store space is not in our business strategy.

Thanks.

Thank you.

Thank you.

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

Yes, hi.

Good afternoon.

On your '05 guidance, I think you mentioned NOI growth of 2.5 to 3%.

This quarter, same store.

Hello?

Yes.

Oh, okay.

I thought I was cut off.

Same store NOI, was, you know, 1.7 and it has sort of been trending around 2% all this year.

If you're saying that your leasing spreads are sort of the same next year, what's the -- what's the extra pick-me-up?

This is a result of going through each and every property, each and every lease and doing our detailed budget.

And when you roll all that up, and you compare it to this year, part of the reason we had flatness in same center growth was we did lose some occupancy.

We are expecting to see some occupancy gain next year, and that really rolls up from the detailed property level forward, but when you consolidate all that, we are reflecting about a 100 basis point pickup in occupancy.

Based on leasing activity we see, deals that have already been done, or where we think we're going to end up at the end of the year next year.

Okay.

So it's the occupancy more so than the rent spreads?

Well, it's a combination, you have rent spread, you have occupancy gains, you have CPI increases that kick in.

All of those are factored in.

Okay.

Next, getting to everyone's favorite topic this quarter, Sarbanes-Oxley costs.

I can't tell you off the top of my head the cost that rolls through the quarter, I think in total if you look at what we're spending, and we really started to work on this in July of 2003, it has been a very significant effort.

We -- excluding internal costs we probably will spend $2 million by the time we reach the end of this year.

If you factor in the internal costs, you can add -- easily add another million dollars to that cost.

And how much of that though is ongoing versus one-time?

You know, it remains to be seen, because this whole compliance effort is somewhat evolving, as we move through it.

But I would guess on an annual basis it would probably be realistic to say it's going to be at least a million dollars.

Okay.

The stocks based in Carmel, what are the plans?

We are recapturing that, and we've got a number of retailers that are very, very interested in it.

We see some very, very significant upside that we're going to be getting from that.

We've already added some very attractive new tenants to Carmel plaza and expanded Louis Vuitton space, we're adding Tiffany's to the center.

There are a number of very hot retailers that want to be in that location and in particular, the building on Ocean Avenue is the most valuable real estate, obviously, in that whole marketplace.

So we're talking to a number of different retailers.

We'll be basically redemising both buildings and we see a tremendous amount of upside from it.

Okay.

So it is going to be completely cut up and reconfigured in --

I mean not completely.

We're -- you know, I would guess each building might be cut in half, something like that.

Okay.

So the spend, that sounds like another re-development project.

So what is the spend on that?

It is not going to be significant.

Okay.

It is not going to be significant.

Okay.

So like less than -- less than 15 million or so?

Oh, it is on one hand.

It is --

One hand?

Yeah.

Maybe your hand, not mine.

It will be a couple of million but I mean we don't have the number yet because we haven't decided exactly who we are putting in and how we are going to do it, but whatever we do, we expect to see not only huge increases in sales productivity but also some very attractive increases in rents.

My final question, just going back to the 29th street project, I know last quarter, you spoke about Wild Oats.

There seems to be more press coming out on them.

What's your conversations with them in terms of if they back out the office space, et cetera?

We're not worried about it either way.

I mean we have plenty of other uses that we could put into the office location that they would be taking.

From their viewpoint, they're optimistic about their future.

I've had, you know, numerous conversations with Perry O'Dack their CEO and he indicated to me that these were one-time structuring and restructuring charges that impacted them.

The real estate that they'll occupy is some of the best real estate in the project so no matter what happens to them I'm not at all concerned.

Great.

Thanks.

Thank you.

Thank you.

Our next question is coming from Robert Belzer with Prudential Equity.

Hi, yes, a few questions today.

First, specific to KB Toys, can you indicate how much of the space that they gave back at the beginning of the year you've already re-leased and what the spreads may have been on that space?

Well, of the 99,000 square feet or so, I think we've got deals being negotiated for over half of that.

So there's certainly a fair amount of interest and it's reasonably good space.

In terms of the kind of rent they were paying, they really were not paying a whole lot of rent.

Square footage was -- the total rent they were paying was in the neighborhood of about $20 a foot, and on average, we're re-leasing in the mid-30s.

And this is pretty well located space.

So I would expect to see a better-than-average re-leasing spread on that space when we do -- when we do get it under contract.

And how much more space do you expect KB to give up?

I don't think we're expecting to get back any more space from them.

Okay.

Then moving on to phase one and two of San Tan, the two power center components, can you indicate an investment amount on those two phases?

Sure.

I guess I'm going to actually give you a little bit longer answer than you may want.

The project is a 500 acre project and the business model that we have with the land owner that owns the land is that we have the option to buy the core of 120 acres and then we're the master developer for the other 380 acres.

Along the way, we make decisions with the land owner as to whether or not we're going to sell land and then redeploy the money into infrastructure or we're going to actually build on the land.

So the first phase where we -- we decided with the land owners to sell land to Sam's Club and to Wal-mart, and then jointly we decided to redeploy that money into infrastructure, meaning several million dollars of roadways in the project.

There's a 300,000 square foot power center that's under construction right now.

And we decided with the land owner to joint venture that, so we will own that 50/50.

That is being built at a cost of around are $35 million.

Total so we'll have half of that obligation.

And the projected returns on that are 12%.

The third phase of the project involves the addition of another power center as well as some free-standing department stores.

We will jointly make that decision with the land owner as to whether or not we're going to sell that land and redeploy it into infrastructure and essentially reducing our costs on the mall component.

Where we're going to jointly develop that.

So that's undetermined at this point in time but the basic business model on these large tracks that we have under option in Phoenix is that we don't take down the mall land until we need it.

We become the master planner and the master developer of the peripheral and surrounding land and then we decide with the land owner whether or not we are going to sell off land and redeploy the money into infrastructure, or go vertical and become partners.

At Gilbert's, which is San Tan, we have done -- the first phase, we have sold off-line and put it back into infrastructure and then we're joint venturing the power center and then we'll decide on the next phase whether or not it's going to be a joint venture or a land sale and then the mall component that's just us and the land owner won't be involved in that.

Great.

I appreciate the detail on that.

And then just a couple of questions on Fiesta.

What is your current occupancy at the mall and also how do you expect to finance the balance of the acquisition?

The current occupancy is around 92%.

And the acquisition is being funded by a permanent loan of 84 million with the balance being funded just off of our line of credit at this point in time.

Okay.

Great.

That's all my questions.

Thanks.

Thank you.

Thank you.

Our next question is coming from Rich Moore with Keybanc Capital.

Hi, good morning, guys.

Hey, Tom, what is the balance on the line of credit, the outstanding balance?

Outstanding balance is 550 million, Rich.

Okay and when you guys look at year-end '04 occupancy, what are you thinking there?

You know, year-end, Rich, last year at 93.3%, you know, you typically pick up 50 to 100 basis points between the end of the third quarter and the fourth quarter, so I would think we would be in the mid 92s.

Okay.

And then you were saying that, Art, that you think it goes up from there next year?

Well, that's what we have in our forecast, Rich.

Our budget -- detailed budgets that we go through a tremendous amount of effort and scrutiny, and when you roll through everything, in the end of the day, we do have some occupancy gains there.

Okay.

Great.

Thanks, Tom.

And last thing, you know, maybe you guys could give us a quick synopsis of what retailers are thinking right now, what you're hearing from them, and maybe your outlook for the holiday season?

Retailers are very bullish in terms of their expansion plans, in terms of their outlook, as well as our outlook for the holiday season.

Sales have been strong.

Sales overall in September were good.

They were better than August, which is a little bit unusual.

So sales picked up in September versus August, which is a very good sign.

And I think that everybody is optimistic about the fourth quarter sales.

Okay.

Great.

Thank you, guys.

Thanks.

Thank you.

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

Hi, good morning.

Hi, Dave.

Hi.

On the 12% return on cost on Queens center, --

Yes.

-- what are you using for cost?

275 million.

And that's all hard and soft and everything that was capitalized in, that's that consistent?

All hard, all soft, includes the renovation of phase one, everything.

Okay.

And the next question is on -- you were comparing Phoenix population growth with California population growth.

Yes.

And you said Phoenix over the next 30 years was 3 million, I think.

Over the next 15 years or so, Phoenix is projected to grow by 3 million.

Over the next 15 years, okay.

Yes.

California you said is expected to grow by --

They just had a major reduction in their population growth estimates in California, and they're now estimating that by the year 2040, there will be an additional 5 million people in California.

And that's really a function of a lot of the immigrant population, has had birth rates almost cut in half in the last 10 years.

Okay.

Because the latest numbers on their web site for 30 years is like 14 million or something like that, so maybe they just cut it and it's not up on the web site there.

The number that I saw in a recent article out here was that they had cut back population growth projections between now and 2040, almost in half.

Okay.

Largely due to a slow-down in birth rate for the immigrant population?

The vast majority of it and people moving to Phoenix.

Well, I think that's half of it.

You know, the first, they went to Vegas and now I think they are going to go to Phoenix.

One out of every three people that moves into Phoenix comes from California.

I think that's right.

I think that's right.

Okay, well thanks a lot, Art.

Thanks, David.

Thank you.

Our final question comes from Alexander Goldfarb with Lehman Brothers.

Hi, I had just two quick follow-ups.

First the Biltmore, the spend that you quoted was your pro rata or that's the total spend?

That's the total spend.

And again, I want to emphasize that at this point in time we have not decided on the scope of the project or the size of the project, but it is clearly an ambitious project, it's a significant project, and we would all be surprised if it was in excess of 100 million and that whatever the cost is, that we would have half of that

Okay.

That's fine.

And then just the final one is, there's another center that's going up in Mesa that seems to be -- being given a lot of incentives.

Are you guys receiving any incentives for San Tan?

There were pretty significant highway and infrastructure improvements that were done by the state as well as by Gilbert.

So it was mainly in the form of expenditure incentives, but we don't have a tip, no.

What were the total incentives that --

I could don't have that in front of me but there were -- multimillion dollars of -- I mean first of all, the major incentive was they brought the San Tan freeway right to our front doors, which was, you know, that was a several billion dollar project, and our predecessor, Westcor Group was instrumental in getting the freeway brought exactly right through the heart of this project many, many years ago.

Okay.

Thank you.

Thank you.

Okay.

Well it appears that there's no further questions.

We appreciate your being on the call and we invite you all to visit our Queens center.

We have the grand opening is November 19, it's actually open right now, that's just the acknowledgement opening.

It's a very, very exciting project and I know you will be thrilled when you see it, if you haven't already seen it.

So thank you very much.

We look forward to talking to you in a few months.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

And have a wonderful day.