Macerich Co (MAC) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Macerich Company third 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 for you to queue up for questions.

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

And would now like to turn the conference over to Georgeann Palffy of the Financial Relations Board.

Please go ahead, ma'am.

Thanks to all of you who have joined us today for the Macerich third quarter earnings call.

If you do not have a copy of the release, you may access it on the company website 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, please refer to the Company's press release and the SEC filings.

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 on 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; and Tom O'Hern, Chief Financial Officer.

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

Please go ahead, sir.

Thanks, Georgeann.

We will be discussing today the third quarter results, recent events and our outlook for the rest of 2005.

Our business fundamentals remain excellent.

It was another strong quarter in terms of tenant sales with strong year-over-year gains, continued high occupancy levels, very good releasing spreads and significant redevelopment activity, as well as a strong quarter for FFO growth.

Looking at total same-center tenant sales, the fourth quarter -- excuse me, the third quarter grew to 7% rate over the third quarter of last year.

Breaking that down by region;

Southern California was, again, strong, up 6%, Northern California and the Pacific Northwest is up 4.5%, the Inner Mountain Region was up 1.9%, the Eastern Region was up 7.9%, Central Region was up 8.2%, and Arizona continued to be very strong, up 16.7%.

Looking at a sales on a comp space basis, specific space to -- that same space a year ago, sales were up 4.9%.

Total mall sales per square foot, on a rolling 12-month basis, was $410 per square foot.

Looking now at the occupancy level, it continued to remain very high with the quarter-end occupancy level for the portfolio -- entire portfolio at 93.4%.

That compared to 91.8% a year ago.

On a same-center basis, excluding the acquisitions, the occupancy ticked up 50 basis points to 92.9% compared to 92.4% a year ago.

The large increase in the total portfolio occupancy versus 9/30/04 was added largely by the Wilmorite portfolio, which averages over 96% occupancy.

It was, again, a good quarter in terms of leasing activity.

We signed 350,000 square feet of shop leases.

The average new starting rent was $3720.

The average releasing spread was 21.8%.

Average rent in the portfolio today, as of the end of September, is $33.67 per square foot.

Now, looking at the results of operations for the quarter;

FFO per share diluted for the quarter was $1.04, that's a 9.5% increase compared to the $0.95 reported in the quarter ended September 30th, 2005.

EPS diluted came in at $0.07 per share for the quarter, compared to $0.29 for the third quarter of last year.

The drop in EPS was primarily due to the increased depreciation and amortization expense of $25 million, resulting from the acquisition of Wilmorite.

The strong growth in FFO per share was driven by same-center NOI growth, which was up approximately 3.6% compared to the third quarter of last year.

Additional increase resulted from CPI rent increases, 825,000 higher than the third quarter of last year.

Rental revenue attributed SFAS 141 was up about $500,000 to $4.6 million for the quarter compared to $4.1 million in the third quarter of last year.

Specialty tenant leasing, fueled by the addition of Wilmorite, was up 54% to $9.7 million for the quarter.

Interest rates had a negative impact on the quarter.

The average interest rate during the quarter was 5.85%, compared to 5.5% for the quarter ended September 30th, 2004.

Average maturity on that debt is 3.94 years.

For the fixed rate debt portion, only, the average life is 5.2 years and the average interest rate 6.5%.

On August 26th, we declared an increase in our quarterly dividends, moving it up to $0.68 per share per quarter.

This is a 5% increase over the prior dividend and represents our eleventh consecutive year in which we've increased our dividend.

Based on our annualized dividend rate in the midpoint of the 2005 guidance, this is a very healthy pay-out ratio in the low 60% range.

In terms of the year 2005 guidance, we raised the bottom end of our previous FFO guidance in this morning's press release.

Our current FFO per share range for the year is $4.34 to $4.40.

Some of the basic assumptions in there are that same-center NOI growth will come in at about a 3% rate, which tracks the actual year-to-date same-center NOI growth.

Additionally, we have managed the forward LIBOR curve and assumed that the 30 day LIBOR rate will hit 4.2% by year end.

In terms of the 2006 guidance, we expect to give our year 2006 guidance when we report fourth quarter results and annual results for 2005.

Looking now on the balance sheet, at September 30th, 2005, we had $6.6 billion of debt, including our prorata share of unconsolidated entities which represents $1.5 billion.

Our floating rate debt to total market cap at the end of the quarter was 22%.

Our floating rate debt was 38% of our total debt.

Our total debt to market cap was 56% at quarter end, and the interest coverage ratio is 2.3 times.

We have a number of interesting refinancing opportunities currently underway and planned for the first half of 2006, including large mortgages on Los Cerritos Mall, Valley View Mall and the IBM portfolio, which collectively today, before the refinancings, are about $800 million in debt.

But those refinancings combined could generate approximately $400 million in excess proceeds for us.

It's anticipated that those excess proceeds would be used to play down floating rate debt.

That would reduce the floating rate debt down to about 32% of our total debt.

In addition, we will probably refinance the floating rate mortgage on Salisbury which is currently an $80 million floating rate debt.

And do that on a fixed-rate basis.

There's also an asset or two we are considering selling.

And to the extent we do sell those assets, it's anticipated that the net proceeds would be used to pay down floating rate debt.

Accordingly, when you factor in those transactions, we anticipate over the next six months that we would be able to reduce our floating rate debt as a percentage of our total debt to below 30%.

At this point, I am going to turn it over to Art to discuss redevelopments and other major events impacting our business.

Thank you, Tom.

We had the pleasure of seeing a lot of you last week, at the NAREIT convention.

And one of the things that was expressed as a concern by many investors was, what will happen, what could happen to our operating results should there be a consumer slowdown?

Of course, during the third quarter -- each month during the third quarter, if you looked at consumer confidence surveys -- consumer confidence kept hitting 10, 12, 15-year lows.

And yet, if you look at our operating results here, you see that our sales, both on a total sales basis in the third quarter, as well as a comp sales basis, were extremely strong throughout our portfolio and particularly in Arizona.

Also, if you take a look at our leasing results, as Tom mentioned, leasing spreads were back up to our norm of 22% spreads over expiring leases.

So we clearly see no letdown from a retailer demand viewpoint or from a consumer demand viewpoint.

Looking at the financial results, as Tom has mentioned, we've tightened up our guidance to $4.34 to $4.40 for the year.

You'llremember that our original guidance was given out in November or December of last year, was $4.20 to $4.30 for the year.

We upped that to $4.30 to $4.40 in May of this year and we're now tightening it to $4.34 to $4.40.

So if you look at that and see what that implies for the fourth quarter, we are looking at approximately 14% to 19%, FFO growth per share in the fourth quarter.

And that's in spite of the fact that when we gave guidance, we had actually used the forward LIBOR curve, which at that point in time, had LIBOR levels lower than where they are today.

We are doing better than expected, in spite of the fact that LIBOR has even gone up faster than expected.

Our development and redevelopment pipeline remains extremely strong and powerful.

Probably the most exciting activity that happened during the third quarter, from a redevelopment viewpoint, was the expansion of Tysons Corner.

You will remember in May of this year, I indicated to you that we had intended to open up the expansion -- the 400,000 square foot expansion of Tysons in the fourth quarter.

We couldn't be completely clear about the timing, in terms of the opening, or in terms of the occupancy levels that we would achieve, because we had really just closed on the transaction.

And we really only gotten involved in the expansion in December -- late December when we signed the contract with the owners.

I'm very proud to report to you that, on September 29th, the expansion opened well on time, under budget, in terms of costs, over budget in terms of return; and 93% of the space that was opened for business and paying rent and over 97% leased in the expansion area.

So we are -- our two teams, between Wilmorite and the Macerich team executed that expansion fabulously.

That was one of the big question marks that we had for the year, was when was that going to open.

And when we gave guidance for the year, we even indicated at the time, that it was going to be hard to give you guidance on a quarterly basis but we felt comfortable on an annual basis as to where we saw results.

So this expansion of Tysons, --we are just thrilled about it and that has a lot to do with the growth that we anticipate seeing in the fourth quarter.

Looking to other major expansions and redevelopments that are underway -- Twenty Ninth Street in Boulder remains -- going along extremely well, with several new tenants such as Puma, J. Jill and Ann Taylor Loft and even a tenant from Montana Avenue here in Santa Monica, Francesca's Collection, signing on to join Macy's;

Wild Oats, Home Depot, Century Big Theaters and a slew of restaurants that will be opening in fall of 2006.

That project is coming along extremely well.

Our Washington Square lifestyle expansion project will be opening up in a another couple of weeks on time and on budget.

Our Fresno Fashion Fair lifestyle expansion will be opening up in phases in another couple of weeks and then finishing off in spring.

Again, on time and on budget in terms of our original estimations.

So we are thrilled about where that is headed.

In looking at our Arizona development pipeline, we are moving along with SanTan Village in Gilbert.

You'll remember this is a 1.5 million square foot open air regional center that starts construction in early next year and it will be opening in phases in '07 and '08.

One of the reasons for it opening in phases is that we originally had commitments from May Company but now with the Federated acquisition of May Company, the opening of Macy's store there in lieu of a Robinson's May store there could get delayed beyond the '07 timeframe.

But we are very excited about that project and very bullish and optimistic about it.

We announced previously that we saw that our Goodyear project, another million plus square foot regional center, which will be called Estrella Falls, we will be starting construction on that in another 18 months or so.

We anticipate an opening on that in 2008 and are very bullish on that.

Finally, in terms of significant entitlement activity at Biltmore Fashion Park we recently received approval from the Phoenix city council for the additional of four highrise towers which could be office, residential or hotel with heights approximately of 140 plus vertical feet.

We believe that that would really take that project to a new level, as that becomes the commercial and retail core of the entire Phoenix marketplace.

So we are thrilled about that.

Finally, on the he entitlement side at Tysons Corner, we will well underway in terms of getting our approvals which we applied for about a year ago to add 3 million square feet of mixed-use highrise office, residential and hotel uses.

Again, as we've said in the past, our efforts here are on getting the entitlements and then in terms of capitalizing on the entitlements, we will figure that out later.

But they clearly will show great upside in the future.

As we have talked about in the last couple of calls, the Federated and the May Company merger is going to have significant impact on our portfolio.

Of the 10 or so centers in which there's duplicity between Federated and May Company, and where there will be divestitures; these centers are highly productive centers doing over $465 a square foot .

And this merger is going to trigger and accelerate some very major and exciting redevelopment and expansion opportunities at each of the centers.

Finally, before we turn it over to questions, you will remember back in February when we had our fourth quarter conference call, Tom was not able to join us because he was at the hospital with his wife, giving birth to Maggie.

And one of the most exciting developments or the most exciting development for me during quarter, was the birth of Francesca Coppola, my daughter with Kate, my wife, who was born on August 24th.

It's been an exciting year and exciting quarter and we are very bullish looking forward.

And now we'd like to open it up for questions.

Yes, sir, thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Michael Bilerman of Citigroup.

Please go ahead.

Hey, guys.

John Litt is on the phone with me, as well.

Tom, you outlined the refinancing plans and you included in there the IBM portfolio, with -- that you jointly own with Simon.

Is it fair to assume then that that is the likely scenario that you are going to keep the venture going, and just refinance and take out proceeds out of the asset?

No.

What we're going to be doing is -- David and my brother Ed and I met last week in the process of continuing meetings on this.

And, again, as we've mentioned in the past, given that those 12 assets are all cross-collateralized by a blanket mortgage, we haven't had really had the opportunity to do much pruning within the portfolio without incurring significant yield maintenance penalties.

But with that mortgage maturing in May of next year, we made the decision that we are going to take several of the assets within the portfolio -- probably four or five assets, and go ahead and dispose of those assets, prune the lower level of the portfolio.

And then as the mortgage matures, we will be doing some refinancings of the individual assets and raising substantial proceeds, both between the dispositions and the refinancings.

And then going forward after that, we'll leave David and Simon Group -- Simon Property Group and we will make a decision as we go forward as to whether or not to keep the partnership going or to go ahead and split up the remaining assets.

We now have the opportunity to go ahead and to tap into the value that's been created in that joint venture, which is quite substantial.

Both through a combination of a disposition pruning process and a refinancing process.

And how should I think about then, your comment on the $400 million of FX proceeds?

And then also disposing of assets?

How does the split go in terms of debt refinancing and after-sale proceeds?

Yes, Mike, it's too early to tell at this point.

That's one reason we deferred the '06 guidance is because we have some strategic decisions to make to exactly identify which assets.

But suffice it to say that between Valley View, the remaining assets in the IBM portfolio, Salisbury, that even if we do some pruning in the IBM portfolio, we should be able to generate $400 or so of excess proceeds.

To extent that we sell more than a few, then we'd obviously we'll have more in sales proceeds and fewer in refinance proceeds.

But the message there that there will be a liquidity event, in one way or another, that will be used to reduce the floating rate debt.

And then the next question was just on the development pipeline.

Art, you talked about SanTan and Goodyear coming in in phases.

Can you walk through the total capital spend that you are going to have on those two assets and when you think that -- that it will come online?

Well, the initial phase of the mall component of SanTan will be the construction of the multiplex theater, which will start early next year.

We have not disclosed the total dollar --estimated dollar commitment to either of those projects.

And we're not prepared to at this point in time.

However, it would not at all be out of the question to assume that they are both $200 million plus projects, the scope and the phasing of the projects is still being analyzed and decided upon.

We are deciding upon right now, for example, whether or not to add a mixed-use residential component to SanTan Village.

Which, again, could -- could result in either a sale of that entitlement or somehow us being involved.

But, they will clearly both be $200 million plus projects.

Our developments targeted returns in the Arizona marketplace, as always, is in the 10% to 11% to 12% neighborhood.

And we anticipate that we'll be able to achieve those type of returns.

And we know the more specific dollar figures based upon the -- as the projects shape up, in terms of specifics, we will clearly give you a much more concrete target and number to look at.

And the $200 would be your share of those projects?

Of each them, yes.

Of each of them.

My last question was just on operating expenses.

They seemed to tick up this quarter both relative to the beginning of this year and to last.

The NOI margin was a little bit more depressed.

Was there anything going on in terms of maybe bad debt or some other reason for that?

No, if you look -- and you really need to look at a year-to-date number other than just one quarter -- but year-to-date, the gross margin was about 68% compared to 70% year-to-date last year.

And the biggest impact on that was just adding the Wilmorite portfolio.

And that's primarily the recovery rate.

Our consolidated recovery rate is about 95%, compared to Wilmorite at 92%.

So that's really the reason the gross margins dipped a little bit.

There was nothing particular in this quarter, at all?

No.

No.

All right.

Thank you.

Thank you.

And we'll take our next question from Lou Taylor, Deutsche Bank.

Please go ahead.

Great.

Thanks.

Congrats on the quarter.

Tom, can you talk a little bit about the refinancings you did during the quarter, just in terms of your strategy and your direction off and going with floating instead of fixed rate on several of the loans?

Well, the only time you really -- well, in the case of Greece Ridge, that is part of the Rochester portfolio.

And really, in that particular situation, if you'll recall, those assets could potentially go back to the former owners of Wilmorite.

And as a result of that, we are somewhat restricted in terms of how we can finance those.

So we were really limited to a floater in that particular case.

However, the good news is we are able to drop the spread on the floater by about 200 basis points by pursuing a new loan on Greece Ridge.

In terms of Camelback Colannade, that particular situation is one where we expect to have a tremendous amount of development potential.

Potentially recapturing Mervyn's and converting that into a higher and better use.

So given that, we're not going to -- we're not going to entertain putting a fixed rate loan in place because the prepay penalty to break that up, when we're able to do our redevelopment, just wouldn't make any sense.

So generally speaking, though you are only going to see us do a floater when there is major redevelopment expected in the near-term.

And that's certainly the case in Camelback.

Greece Ridge was kind of a unique situation, it's one of the Rochester properties and we didn't have a lot of latitude there to do anything other than a floating rate loan.

And then how about at Scottsdale 101, is it going to get ultimately folded into the larger project and refinance then?

Is that the strategy there?

No, there's been a tremendous amount of interest in this product type in the Phoenix area with the recent divestiture by Vestar, for example, of their power center portfolio, bringing in a partner at a very low return.

So we wanted to maintain the flexibility at Scottsdale 101to go ahead and preserve the opportunity to go ahead dispose of that asset and let the buyer make their own decision on what kind of financing they wanted to put on the asset.

Okay.

Super.

Art, just staying with Arizona for a minute.

Given the amount of development that you are about to embark on over the next two to three years, do you have the necessary staff and team to handle all of those projects simultaneously -- or nearly simultaneously?

Definitely.

I mean, our team in Phoenix is extremely strong.

We -- when we acquired Westcor, we retained all of the top people.

And, in fact, that development team not only handles the Phoenix and the Tucson development activities that we have and they also now have become extremely involved with us on many of our other development and redevelopment activities.

So Phoenix is really the -- it is definitely got a lot of our heavy development and redevelopment people there.

And they are extremely talented in many ways, both on entitlement side, the planning side, the strategic side; as well as leasing and everything else.

So we definitely have more than enough bench strength there and are thrilled about that.

And also, when we acquired Wilmorite, we retained some extremely senior people there that are very, very talented people that are going to help us to mine a lot of our opportunities on the East Coast also.

Okay and just going back to Tysons for a minute.

In terms of the entitlements, what is your expectation on timing?

And then, B, how do you expect to -- or anticipate monetizing it?

Well, the timing of getting the entitlement is that we fully anticipate within the next three to six months we will have the entitlement.

And then at that point in time, should we want, we could proceed with the actual implementation of the development immediately thereafter.

In terms of how we monetize it, that's going to require some careful thought.

We have a partner there, the Alaska Permanent Fund.

We will have to work it out with them.

But from our view point, when we have the opportunity here to maximize and intensify these projects like Biltmore, like Tysons; some of the biggest value that we create is getting the entitlement.

And then how we monetize it, we are going to be very thoughtful and careful about how we go about thinking through that.

And we're thinking through many alternatives, but clearly, getting the entitlement is where the big value is for us.

Okay.

And the last question for Tom, in terms of the FAS 144 adjustment this quarter, can you just give us a sense for how quickly that burns off?

FAS 144 or FAS 141?

144.

Well, 144 is what you allocate to discontinued operations, which in this particular case is just Crossroads, Oklahoma.

Okay.

So that's there until the asset is sold or it's recharacterized as an asset that we're not going to sell.

Great.

Thank you.

Thanks, Lou.

And we'll take our next question from Michael Mueller, JP Morgan.

Please go ahead.

Hi.

A few things here.

Tom, speaking of some of the numbers, any debt premium amortizations in the third quarter?

There is, Mike.

There's a lot of pieces to that.

Virtually any acquisition that's taken place over the last five or six years and the detail of that will be in the 10-Q, which will get filed later today.

Okay.

You mentioned potentially breaking through 30% variable rate debt by the -- it looks like the first part of '06.

Once you break that, where should we expect you to take the balance sheet from there?

Should we expect to you run it in the high 20s, do you expect to pull it down to the low 20s at some point?

I would say mid-20s, Mike. 25 is probably a good target.

We've got a lot of activity that we're going to see between now and the middle of next year in terms of refinancing.

A lot of these, at the moment, are cost prohibitive because of yield maintenance penalties but that changes in the early part of '06.

So we're going to pretty actively work that and then go from there.

To the extent there is asset sales that creates additional liquidity and then you would see us use that as well, in all likelihood, to pay down unsecured floating rate debt.

Do you think that's a target you will get to by year end '06?

It's hard to say.

I'm pretty comfortable saying that we'll be at 30% or lower by the middle of '06.

Beyond that, it's not as clear.

But it is certainly a goal.

Okay.

And last question.

Any plans -- you mentioned getting the Mervin's box back at Washington Square.

Any initial plans for that?

We are looking at multiple plans.

The key was getting it back.

And we were able to get it back at very reasonable investment, and we now have multiple plans in terms of what we're going to do.

Right now, we are really focused on finishing up the expansion that's underway right now, which that opening is going to be on November 18th, and that's going to be a fabulous addition to that property.

So we're looking at several alternatives with that, and they are all good.

Okay.

Thanks.

Thanks, Mike.

And we'll take our next question from Ross Nussbaum, Banc of America Securities.

Please go ahead.

Hey, guys.

Good afternoon.

Hey, Ross.

Art or Tom, can you refresh me as to what the cost of the expansion at Washington Square -- as well as at Fresno Fashion, what the costs there are?

Washington Square, the cost is going to come in around $55 million.

Remember, we have a joint venture partner there.

And Fresno Fashion, we initially estimated the cost to be $25 million.

It looks like it will come in around $23 million.

And that's 100% owned.

And you said the cost of the recapture of the Mervyn's box at Washington Square was pretty nominal.

Yes, it was.

It was about $1 million.

Tom, with respect to the operating expenses, I just wanted to follow-up on the earlier question.

You are saying that they were higher because of the mix of assets now with the acquisition completed?

Well, it really boils down to the recovery rate.

We, on a consolidated basis have a 95% recovery rate.

And the Wilmorite portfolio has a lowerer recovery rate.

When you include Wilmorite and consolidate Wilmorite, that pulls the overall recovery rate down.

Why is their recovery rate different than yours?

Well, they have just have written their leases differently.

I mean, ours is an accumulation of assets that we bought from a number of different owners over the last 20 years.

And then over time, of course, you roll those leases and they get on a standard lease.

But, on average, we are able to recover a higher percentage than they have in their leases.

Which may over time become a moot point because we are gravitating towards fixed cam.

Okay.

So outside of some seasonal fluctuations, this quarter's percentages are probably, in the short-term anyway, some good numbers to go with?

Well, I think if you look over a one-year period -- if you are trying to forecast a recovery percentage, 95%, which is where we've been year-to-date, is a pretty good number.

Thank you.

Thanks.

And we'll take our next question from Alexander Goldfarb, Lehman Brothers.

Please go ahead.

Hi, good afternoon.

Thank you.

Or actually, I should say good morning out there.

Just going back to the IBM portfolio.

When you were mentioning selling four or five of the 12 assets, those would be out of your share of them?

Or that's collectively out of the JV and then the remainder you guys would split between you and Simon?

It would be out of the total JV.

So some of it would be -- first of all, each -- we and Simon own half of each of the 12 properties.

The only thing we do separately is that they manage six and we manage six.

So, we each own 50% of each of the properties.

And so we have identified four or five of them that we think would be opportune to dispose of.

And then the next step would be we will be refinancing the balance of the properties, generating some substantial proceeds from that, on a property specific basis, not on a blanket basis.

And at that point in time, we will jointly make a decision whether or not to split up the assets or maintain the partnership.

It's been a very, very good partnership.

And it's quite possible that after monetizing these assets and pruning the portfolio, that we'll keep the partnership in place.

Okay.

Tom, on the variable rate debt, for P&L purposes, how much of your variable rate exposure should we think that's capitalized in terms of construction-related versus from the operating portfolio that will actually be affected by rising rates?

That's a fairly small percentage, Alex, as a total.

I would say it's probably 15% to 20% of the total.

Of the total variable rate?

Yes.

We are just finishing up with so many projects.

And the new projects are just beginning to come online.

Okay.

But then -- okay.

So then as we see the variable rate continue to build then, it's going to be obviously more related to construction?

Can you comment on -- both on Queen Center and Broadway Plaza?

Queen Center in terms of, if you've had any success, in terms of further expansion plans, there?

I think in the past you have spoken about maybe entertaining other retail possibilities in New York seeing as the City was pretty pleased with your performance there.

And then also what you envision for potentially redeveloping at Broadway plaza?

Sure.

At Queens Center, we think that there's an opportunity for us to potentially expand the center further.

We clearly have an entitlement right to expand another 60,000 feet vertically on top of the original structure.

We're looking at some peripheral land to us which, I'm not going to get into the details on right now, but we're looking at land in the vicinity to acquire, to go forward with a further expansion in Queens.

Which we could be announcing that within the next six months.

At Broadway Plaza, we are looking at and working with the City to do a relatively significant expansion of the property.

The City is going through a master planning process right now.

And so we are looking to get the opportunity to add approximately 400,000 square feet of space to Broadway Plaza and given the retail demand that we have at Broadway Plaza there.

We could easily fill that up.

We have retail demand both on the specially store basis, as well as from some specialty anchors that would love to be there.

So that's probably classed as clearly a more long-term planning process -- that could easily take us a couple of years to get the entitlement and then another couple of years to be able to play it out.

But that's what we do with these properties.

We constantly have each of them in our sights from where we are going to take them five, ten years from now.

And Broadway Plaza -- the City has come to us and said that they are willing to embrace the possibility of a major expansion at Broadway Plaza, as part of their redoing of the master plan.

It remains to be unseen whether or not that will be accomplished as part of the redo of the master plan.

But if it can, it's obviously going to be a fabulous opportunity.

And that would also include some residential component in the towers?

No, not at Broadway Plaza.

No.

You may have that confused with Biltmore Fashion Park?

No, I was just reading that there was a talk about trying to increase the height limits there.

So I didn't know that that relates to the actual retail center.

Or if that related to residential?

No, the height limits in Broadway Plaza are -- that's pretty sacrosanct.

And I wouldn't want to be quoted as saying that I want to increase the height limits there.

No, you weren't.

There was a journalist who was.

Okay, well, I wouldn't want to say it because I would get shot down pretty quick.

They are tougher than Santa Monica?

I don't know who could be tougher than Santa Monica.

Anyway, we're -- we're looking at pure retail at Broadway Plaza.

And there is not the opportunity there for significant vertical expansion.

But we may be looking at some minor vertical variances.

When I say minor, I'm talking 10, 15, 20 feet.

Okay.

And then my final question just goes back to the Twenty Ninth Street project.

I believe as part of that buildout, there's a residential component.

And just wanted to understand more how you guys are thinking about handling that?

If those would be outright land sales that you guys would sort of retain a JV interest?

And then as far as valuation, if you thinking more condo-type valuations on these things?

Or if this be more towards rental?

The residential opportunity at Twenty Ninth Street -- we've carved off five acres from the project for residential opportunity.

And what we decided is to go ahead and to get the retail open and humming before we go ahead and tap into that opportunity.

My guess is it would be a for sale project to a residential developer, where we just sell the land off to them and then it will be their decision whether or not they go for rent or condo.

Do you know how many units it's entitled for?

We have not got a specific entitlement for that project yet, no.

Thank you.

So I just don't know.

And we'll take our next question from Matt Ostrower, Morgan Stanley.

Please go ahead.

Hi, guys.

Hey, Matt.

Hey.

On the -- on the JV front, you have been talking a bit about moving from variable to fixed, which is obviously a positive.

But what about -- can you just refresh your view on overall leverage?

Do you think it's appropriate now?

Do you think it's too high?

And if you -- is it just going to be sort of one-off asset sales that you envision yourself using to lower leverage, if you think it's too high?

Or are you still exploring a programmatic approach, in terms of a joint venture?

Matt, I think our bigger concern, frankly, is the floating versus fixed percentage.

The debt-to-total market cap is about 56%, and the coverage ratio is pretty healthy at 2.3 times.

So our focus is going to be more on reducing the floating percentage rather than the overall leverage.

That being said, to the extent we sell an unincumbered assets like Crossroads, Oklahoma; that would have the impact of doing both, reducing the floating rate debt as well as the overall leverage level.

And when you do something like that, would you view that as a move back to a longer-term different leverage level?

Or is that just a temporary generation of funds that you would just reuse and then go back up to the leverage you are now?

Over the course of our history, we have been between 50 to 60% debt-to-total market cap.

I think we have only gone over that occasionally, such as when we bought Westcor.

And I see us over time operating between 50 and 60, which is right where we are today.

Okay.

And then on the -- I guess the only other question was JV prorata share of interest expense -- it went from $20 -- $20ish million down to $16 or $17 million.

Is that just asset sales that caused that decline?

No, as Art mentioned, we had an extraordinary amount of construction in the joint venture portfolio this quarter.

We were finishing up with some major capital expenditures on Washington Square, North Park as well as Tysons, so we had a significant amount of capitalized interest in the quarter.

Oh, okay.

Understood.

Last quarter would be normal.

Plus we only had a partial quarter for Tyson's in last year.

Okay.

Thank you.

And we'll take our next question from Craig Schmidt, Merrill Lynch.

Please go ahead.

Well, thank you.

I'm just -- a little bit more detail, perhaps, on SanTan Village.

What is open in Phase I versus Phase II?

And how did the project work, in terms of, you had some value components and some traditional mall components?

And just a better understanding how the project works.

Hi, Craig.

The phase -- the basic phasing is going to be that we'll start construction on the Harkins Theater early next year.

We anticipate -- again, we're going to build this in an open-air capacity.

But we anticipate that in late '07, we'll be opening the Dillard's-Harkins wing -- with traditional mall tenants in that wing.

And we'll also be opening, during that time frame, the lifestyle attached center which will be open in conjunction with that.

The 1.3 to 1.5 million square foot project that's underway -- that we call SanTan Village, is more of a traditional regional mall.

Now the PowerCenter that has been built to date -- or the land that we have sold in conjunction with that, is really separate and apart from the mall component from SanTan Village.

And is not a significant investment on our part because basically, the plan at that particular project was to use land sales -- the people like Wal-Mart and Sam's Club and other big boxes, to fund the infrastructure to then reduce the cost of the mall development itself.

I see.

So the 1.3 to 1.5 million is primarily a traditional mall/lifestyle-type tenants?

It's traditional mall/lifestyle- type tenants, there may be an upscale grocery store that would be included in that square footage.

But the big box development is not part of any of those numbers and is really not a significant investment for us.

I think our total share of that investment is only $30 million because it's predominantly was accomplished through land sales.

Which was the original deal with the land owner that we made the deal with several years ago.

Thank you.

[OPERATOR INSTRUCTIONS] And we'll take our follow-up question from Michael Bilerman from Citigroup.

Please go ahead.

Yes, Tom, I had a follow-up question on the debt.

You talked about the IBM portfolio looks [inaudible] being $800.

That total share -- your share of that's about $420.

When you talk about $400 million of excess proceeds, are you referencing that net to you or gross?

Net/net to us.

Net/net to you?

Right.

Right.

And Salisbury is in the equation as well.

And there is a handful of others that we didn't get into specifics on where we expect to refi for excess of the existing mortgage.

And then 30 -- a large amount of the IBM portfolio is floating today.

Would you expect that all of that would go to fixed or that you would keep some percentage loading?

That's a partnership discussion.

But if you look at where the yield curve is today, it's pretty attractive to go fixed on that.

That would be our preference.

Okay.

And the last question is; where were the land sales booked in terms of on the income statement?

The land sales are in JVs, Michael.

If you go to the section that breaks out prorata share of joint venture, income gain on sale of assets.

Got it.

Thank you very much.

Thank you.

And we'll take a follow-up question from Matt Ostrower, Morgan Stanley.

Please go ahead.

Thanks.

Sorry, just going back to the JV question that I asked before -- as I understood it, when you bought Wilmorite, there was this initial discussion about doing a JV on that portfolio.

And then you pulled back and said this could be a much larger -- it was a large transaction for the Company and we are thinking of doing it on a number of different assets, not just Wilmorite.

And now it sounds like you have rethought that as well.

I'm wondering what has changed to make you rethink doing that at all?

We are coming to the conclusion that, certainly at a Wilmorite level, that it does not make sense to bring in a joint venture partner at this point in time or any time in the near future.

Because they wouldn't be willing to pay for the development upside that we now see in that portfolio.

There's development in the beginning but there's even more has been created by virtue of the Federated-May Company merger, which is going to allow major redevelopment at Danbury, at Freehold, and even, potentially,a large major -- further retail redevelopment at Tysons Corner, should the Lord & Taylor situation evolve in a different direction.

When you look at the scarcity of high-quality retail assets today -- we're going to be extremely careful and disciplined in terms of bringing joint venture partners into that kind of quality going forward.

Because of the fact that it's just so hard to get your arms around and to get your hands on that kind of quality.

The list of people that would love to do joint ventures with us is extremely long.

But we see a number of different ways of raising equity within the portfolio and raising liquidity to reduce the variable rate debt.

Raising liquidity, either through fixed rate refinancings, taking cash out, and raising equity through pruning of some of the other assets in the portfolio.

So if we could raise, $200, $300, $400 million by selling 100% of assets that are doing, $200, $250 a foot -- I would rather do that than raise the same kind of money by bringing a partner into an asset that's irreplaceable.

So we should really be looking at this IBM, which is effectively an announcement you made today, without being official about exactly what you're going to be doing -- that's effectively, we should be looking at that as a replacement to -- basically as the execution on what you said when you said you are not going to do a Wilmorite JV awhile ago.

You are exploring doing some broader things in the portfolio.

This is an example of the broader stuff that you're talking about.

Let's use the word example, not replacement.

Because there was a lot of specific speculation about bringing a partner into Wilmorite, both fueled by us and others.

But as we got deeper into it, during the due diligence phase, we just came to the conclusion that it would not only be mathematically dilutive to our shareholders to bring a partner into that transaction but it would be extremely value-dilutive in terms of NAB creation going forward to bring a partner in.

And it would have been a complicated partnership.

So we want to try to keep our balance sheet simple in that vein.

And certainly, it's an example of raising capital through dispositions of -- 100% dispositions as opposed to a 50% disposition through a joint venture.

And the IBM dispositions that you talked about, is that what we should be thinking of as the bulk of it?

Or are there other dispositions that you really are -- there's a reasonable probability you may do as well on top that?

There's definitely others.

We made -- we alluded to the fact that one of the reasons we went on the refinancing of Scottsdale 101, the floating rate debt, is that that's a high candidate for disposition.

All right.

Thank you.

Thank you.

And we'll take another follow-up question from Michael Bilerman, Citigroup.

Please go ahead.

Sorry to queue up for a third time.

I just had a question on the guidance.

I was looking at your EBITDA per share that went up about $0.15 to $0.19, versus FFO that went up $0.04.

Is it a fact that then, basically -- I just think about it simplistically -- that your topline doing very good in terms of the property level but that's being offset by higher interest expense, higher G&A, and I don't know what else?

Is that a fair way to think about it?

Yes, I think that we said that earlier.

Art mentioned that the original guidance had factored in a lower LIBOR level than what we see now.

So, yes that's absolutely right.

Great, thank you.

And at this time we have to further questions from the phone audience.

I would like to turn the conference back over to the speakers for any additional or closing remarks.

Great.

Well, thank you for joining us.

We're looking forward to reporting to you our fourth quarter results, which we are very bullish on.

All indications, from retailer and consumer demand, is that the fourth quarter is going to be a great quarter for us.

And that's in our revised guidance to you.

And, again, look forward to reporting to you further in the months to come.

Thank you.

And that does conclude today's presentation.

We thank you for your participation.