Macerich Co (MAC) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Macerich Company first quarter 2005 earnings conference call.

Today's call is being recorded.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time.

I would like to remind everyone that this conference is being reported.

I would like to turn the call over to Georgeann Palffy of the Financial Relations Board .

Thank you all for joining us for this afternoon's first quarter, 2005 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 the risks 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 SEC Regulation G. The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the press release for the quarter, which is posted on the Company's home page under the section entitled investing.

I would now like to introduce the members of management with us today.

Mr. Art Coppola, President and Chief Executive Officer;

Mr. Ed Coppola, Senior Executive Vice President; and Mr. Tom O'Hern, Chief Financial Officer.

I'd now like to turn the call over to Tom for opening remarks.

Please go ahead, sir.

Thank you, Georgeann.

Today Art, Ed and I will be discussing the first quarter results; recent transactions, including our recently closed acquisition of Wilmorite; as well as our outlook for the rest of the year.

It was a quarter with very strong tenant sales with good year-over-year gains, continued high occupancy levels, double-digit releasing spreads, significant redevelopment activity, and a strong quarter for same-center NOI growth.

Looking at total same-center tenant sales, the total portfolio was up 5.8% for the quarter.

That compared to the first quarter of last year, which was also a strong quarter, and that was up 7.9%, so a good quarter going against a tough comp.

In terms of tenant sales by region, southern California was up 7.7%, northern California and the Pacific Northwest up 6.5%, mountain region was up about 2%, central and eastern regions up 1.7%.

Arizona had another strong quarter, being up 9.5%.

In terms of a comparable tenant sales, space-by-space was up 4.6%; and total mall sales per square foot came in at $401 per square foot, that compared to $368 at March 31st of '04.

Occupancy levels remain high.

We were -- came in at 92.2% at quarter-end, that's compared to 91.8% a year ago.

Leasing activity was also strong for the quarter.

We signed 187,000 square feet of leases during the quarter.

Average new rent was $35.77 per square foot, for a positive releasing spread of 17%.

The average rent per square foot in the portfolio came in at $35.06, that compared to $32.19 at March 31st of '04.

That was heavily impacted by Queen Center Expansion, which is now included in that number, which had a positive impact of $1.46 on that average space rent number.

FFO per share diluted for the quarter was $0.99, a 10% increase over the $0.90 that was reported in the first quarter of last year.

EPS diluted was $0.30 for the quarter, compared to $0.31 for the first quarter of 2004.

The strong growth in FFO per share for the quarter was driven by a number of things, including same-center NOI growth of 3.4%, compared to the first quarter of last year -included in that was straight-line rents of about 562,000, which was virtually flat with a year ago.

We also had lease termination revenue of $1.7 million, which was up about $800,000 from the first quarter of last year.

We had CPI increases during the quarter of $810,000, compared to the first quarter of '04.

Today we have about 53% of all of our leases now contain CPI provisions.

We made the move to CPI a number of years ago, and that's giving us a built-in inflation hedge that is unique to Macerich, as most of our competitors still use fixed rent increases, rather than CPI-based rent increases.

We continue to write about 95% of new leases and renewals with the CPI increases included.

It was a good quarter for specialty leasing, specialty tenant leasing revenue was up 25% to $7.6 million.

During the quarter, the average interest rate rose to 5.79% compared to 5.5% at year end.

The average maturity on this debt is 4.1 years.

Last quarter was the first time we broke out the Management Company into two line items;

Management Company Revenues and Management Company Expense.

We only record Management Company revenue on third-party managed properties and joint-venture properties.

Whereas, we recognize Management Company expenses on all of our assets, including those that are wholly owned.

For the quarter, the revenues -- Management Company Revenues were $5.3 million, Management Company Expenses were $10.5 million for a net loss of $5.2.

However, as I pointed out, we do not charge ourselves a management fee on properties that we own 100%.

If you took the consolidated rents for the quarter of about $97 million, and used a 5% management fee, that would equate to approximately $5 million, or the equivalent of the loss that we reflected.

There was a slightly smaller loss in the first quarter of last year; and that resulted from booking an income tax benefit at the TRS, which is the management company; and that related to the exercising of some options in the first quarter of '04.

Also, in this morning's press release we gave revised guidance.

We moved FFO per share for 2005 up $0.10 per share to a range of $4.30 to $4.40.

This revised guidance factors in recent acquisitions and the impact of higher interest rates.

For example, when we gave guidance in November -- we gave initial guidance -- LIBOR was substantially lower.

In fact, three months LIBOR at the time was 2.17.

Today, three months LIBOR is 3.21.

We have factored in LIBOR increases throughout the year, also assuming by year end LIBOR would be at 3.75.

That's slightly more conservative than the forward LIBOR curve, which has a one-year LIBOR today at $3.68, but that has been factored into our new guidance.

There’s many factors that get rolled into that guidance.

There are three major components to the change.

One being, we were able to reprice the $250 million term note, we did that concurrent with closing on Wilmorite, but we reduced the borrowing spread by 100 basis points.

And that had a positive impact on the guidance of $0.02 per share.

Cutting the other way was the increase in the LIBOR rates on all of our floating rate debt.

That had a negative impact of about $0.12 per share.

The other factors were primarily the acquisition activity, Wilmorite and some of the other assets that Art is going to speak of in a minute, and that had a positive impact of about $0.20.

If you net all that out, it's $0.10 positive, moving the range on both ends up by $0.10.

Looking at the balance sheet now.

At March 31st, we had $4.4 billion of debt, including our prorata share of debt from unconsolidated entities.

The JVs had $1.2 billion, and of that $1.2, $1 billion of that was fixed rate debt.

Our total debt-to-market cap was 52%, average interest rate was 5.79, with an average maturity of 4.1 years.

Post Wilmorite, the debt amount will move to $6.5 billion, which represents 57% debt-to-market cap today.

Unhedged floating rate debt would be 37% of the total debt.

We are, however, considering doing interest rate swap on the term note, which would drop that percentage down to 30%.

Concurrent with the acquisition of Wilmorite, as I mentioned, we repriced our existing $250 million term note and dropped the interest rate on that.

We also had very very favorable financing terms on the Wilmorite transaction, and hit the market at a perfect time in terms of pricing unsecured corporate level debt.

At this point I'd like to turn it over to Art to talk about acquisitions with a focus on Wilmorite and the redevelopments.

Thanks, Tom.

During the quarter we were able to close on two synergistic acquisitions that we have in the Phoenix marketplace.

One is that we bought a minority interest in Metrocenter, a 15% interest there.

We were brought in by the ownership group, which was a combination of AEW and Somera, to come in and manage and lease the property.

Given our strength in the marketplace, they felt it would be appropriate for us to do that, and we agreed to do it and take a small equity interest in the center.

We also closed on a 25% ownership position on Kierland Commons, one of the premier main street lifestyle-oriented centers in the United States.

We took over the management and leasing of that project, and that really rounds out our high-end focus in the Phoenix marketplace.

And we're very excited to have accomplished that acquisition in a privately-negotiated transaction.

Just after the close of the quarter, we closed on a 50% interest in the Ridgmar Center, in the Ft. Worth marketplace.

We were brought into that opportunity through our partner, Walton Street Capital, who is our partner in Inland Center, also.

Again, we're very pleased to get involved in that opportunity and are sure that it will yield good accretive results for us, over the years to come.

The big story in acquisition that we consummated just recently, is the Wilmorite acquisition.

We have been working extremely close with management of Wilmorite from the day that we shook hands on this deal, back in December.

And we are on the ground with our feet moving, as we proceed to take over the management, the leasing and the development opportunities at Wilmorite.

We are just thrilled with the entire portfolio.

We're extremely bullish on the opportunities that we have there.

There's been a lot of speculation about whether or not we're going to be bringing in a joint-venture partner into Wilmorite at an entity level.

We have extremely strong interest from an existing partner to come into that transaction at an entity level.

Frankly, at this point in time, we told the partner and we'll tell you; that we're just going to take complete inventory of everything we have there at Wilmorite, and go ahead and make that decision on whether we bring in a partner at the Wilmorite entity level over the months to come.

There is nothing eminent on that, the opportunity is clearly there for us to do it, but we're going to treat that decision like any very major corporation finance decision.

If you think about it, we're talking about bringing a partner in at an entity level that’s almost a $1.2 billion transaction.

It is something that's going to be considered extremely carefully.

I will say that we have absolutely no plans -- there has been speculation that we might bring a partner in to Wilmorite, and that would obviate any thinking about doing common equity.

We have absolutely no plans or needs to do any common equity at a corporate level of Macerich.

As we look at our overall balance sheet in the months to come, we'll evaluate possible joint-ventures at an entity level at Wilmorite and elsewhere, as well as possible dispositions, as we go about the process of reducing our debt levels, just as we did when we bought Westcor three years ago.

Our development pipeline remains extremely strong and attractive.

We're in the ground at Twenty Ninth Street in Boulder.

Anticipate some early openings of some of the Power Center users as early as spring of next year, with the vast majority of the project being completed by fall of next year.

So that's $130 million project where we're anticipating double digit returns -- about 11% incremental return on investment, and that's looking very good.

Our project in Gilbert; which is in the Phoenix submarket, San Tan Village; remains underway.

That is a large, 3 million square foot total development with the core of the development being about 1.3 million square foot open-air mall that we'll be building there, which we anticipate completion to take place in fall 2007 through spring of 2008.

That will be anchored by two traditional department stores, a large theater and a very significant open-air outdoor component, that will also be part of the project.

Probably the most exciting expansion in redevelopment that is underway right now, actually is in the Wilmorite portfolio.

And we've been working closely with our management team at Wilmorite, to continue to move forward on the 365,000 square foot, $130 million redevelopment of Tyson's Corner, which is anticipated to be open for business by October 1st of this year.

The key anchor in this expansion is the 100,000 square foot AMC Theater.

Again,the size of the project is $130 million.

Our half of that will be $65 million.

We fully anticipate seeing at least an 11% return on our investment there.

The bulk of that expansion has already been funded through the closing of the Wilmorite transaction, but the income does not come on line until October 1.

Part of Tom's guidance -- the guidance we'll see through the balance of this year is going to be relatively weighted more heavily towards the fourth quarter, primarily because of the fact that the Tyson's expansion kicks in October 1.

We have a great lineup of tenants that are going to be joining us at the Tyson's expansion.

We've got major tenants such as West Elm, Z Gallery, Urban Outfitters, Neiman-Marcus is talking about opening a specialty store in the center, Lucky Brand Jeans; a half a dozen great sit-down restaurants that will occupy what amounts to a sit-down restaurant food court.

So we're very bullish on what's going to be happening at Tyson's Corner, both with this expansion and the expansion that we are in the works -- on working on getting entitlements on today.

We're working on getting a 3 million square foot entitlement to add vertical residential and office on the land surrounding Tyson's Corner, and anticipate obtaining that entitlement by sometime in 2006.

On the entitlement front, we're also working on getting entitlements at Biltmore Fashion Square in the Phoenix marketplace.

We're going to be redoing the retail there, and also, we anticipate adding residential towers for -- at the property, as well as the possibility of an office tower down the road.

We think this will be a great, great addition to this center.

The corner of 24th and Camelback is really main and main for high-rise residential in the entire Phoenix marketplace, we think it is a great opportunity.

In looking at our overall development pipeline, a couple of major redevelopments are going to affected by the Federated May Company merger.

We have 15 centers in our portfolio, where we have both a Federated store and a May Company store.

And in several of our centers, we anticipate, that as a consequence of this merger, that our redevelopments will actually proceed sooner and more efficiently than otherwise planned.

At Santa Monica Place, where we continue to work on entitlements with the city of Santa Monica, we have both a May Company and a Macy's store.

We have let it be known, frankly, that we would not at all be heart broken if we were to recapture one of those two boxes from those two department stores.

And we anticipate that the possibility of getting back one of those boxes as a consequence of this merger is extremely strong.

We think that that will actually expedite and make our expansion of Santa Monica Place even more profitable.

At The Oaks, we're also significantly impacted by the Macy's and Federated proposed merger.

Four of our current existing anchors are either at May Company or Macy's.

Clearly, that's, at least, one or two boxes more than what Federated will need as a post-merger.

And we think that will actually facilitate the entree and the speed with which we'll be able to bring Nordstrom’s as well as additional retail to that center.

So we see the Federated May Company potential merger as being something that is going to really open up a lot of opportunities for us, throughout our portfolio.

At this point in time I would like to open it up for Q&A.

[OPERATOR INSTRUCTIONS] We'll take our first question from Jay Leupp from RBC Capital Markets.

Hi, good morning.

Jay Leupp here with Brett Johnson at RBC.

On the leasing spread information you gave earlier, Tom, 17% in the first quarter, we realize those spreads move around quarter to quarter.

Given what you're seeing in your business, what do you think is a reasonable range, up and down, that we'd expect to see this year?

And what have you built into your guidance?

If you look at the expirations we've got for the year, the average expiration is about $30.50.

It's hard to extrapolate from one quarter.

Over the last couple of years we've been coming in at 20% to 24%, and we think that's going to be fairly consistent with what we see this year.

One quarter is not going to really give enough direction for the full year.

We actually go through space by space, and predict what we're going to release the space for.

With expirations under $31 a foot, and new lease signings coming in at $36, $37 a foot, we think we'll be in the 20% range for the year.

Art, In terms of Phoenix and your large market position there, can you give some examples, have you seen any yet, of how you've been able to exploit your market position to your advantage in Phoenix?

Sure.

Probably the biggest story we've got is really a relatively mundane one.

At centers that had been open for business in the Phoenix marketplace for more than five years -- when we bought Westcor, we have found huge opportunities for releasing of those centers.

The focus of the Westcor folks really was on new ground-up development, and we found that in going back into several of the existing centers in Phoenix we were able to, and have been able to, drive NOI growth dramatically, just by the fundamental blocking and tackling and releasing of existing space.

Great, and this is Brett Johnson with one quick follow-up.The guidance you gave on a per share basis, the $0.12 from the rise in interest rate, or interest expense, excuse me.

What portion of that is coming from new debt from the acquisitions, versus just an increase in the interest rate assumption on your existing debt?

That relates to existing debt that we had in place when we gave the original guidance, Brett.

Great.

Thank you.

We'll take our next question from Lou Taylor from Deutsche Banc.

Congrats on closing the deal, guys.

Tom, as a follow-up to that -- When you gave your initial guidance for the year, your assumption for LIBOR was flat for your existing debt?

No, we had LIBOR moving up to a year-end rate of 3%.

And just to put this in context, when we gave that guidance in November, three months LIBOR was at 2.17, and today it's at 3.21.

During that six month period of time, LIBOR rates moved up 100 basis points,so it's far more than everybody thought.

We typically base our estimates on the forward LIBOR curve, and that's what we had done in that case.

Obviously, rates moved quite a bit, so even though we had upward assumptions in our previous guidance, it wasn't enough to match the forward curve, so we readjusted to do that as well.

The forward curve today, one year is 3.68.

So using 3.75 we felt was reasonably conservative because we're looking at a nine month period, not a one year period.

Second question, Tom, is how much of a FAS 141 revenue do you have in your new guidance?

On SFAS 141, the way we go about it is we actually hire an independent valuation firm, based on the complexity and need for it to be coming from a third party.

They're going through those evaluations now.

In the meantime, we have made an estimate and factored in $0.05 a share into that guidance, relating to SFAS 141, and when we get the final reports we'll fine tune that.

We do have it in there right now at $0.05.

Okay, so that's $0.05 over the remaining eight months of the year?

Correct.

What's your strategy in terms of refinancing or repaying or swapping out the shorter of the two term loans that you took on for Wilmorite? -- the $650 million tranche.

In that, Lou, obviously, we want to maintain maximum flexibility with that debt.

If we were to have a liquidity event, a selling of an asset or bringing in a partner or something like that, we want the flexibility to pay that debt off.

I think we're more focused, Lou, on the term note which has a longer life.

If you look at what's going on with swaps today, they're getting relatively inexpensive, and I think there is a pretty good possibility or probability that we're going to go ahead and swap out of that $450 million term note, but we want to maintain flexibility on the acquisition debt.

With regards to the assumed mortgages, is there much in the way of refinancing opportunities there in the next 24 months or so?

Not really.

Most of that debt has five years or so left on it, five to six years.

Great, thank you.

The next question is from Michael Bilerman from Smith Barney.

Hey, guys.

Jon is on the phone as well.

Art, you talked last quarter about bringing in a joint-venture partner, basically at your cost basis -- the same level as you.

Is that your current thinking today?

No.

Our current thinking is that we're going to evaluate that decision on whether to bring a partner in, as a corporate finance decision.

We may or may not bring a partner in.

The interest level that we have, both from existing partners as well as others that have approached us to come in at an entity level on Wilmorite, couldn't be higher.

I think there's the recognition of the quality in this portfolio and the scarcity of assets like this, but we really want to be extremely careful about making a decision like that.

It's obviously a large decision, it's tantamount to making a decision to disposing of $1.2 billion of assets.

Something we want to be very careful about, and we're going to continue to evaluate that, but really on our time schedule.

And your sense is then, you'll be able to get someone to pay premium for coming into that 50% interest, relative to what you paid.

No, my sense is that we've not made a decision to bring a partner into Wilmorite at this point in time.

The fact that others -- and current partners as well as others are extremely interested in pursuing us to come in at an entity level and to be a partner with us, is true.

We have extremely strong interest there.

Clearly, if we were to bring a partner in in the near-term, the idea of marking up the portfolio is not really very palatable from a partner's viewpoint, so we wouldn't anticipate that happening.

But, again, I want to emphasize that while we have extremely strong interest from Pension Funds in partnering up with us on Wilmorite, as well as other assets, we are going to evaluate that interest level extremely carefully, and we may or may not bring a partner in to Wilmorite.

If we decide not to, it's because we have got other alternatives to us that are more attractive then before bringing a partner in.

Do you have a sense, Tom, on the FAS 141, 142, the $0.05, is that both the mark to market on the leases and mark to market on the debt?

No, that's mark to market on the leases.

How much is it then on the mark to market on the debt?

I don't recall off the top of my head, Michael.

It's included in those numbers, and we factored it into the accretion from the acquisitions, but we don't consider it part of the SFAS 141.

That's an old GAAP calculation that existed long before SFAS 141.

It would be helpful to understand what's baked into your range for that adjustment.

If you have it, that would be helpful.

There is a lot of components in there, if I broke that out, I'd have to give you ten other pieces of that.

The average debt, you can do a calculation on your own if you'd like, the average debt is 643.

The average maturity is five years, now that's overly simplistic because you have to calculate it on a loan by loan basis, so using averages can be a little deceptive, but that will give you a frame of reference.

The current five year treasury is 390, and a typical spread on that kind of debt would probably be 100 basis point.

So, if you said 5% versus 643, you'd be in the ballpark.

And this is -- it did go into the range that you said, both $0.05 and some amount for this debt --?

Correct.

Okay.

Can you talk a little bit about -- how much floating rate debt did you have at the end of the quarter?

Both of the consolidated and the unconsolidated?

Consolidated floating rate debt was $1 billion.

And joint-venture floating rate debt $189 million, total $1.2 billion.

That's JVs at prorata.

And on the management companies, you talked about a loss of about $5.3 million in the first quarter.

Do you have a sense of how that transitions throughout the year, if there is any seasonal impact, and what your full year estimate would be for that?

The first quarter is a pretty good run rate, and I don't expect that to change materially, post-Wilmorite.

First quarter '05 run rate would be a reasonable run rate to use if you wanted to annualize that.

Okay, thank you.

Next question is from Mike Mueller from JP Morgan.

Hi.

A couple follow-ups here.

The $0.05 for FAS 141, is that the marginal increase, or the total number?

I’m not sure I understand your question, Mike.

You said the FAS 141, of $0.05 that was in guidance, is that a $0.05 increase above what was there before due to Wilmorite, or is it $0.05 all end?

It's $0.05 relating to Wilmorite.

And how much was it before hand?

I don't recall, Mike.

I think it was in the neighborhood of $0.12 on an annual basis.

We're running about $0.03 a share a quarter in the first quarter, and I think that's what we used for guidance, $0.12.

So the $0.12 plus $0.05.

And just to clarify, your guidance does not assume anything for a JV.

Correct.

No assumption regarding a JV.

And finally, if you do not go the JV route, I was just wondering if you could spend a minute talking about other deleveraging tactics that you might employ?

There's a probability that we will consider.

We've long had our eye on the perpetual preferred market.

There is a possibility that that will find it's way on to our balance sheet over the next year or so.

We have been in discussions about disposing of some of our current assets.

Some of the assets that we consider to be noncore, and as those transactions take place they will be announced.

There is the possibility that we will bring a partner into Wilmorite at an entity level.

There is also the possibility that we may bring partners or a partner into some of the other assets that we own in our portfolio, just at a property specific level, at this point in time.

We've got significant interest in both of those alternatives, whether it be a joint-venture at an entity level at Wilmorite, or the possibility of doing a joint-venture elsewhere in the portfolio as a means of paying down debt levels.

And as we evaluate what is best from us from an entire portfolio viewpoint, then those transactions will be announced.

But there is no -- there are no dispositions or further acquisitions built into our guidance numbers for the balance of this year.

Our next question is from Craig Schmidt with Merrill Lynch.

Good afternoon.

What direction are you going to take the leasing at the Metrocenter?

It'll be more value-oriented.

We anticipate bringing in, for example a discount anchor such as a Wal-Mart or a Target, as well as several big boxes will be added to the center as time goes on.

Great.

And given your greater exposure to the lifestyle component, are you going to be bringing more of that to your malls, particularly in the Wilmorite portfolio?

Some of that will occur in Wilmorite, there is a plan to do some of that at Freehold, relatively significant potential lifestyle extension there.

Possibility of doing some of that in one or two of the upstate New York assets.

The entire shake-out that will come out of the Federated May Company potential merger could result in us recapturing GLA at several of our centers, that could result in lifestyle-oriented expansions.

Such as at Cerritos, for example, here in southern California, we are currently underway with a relatively significant lifestyle open-air expansion at Fresno Fashion Fair.

Clearly, that will definitely be a component of our future growth both here, as well as in the Wilmorite portfolio.

Thanks.

We'll take our next question from Matt Ostrower from Morgan Stanley.

Thanks.

Two questions.

On recovery ratio, just the way that I had looked at it, anyway, it looked like it had ticked down in the first quarter from 1Q of '04.

Wondering if that's what you saw as well?

If so, what happened, and what would be expected going forward from that?

Matt, if you recall we did revise downward our recovery rates mid-year '04, and that's not reflected in the first quarter '04 numbers.

The total recovery rate for all of 2004 was 96%, and that compares with 94% that we have here in the first quarter.

Main difference in those two is, late in '04 we acquired a mall called La Cumbre Center in Santa Barbara.

And there's significant ground leases there.

And that ground lease expense is included in shopping center expense, but it's obviously not a recoverable expense, so that really had the impact of taking it down from the average rate of 96% we saw in '04, and this first quarter it's pulled it down to 94%.

And I would expect that rate to hold fairly consistent for the rest of year.

Okay, thanks.

I had forgotten about that guidance.

On Ridgmar, just the way we looked at it, it seemed to be attractively priced.

We had read in the press anyway, that the last owner had poured almost the same amount of money into renovations that you guys paid for the whole thing.

Wondering if it was fully marketed auction process there, and also is there any concern -- it seemed like the productivity for the mall was pretty low given that it has a Neiman-Marcus.

Do you have any concerns about Neiman-Marcus potentially relocating or moving or anything like that?

Ed, you want to comment on that?

Sure.

The property was fully marketed by a broker that has sold many malls.

The major mall companies were obviously distracted on other things.

In fact, when they called me and said, "we really want to do this deal will you help us?"

We were in the middle of Wilmorite and I was obviously in the middle of my hip operation.

I said, I'll tell you what we'll do, you can have our Dallas office do all the due diligence, but we can't give you our acquisition guys.

You do the work, and we'll be right along side you, and we'll work with you to analyze the property.

Things got to a point where we wanted to go ahead and buy this property.

I saw it in your note where it was an underperforming Neiman-Marcus.

It's interesting you would say that because Neiman does over $300 a foot there.

With the advent of the Foley’s and Macy's merger, it's a new Foley's store relatively, you're going to have a Macy's Neimans wing, which we are focused on, and upgrading the marketing between those department stores.

Department stores all do fine there, and it happens to be located in one of the better demographic areas of Ft. Worth, so I'm confused why you think Neiman-Marcus would be leaving.

For the record, Ed, I think we may have expressed some concerns about sales productivity in the mall, but I don't think we had any insight in the particular sales productivity of that store.

I think the center is on the verge -- it was an underperforming center.

It hasn't been touched since it was built in the late 60s, early 70s.

It was leased out of Philadelphia first by Crave (ph)Co.

And then in a joint-venture with an investment bank and a New York leasing firm, all good people, but I think it's -- it really has not been aggressively managed and leased.

And I think that this was probably part of another joint-venture of a group of centers with different economic incentives for these people to either buy or sell, which that's not my business.

My business is to make money for our share holders, and we saw this as a great opportunity to make money in the mall business, and that’s what we're doing.

From the metric it looked pretty good.

You were right, by the way, Matt, there was rumored that the former owner did invest almost what we paid for the center into repositioning and expanding the center a couple years ago.

And Art, is that a case of just -- we've seen it in many other cases where renovation money gets spent, but it's not necessarily -- I guess to put it differently, is it necessarily money that you would have spent yourselves?

Was it spent in a way you would have spent it?

We were happy that somebody else spent it, and we were happy to take over the results of their expenditure.

And we're very excited to lease the vacancy that is there, which is significant.

Thank you.

We'll take our next question from Robert Belzer with Prudential Equity Group.

Hello.

To your question -- just on the initial yield, on Wilmorite.

Has that changed since you announced the acquisition?

No, the only thing that's happened is, now we know -- when we're going to close, in December we weren't sure when we were going to close, and we anticipate our first full year of return from ownership there to be 6% unlevered.

We have a better handle on the expansion at Tysons Corner, both from a leasing and a construction viewpoint, and it's pretty solid that will open up October 1st, and it will be economically over 90% leased, the 365,000 foot expansion.

We feel very solid about those numbers.

If anything, we feel moderately bullish because we found some significant opportunities in terms of bulk buying, to drive our operating margins up in the portfolio.

Predominantly, in the area of insurance alone, we found a couple of million dollars of insurance savings just by putting the portfolio into our blanket program that we are able to generate that'll fall to the bottom line.

We feel very solid on those numbers.

What could the expense savings equate to, on a yield business?

Insurance alone was $2 million.

Okay.

Just moving on to potential JV sale at the entity level, would that include the Rochester assets?

And also, could you give us an indication on when you might be thinking about doing a JV, if you do indeed go that route?

If it was done at an entity level, the joint-venture, then yes.

The Rochester assets, economically, would be owned by the joint-venture partner, they would own their prorata share of those, subject to the right of redemption that the founding family has at Rochester.

And, again on the possibility of a joint-venture at Wilmorite at an entity level, it's clearly on the table in terms of something that we have available to us, and we're really just evaluating what's best for us and this portfolio.

And we'll be evaluating that over the next couple of months, in terms of deciding whether and/or when to bring a partner into Wilmorite.

But it's really whether and when, it's not for sure.

It is our choice and we'll evaluate that, as we would any large corporate finance decision.

Moving on to the debt amortization, on the Wilmorite debt.

If I assumed a 1.5% spread to mark that debt to market to calculate the amortization, would I be missing something?

That's probably a little high, because you're using an average, and some of the more recent debt is closer to market, but that would give you a top end number and then you'd probably have to take that down by 25%, and you'd be close.

Great.

And one final question.

You mentioned -- you don't expect the need to issue any equity, currently.

How about to fund your developments?

Could you potentially need to go to the equity market to fund that component of your expansion program?

No, we've got capacity on our lines and we've got the ability to put attractive construction financing in place.

There's absolutely no anticipation of having to go to the equity market to fund our development.

Great.

That's it for me.

Thanks.

Our next question is from Alexander Goldfarb with Lehman brothers.

Hi, good morning out there.

Going to your debt in your filings, there's a step up on the spread for the 650 term loan that steps up next year and then increases -- should we read that to mean that you're thinking about taking out that 650 first next year, in terms of if you did a prep deal or asset sale, et cetera?

We really had our choice when we structured that financing as to how much to put into the term loan and how much to put into the acquisition facility.

There was a tremendous amount of demand from investors in our existing lending group, and we made the conscious decision to make the acquisition loan the larger of the two, because there was an anticipation there would be some liquidity events from asset sales or JV partnering to reduce that debt amount.

So that's the way it was structured the way it was.

So for modeling perspectives, we should think of that 650 as sometime for the next year, being replaced by either asset sales, JV or pref?

There's a lot of possibilities.

If it came down to the point where we looked like we needed more term on that, I'm sure we could negotiate more term or convert that into a term note.

The next debt question -- the refinancing of Lakewood, are you waiting until August to do that or is that going to be done sooner?

No, that transaction was negotiated where we have a six month note penalty window.

And so, we're going to try to finance that within the next 30 days.

We've got a commitment and we're going through documentation, and getting estoples, and doing what needs to be done to get that finalized.

But our expectation is to fund that in the next 30 days and capture that as interest savings.

And next, going to the condo planning for the various assets, Tysons, Biltmore, et cetera.

How are you viewing the condo market in terms of -- there's a lot of REITs, including nonresidential REITs, continue to talk about turning their properties into condominiums.

And with the heightened sensitivity that we may be nearing closer to the end of it, rather than this continuing for several years.

How are you guys viewing that, so you don't get stuck with something or it becomes part of your financing plan in terms of paying down debt?

At Biltmore, for example, if we pursue a residential opportunity there, chances are it will be condo and chances are we would simply sell the entitlement right to a developer who would then proceed with that opportunity.

At Tysons, we are working on a very long-term master plan amendment for the property to enable us to add up to 3 million square feet of office and residential.

And really, that's the focus, is getting the entitlement and then how we actually implement the buildout would be something that we'll determine down the road.

It is not -- it's intended where we are pursuing these residential primarily opportunities, they're really market driven.

Where others are coming to us and are looking at assets that we have and to the extent we can get entitlements and free up FAR.

We think that it's a great way for us to go ahead and not only supplement the mix of the property, but also to generate significant capital.

So we should think of this going on at properties like Tysons, Biltmore or Twenty Ninth Street; we shouldn't think of this as going on at some ad hoc , non-mixed use type property?

I'm not sure I understood that last remark.

In the sense of, wherever we would see you guys doing condos, where it would be a logical extension.

Not where there were some extra space in the parking field, for example, to put up a quick tower.

It's really both.

On some of the properties, we are creating the opportunity by tearing down some retail that's underperforming to recognize the fact that the higher and better use -- .

The only time we're doing it, is where the higher and better use for part of our property is for that use.

Otherwise, we're not going to do it.

Where we find that there's a higher and a better use for parts of our assets, such as Biltmore and even potentially Santa Monica Place, as well as Tysons Corner; those are the places we're doing it.

Thank you.

Thank you.

Our next question comes from Greg Andrews with Green Street Advisors.

Good morning.

Hi, Greg.

Just a follow-up on the mark to market for debt, Tom, was there any amortization of debt premium in the current quarter?

If so, how much would that amount to?

There is some of that, Greg, and it's outlined in the 10-K.

There is actually a detail of all our debt and what the amortization premiums are.

I don't have the number for the quarter off the top of my head.

But if you take a look at the K, you'll have all the debt that was in place at year end and the related premium.

Okay.

And in terms of lease termination fee income being a little higher this quarter versus last year.

Was that related to any one particular situation or -- ?

It was one tenant.

There was a sizable termination payment from Saks at Carmel.

Okay.

In terms of the Lord and Taylor store at FlatIron.

Can you give us a little update on what's going on there?

We've reacquired it from May Company.

Is their store closed now?

Yes, and we are pursuing a remerchandising plan at that end of the property right now, and evaluating what's best to be done within that location, as we speak.

So do you have a sense of whether you're likely to put in another anchor there, or more likely to turn it into shop space?

A combination of the two, probably not a single user.

Probably multiple users.

There maybe one user that may use one entire level of the two levels, but we're really evaluating what's best to supplement the tenant mix there right now.

Okay.

And lastly, could you give us a little update on the expansion at NorthPark and how that's coming?

It's coming along great.

Nordstroms should be opening up late this year, October, November.

It's amazing sales at that center, now are approaching $600, in excess of $600 a foot.

Sales are actually up on a comp basis, even during construction.

And the 300,000 feet of new shop space that's being added is all scheduled to be coming online by late spring of next year.

It's coming along great.

Leasing is very very powerful.

Construction is on schedule, and that's truly going to be a one of a kind center anywhere.

It's the number one Neiman-Marcus in the world, the top Dillard store in the entire marketplace, top Foley's store, and we have hopes it will be the top Nordstrom store; and from a specialty shop viewpoint, it's clearly the top specialty tenant lineup today.

And the tenant mix that's being added to the center is just fabulous, especially in the area of the luxury tenants.

When that work is all done, where do you think that center will rank, in terms of total sales?

Will it be one of the top centers in the country?

It is one of the top centers today, but it will clearly take its place in the top handful of centers in the U.S.

No question.

Okay.

Thanks.

Our next question is from Rich Moore from KeyBanc Capital Markets.

Hi, good morning, guys.

Art, obviously running at higher debt levels is accretive.

I realize it's not an exact science.

But how long, should we assume, before you're back to a more nominal level of debt?

I would clearly think that over a 12 to 18 month period of time that there will be significant reductions in debt percentages, debt amounts, as well as the floating element of that debt.

We've shown that, in terms of the way that we handled our balance sheet, when we levered up to buy Westcor.

The one difference being, when we bought Westcor. we did we did follow up with a significant equity offering six months after we bought Westcor.

And I said it earlier today, I do not anticipate any common equity offering to be done as part of our deleveraging process here on Wilmorite.

There are plenty of other opportunities for us to deleverage, both within the Wilmorite portfolio as well as within the balance of our portfolio.

So the current guidance you guys offered today, does that assume, basically, this sort of debt level for the rest of the year?

Yes.

And then, I noticed that you issued $240 million worth of preferred and common units, and I thought previously that was going to be higher, like $320 million.

Is that just more unit holders that wanted cash?

They had the election, and the $320 was just an estimate that we'd received from the seller.

So, other than the $210 million that we knew was attributable to Rochester, it was just sellers estimate beyond that.

More of the partners did end up taking cash than units.

Thanks, Tom.

And a couple questions on the transaction.

The recovery ratio, does that change dramatically at all with the Wilmorite transaction?

No, it was fairly consistent.

Their portfolio was comparable to ours, so that shouldn't change the overall recovery rate.

And the same thing for CPI leases?

I assume they don't have much in the way of CPI leases.

They don't.

So to the extent we're rewriting any new leases in the Wilmorite portfolio, they will contain the CPI provisions.

They have, however, have a number of fixed CAM (ph) clauses that they've been writing for the last four or five years.

They are ahead of us, in that regard.

They've probably got 50% of their leases have fixed CAMs with a CPI component to those fixed CAMs.

Good.

Thanks.

And on the Crossroads Mall in Oklahoma, do you know, Tom, off the top of your head, and if you don't, I'll just get back with you -- the amount of income from discontinued operations you have in that line?

Rich, the bulk of it is Crossroads, Oklahoma.

I think there's one small asset in there in '04, but the '05 number, I believe is all Crossroads, Oklahoma.

And do you have any thoughts on why operating expenses stayed high this quarter?

Maybe you don't see it so much that way, but it seemed a little higher than typical for a first quarter.

It's a function of acquisitions we did in the second half of last year are in there.

Okay.

Good.

And turning to the more macro environment.

What do you think of bankruptcies for the rest of this quarter?

Is it pretty much done for the year?

I think so, Rich.

First quarter, fourth quarter is typically when you see it, this was no exception.

We don't see a lot on the horizon for the rest of the year.

And occupancy target for the year end, have you got any thoughts on that?

The guidance we gave was consistent with where we were last year.

We do it, actually, on a very granular basis, where we go through every space and take a look at how it is going to be leased and remarketed.

We ended last year at 92.5%, and that's about where our forecast came through this year.

And last thing, tenant attitudes, how do you feel about how the tenants are thinking about things at this point in the year?

Tenant mood is great.

And I think that's reflective -- the proof is in the leasing.

And we've had continued strong leasing results, at very strong rents, and have improved our occupancy levels.

So, the tenant mood is very very good.

So you think that continues, going forward, Art?

It's hard to predict.

Look,there's an obvious understanding amongst retailers who have their growth plans that there are limited opportunities for them to get into the regional shopping center locations.

Demand tends to be stronger than new supply that's brought online.

When you add to that, the opportunity for us to take advantage of convergence of retail that's happening at regional malls today.

Where to some degree, value-oriented players want to be in the same centers as more luxury tenants.

Topanga Plaza announced recently that they are adding a Target and Nordstroms wing to the area, also, where Neimans is going.

You have that whole convergence is happening, as well as the implantation of lifestyle extension that we've got in our centers.

From a retailers viewpoint, there is great mood, great attitude.

I think that the offering we have to offer to our retailers is at the highest level that we've ever been able to offer them.

Both at the high-end of the scale, with our luxury centers, as well as with centers such as the newly acquired Ridgmar center, which will, obviously, be much more a "cater to the masses, eat with the classes" type of center.

Tenant mood is great.

Thank you, guys.

The next question from Paul Morgan with Friedman, Billings, Ramsey.

Good morning.

Did you mention anything about the timing for the Crossroads sale?

No.

Any guidance as to that?

No.

Any idea about -- ?

The reason I have to say no, is that we don't have a contract.

For me to answer that question, would put us in somewhat of a disadvantaged position as you can well expect with potential buyers.

So I trust you can understand why I can't give specific guidance on timing or dollar amounts, or anything of the sort.

That's fine.

And you said there was no other asset sales in the guidance you gave?

There’s none in the guidance, that’s correct.

There’s no new acquisitions or dispositions in the guidance.

Can you refresh my memory about the Simon JV and the terms of that -- ?

The joint-venture has a virtually perpetual life to it.

It's a long-term, good partnership that we've enjoyed with Simon.

One thing most people are focused on, because it's public knowledge -- and also through our own financial statements, you can find a subaudit of that particular partnership.

A lot of people are focused on the fact that all 12 of the assets are cross collateralized with one big blanket mortgage that matures in May of next year.

So certain people have speculated that by May of next year, something will happen there, and that's a possibility.

But certainly nothing that we're in a position to talk about today.

Great.

In terms of -- one more thing about the Tysons, looking at the property, there's not really an abundance of land there.

This would entail a pretty major redevelopment teardown of some of the existing either retail or some of the other types of properties around the periphery, and really create a lot of density.

What's the -- I guess, is that correct?

And then how is it going, in terms of posing that plan to the county?

The process is going very well with Fairfax county.

They have embraced the idea of us adding vertical elements, primarily because Tysons will be the location of a new metro link there, in that marketplace.

The areas that would be primarily disrupted in the beginning would be, that we have a free-standing strip center with Circuit City in it that would be demolished to accommodate the first residential and office towers.

Which, while we're working on the entitlements today, we clearly don't anticipate being able to start building on those entitlements until a minimum of two years from now.

We view that as being a high-rise vertical opportunity.

And each of those buildings would generally have to self park themselves, so you'd either have a subterrain or attached deck parking that would be added to facilitate any ongoing vertical expansion there.

On the San Tan Village, last quarter it seemed like you were talking about some type of entertainment section targeted for-- I guess it was late '06, or something like that.

It's not mentioned this time.

Have the development plans changed at all or is this just kind of the typical moving target?

A typical moving target.

The entertainment component is budgeted -- the theater wants to open by late next year.

That's certainly a possibility.

With the Federated May Company merger being announced, that, to some degree, throws a new element of conversation into the equation.

Given the fact that Robinson's May was one of the two anchors that we had announced, together with Dillard's, at the center.

So the outcome of that whole merger could impact whether and when we have the successor to Rob May opening at that center in '07 or later.

But everything from a tenant demand viewpoint is very strong.

And we anticipate a very strong leasing convention that will be focused on the mall and open-air component at San Tan Village, so at this point in time, everything looks great.

Thank you.

We'll take a follow-up from Mike Mueller.

Hi.

Wondering how much of the $0.20 of accretion in the guidance coming from acquisitions is due to Wilmorite versus the smaller deals?

When the transaction was originally announced, you were talking about it being FFO neutral in '05, and it sounds like there is just about a $0.05 accounting write-up because of FAS 141.

There is a lot of components.

When we said FFO neutral, Mike, it was -- looking at a cash basis without straight lining the rents, without SFAS 141, without marking the debt to market, all those components.

But of the $0.20, $0.17 or it or so is Wilmorite.

And it's comprised of a lot of things we just talked about.

Of that $0.17, do you have an idea of the split between cash and other items that are impacting you, like you mentioned, straight line rent and everything else?

Is it half and half?

No.

Cash is probably $0.05 and the other stuff is $0.12, something to that effect.

Thanks.

And we'll take a follow-up from Mike Bilerman.

Hi, guys.

It's Jon Litt here with Michael.

Back on your February 10th conference call, you sounded much more focused on pursuing a joint-venture on Wilmorite.

I'm wondering what's changed between now and then?

What's changed is that, first of all, as we closed on the Wilmorite transaction, the transaction itself changed a little bit.

The amount of OP units that were selected by the owners changed somewhat, and that decision was really made about ten days before the closing.

What's really happened is, as a consequence of buying Wilmorite and having discussions with one particular joint-venture partner, the possibility of bringing in joint-venture equity even outside of Wilmorite, has become something that is also potentially extremely attractive to us.

As time has gone on, what we've begun to focus on is, obviously, this is a very, very big decision to bring a partner into the Wilmorite entity level.

It is clearly something that is sitting on the table that we could pull the trigger on today, and just make a decision to bring in a partner.

Our sense of it is, being patient is going to result in a better transaction in terms of our balance sheet and in terms of total shareholder value, if we're patient here.

While we're very focused on it, it's not something that is -- should be deemed to be something that is going to happen anytime in the weeks to come.

Is it your sense that -- when you started looking at the JV equity, what you're saying is that you could have done it on Wilmorite, or you could take some subset of the existing MAC portfolio and do it on a piece of that?

And once you realized that there is that capital out there at that pricing, you said, there is no reason to pull the trigger right now?

Exactly.

And it's not something that we sought in the beginning.

As we tied down the Wilmorite transaction, this was interest that was unsolicited, that came from both existing partners, as well as others.

The list of interest is extremely long.

We'd been primarily focused on having conversations with one of our existing partners.

And it's really just coming to a decision as to what makes the most sense, from a corporate governance viewpoint.

The other thing that one has to evaluate is that a $2.4 billion joint venture is a big decision.

And rights and controls and governance issues have to be weighed in on that decision.

We have the luxury, through the various bank facilities and the terms of those bank facilities, to be patient.

And we're going to be patient, and I'm very convinced at the end of the conversation that we're going to be very happy with the alternatives we select.

Was there a consideration to the redevelopment opportunity, in that you wanted to keep more of that upside for MAC, then necessarily share it with a JV partner?

There's a lot of things out there, John.

Obviously, the issue of Tysons, to the extent we bring a partner in to Wilmorite at an entity level, our ownership at Tysons would go from 50% to 25%, and we have to evaluate the complexity of that relationship of having a partner, both at an entity level, as well as on the ground with Alaska.

So, that, clearly, is something that has to be considered, and it's one of the many, many things that are going through our minds as we decide from a corporate finance viewpoint, what is the best thing to do for our balance sheet as well as for the future.

What do you think has happened to cap rates, since you put this under contract?

I don't think there's been any major retail acquisitions or dispositions that have occurred in terms of malls.

If I'm going to judge by the level of interest that we have from people that have pursued us on Wilmorite, they haven't gone up.

If anything, the level of interest that we had from existing, as well as other potential partners on the Wilmorite entity deal, even though it's got the complexity of an entity deal, and it’s really been unsolicited -- has been extremely strong.

I think that both interest levels that have been expressed to us in that transaction, as well as in certain other assets that we own, not only validate the pricing that we have on that transaction, but even begin to make it look relatively attractive.

The other thing that's happened, as we take a look at other retail portfolios that are being traded right now, we're seeing cap rates approaching 6% cap rates for a whole variety of other types of product that, traditionally, has just never commanded the low cap rates that malls have commanded.

So, if anything, it seems that the scarcity factor has begun to find it's way throughout the retail world.

Tom, a question for you.

You talked about the amortization of the above interest rate debt on the Wilmorite.

Tell me if I'm doing the math right.

If you have, roughly 850 at a 1.5% spread, that's roughly $12 million in excess that you would then have to amortize each year, which comes to over $0.12 a share.

Am I doing that right?

There is a little bit of flaw in that logic, Jon.

Some of that debt at Wilmorite is floating rate debt.

So, it's not on the entire 850?

It's not on the entire 850, and you actually have to look at each piece of debt and do the calculations.

Do you think it's more -- under a nickel or something?

No.

It's in the neighborhood, for the remainder of the year, in the $0.07 to $0.08 a share range.

And that's captured in the $0.12, so you have, let's say, $0.07 and then $0.05 from the below market leases.

Right.

And then, anything on straight line rent in that number?

It's like a $0.03 straight line rent.

And that's on a full year basis?

Yes.

Thank you, guys.

Gentlemen, there appears to be no further questions.

We appreciate your attendance, and we look forward to seeing some of you at the upcoming ICSC convention.

It looks to be a very strong convention for us.

And look forward to reporting to you as the year goes on.

So thank you very much.

And this does conclude today's conference call.