Macerich Co (MAC) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Macerich Company second quarter 2006 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 Ms. Georganne Palfey of the Financial Relations Board.

Please go ahead.

Thank you, and thanks to everyone joining us today for the Macerich second quarter earnings call.

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

Management will discuss certain non-GAAP financial measures as defined by the SEC Regulation G. The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the 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 and Tom O'Hern, Chief Financial Officer.

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

Please go ahead, sir.

Thank you, Georganne.

Today we'll be discussing second quarter results, recent capital activity, upcoming opportunities and our outlook for the rest of the year.

It was another quarter with good operating metrics, good tenant sales gains, continued high occupancy levels, even in light of some significant tenant closures, strong releasing spreads, significant development and redevelopment activity and a number of capital events.

During the quarter, total same center tenant sales in the portfolio increased 4.4% compared to the second quarter of last year.

Looking at that by region, Southern California was up 1.2%, Northern California again strong at 7.4%, the Intermountain Region was up 7.9%, the Eastern Region was flat, the Central Region was up 1.7%, and Arizona was again very strong, up 9.3%.

Looking at comp tenant sales, they were up 3.9% for the quarter.

And in terms of total mall sales per square foot for the rolling 12 months the sales per foot was $433 per square foot and that's up 4.1% from year-end.

Occupancy remained high in the quarter with the year-end occupancy at 92.1%, that compares to 92.3% at June 30th of '05.

On a same center basis, occupancy was 92.1 compared to 92.6 a year ago.

The bulk of that lost occupancy was from a combination of retail brand alliance, where we got back 165,000 square feet of space in the first quarter, and Sam Goody and Musicland, who went through a bankruptcy and we got 255,000 square feet of that space back, most of it in the second quarter, some of it in third quarter.

Those two combined for about 1.2% of our mall shop space and that is the primary reason for the drop from the second quarter of last year.

Looking at leasing activity, again another brisk quarter.

We signed specialty tenant leases for 398,000 square feet, the new base rent was a little bit over $41 per foot for a positive releasing spread of $24.

Excuse me 24%.

Average rent per square foot in the portfolio increased to $37.39.

Looking at results for the quarter, FFO per share diluted was $0.96.

That was a 4% decrease compared to the $1 per share for the quarter ended June 30, 2006.

EPS diluted was $0.36 per share for the quarter compared to $0.11 for the second quarter of '05.

The increase in EPS was primarily due to the sale of Scottsdale 101, where our 46% pro rata share of the gain was approximately $23 million.

The decrease in FFO compared to the second quarter of last year was primarily due to short-term interest rates being 1.9% higher than during the quarter ended June 30, 2005.

This FFO per share of $0.96 was $0.04 below the midpoint of our guidance to you, which will be discussed shortly.

Impacting the quarter we had same center NOI growth of 2.5% compared to the second quarter of last year.

That was down from the first quarter, which was about 7%, and it was also shy of our guidance range of 3 to 3.5% and that was primarily due to the closures of Retail Brand Alliance where we got a substantial lease termination payment in the first quarter as well as the closure of Sam Goody and Musicland stores.

If we factored in a pro rata share of the lease termination payment that would have been earned in the second quarter from Retail Brand Alliance, the same center NOI would have been closer to 3.2%.

The Musicland/Sam Goody closure during the second quarter impacted us negatively by about $800,000 compared to the prior year.

During the quarter we had approximately $3 million in gain on land transactions for the quarter.

That compared to $250,000 last year and year-to-date we're at the same level compared to $1.8 million for the first half of '05.

We've historically had about 3 to $5 million per year in land sales and that's primarily pad sales of peripheral land, but it's lumpy and does not flow pro rata through the year.

We do expect some additional land sales to occur in the fourth quarter of this year.

We'll be speaking to that shortly.

CPI rent increases were $1.3 million higher in the second quarter than in the second quarter of last year.

As indicated, we sold Scottsdale 101, that was a joint venture asset.

We had a gain of approximately $23 million recorded in the second quarter.

That was the center that was under development when we bought Westcore in 2002 and we completed the development.

Looking at the expense recovery rates, the consolidated recovery rate including joint ventures of pro rata for the quarter was 92.5%.

That compared to 95% in the second quarter of '05.

Again, it's really critical to take an annual average when looking at the recovery rate because non-recoverable expenses do not flow evenly through the year.

In fact, if you look at the 2005 recovery rate we're at 91.6% so although the recovery rate was lower than the first quarter primarily as a result of the occupancy drop, it was consistent with our recovery rate for the full-year 2005.

Interest rates were by far the largest factor impacting the quarter.

Even after a significant amount of progress was made moving floating rate debt to fixed, we still have $1.6 billion of unswapped floating rate loans.

LIBOR rates were approximately 1.9% higher in second quarter of '06 than the second quarter of '05.

This adversely impacted the quarter by $0.08 per share compared to the same quarter last year.

In our FFO guidance we based our interest rates on the LIBOR curve that existed when we did our forecast in January, late January and gave guidance in early February.

At that time, the one-year LIBOR rate was 4.94.

Today, six months later, the six-month LIBOR rate is 5.51.

Using the new LIBOR curve, on average our assumptions for floating rates for '06 and the original guidance based on our new assumptions were .16% lower.

This caused a $0.03 per share difference versus our guidance for the quarter.

This is also the primary reason we are reducing our FFO per share guidance for the year.

Looking at the average portfolio interest rate for the quarter, that's all debt, both fixed and floating, during the quarter was 6.41%.

That's up from 6.04 at March 30, 2006 and it's up from 5.79% a year ago.

The average maturity of the debt's 4.56 years and for the fixed rate debt only, the average life is only 5.52 years and average interest rate of 3.69.

Looking at the balance sheet at June 30th we had $6.3 billion of debt, including our prop rata share of unconsolidated entities of $1.6 billion.

Our floating rate debt as a percentage of our total debt was reduced to 24% at quarter end.

Also, with the closing of the sales of five assets, which Art will discuss in a few minutes, in the fixed rate financing on Crossroads, Oklahoma and the IBM portfolio, that rate will drop to 21% by the end of August.

Our total debt to market cap was 48% at quarter end and the interest coverage ratio was 1.93 times for the quarter.

We'd continue to pursue our strategy of putting long-term fixed rate mortgages on properties and taking the excess proceeds to pay down floating rate debt.

And we have a number of examples of that have occurred subsequent to the last call.

We put a $61 million loan on Crossraods Mall, it was fixed at 6.625 for ten years.

We put $115 million loan on the Center at Salisbury, that was a ten-year loan fixed at 5.8%.

And in addition, we closed on the IBM refinancing, which we discussed on the last call.

Our pro rata share of that refinancing was $398 million fixed at 5.8% for ten years.

That paid off the old debt of $313 million our pro rata share, and it reduced our floating rate debt by about $220 million.

In addition, the Company's line of credit was recently upsized from 1 billion to $1.5 billion, that occurred in July.

The borrowing spread was reduced by 25 basis points to 1.15 over LIBOR at the current leverage levels.

Maturity on that piece of debt was also extended from July of '07 to April of 2010.

In this morning's press release, we revised our FFO per share guidance down.

We moved the range down by $0.05 per share for '06 to an annual range of $4.45 to $4.55.

Also, due to the asset sales, we revised upwards our EPS guidance by $0.49 per share to $1.73 to a range of $1.83.

The primary reasons for the change in guidance, keep in mind we went through a complete reforecast, addressed all our operating assumptions, financing assumptions, factored in the recent transaction, and the biggest factors changing that guidance, number one was the interest rates.

They've moved up gradually 10 to 20 basis points a month since the initial guidance when the one-year LIBOR 494 and at that time, we based our year-end LIBOR rate at 5% matching that LIBOR curve.

Before our last earnings call, we looked at the interest forecast again as the 30-day LIBOR rates had gone up about 35 basis points.

But at that time, we had enough room in our range to absorb the increase when you factored in the positive impact of recasting our line of credit and picking up a 25 basis point reduction in the spread as well as other offsetting positive factors.

By the end of July, however, LIBOR was up, 30-day LIBOR was up another 40 basis points and the six-month LIBOR had gotten to 551.

As a result, we revised our interest rate assumption and that had an impact of $0.08 on the downward guidance.

Also combining to downward guidance were the asset sales, which had not been forecast as is our practice.

We sold Scottsdale 101, in addition, as Art will elaborate on it in a few minutes, in July we sold Holiday Village, Parklane and Greeley Mall and we are under contract to sell Great Falls Marketplace soon.

So factoring that into the guidance that's $186 million basket of assets sold at a blended cap rate of about 7.5.

That's a negative FFO impact for the remainder of '06 of about $0.02 a share.

So those are the two primary negative factors.

In addition, we've got some mitigating positive factors, the largest of which as we do anticipate some additional land sales in the fourth quarter of approximately $5 million, which would go to offset the negatives I previously mentioned.

And again, we've been giving quarterly guidance on FFO and in terms of the quarterly guidance we expect the third quarter to represent about 22% of that annual number.

At this point, I'd like to turn it over to Art to talk about developments, redevelopments and other major events impacting our business.

Thanks, Tom.

I'm going to be chatting with you about our development and redevelopment activity, the impact of the Federated-May Company merger, our asset sales and recycling of capital that will be as a consequence of that, as well as my view on the always illusive consumer and what impact the consumer upturns or downturns will have for our business going forward.

As we've talked with you over the last several quarters, our development and redevelopment pipeline continues to be large and evolving.

We have given you guidance that over the next five to six years on average, we anticipate that we will profitably invest between 3 and $500 million per year on new developments and redevelopments with a bias towards the upside on that.

We said to you in the past that we anticipate funding that development and redevelopment pipeline through a combination of property-specific project construction loans for the projects in question as well as proceeds that will be raised from recycling non-core assets, which we've commenced doing already.

On the development and redevelopment front, we're proceeding very well with all of the projects that we've talked about many times in the past.

Twenty Ninth Street continues to march along very, very well.

We will be opening -- we will have the first major phase of the opening on October 12th of this year with the second major phase being the grocery store, Wild Oats, and the theater opening up in the first quarter of next year.

All of our leasing activity is coming along great there, and we're very enthused about the progress that we've made there.

We have broken ground on our regional center in Gilbert called, SanTan Village, the 1.2 million square center, and again, we see this happening and opening up in the third quarter of 2007 with some phases opening up in 2008 and that's going along very well, leasing is going along terrific with over 50% of the small store space already spoken for.

We anticipate breaking ground next month in Flagstaff on The Village of Flagstaff.

We're doubling the size of our retail complex there.

We have a 400,000 square foot regional mall called Flagstaff Mall and next door to that we will be building 435,000 feet of retail of large format users as well as theaters, a theater, village shops and a lifestyle extension.

This will be opening up in phases starting in fall of 2007, and then the second major phase opening up in 2008 spring.

We continue to proceed well with our addition of a new major theater and bookstore to our Westside Pavilion.

That will be one of the largest, if not the largest, independent film theater in the United States.

We think it will be a great addition to Westside Pavilion, which is in the heart of west L.A. and the heart of the entertainment and film industry and we think that it's going to have a great impact on that center.

At Santa Monica Place we have received very favorable media and community support regarding our outreach strategy recently.

Our proposed design for the property at this point in time includes a complete transformation of the mall into an open-air center with very high-end retail, a lifestyle center that connects the mall seamlessly with the highly successful Third Street Promenade.

The Third Street Promenade, for those of you that are not familiar with it, is roughly a 250,000-square foot three-block area of open-air, street retail that averages around $1,000 a square foot and we are going to be basically having a seamless integration of the Third Street Promenade into our center.

We've recaptured the Robinson's-May building there from Federated and we anticipate either redemsing that into a couple of major users or possibly bringing in a new specialty department store.

Our plans for our new center, major regional center, in Goodyear, Arizona, Estrella Falls, continue to proceed on plan and that project, as we discussed in the past, would be opening up in phases in '08 and '09 most likely and all of our plans on that project are coming along very well.

Our very major expansion at Tyson's Corner is proceeding well in terms of getting the entitlements.

We're very hopeful that in the fourth quarter of this year we will complete the rezoning and complete the approval of our entitlements to add 3 million square feet of new development which will be completed in a series of phases over approximately a 10-year period.

The first and most imminent phase of the project reflects about 1.4 million square feet of office, residential, hotel, and a small amount of retail.

That project itself could be completed as early as 2009, 2010 depending on market conditions.

So we're very pleased with that.

On July 26th, we completed the acquisition of the 11 stores that we have been negotiating with Federated for that we were able to obtain as part of the merger and we're well underway on our plans to go ahead and recycle those spaces.

As I mentioned in the past, those stores represent about 1,800,000 of GLA over which Federated had control, or May Company had control of around 140 acres of prime space throughout the ten centers affected.

To give you a flavor again for what we intend to do with the various centers in Phoenix, at Fiesta Mall, we intend to replace the Macy's with a lifestyle expansion to the center.

Paradise Valley Mall we anticipate replacing the Macy's store there, which Macy's moved over to the Robinson's-May store with a new anchor, Scottsdale Fashions, where it could be a very exciting new mixed use project with a possibility of a new fashion anchor.

At Inland Center in California, we anticipate a new anchor, as well as the possibility of moving one of our existing anchors to the Macy's box.

We anticipate a new anchor at Lakewood Mall.

At Cerritos we anticipate an expanded anchor as well as an expansion of the mall.

At Pacific View we anticipate a new anchor as well as an expansion of the mall.

At Santa Monica Place we anticipate new anchor as well as a complete redo of the mall.

Talked about the Oak Center, which is proceeding well.

We anticipate a new anchor with Nordstrom there as well as a major expansion of the mall.

And then at Danbury Fair our anticipation is that we will have an expansion of the mall and a new anchor added.

So there's very, very exciting prospects at each and every one of these centers, and again, I'll remind you that these centers where we've obtained control of the anchors average in excess of $500 a square foot.

So these are fabulous opportunities to get back the space and to recycle it.

On the asset sales to give you a little more color in terms of the why and the wherefore on these asset sales, Scottsdale 101 closed in the second quarter.

We owned 46% of that center, it was a power center.

It was basically a merchant build situation for us.

When we bought Westcore, we commenced construction on it shortly after the purchase, and as Tom said, for our 46% interest there, we were able to book a very sizable gain.

Our partners were desirous of selling and from our viewpoint the major opportunity had been created as you may now, with the branded power center, it takes a while for a new growth to then be realized and so we took the opportunity to take the profit on that particular property.

We closed in July on Greeley Mall, in Greeley, Colorado.

Greeley Mall is a center that does roughly $270 a foot.

We viewed it as a non-core asset.

It's a secondary market for us.

As you know, we're focusing more and more and more on the metro and urban markets where we can create fortress opportunities.

The same holds true for Holiday Village in Great Falls, Montana.

That was a center that was doing roughly $240 a foot, again, a non-core asset.

The same holds true for Park Lane in Reno, Nevada, that was a step-in center that was a right for redevelopment and we were able to sell that at an attractive price.

Again, we have a power center in Great Falls, Montana, called Great Falls Marketplace which we anticipate closing on next week.

In total these represent about 1,500,000 feet of space and as tom mentioned, the net proceeds that we will realize from those sales will be roughly $147 million, the average cap rate was roughly 7.5% with the estimated gain from all of these being approximately $70 million.

So this really fits with our philosophy that we've shared with you in the past that we're going to be pruning and tuning a lot and that we're going to be taking non-core assets and disposing of them to reinvest into our core assets and to build new core assets, and we think that's a great portfolio strategy for us and it's a strategy that we will continue to pursue to fund the burgeoning development and development pipeline.

Much has been written and talked about over the last several quarters about the consumer and whether or not the consumer is going to cut back, whether or not there's going to be a deterioration in consumer spending, what impact, if any, that might have on the regional mall business.

We measure the health of our consumer by several factors with the first and foremost factor and barometer for us in terms of the health of the consumer is measured by the demand for retail space that we have from our tenants as measured by their appetite for leasing, new stores from us and the rents that they will pay.

No one has a better pulse on the consumer than the retailer itself and the store manager and the salesperson on the floor in that retail store.

As we've talked about, our leasing demand remains high, our rent spreads were excellent in the second quarter and year-to-date and occupancies remain solid.

So that is a very, very important barometer for us as to what is happening with the consumer and our retailers are looking far out into the future as they sign ten-year leases and when they show strong demand for space that tells us that they see that see, that these retailers see strong demands for their goods in our malls.

The second barometer that we look to in terms of measuring the health of the consumer is the actual sales in our malls and as Tom reported to you, our sales remain very strong with very good comp sales, total sales growth year-to-date and strong portfolio growth in sales with the portfolio sales now being up at $433 a foot.

Anecdotally, although I don't put of credence into these monthly numbers, ICSC reported today that July sales were up approximately 3.5% versus their previous estimate of 2.5%.

Finally, when we talk about the consumer and the possibility of consumer slowdown, generally that's measured by GAFO sales and GAFO sales really have nothing whatsoever to do with sales that are generated in regional malls.

Let's remember that there are less than 1,000 regional malls in the United States and of those thousand, you're really talking about 5, 6, 700 fortress malls of which we own quite a few of those.

In those particular retail formats, these formats are the most desirable, the most resilient, the most well located and the most immune from any consumer slowdown.

That's proven from a 30-year history that we have in this business.

So when you look at the consumer itself and you look at whether or not they're made to be a deterioration, keep an eye on the health of the malls because these malls have proven to be immune from consumer slowdowns in good times and in bad over a 30-year period of measurements that I've been able to measure.

At this point in time, we'd like to open it up to Q&A.

Thank you.

The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] And we'll take our first question from Lou Taylor from Deutsche Bank.

Please go ahead, sir.

Good morning, guys.

Tom, can you just go over that expense recovery discussion that you had earlier?

Just wasn't clear in terms of, I guess we looked at, you recovered about 93% of operating expenses this quarter versus 95% last quarter.

Is that -- I just, I don't see how that fit with what you had described earlier so can you just go over that?

Sure, Lou.

The recovery rate quarter-to-quarter can fluctuate a little bit because certain expenses are non-recoverable, bad debt expense, legal expenses, things of that nature.

So really we look at recoveries on an annual basis and last year the recovery rate was about 91.6 on a consolidated basis for the whole portfolio including JVs and pro rata.

This year, the first quarter was 95, the second was 92 but on average throughout the year we expect it to be about 93% for the full-year.

So slightly higher than last year primarily as a result of moving to some fixed cams rather than triple nets.

And that may be somewhat mitigated by some of the space we've gotten back, obviously, declining occupancy hurts you somewhat when you've got fixed cams versus triple nets.

So again, one quarter as it relates to a cam recovery rate is not inclusive, you've got to look at the longer period and we're tracking consistent to slightly ahead of last year.

Okay.

Now, is another way to phrase it were some expenses or non-recoverables [inaudible] either occurred earlier in the year or were brought forward or the recovery on some of the higher expenses won't occur until the true-ups basically first quarter next year?

Well, yeah, we had more non-recoverable expenses in the second quarter than the first quarter, Lou, which will reduce that recovery rate because they're non-recoverable expenses in the shopping center expense line item, you know, such as bad debt and legal fees, ground rent expense, management administration, things like that.

Right.

And not to beat a dead horse so, is it a way to characterize it that it was just the timing of when they sell within the year or were there just more than usual?

It's timing within the year, and again, on an annual basis I'd expect that recovery rate to be about 93% including JVs and pro rata up slightly from last year when it was 92%.

Okay.

Great.

And then the second question just pertains to other than the sales that you've already announced, do you have much more or anything more on the market for sale?

We have exposed three of the properties that we own together with Simon Property Group and we are in the process of beginning to gauge interest on those properties.

And there's a possibility something may happen there, but there's also a possibility something may not happen there.

Okay.

Thanks, Art.

Thank you, Lou.

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

Please go ahead, sir.

Hi, it's Christine McElroy here with Ross.

What percentage of the Retail Brand Alliance and Musicland space is leased up at this point and how much of that is already reflected in the June 30 occupancy number and what's the timing for the move-ins of the remaining space that's been leased up?

There are currently about 60% of that space on Retail Brand has been leased up and there's another 15 to 20% in negotiation right now.

We're still fairly optimistic that that 15 to 20% will get signed and opened before year-end.

Of the 60%, probably two-thirds to 75% of that space is already in place and opened by mid-year.

So how do you expect occupancy to shake out here through the rest of the year?

I think it will trend up slightly from where we are today.

The Suncoast space, which we got which was 255,000 square feet of space is tougher space and that's going to be a slower lease-up than Retail Bran Alliance and I think we are going to have some of that space that is still available at year-end.

So I think we'll trend up, but I would expect our year-end occupancy to be somewhat lower than it was last year.

Okay.

And then given that you're in the market selling assets, are you seeing in change in cap rates at the margin for lower productivity assets?

Not really.

At this point in time we're pleased with the pricing that we're able to generate from the assets that we sold.

In general, with rising interest rates with some of the types of buyers that are buying B and C-type of properties that can have some impact on the cap rates, but it's nominal at this point in time, again for the, if you take a look at the sales per foot of the assets that we sold and the blended average cap rate at 7.5%, we're pleased with that for that quality of real estate.

Okay.

And then just one last question.

In any of your malls, have you seen dips in occupancy in the inline phases as a result of any anchor closings?

The Federated closings?

Not yet, but there will be some of that.

In particular at centers where we are planning a major, major redo, like Santa Monica Place where we will ultimately close the center roughly 15 months from now, there have been and there will be closings over the next 15 months, which are really also planned buyouts, frankly, in terms of getting that property ready for recycling.

But at this point in time, we have not seen any specific closings related to anchor closures.

The interesting thing that we have seen is that we've interviewed the other anchor stores at each of the malls where there's been a closure.

And anecdotally, quite a few of them, even non-traditional department stores such as even Penney and Sears have noticed substantial pickups in their sales to the point to where they are considering taking and doing remodels of the stores to freshen them up and get them ready to capitalize on the lost sales that the closure of one the -- of the May Company or the Macy's store created, and also to get ready for the redo of the center as we go about doing what I'd indicated we might do at each of the ten centers, we add another anchor, add an anchor and redo the center, add an anchor and expand the center.

There's been some marginal sales slippage in the mall stores, but it's really too hard to measure -- it's a very small amount at this point in time.

We'll see how that will play out.

There could be some impact at some of the centers as we go about the recycle process, but, you know, over the next 18 months or so that will all come back.

Okay.

Great.

Thank you.

Thank you.

We'll take our next question from Ben Yang from Green Street Advisors.

Please go ahead, sir.

Greg Andrews with Ben Yang.

With respect to the cap rate on the sales, the 7.5%, does that include the Scottsdale 101?

Yes, it does.

Okay.

And would it be fair to say that that cap rate was probably lower than that average and that the cap rate for the other malls was higher than that average?

Yes.

Okay.

And then in terms of the -- have you measured kind of the impact on your overall sales per square foot of disposing of these less productive malls?

I don't have an exact number for you today, Tom, do you have an exact number?

No, I can tell you our Chief Operating officer is extremely excited though, because he knew it would have a positive impact and I think his estimate was between 10 and $15 a foot.

Okay.

That sounds about what I would guess.

I mean all that information's in the 10-K, so --

We can do the math.

I'm not asking you to do it, but it's right there.

And then in terms of those mall assets, would it also just, I mean, could you give us a little bit of a sense maybe of how you thought about the growth prospects for NOI in those assets compared to the overall portfolio?

Sure, you know, I mean any time that we -- well first of all, it relates to a strategy of using asset sales of non-core assets to add on to or to create core assets.

So that's the fundamental strategy.

In identifying the assets that were disposed of, we clearly looked at where we felt the growth was in terms of -- and the amount of energy that would be required to get that growth over the next several years as well as the size of the markets.

And, you know, as time has gone on, we're moving away from markets like Greeley, Colorado, Great Falls, Colorado and moving much more to the major metro markets and urban markets.

But clearly, if we felt that there was above average growth in centers that were sold compared to what we own, we probably wouldn't have sold them at this point in time.

Okay.

And you've got your guidance this year of same property NOI of 3 to $0.03.5, and if we assume that that's probably not a bad range for the next few years for the portfolio, I mean were these, you know, much lower than that or just a little bit lower?

Can you give us just help quantify a little bit your sense of that?

You know, what we really look at is the long-term future of a center and when we buy a center, or we redevelop a center, we only do it when we review the asset as being something that we want to own, quote forever.

And so in looking at these assets, the long view on them was that, look, these are not assets that we want to own forever.

This is a good market to be selling assets like this because there are buyers for them.

Let's take advantage of this market to go ahead and take the capital that we can recycle from these assets and redeploy them from B and C centers into A centers and that's really the strategy.

The actual specific growth per year that may or may not have been attained from the properties, you know, I'm sure the buyer felt there was very good growth there and they may attain that, but that's not the driving factor.

It's really the quality of the real estate and the desire to go from B and C malls to A malls, to go from non-core assets to core assets and to fund our growth and our capital needs for development and redevelopment by recycling capital in a prudent way.

Great.

Thank you very much.

Thanks, Greg.

And we will take our next question from Paul Morgan from FBR.

Please go ahead, sir.

Good morning.

Just to stick on that point there.

Would it be fair to kind of characterize it as even if you're selling a B [minus] C mall at an 8.5 cap rate your return on the redevelopments and the developments you're doing is at least that going in, but has much better internal growth prospects rolling forward?

Yeah, well the cap rates excluding Scottsdale 101 were lower than 8.5, closer to 8.

But, yes, that's the strategy, and it's also, it's not just pure math, I mean, it's not spread investing, but clearly our new developments we anticipate seeing 10% plus or minus returns on those unlevered and we anticipate those assets being fortress assets that we're going to own for a very long period of time that are in markets where there's great growth potential like Phoenix, like Los Angeles, like Danbury, Connecticut, like the entire Arizona marketplace.

So that's really the strategy.

I think that's great.

In terms of land sales, more than you've had in the past, and I just want to get a sense of rolling forward if you're going to start to see more regular material land sales contributions coming out of the development pipeline, if that's where it came from.

Paul, in terms of the land sales, we've been running about 3 to $5 million a year on average.

And it's somewhat unpredictable, but I do think there'll be more of those situations as we get into our ground-up developments in Phoenix and some of our other redevelopments where there will be more parcels available and they'll be more actively sold.

So I don't think it's something you can model ratably through the years, as I said, we factored in an additional $5 million in the fourth quarter, but there will be more and I would expect more in '07 and '08.

It's just a little bit hard to predict which quarter that's going to hit.

Okay.

Last question on the development number of 300 to $500 million per year, maybe closer to the high end of that.

Did that include the Federated May investments going forward?

Yes.

It does?

And those will, you know, be essentially between now and 2010?

Absolutely.

Okay.

Thanks.

Thank you.

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

Please go ahead.

Hi.

This is Mick Chang here.

A couple of questions.

First of all, it seems like the operating margin was a little bit lower this quarter and we're curious what the reason behind this was and what management's expectations are going forward?

Mick, the things that put pressure on the margin this year or this quarter, excuse me, were the fact that we had a significant amount of revenue that would normally be recognized in the second quarter came in the first quarter and that was the termination payment from the Retail Brands Alliance, and the vacancy caused by Retail Brand as well as Sun Capital also put some downward pressure on the recovery rates.

Those two factors moved the gross margin, you know, down to about 65.5% compared to 67% last year.

So those were two, you know, two factors in the equation that put some downward pressure on it.

Okay.

And also on the income statement on the line minority interest in consolidated joint ventures, we noticed that it was about $38 million this year -- I mean this quarter compared to a year ago's levels only about $255,000, and we're curious, what exact is in this line item and if it's related to the asset sales?

Yes, it sure is, Mick.

Scottsdale 101, although we only owned 46% of that, we guaranteed a disproportionate share of the debt, and under the accounting rules we had to consolidate that asset even though we only owned 46%.

What you see in the gain represents, or the minority interest line, excuse me, represents a big chunk of that gain that's allocated to the other 54% owners.

Okay.

And obviously, that wasn't there in that comparable quarter a year ago because we didn't have that sale.

Right.

Thank you very much.

Thank you.

And we'll take our next question from Jonathan Litt from CitiGroup.

Please go ahead, sir.

Hi, this is [Amy] with John.

We've seen reports of about four new developments in the Phoenix area, which you've previously not disclosed.

What's the timing on these developments and are they entitled?

Which four would you be referring?

Coolidge, Casa Grande, [Morana] are three of them.

Right.

We have land under option in Coolidge, so at this point in time, that's not in our specific pipeline.

Casa Grande is just south about 25 miles of Chandler, and it is entitled.

It is, I believe just recently entitled in the last couple of weeks.

We anticipate breaking ground on that later on this year with the completion into late fall of next year into spring of 2008.

That will be about an 800,000 square foot combination regional malls types of tenants, power types of tenants as well as specialty tenants.

And we most likely by the next call will be ready to go ahead and give absolute specifics on the dollar investment that we see in that project.

[Morana] is a track of land that we acquired in about 20 miles northwest of Tucson, and that is not entitled at this point in time.

That's in the longer phased pipeline, probably at least four to eight years out in terms of the development there.

And the last one was Clean Creek.

That's land that we have acquired that is definitely in the long-term development pipeline, nothing imminent on that.

But we own it at a very, very good price, and -- but it's definitely in the long-term pipeline.

And we have other sites that we have under option in the Phoenix marketplace, but we don't go out of our way disclosing that for competitive reasons in terms of the fact that we have sites under option.

Art, this is Jon Litt.

During your prepared comments, you had said prune and tune the portfolio, and I don't know if I missed this during the call, how much do you think you might now be doing on an annual basis in terms of asset sales?

Well, let's say we're doing $500 million a year of new development and redevelopment, and if you're doing 70% project specific debt for each of those, then that would mean you'd be doing roughly $150 million a year give or take net proceeds of asset dispositions to recycle from lower producing non-core assets into the high producing core assets.

That's probably not a bad number, but we're going to be opportunistic about this as we go about the process.

But the long-term strategy clearly is to take and to recycle out of secondary and tertiary markets with properties that are doing lower sales per foot and maybe don't have the barriers to entry that some of our other projects have and to redeploy that money into other projects.

But it will clearly be the source of capital that will be used to fund the new projects combined with project specific loans.

I would assume that the debt levels on the [inaudible] sale and new projects would be roughly the same, so it would be about 500 in sales and 500 in the new projects?

Not necessarily, Jon.

In fact, the assets we just sold, most of them were unencumbered and I think there was $56 million in debt on Scottsdale 101, our per rata share was 30, a little bit less than $30 million.

And then on Greeley there was $28 million in debt but the other three assets were unencumbered.

So it's really to come up with the equity component of your redevelopment-development program?

Yeah, I mean it's not precise from A to Z on that one, but it does reflect our strategy that we have said, which is that we're going to take advantage of the fact that there is market for these tertiary and secondary markets and for properties that are doing say, $240, $250 a foot and to dispose of those assets and recycle them into the high barrier assets that we own today or the ones that we're going to build.

And the spread there, do you think it will be a wash or is there a negative spread?

Oh, no, it will definitely be a positive spread because if you're selling like this group of assets that we've sold, we sold at an average cap rate of 7.5%, much of which was unlevered, and we're going to be developing cap rates of, you know, easily 10% and then when you take the leveraged return, it's obviously a much higher number than that.

Clearly, we anticipate exiting at lower cap rates than we're going to reinvest at.

And most importantly, going on the quality spectrum from, you know, if ten is the best and one is the worst, you know, going from a two or three, or four asset to a ten asset.

Now again, of the assets that we sold, and we called non-core the Greeleys, the Holiday Villages, and the Parklanes and the Great Falls Marketplace, those all averaged you know, roughly $230 a foot and they were non-core because they're secondary and tertiary.

On the other hand, Scottsdale 101, that's easily a core asset for many investors, but for us it's a power center, it's not a mall and we had partners who wanted to sell and we decided that there was a great opportunity to sell it at a very nice profit and to go ahead to use the profit to go forward and redeploy it.

But for many people, 101, which is at a fabulous intersection, it's Scottsdale Road and the 101, it's a great project, but for us it's non-core.

Okay.

Thank you.

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

Please go ahead.

I'm good, thank you.

We'll take our final question from Michael Mueller from JPMorgan.

Please go ahead.

Hi, Michael.

Great, hi, thanks.

Tom, a question for you.

At this point I know you're not putting out '07 guidance, is the expectation, though, that '07 looks more normalized compared to the depressed level of '06?

I mean I know you have development projects coming online the second half of the year, but offsetting that, rates look like it will cut into as much.

Obviously, '08 looks like it will be pretty strong but where do you see '07 in the grand scheme of things?

Well, Mike, again, no guidance, you know, obviously this year we had decent core performance, good same center NOI, growth is forecast for the rest of the year and the negative out there is interest rates where short-term rates have gone against us by 190 basis points, so it really boils down to what's your view of that and, you know, we don't put ourselves in a position of forecasting interest rates.

But 190 in one year is fairly significant, plus if you factor in, you know, we started the year at above 30% floating rate debt and we're down to 21% today.

That's going to lower our risk profile as it relates to interest rate increases in '07 and'08.

Okay.

Thank you.

Operator?

Yes, we have one more question from Rich Moore.

Please go ahead, sir.

Hi, good afternoon, guys.

Hello, Rich.

Development yields, what are you guys seeing there?

Are you able to pass on some of the rising construction costs on to the tenants?

Not much.

Not much.

So they're coming down a bit would you say, Art?

Yes, in Phoenix for the regional sites, for example, where we, you know, historically been able to achieve 11 to 12% returns pretty much, you know, that's been the history in terms of what's been able to be achieved.

We're looking probably at more 9 to 11 probably on average 10, 10.5 type returns because of the construction costs that have gone up.

So it has cut into our overall [going] in returns.

Okay.

So same thing on redevelopments would you say?

Yes, it will have some impact, there's no question about it.

And then Tom, lease term income, remind me, is that in base rents or is that other income?

It's in base rent or it's in equity interest to joint ventures, there's some in both locations, Rich.

Okay.

Very good.

Great.

Thank you, guys.

Thank you.

It appears there are no further questions at this time.

I'd like to turn the conference back over to management for any additional or closing remarks.

Well, thank you very much for joining us.

We're obviously not thrilled reporting a quarter to you that's disappointing from your viewpoint, but again, I want to reiterate that all of our operating metrics are in great shape, our centers are in great shape, we're proceeding on our balance sheet strategy of recycling out of some very non-core assets into the core and fortress assets and it just goes to prove that we're very good at shopping mall business and we don't make our living predicting interest rates.

We look very much forward to the future, and we're very excited about the pipeline that we have here going forward.

Thank you very much.

Once again, ladies and gentlemen, this will conclude today's conference.

We thank you for your participation.

You may now disconnect.