Macerich Co (MAC) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Macerich Company fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Suzanne Karpick, Director of Investor Relations for the Macerich Company.

Please go ahead.

Thank you, operator.

Thank you, everyone, for joining us today on our fourth quarter earnings call.

If you do not have a copy of our earnings release, you may access it at the Company's website, 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 our business and industry.

For a more detailed description of the risks, please refer to the Company's press release and SEC filings.

Management will also be discussing 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 and supplemental 8-K filings for the quarter, which is posted in the investing section of the Company's website.

Joining me today are Art Coppola, President and CEO, and Tom O'Hern, Executive VP and CFO.

With that, I would like to turn the call over to Tom.

Thanks, Suzanne.

Today we'll be discussing the fourth quarter results, recent capital activity, developments, upcoming opportunities, and our outlook for 2007.

In terms of operating metrics it was another quarter with good tenant sales gains, continued high occupancy levels, strong releasing spreads, significant development and redevelopment activity and other capital events.

Looking at sales, total same center tenant sales for the quarter were up 2.53%, keeping in mind that was going against a tough comp quarter.

The fourth quarter of '05 was up 5.5%.

In light of that 2.5 was relatively strong for the year.

Total same center tenant sales were up 4.1%.

Looking at that regionally, excuse me, southern California was up 2%, northern California and Pacific Northwest up 2.7%, the inner mountain region up 6.8%, the Eastern region up 3.4%, Central region down 2% and Arizona up 1.6 %.

Comp tenant sales, that's same tenant same space for both periods the fourth quarter of '05 and '06, were up 1.7%.

Looking at total mall sales per square foot we came in at 452 for the year compared to 417 in 2005, that's an 8% increase.

Part of that obviously is due to buying some high quality productive centers doing over 500 a foot, as well as disposing of some non-core assets that were doing far less than our average.

Occupancy levels remain strong.

At year-end occupancy level was 93.6%.

On a comp basis that was 93.6% compared to 93.8 a year ago.

So just as we have been most of the year down anywhere from 20 to 40 basis points, that continued through the fourth quarter.

In terms of the leasing activity, we signed 286,000 square feet of leases.

We saw some very strong re-leasing spreads.

We were up almost 21%.

The new starting rent averaged 39.90 per foot.

Average rent in the portfolio today stands at approximately 37.75.

Looking now at financial results for the quarter.

FFO per share and diluted for the quarter was $1.36.

That compared to $1.32 for the quarter ended December 31, 2005.

EPS was up at $1.98 for the quarter, compared to $0.39 for the fourth quarter of '05.

That strong increase in EPS was primarily due to a large gain on sale resulting from the December sale of Crossroads Mall in Oklahoma, Citadel Mall in Colorado Springs, and Northwest Arkansas Mall in Fayetteville, which Art will be discussing in a few minutes.

Also impacting the quarter we had same center net operating income which was up approximately 6.7 compared to the fourth quarter of '05.

However, in looking at that we did have two big box tenants that terminated early and paid us quite a bit of lease termination revenue.

So stripping that out of the same center number, same center NOI came in at 3% for the quarter and that was very close to the annual rate, which was 3.03% for the year, again, excluding lease termination revenue.

Gain on land sales for the quarter was 3.6 million, up from 200,000 in the fourth quarter of '05.

Although it was up, this was far less than the 6 million that we had forecast in our last guidance and that's a large part of the reason we came in below our guidance range.

We had a large land parcel at one of our centers under contract that was expected to close with a significant gain by year-end and it did not close by year-end.

We do expect that land to be sold in 2007, however.

The expense recovery rate was 94% including JVs at pro rata, that compared to 91% in the fourth quarter of '05.

This change was primarily due to our shift to quoting fixed cams that's had the effect of increasing our gross margin as well as increasing our recovery rate.

CPI rent increases were 1.3 million higher in the quarter than in the fourth quarter of '05.

Looking at the noncash item of straight lining the rents, there was a decrease of 1.7 million in the quarter.

It decreased to 2.8 million, that's a reduction of 1.7 million.

SFAS 141 income also dropped to 4 million, that compared to 4.4 million in the fourth quarter of '05.

I mentioned earlier that we had, as anticipated we had two large big box tenants vacate during the quarter that contributed to lease termination revenues for the quarter of 7.9 million, that compared to 600,000 in the fourth quarter of '05.

During the quarter, we also had a significant amount of bad debt expense, it was up 1.6 million or almost $0.02 a share compared to the fourth quarter of '05.

This was not in our prior guidance and also contributed to the miss.

Looking at REIT G&A, during the quarter expenses were up about 1.8 million over the fourth quarter of '05.

Some of these changes are merely timing differences that flow from quarter to quarter, and some of it also related to the accelerated vesting on restricted stock to our former Chief Operating Officer.

By far the greatest negative impact on our results for the quarter related to interest rates.

The average interest rate in our portfolio in the fourth quarter was 6.9%.

That's 23 basis points higher than the fourth quarter of '05 and adversely affected the results by about $0.05 a share during the quarter.

The average maturity on the debt is 4.8 years and for the fixed debt only the average life is 5.1 years and the average rate is 5.96.

It was a productive year for us in terms of strengthening our balance sheet.

Floating rate debt was dropped substantially down from 36% in end of '05 to 20% today.

As Art will discuss in a few minutes, we sold eight non-core assets and redeployed that capital.

However, this was the first year in our 13-year public history that we have not had an annual increase in FFO per share.

In fact, prior to 2006 we had averaged double-digit annual increases in FFO per share.

Some of the factors contributing to the flatness, higher interest rates were probably the biggest factor and adversely affected us by about $0.23 a share compared to 2005.

In addition, we did have an earnings drag from redevelopment properties, primarily Santa Monica Place, and that was about $0.04 a share negative.

We had a difference in our income tax expense in '06 compared to income tax benefit in '05 of approximately $0.02 a share.

And we had earnings dilution due to asset sales sold in 2006 of about $0.03 a share.

Going the other way lease terminations were up about $0.14 a share and land sales increased about $0.06 a share.

Netting those all out, negative impact of those somewhat unusual items was negative $0.12 per share.

Also, as a point of clarification, during the fourth quarter the convertible preferred operating units issued in the Wilma Wright transaction became dilutive in the fourth quarter, dilutive for FFO, and increased the share count by approximately 3.1 million.

Looking at the balance sheet at year-end, we had 6.6 billion of debt including our pro rata share of JV debt of 1.7 billion.

Floating rate debt was 20%, again down from 36% at year-end '05.

Total debt to market cap at year-end was 45% and the interest coverage ratio for the quarter was 2.4 times.

During the year we continued to pursue our strategy of putting long-term fixed rate mortgages on properties, taking the excess dollars and paying down floating rate debt, primarily our line of credit.

During the year we did over 19 separate loans, $2 billion of property specific financings.

We also renegotiated and up-sized our line of credit, up to 1.5 billion at a reduced borrowing spread, and we raised over 740 million of equity.

As a result of all this activity and our asset sales, our balance sheet is in excellent shape today and we're very well positioned with a capacity to handle the robust development and redevelopment pipeline we have ahead of us.

This morning we gave our initial 2007 FFO and EPS guidance.

EPS guidance is in a range of $1.24 to $1.34 a share and the FFO diluted per share guidance is a range of 4.58 to 4.68.

That range for FFO shows a growth rate of 5% to 7.6%.

It was based on our internal forecasting and planning process and it considers many assumptions, some of those assumptions include same center growth in net operating income of 2.5 to 3.5%.

That's consistent with historically what we had in 2005, which was 3%, and 2006, which was 3.03%.

So very consistent with what we have seen in the past few years.

In addition there are four assumptions with a very high degree of variability compared to our core business and those are number one asset sales.

We have not factored in any asset sales in the '07 guidance.

The dilutive impact of the '06 sales is included, however, and that was a negative impact of about $0.07 per share in '07.

In addition, gain on land sales is estimated to be 10 million in 2007, that's approximately the same level as '06.

This is an unpredictable category in terms of timing and amount, and we will be giving quarterly updates on this particular assumption.

In 2006 we had a very large year for lease termination income.

For 2007 our assumption is that we will only see 50% of the '06 level, so we'll recognize in our forecast, we have factored in $10 million of lease termination revenue, that's down 10 million from '06.

So very significant reduction from '06 adversely affecting that growth rate.

Also SFAS 141 and straight lining of rents, as tenants terminate early there are write-offs.

We're forecasting a reduction of 6 million in SFAS 141 income and straight lining of rent income for '07 versus '06.

So if you look at the impact of those last two items, the decline in lease termination revenue and the decline in SFAS 141 the straight lining of rent, that reduces our '07 guidance versus '06 by $0.18 a share.

So that's about 4% of the total FFO rate.

So if that was added in, there would be a significantly higher FFO growth rate and that is one factor that I very much doubt any of the street estimates had factored in prior to this time.

Looking now at the quarterly split, because our earnings do tend to be somewhat seasonal, weighted toward the fourth quarter, our estimate is the first quarter would be about 20.5% of the total year, second quarter about 22.5%, third quarter approximately 26%, and the fourth quarter about 31%.

At this point I would like to turn it over to Art to discuss the redevelopments, developments and other major events impacting our business.

Thank you, Tom.

We're obviously not thrilled with the FFO performance that we had for 2006, but from a balance sheet viewpoint, we have positioned ourselves very well for the future.

We lowered our floating rate debt substantially.

We did very significant pruning of our portfolio, which Tom mentioned and I'll get into later.

We acquired a couple of great assets and we positioned the portfolio for growth through some very substantial redevelopment, development, and major entitlements that we have been able to acquire.

Our development pipeline remains the very major force of our future growth.

We have got over $500 million per year of major development and redevelopment in our pipeline.

During '06, in the fourth quarter, we opened up the first phase of Twenty-Ninth Street in Boulder, Colorado.

Future phases of that will open up in the spring and the summer of this year.

We completed our redevelopment of Carmel Plaza, which was a very significant redevelopment for us.

While the dollar amount was not major, the value creation was very significant, as we spent $11 million in the redevelopment of the asset and saw over an 11% return on that cost.

We just started and had a ground breaking last week on Thousand Oaks, the expansion of that center, with the addition of Nordstrom at that location.

We continue to go along with our redevelopment and our expansion in a new development of SanTan Village, which is the 1.2 million square foot regional center that we are building in Gilbert.

Leasing is very well along there, with 85% leased.

The project cost is a little over $200 million and we anticipate double-digit returns on that.

We broke ground on The Promenade at Casa Grande, which is also in the Phoenix market.

It's a $135 million development.

We own 51% of that center.

The major anchors that we've got here are Target and JC Penney.

It's an open air project and we anticipate very good returns there also.

We also announced in the fourth quarter the addition of Barneys New York, the first to market fashion store to Scottsdale Fashion Square.

They will be locating in the area that Robinson's May previously was located at Scottsdale Fashion Square.

It's a 65,000 foot location that will open up in 2009.

Major entitlements that we were able to obtain in the fourth quarter as well as recently in the last couple of weeks include Biltmore Fashion Square, which we've discussed in the previous conference call, with very major five potential towers that we can add there with up to 165 feet of heigh, which is in the Camelback quarter and is in a terrific location there.

Probably the most exciting entitlement that we recently were able to obtain was at Tyson's Corner, where we were able to get a 3.5 million square foot of office, residential and hotel, mixed use addition entitled there.

This will be something that will be built out over the next five to seven years and we anticipate this will be most likely the most significant mixed use project in the U.S.

As Tom mentioned, we had some very significant asset sales that we were able to conclude in 2006 and most importantly in the fourth quarter.

We were able to sell these centers for approximately $575 million for our pro rata share of the proceeds at rates of return that were just over about 7%, 7.25% on centers that averaged under $300 a square foot in sales.

So that shows the very robust market that is out there for us in the area of dispositions.

Pruning of our portfolio and recycling these proceeds is very important from the balance sheet and something that we're going to continue to pursue aggressively.

Significant to note that the three centers that Tom mentioned that we sold in Colorado Springs and Oklahoma and Fayetteville, were privately negotiated transactions as well as the acquisition of Deptford Mall in New Jersey was also a privately negotiated transaction, which shows our access to the deal flow.

At this point in time we would like to open it up to question and answers.

Operator?

[OPERATOR INSTRUCTIONS] We'll take our first question from Lou Taylor from Deutsche Bank.

Tom, you cut out a little bit when you were talking about the Wilma Wright units.

What triggered them now going into the FFO share count?

Lou, that's a function of when they become dilutive to the quarter and they were dilutive to FFO in the fourth quarter prior to that they had not been dilutive so they were not included in the share count.

What was the trigger, was it time -- ?

It was-- the fourth quarter is sequentially a higher FFO quarter than the previous three.

Okay so-- will it reverse in-- ?

Yes.

-- in Q1?

Yes, it will.

Okay.

What is just the status in terms of those assets?

Are they -- is it disposition of those assets in your guidance for '07 and maybe if you could just talk about the plans for those -- some of those upstate New York assets?

Yes, Lou, at this point it's beyond our control whether those assets get converted or not.

I believe the earliest that they could be exchanged for those OP units would be in late '07 and so we have not factored that into our guidance yet.

It's certainly a possibility, but it would be, I think the earliest is mid-October.

Okay.

Tom, when you guys had issued third quarter results you were still guiding toward a 440, 450 type of year.

I mean, what happened in the last 45 days of the quarter to -- to change the full year results that you didn't expect?

Yes, the-- there are a number of factors, Lou, some of which I mentioned.

Part of it is we had a relatively large parcel that we felt reasonably confident that we were going to close on before year-end or we would have not included it in our guidance and we took the unusual step of even specifically identifying it when we gave that guidance.

That was relatively significant, that was about $6 million or $0.06 a share.

And that literally fell out close to the last day of the year.

Some of the other things we weren't aware of until we closed the books.

Bad debt expense is always a guesstimate.

And frankly, it is the result of going through every receivable from every tenant, line item by line item, and determining what we need to reserve or write-off or not, so that was part of it as well.

Okay.

And then last, in terms of your debt maturities '07, what are your current plans, are just doing individual property loans or maybe a larger CMBS type of financing?

Well, we're going to continue to do what we have done, is take advantage of these relatively low long-term rates, Lou.

And to the extent we can finance something or maybe even finance something early, we are going to try to do that and drive down our average borrowing rate.

That's a constant effort.

As you can tell, we did over $2 billion worth of property specific financings in '06, and we were able to lock in very attractive rates and spreads and we're going to continue to push for that in '07 and '08.

All right.

Great.

Thank you.

Thanks, Lou.

And we'll take our next question come from Michael Mueller from JPMorgan Securities.

Yes, hi.

Tom, question on if we're looking out at SanTan and Casa Grande impacting '07 and '08, can you give us a sense as to what portion of those developments will be coming on in late '07?

How much will be cash flowing driving your end '07 numbers and how they could fill in to drive the '08 numbers?

Right.

Mike, I think as you noted a few weeks ago, a lot of this stuff is under construction with completion in late '07.

So we really get the benefit of the work mostly in '08.

Casa Grande, which is 135 million at an expected double-digit return, is going to be completed in late '07.

With that finishing up in November, we get a very small benefit of that in '07, but the bulk of that is going to fall into '08.

SanTan is similar.

It is going to open, I think we probably have got that one slated more like October.

That's 205 million, so we'll get a small benefit of that in '07, but the bulk of that is going to flow through in '08.

So as Art said, we have got significant amount of spending we're doing in '07, about 500 million or so, most of that benefit won't be felt until '08 in terms of the income side of the equation.

Okay.

And with SanTan coming on and really driving the '08 numbers at that point, will it be -- would you imagine it will be pretty ratably through '08 as the phases come on or -- ?

Yes.

Okay.

Thank you.

And we'll take our next question come from Paul Morgan from Friedman, Billings, Ramsey.

Good morning.

Hi, Paul.

Hi.

You said the $0.06 per share parcel that fell out of 4Q is that -- should we expect that to be in 2007 or did that just fall out completely?

No, no, we expect it to close in '07.

We've kind of back end weighted that toward the back half of the year.

It's a very viable piece of property.

We're pretty optimistic that that transaction will close in '07.

So that's incorporated in the guidance, then?

Yes, it is.

The-- in terms of the redevelopments, the $250 million on the Oaks, more than I guess I might have expected, should I think of that as being representative of the amount of investment you might make in some of these Federated opportunities or is-- it is just-- is there a reason why it's a particularly big number given the incremental space?

That's been under planning for quite some period of time and it's a very substantial expansion.

I would say the most mayor of the Federated recyclings that we're going to be looking at will be at Scottsdale Fashion Square where we are going to be able to recapture 15 acres of land there and redo that with both the Barneys as well as a luxury wing, as well as some high-rise residential and potentially even hotel.

But the Oaks has clearly been something that has been very major for quite some period of time and it was really the recapture of the May Company stores earlier that accelerated that particular kickoff.

If I think of like Scottsdale, excluding the non-retail, is that the same order of magnitude in terms of the investment?

It could be very substantial, yes.

That's a very substantial asset.

I just want to make sure I heard your right in term of the -- you said $0.18 a share from the lease term income and the straight line rent in isolation, the dilution for '07?

That's right.

Okay.

Thanks.

And we'll take our next question from Jeffrey Spector from UBS.

Good afternoon.

Hi, Jeff.

Hi, Jeff.

Quick question, did you comment on the occupancy cost as a percentage of sales at year-end?

Jeff, we did not, although thank you for that question.

We came in right around 12.2%, which is where we have been the last few years.

And frankly, that's a real focus of our new Chief Operating Officer, who joined us at the beginning of the year.

We feel that there's some latitude there to move that up, given the fact that we're averaging over $450 a foot in sales.

And at 12.2 that might have been a reasonable number at a lower sales level, but certainly as we push up to the levels we're at today, we think that there is some latitude to start moving rents up a little bit more aggressively than we have.

Okay, great.

And a question on an investment you made last year in Cross County Mall in Yonkers, any sense of redeveloping this high traffic infill location?

Actually at this point in time we're just the manager of that property, so we do not have an ownership interest at this point in time.

But there's some very significant redevelopment that's planned for an expansion of the Macy's store, the addition of probably another 200,000 feet of GLA and probably a total expenditure of probably 200 million.

And we would clearly love to have an ownership interest.

It's something that could happen over time, but at this point in time we're the management, and leasing and development arm for that.

Okay.

If I could just ask is Brookfield talking to you guys about selling off or potentially divvying up some of the assets for the Mills portfolio?

Well, obviously, we can't comment on that.

Sorry, I cannot comment on that I'm sorry.

Okay.

Thank you.

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

Good afternoon.

Just to make sure I understand.

So the two major deltas in the quarter were the bad debt expense increase and the delayed land sale gain, which amounts to about $0.05 is that right.

That's most of it, Matt.

Also percentage rent came in lighter than we expected, which, again, is something you really don't know until the retailers report their numbers in January.

Just to make sure, because it seems like your guidance was 440 to 450, I think, and you end up hitting 335, so that would sort of put you $0.10 below the midpoint.

The $0.05 is very clear.

Percentage rents was that more than $0.01 or $0.02?

Percentage rent was about $0.02, and one of the things that happens in the fourth quarter is we get over 50% of our specialty leasing comes in in the fourth quarter.

Okay.

And historically that's been a double-digit growth over the prior year and the fourth quarter this year was only up about 3% versus the prior year.

Any idea for the reason for that?

It's becoming a more mature category.

When we started doing that five years ago, we had some -- we had some kiosks, but there weren't a lot of carts and there weren't in-line spaces and there weren't the kind of things that specialty-leasing folks focus on.

And they've pushed that category pretty hard and we have seen some pretty decent growth, but it's reasonable to expect that to slow down a little bit, Matt, and that's what we saw in the fourth quarter.

Okay.

And then in terms of thinking forward in '07, you guys have, it strikes me anyway, I know you have always had a lot of redevelopment but this seems like a an especially high level that you are sort of entering into.

Do you feel comfortable -- you are guiding the same 2.5% to 3.5% note to present number, which is-- it sounds like it's historically consistent.

Shouldn't that be a little bit lower just because of the potential dilution that comes from redevelopment?

I think generally speaking when something is in redevelopment, it's not considered a same center.

Okay.

Once we've filled it up and redeveloped it and put in a bunch of new tenants, we don't throw that in the same center because it would skew the numbers.

But in terms of Santa Monica Place probably being the biggest one, we had about $0.03 or so of negative earnings drag from Santa Monica Place in '06 and we factored in another $0.025 a share of earnings drag from Santa Monica Place in '07.

So we have looked at that in giving our guidance on centers where there is a Federated store that we have recaptured that's not part of a major redevelopment.

It wouldn't include Santa Monica, wouldn't include the Oaks, but someplace like Lakewood where there is just one store.

We factored in the negative impact that might have on stores adjacent to that vacant anchor.

That is included in our guidance.

Okay, great.

Thank you.

Thanks.

We'll take our next question from Jonathan Litt from Citigroup.

Hi, this is Ambika Goel with John.

Could you, I think earlier in your remarks you commented that sales in Arizona, the Phoenix area, were down.

Could you comment on the reason why you think that occurred?

They weren't down as in negative MB, because they were lower than they had been, which is something we have seen this year at 1.6%.

I think if you go back post 2001, '02, '03, '04, they were pretty strong double-digit gains in Arizona and then that has slowed down this year.

This year year-to-date the sales were up 6%.

So it's-- it still strong compared to the rest of the country in terms of the annual number, but it has slowed from those double-digit increases we saw in the early 2000s.

Can you give an update on Casual Corner and Musicland re-leasing.

To date that space, and again, that was relatively good space that we recaptured a year ago, generally speaking about the 35 yard line and that's 87% re-leased today.

So most of that space has been absorbed.

Okay.

And then my last question, can you just give an update on yields that you are seeing on redevelopments and developments, because you don't break it out by project, just overall what you are seeing?

On the ground-up new developments, we're seeing generally double-digit returns, 10 to 11% returns.

On the redevelopment projects that we're working on, the more single-digit types of returns generally between 6 and 9%.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] And we'll take our next question from Christine McElroy from Banc of America.

Good afternoon, I'm here with Ross as well.

Hi.

With regard to the lease terminations in the quarter, did the two big box terminations account for the full 7.9 million of lease term fees?

It was close.

It was about-- it was close to 7.

I think it was 6.8 of the total.

And was this included in your guidance.

Yes, it was.

Are their move outs reflected in occupancy?

Yes.

They are.

And do you have the space preleased at this point?

Well, one of the buildings will likely get demolished, it stands in the path of progress for a major redevelopment at Pacific View.

So it was important for us to get access to that space and be able to demolish it in light of what our plans are for redevelopment there.

Okay.

And then you talked about the drivers behind the year-over-year increase in interest expense.

I'm just having trouble reconciling the sequential increase.

Can you walk through the drivers behind the increase in quarter versus the Q3 level?

In terms of interest rates?

Interest expense.

Well, there's a lot of pieces that go in there.

Obviously the average interest rate was higher, but we also had Crossroads Boulder rolled out of development and into operation in the beginning of the fourth quarter.

So the interest on that project would have been capitalized prior to the fourth quarter, would have been expensed in the fourth quarter.

So that's roughly 130 million or so of additional debt that was coming online in the fourth quarter.

That was probably the biggest piece of the change.

Okay.

Thank you.

We'll take a follow-up question from Michael Mueller from JPMorgan Securities.

One other question on your comments about guidance and straight line rents FAS 141, it looks like there's about 29 million this year, you said about 6 million lower for the combined amount in '07.

It is safe to say just because of looking at the Q4 run rates for those items that they are not yet reflected in the revenues going forward, so that's really going to take its toll beginning in the first quarter, is that a fair way to look at it?

That's right, Mike.

Okay.

Okay, that's it.

Thanks.

And this does conclude our question and answer session for today.

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

Thank you for joining us.

We look forward to reporting significantly better results over the upcoming year.

And again, I want to reemphasize the fact that from a balance sheet perspective and from an entitlement and NAV perspective , '06 was a terrific year for us and it will pay off in the years to come.

Thank you very much for joining us, and we look forward too talking to you soon.

Thank you.

And this concludes today's conference.

We thank you for your participation.