Macerich Co (MAC) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Macerich Company fourth quarter 2007 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 Suzanne Karpick, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you.

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

If you don't have a copy of our earnings release, you may access it at the company's website, 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 these risks, please refer to the company's press release and SEC filings.

Management will also be discussing certain nonGAAP financial measures as defined by SEC Regulation G.

The reconciliation of each nonGAAP financial measure to the most directly comparable GAAP financial measure is included in the press release and supplemental 8K 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, Tom O'Hern, Executive VP and CFO, and Tony Grossi, Executive VP and COO.

Before we begin though, let me announce that I have announced in the past we will be holding our 2008 investor outlook forum in Scottsdale on March 12th and 13th.

This event will be very different from the program we held last November, so please call me or e-mail me today after today's call if you would like to find out more.

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

Thank you, Suzanne.

Today we'll be discussing the 2007 results, recent transaction, the status of our redevelopments and development pipeline and our outlook for 2008.

The operating metrics for our business generally remain strong in the fourth quarter with continued high occupancy levels, very strong releasing spreads, but with some softening in retail sales during the quarter.

Looking at the sales numbers, the total portfolio of sales for the quarter were down .7% in the quarter, year to date those sales were up 1.7%.

Looking at it regionally, the eastern region remains strong, up almost 4% for the quarter, 5.3% for the year.

The central region was up 3.2% for the quarter, 2.8% for the year.

Southern California was down 4.3% in the quarter, down .7% for the year.

Northern California, down 1% for the quarter, up 1.7% for the year.

Arizona, down 4.9% for the quarter, and flat for the year.

Total mall sales per square foot for the year increased to $472 per square foot.

That was up 4.4% from the $452 a foot in the portfolio at December 31st, 2006.

As I mentioned, the occupancy level remains strong at 93.5%, down 10 basis points from a year ago.

Looking at the occupancy on a same-center basis, the occupancy was 93.4%, down from 93.8% a year ago.

Leasing activity continued to be robust in terms of both volumes and spreads.

Did approximately 283,000 square feet of leases in the fourth quarter.

We saw average new rents at $46.20 a foot and there was a positive spread of 34%.

Year to date, we did 1.3 million square feet of shop leases and that was at a positive spread of 28.6%.

Average rent in the portfolio was up almost 5% at $39.51, that compared to $37.75 at the end of 2006.

Looking at FFO, diluted for the quarter was up 7% to $1.45, that compared with $1.36 for the quarter ended December 31st, 2006.

For the year, FFO per share diluted was $4.62, that compared to $4.35 in the year 2006.

These results were in the middle of our guidance range.

Noteworthy in those results is that the preferred units issued on the Wilmorite acquisition were dilutive to FFO per share for the quarter, but were antidilutive to FFO per share for the year.

We will discuss later in the call those units which were redeemed on January 1, 2008, and will not be a factor as we look forward into the results of 2008.

EPS diluted was $0.53 per share for the quarter and that compared to $1.98 in the fourth quarter of 2006, when we sold some noncore assets and recorded $133 million gain on asset sales.

Reflected in the quarter were same-center NOI growth excluding lease terminations of 2.05% compared to the fourth quarter of '06.

We made some merchandising decisions during the quarter that hurt the fourth quarter occupancy, as was reflected by that dip in same-center occupancy, but these are decisions that will benefit us in 2008 and beyond.

Year to date same-center NOI growth was 2.4%.

We expect this to see a significant pickup in 2008, as we are giving guidance that includes a range of same-center NOI growth of 3.5% to 4%.

Lease termination revenue including JVs at pro rata was $1.2 million for the quarter.

That was down significantly from $7.8 million during the fourth quarter of 2006.

Year-to-date terminations were $13 million in that compared to $20 million during 2006.

Expense recovery rate including JVs and pro rata was 92.3%, that was down from 94% in the fourth quarter of '06.

DPI increases were $1.3 million higher than the fourth quarter of '06, a trend that continues as we convert more of our leases to DPI increases rather than fixed bumps.

Straight-lining for rents were $4.6 million compared to $2.8 million in the fourth quarter of last year, primarily to -- due to the addition of 29th Street, as well as Deptford and the expansion at Fresno Fashion Fair.

FAS 141 income was $3.5 million, down from $4 million in the fourth quarter of last year.

Gain on sale of undepreciated assets was as forecast and came in at about $10 million for the quarter.

That compared to $3.6 million of similar gain in the fourth quarter of last year.

Now focusing on the balance sheet at year end we had a total of $7.5 billion of debt outstanding, including JVs at pro rata.

Our average interest rate is 5.73%, and the average interest rate on our fixed rate debt is 5.65%, with an average remaining term on that debt of 4.8 years.

Our debt-to-market cap at quarter end was 46% and we enjoyed a very healthy interest coverage ratio of 2.4 times for the quarter.

As you can see in the detailed debt schedule in the supplement that was issued this morning, we have a very manageable maturity schedule.

We have some of our top assets with low leverage loans on them that are maturing this year, such as Fresno Fashion Fair, Broadway Plaza and Westside Pavilion.

In 2009 we also have a light maturity schedule, about $700 million, with low loan to value mortgages on high sales per foot centers, such as Queen's Center in Washington Square.

We expect that by placing conventional 55% to 60% nonrecourse loan-to-value mortgages on our 2008 maturities, we will see between $300 million to $500 million of loan proceeds in excess of the debt that's expiring on those properties.

In addition, we have a number of unencumbered assets such as The Oaks and SanTan Village that lend themselves very nicely to permanent loans, should we so choose any time in the next 12 months.

As you can see, our balance sheet remains in very good shape.

Shifting now to 2008, this morning we issued our initial guidance for 2008.

The range for FFO per diluted share is $5.00 to $5.15, which at the midpoint is a 10% increase over 2007.

Our assumptions reflect our positive outlook for our portfolio in 2008.

Included in those assumptions are same-center NOI growth in a range of 3.5% to 4%.

This growth, which is up from 2.4% in 2007 is a function of our focus this past year on the quality of the leases that we execute.

Strong 28% releasing spreads we achieved in 2007 are helping to fuel this 2008 growth.

As of today, we're over 70% of our 2008 lease expirations have already been negotiated.

We feel very comfortable with our space-by-space revenue forecast for 2008.

Lease terminations in the forecast are at $12 million, that's down from $13 million in 2007 and $20 million in 2006.

We have forecast gain on undepreciated asset sales of $10 million and that's approximately the same level that we've had in 2007 and 2006.

The Mervyn's acquisitions are forecast as accretive during 2008.

That accretion is offset by the disposition of four Rochester assets, which were lower quality assets that were redeemed.

Art will be speaking about that transaction in more detail in a few moments.

Straight-lining of rent and ex FAS 141 income are forecast to be down $7 million in 2008 compared to 2007.

Keep in mind we do have seasonality in our earnings, so our forecast split of FFO by quarter is 22% in the first quarter, 22% in the second quarter, 24% in the third quarter, and the balance in the fourth quarter.

This guidance is based on management's current view of current market conditions in our regional mall business.

At this point, I would like to turn it over to Art to discuss our recent transactions, the strength of our business, our pipeline, and other events impacting our business.

Thank you, Tom.

I'm going to focus on our mall fundamentals and the results of the fourth quarter a little bit and my view on 2008.

Secondly, an update on our development and redevelopment pipeline.

And thirdly, a comment and some further color on the acquisitions and dispositions activity during the quarter and the first two days of 2008.

I would categorize the quarter as well as my outlook for the year as being very solid, but also very unique and diverse.

On the solid side, our releasing spreads in 2007 ended up at 28% over expiring rents.

That compares to an average of 20% some over the period of 2002 through 2006.

As outlined actually on our previous call -- on the last call from the last quarter, from 2002 through 2006, our spreads were 25% in '02, 20% in '03, 24% in '04, 20% in '05, 19% in '06, and 28% now in '07.

So we're continuing to realize very strong releasing spreads, which we anticipate and know will continue in 2008.

Expiring rents in 2008 are just under $35 per square foot, and as Tom has indicated, we've already got commitments for over 70% of that space.

We're very comfortable that we're going to be able to continue our releasing spreads in 2008 to be in excess of 20%.

The reason that we're able to generate these kind of spreads is because of the strength of the portfolio, both in terms of, in terms of the sales per square foot, as well as the makeup and the location of the properties.

Our properties are located in high growth, high barrier to entry markets, and consequently we've been able to mine the embedded growth from those assets through our strong releasing spreads and remerchandising of these centers.

Our portfolio today at the end of the year has averaged sales per square foot of $472 per square foot.

Of note, over 10 of our centers have sales over $700 per square foot.

If you look at our top 50 centers, our sales are in excess of $500 per square foot.

You take a look at the quality of the income stream that we have coming from our portfolio, well over 70% of the NOI in the portfolio is definitely in A-quality malls, with the balance in B-type and C-type of assets.

And as we look at the growth that we've been able to historically, as well as perspectively realize, from our portfolio, we generally are seeing at least 200 basis points higher growth in NOI per year from the A-quality properties than from our lower asset properties, lower quality properties.

And as you know, over the last couple of years, we've done a very good job in terms of pruning our portfolio, disposing of noncore assets and underperforming assets, and we are continuing to do that.

I'll be discussing more of that when we get into the acquisitions and the dispositions activity for the quarter.

So from a fundamental viewpoint, I'm very pleased with the results for '07, and I have every reason to be confident in '08, because of the current releasing activity that we have already realized, because of the location of our properties, and high barrier to entry, unique and fast-growing markets, and because of the strength of the portfolio in terms of the sales per square foot that it's generating.

Looking at the development and the redevelopment pipeline, we've provided a tremendous amount of detail for you in the supplement, so I'm not going to get into actual numbers.

But in looking at the bigger picture, the fourth quarter saw the most active opening period for us in our history, with the opening of the mall at SanTan Village, which opened up to rave reviews, with tenants doing very strong businesses, with the opening of our retail regional center at Casa Grande, with the opening of our large life-style center at Freehold, New Jersey, which has been tremendously well received, as well as the 400,000-some square foot power center at Flagstaff.

As we look to 2008, we'll have continued phases of SanTan Village and Casa Grande opening.

These are both open air centers that are being built essentially in phases.

One of the reasons we're doing them open air is that enables us to have the tenants open up over a period of time.

When you're adding diverse tenants and unique tenants to centers like this where it's really a combination, at SanTan of a life-style center and a traditional regional center in terms of the tenant mix, it's important to be able to allow the tenants to open up over a period of time.

As we look forward to '08 and '09, we have a very exciting development and redevelopment pipeline, with the bulk of our activity in the redevelopment category.

We'll be seeing the opening of our expansion of The Oaks later on this year and we're all very, very excited about that.

Our Scottsdale Fashion Square expansion is well under way.

We've demolished the Robinson's May building.

As you know we're going to be adding a new Barney's there.

The leasing at the new luxury wing is going extremely well, we're virtually 100% done and we're extremely excited about that expansion and the entire market is eagerly awaiting that to happen.

Probably the most exciting project that we have is right here in our backyard, and that's Santa Monica Place.

I said that our activities and our prognosis for the upcoming year is solid, unique and diverse.

Well, this is certainly unique.

Just a couple of weeks ago, we closed Santa Monica Place.

It's funny when you go there today you walk by and still people walk up to the doors and they try and open the doors to get in.

They just shake their heads.

As we talk to people in the community, they realize what happened, they are all excited and very thrilled to see something new come to the community.

There's probably no stronger demographic location in the United States than Santa Monica in terms of our portfolio, and frankly in terms of most any portfolio, and essentially to have the opportunity to build a new 600,000-square-foot retail center in the heart of the highest demographics in southern California and in the highest of all barrier-to-entry types of markets is an unbelievably exciting.

The returns are also very exciting, with, as you can see, our costs.

We are projecting in excess of $260 million, $250 million to $260 million of new costs to remerchandise the center, but we're projecting that based upon this year's current income of being zero, since we've closed it down, in excess, well in excess of 10% incremental returns on the costs here.

More importantly from a merchandising viewpoint, this is going to be a fabulous center, with one of the most unique, high-end merchandising mixes anywhere in the country.

We'll be announcing the replacement for the Robinson's May store later on this spring, and I know that you'll all be excited to see that announcement.

Further in '08, we've started the commencement of a new life-style expansion at our center in Modesto, California.

We're very excited about that.

At Estrella Falls, we've started the construction there of the Urban Village that we're creating there, which is a combination of the power center and the regional center that we'll be building there.

And the power center component has commenced.

That started here.

It will be coming up here this year, with openings into next year, with the regional mall to follow essentially even during the construction of the power center and opening shortly thereafter.

Also in the upcoming year, we'll be seeing the openings of new Costco stores at Lakewood Center, which will open up later this year, new Costco store at Paradise Valley, which will open up later this year or early 2009.

Target is opening up in Pacific View, and as you look at it basically all of the Federated Boxes that we bought two and a half years ago or so, have now been spoken for and/or have been remerchandised.

One of the most exciting announcements that we have during the quarter was we announced the addition of a new Neiman Marcus to join us at Broadway Plaza in Walnut Creek.

This is one of the highest end markets in the United States.

Neiman Marcus has really targeted Walnut Creek has being their number one new location that they have targeted in the U.S.

for the last several years and we're pleased to welcome them to the tenant mix and to our lineup there at Broadway Plaza.

We're underway with our entitlements, anticipate them opening in the next two to three years, and there will be substantial upgrading in the merchandise mix of that center as a consequence of the adding of Neiman Marcus.

Looking to the future, in Arizona, we received our entitlements at [Presada] in surprise, to do this project, which is in excess of a 2.5 million square foot project.

We're starting on the power center components of that project this year, with those -- with the power center components actually being very large, comprising over 1.3 million square feet and the mall to follow thereafter.

As we talk about our power centers, this goes back to my comment about our prospects being unique and diverse.

You have to keep into context, we're not out there building power centers on a stand-alone basis.

What we're doing is we're building power centers as part of large retail, regional cores that we're building.

We're taking control of large tracts of land.

At SanTan Village in Gilbert, we have control of over 500 acres, upon which we ended up with the conclusion of the regional center building almost three million square feet of retail.

At Estrella Falls, we have control of over 300 acres of land, upon which we will have retail built there of up to two million square feet, between the power centers, other commercial, and then ultimately the regional center.

And then at Presada, which is a 3,000-acre project in the urban retail core of that is over 2.5 million square feet of retail.

The power centers really come before the regional centers because the anchors in the power centers, which are generally Wal-Mart supercenters and Target supercenters are able to open well before the department stores, because they are able to open without the complete growth being there for them.

In many cases, the power centers come coincidentally with the regional center.

At SanTan, the power centers came about a year before the opening of the regional center.

At Estrella Falls, it will be seamless.

We're under construction with the power centers, and as they are opening, we'll already have been under construction on the regional centers, with the opening of the regional centers essentially within a year of the power centers.

At Presada, the power centers are under construction right now.

They will be opening in '09.

On that one, given the growth in the market, most likely the regional centers will lag roughly two to three years behind that.

That will, again, be built, as we always build in Arizona, at a market right timing and when the retailers and the market are both ready for it.

So again, you have to keep into context this power center activity that we have, that it's really part of a larger retail development, because we're taking -- and the unique thing is we get control of large tracts of land in Arizona.

We plan them well in advance, and then we're able to essentially prime the pump with the power centers and then build the regional.

The nice thing about it is obviously that the power centers generate generally very nice returns, generally double-digit types of returns, so that rewards us for our planning efforts.

In the acquisitions and dispositions area, that certainly has been something that's been very solid, unique and diverse.

On the solid side, we completed the acquisition of Northridge Center earlier this -- in January.

You all know Northridge Center in Chicago.

It's home to the second highest volume Nordstroms store in the United States.

With the acquisition of Northridge Center, Macerich now has the, five of the top t volume Nordstroms stores in the world in our portfolio.

So we're thrilled to add Northridge Center to our portfolio.

On the disposition front, we effectively disposed of our Rochester assets.

Now, as you may remember, when we bought Wilmorite we announced at the time that the founders of Wilmorite had the option to redeem the Rochester assets and that that option kicked in roughly two and a half years after the acquisition.

When that option came up, they elected to redeem the assets.

Now, what this is equivalent of, is this is the equivalent of us selling these assets, which are really noncore to us in a lower growth area, in an area that does have -- it is the home to Wilmorite and to the [Wilmorite] family, and they will do extremely well with these assets, but it is not traditionally the type of market that we have sought out.

We essentially have sold these assets at roughly a nine cap rate.

As we've seen in the press release, the average sales of these assets were roughly $360 per square foot.

As I view this transaction, we roughly made a sale of around $430 million, because what we did is that -- is that in redeeming 2.9 million shares of OP units, or preferred units, we effectively -- this is the equivalent of selling these assets at around $430 million, taking the equity of around $220 million, and then immediately consummating a stock buyback of 2.9 million shares.

That's what happened in the Rochester disposition redemption.

That's the way that I view it.

That's the reality of it.

And so as you look at the balancing of the introduction of Northridge to the portfolio and the disposition of the Rochester assets, that's consistent with our goal of redeploying noncore proceeds into high quality assets, whether they be through acquisition or they be through development and redevelopment.

Probably the most unique and diverse deal that we just consummated at the end of last year was the Mervyn's transaction.

As you've seen in the press release, we're buying roughly 43 Mervyn's stores at a price just over $430 million upon consummation of it.

This is a very interesting deal.

In roughly May or June of last year, Mervyn's came out with a sales lease-back transaction on 43 stores.

Now, 13 of the Mervyn's stores that were involved in this transaction are located in Macerich malls.

We immediately went to Mervyn's and to the broker and attempted to buy those 13 stores, because we certainly did not want to have a traditional buyer of bulk big boxes, for example, all of a sudden become the owners of Mervyn's stores in our regional centers, and in many cases of large tracts of land connected with the Mervyn's stores, where they might control as much as five, six, seven acres.

Furthermore, we were concerned about having a third party be involved in buying the Mervyn's stores in our regional centers, because while Mervyn's has something to say about the redevelopment and the expansion of these centers, and while they see things roughly the same way that we see things when we go about the process of bettering a center, a big box buyer, who would be a non -- who would have interests not aligned with the center, per se may not have the same view towards redevelopment and may not be as cooperative in the redevelopment of our centers.

As we got deeper into the transaction we got more intrigued with it, because we realized we'd be able to buy both our stores as well as these other stores at a very attractive return.

But more importantly, we were able to open up redevelopment opportunities at all of our existing properties by essentially taking the Mervyn's agreements and giving them a restricted parking area surrounding their store, but then beyond that, they essentially have given us carte blanche to do anything that we want at the center, which is a tremendous, tremendous redevelopment amount of freedom that we've been able to obtain as a result of that.

As you look at it, there are roughly one million square feet of Mervyn's stores that were acquired as part of this transaction that exists in our portfolio, and if, God forbid, something were to happen to Mervyn's, essentially what we have done is that we have picked up one million square feet of FAR in some of the best centers that we own across the United States.

And if you take a look at the ability to redeploy and recycle that one million square feet, which we as the owner of the Mervyn's store and the owner of the center, would be the only one that could do that, that entitlement alone would be incredibly valuable.

As I mentioned, the returns on the overall portfolio turned out to be very attractive, roughly a 7.25% going in return.

This ranges from some of the centers internally on our books, and our minds being valued at 5% to 6% cap rates, depending on where they are, to some of the strip center types of locations being valued at 9% and 10% types of returns with, an average of 7.25%.

As far as where these stores are, as I have mentioned, 13 of them are in our centers.

Of those 13, two of them we have been able to obtain early terminations of, which we're very excited about, one in Phoenix at Camelback Colonnade, which we see as an opportunity for a large commercial development there.

And the other one in Mesa, Colorado -- in Grand Junction, Colorado, where a life-style center was proposed to compete with us, and by acquiring the Mervyn's store, we're going to essentially be able to add a life-style component to our center there and to address that competition.

Outside of our portfolio, we are also picking up 17 other Mervyn's stores that are located in regional malls.

Of the 14 of those stores that are located in regional malls controlled by public -- other public companies, that are roughly another 17 Mervyn's stores throughout the West Coast here that are located in well-located strip and community centers, and some free-standing.

As I look at our prognosis for this portfolio, the nonmall type of assets, my guess, is most all of them will have been disposed of within the next 18 months to two years.

We've already received interest from some of the strip center types of owners on those and we'll see what happens on the others.

But we're very thrilled about that transaction.

Again, it's very unique, very diverse, but it really reflects our very protective view of our portfolio in terms of the fact that we just were not willing to allow some stranger to end up owning 13 of department stores located in 13 of our regional centers across the United States, and we were able to take control of that, open up big redevelopment opportunities, and do it all at a very attractive return.

So with that, we would like to open it up for Q&A and welcome you to the call.

Thank you.

Today's question and answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) We'll pause for a moment to assemble our queue.

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

Please go ahead.

Hi, good morning, guys.

Hi, Lou.

Art, can you expand a little bit on Mervyn's and maybe, Tom, talk a little bit about the accounting?

So it sounds like in terms of the 17 on the West Coast strip centers that you'll sell over time.

That's my prognosis.

Yes, I mean in terms of those that are at regional malls, should we conclude that to be likely as well?

Well, obviously we're not going to sell the ones in our malls.

Of course, Yes.

As I mentioned, there are 17 in regional centers, 14 of which are owned by other public companies, generally growth has -- we have now owned Mervyn's stores in six general growth malls, three Simon malls, two CBL malls, two Forest City malls.

From our viewpoint, we bought them for investment purposes.

I have no idea what will happen with them.

Okay.

And then, Tom, how would the accounting work in terms of presumably you would be able to sell these things with the development rights and that's going to be very valuable.

Does this go to just reduce your base, or is this something that's you'll be able to recognize as kind of gains over time?

Every one of those assets will be allocated, some of our purchase price, and obviously we're buying wholesale and to the extent we sell these one at a time, we would be selling retail.

So I would expect there would be some gain that would be recognized from these transactions.

Okay.

And that would be gains in FFO, or is that too early to say?

It remains to be seen.

Some of these assets clearly will fall in the category of assets held for sale and they get different treatment than assets that are depreciated over time.

Okay.

And then just two other questions.

In terms of Santa Monica place, in terms of what was the '07 FFO contribution?

I know it was small, that you're not getting in '08, that I guess would be a slight drag on the '08 number.

Yes, that's about, that was about $3 million, Lou, for the year.

So $3 million that was in '07 that's out of '08.

Okay.

And then lastly, just on the Wilmorite shares that were dilutive Q4 for FFO, not EPS, were they in the -- do they affect the full year share count -- did they affect the full year share count in '07?

No, no, they were dilutive for the fourth quarter, Lou, but when the year was calculated, they were antidilutive, so the shares were not in the annual calculation.

Great, thank you.

Thanks, Lou.

Thanks, Lou.

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

Please go ahead.

Hey, Jeffrey.

Good morning.

How are you?

Good morning, great, thank you.

There's a lot of concern about the Phoenix market and the housing downturn there.

Can you just comment on your view of Phoenix for '08 to '09?

Sure.

The Phoenix market, you have to keep in mind as far as housing starts that traditionally the Phoenix market has enjoyed housing starts of between 30,000 and 40,000 housing starts per year.

In 2004, '05, and '06, we had spikes, where all of a sudden the housing starts went up dramatically to roughly 60,000 starts per year.

For 2007, 2008, we're looking more at normalcy, where we're looking at housing starts being roughly 30,000 to 40,000 units per year.

So, it's a drop from that dramatic spike that we had, but it is still probably the most robust market in the United States in terms of new housing starts.

The economists that are employed and most closely followed for University of Arizona and Arizona State and the state of Arizona are projecting growth in Arizona, population growth for 2008 of 2.7%, employment growth in '08 of 2.0%, personal income growth in '08 of 5.5%.

So there's still strong growth here.

And then when you look at the markets in which we are doing business, they are either already completely built up markets or they are very well established markets, and the growth opportunities that we're pursuing have already got the housing and the population there to support the development activity that we've got.

So, yes, housing starts are down dramatically.

There's a lot of press that comes out of all of the public home builders that have been doing business in Phoenix and in Arizona, and they are very visible.

And so if you look at the world through the ice of the home builders, the world looks pretty gloomy, but if you look at it from our eyes, it's very positive.

Great.

And can you provide a little more detail on the Northridge acquisition and some of the upside there to your initial going in yield?

Sure.

Well, this is a very core asset for us.

So, we acquired it at what we view to be an attractive growing in return of just over 5.25%.

Remember, we acquired this in partnership with the Alaska permanent fund, which is our partner at Tyson's Corner.

This is a very powerful property that we think has just got continued growth available to it.

As you look at Michigan Avenue, with the closure of Marshall Fields and the reflagging of it to Macy's, frankly this now has established Nordstrom as being the most powerful retailer on Michigan Avenue, and the retail activity on Michigan Avenue has now become balanced to where the South Michigan Avenue is now getting a great deal of interest in terms of retailers.

And we just see a tremendous opportunity over time to continue to expand upon the brand, and sitting there with the second highest volume Nordstrom in the United States, you're sitting on Michigan Avenue, and you've got retail shift to this end of the street, really an expansion to this end of the street.

We're just very excited about the prospects there.

It's definitely a core asset with, we believe, good -- very good growth characteristics for us, and it's part of our philosophy of buying in extremely high barrier-to-entry markets and owning very highly productive assets, which will perform extremely well in any economic times.

So we're very, very bullish on that acquisition in terms of the specifics of it, in terms of that property, but also in terms of basically the -- it's just one more arrow to put in our quiver, as we look at putting together one of the most productive portfolios in the United States of any regional center company.

And last question on Tyson's Corner, I've recently seen some press articles about the rail.

Can you just provide an update on that redevelopment expectations there?

Sure.

We are currently in the planning process for the initial 1.5 million square feet of expansion, and I can't predict what's going to happen with the rail.

There's been essentially a cooling off period that's been put into place, where politicians have asked the Secretary of Transportation to really revisit all of this in terms of the federal government's contribution.

If the rail does not come to Tyson's Corner, because of a lack of funds, then our 1.5 million square foot expansion, which is really the one that we've been counting on, which is at the prime location, right there on the beltway, that is entitled with or without the Metrolink, and if the Metrolink does not come, that essentially leaves us with probably the single most valuable entitlement in northern Virginia.

So I can't predict what's going to happen with the Metrolink.

We'll see what happens over the next 30 to 60 days.

Okay, thank you.

Thank you.

Thank you.

And we'll take our next question from Jay Habermann with Goldman Sachs.

Please go ahead.

Hi, Jay.

Hi, how are you?

Great, how are you?

Good.

Here with Tom Baldwin as well.

Art, just a question on development deliveries, you provide the detail in the supplemental.

I think on the last call you had mentioned it sort of ramped from the $330 million to roughly $490 million to then $700 million over the next several years, well, actually going out to 2009.

And now it's sort of $540 million and then $540 million in '08 and '09.

Have you made any changes in terms of expectations or any changes I guess in the last several months?

No, not really.

The phasing -- no, not really, no.

Certainly '08, '09, are still pretty much exactly what we've been looking at, so, no.

Okay.

So there haven't been any changes, whether it's sales or simply just holding off on particular projects?

Oh, no, no, no.

You have to remember the vast majority of these projects or the dollars that are involved here are Thousand Oaks, Scottsdale Fashion Square expansion and Santa Monica remerchandising.

So it's really -- as usual that is the bulk of our dollars and -- no.

So it's certainly for '08 and '09 in terms of expectations of deliveries, there's been no change.

What happens in '10, '11 and '12, I can't really predict at this point in time, but we've got very good visibility for '08 and '09 and it's -- that visibility is now on paper for the first time.

Okay.

Thanks for that.

And then also, obviously Tom's comments at the start about the sort of sales declines in the most recent quarter, Southern California, as well as Arizona, what are your expectations?

I mean do you expect to see that sort of magnitude of decline for the first half of the coming year?

And what really turns that around?

Boy, if I knew the answer to that, I wouldn't do what I do today.

If I could predict what the consumer's going to do.

But most retailers I think are forecasting '08 to be a soft year, and I would say that we're ready for a soft year.

, when you look at Arizona for the entire year, we were roughly flat.

We were off maybe 1%.

But you look at that in perspective, that compares to 2006 and 2005 and 2004, all three years where we were up double digits every single year, 10% to 15% every single year.

So being flat compared to that kind of growth is still pretty good.

In terms of a prognosis for the year, I would say we have to be ready for a soft year and that's why, for example, that we've taken our leasing activity and we got already 70% of our leases committed on the rollover.

And we feel very comfortable about our prospects.

One thing I didn't mention that we think is very unique in our portfolio, for example, which we initiated about eight years ago, was we started converting all of our leases to CPIs, and over half -- roughly 50% of the minimum rent in our portfolio now is tied to essentially CPIs, and so that gives us kind of a hedge on that side of it also.

But we're prepared for a soft year, but that's all baked into our

And then just on guidance, can you comment, what was your occupancy assumption for year end?

Do you have a sense -- I know you talked in the past about sort of pushing, looking at sort of occupancy costs and where that lever can move.

Any thoughts there?

Yes, I'll start on that, Jay, and then Tony may want to jump in.

But in terms of the forecast, and again, we roll this up from the most granular level.

We look at every single space in our portfolio.

And we have occupancy-neutral in that guidance.

The forecast actually came up with some occupancy gains and we dialed that back to be conservative, but part of our focus this year has really been on the quality of the deal and we've improved our systems to try to reduce the time line it takes to get a lease signed.

So if we can cut the period of time it takes to get a lease negotiated and signed, we're going to see the benefit in occupancy.

Jay, this is Tony here.

The quality of our portfolio has tremendous embedded growth.

And when you have 10 assets doing more than $700 a square foot and our top 50 doing $500, the real shift in our thinking goes from deal volume to deal quality.

And that was the approach that we took throughout '07 that's giving us momentum into '08.

As Art mentioned, we're 70% complete for '08, and that type of thinking and that type of focus on deal quality is helping us achieve better spreads, and over a period of time, higher costs of occupancy.

Okay.

I think Tom has a question, too.

Hey, guys.

Could you just provide an update on the leasing at Biltmore and how that's been going recently?

Oh, it's -- yes, that's -- we're very excited about that.

As you look at the Biltmore, the east, the furthest east buildings there, we have those in limbo because of what we were deciding, how many towers we were going to build in terms of what -- and whether they were going to be residential or office.

We now have come to the conclusion on exactly what we're going to build in the way of the mixed use commercial there.

There will be two residential towers that will be built, so we currently are in the process now of recycling, building, what we call building J, which is the far east building there, and the lineup of tenants that we have coming over the next 15 months at the Biltmore are -- is very exciting.

It's interesting, we met with Federated last night, and two of the highest performing stores on a comp basis that they had in their entire company for 2007 were the Macy's store at Biltmore and the Macy's store at Scottsdale Fashion Square and the same holds true for Saks, for example.

That's one of the highest performing Saks' stores on a comp basis.

So we've got a tremendous number of retailers that are coming over the next 15 months.

Tony, do you have some of the names on those that you would like to share?

Sure.

We had an opportunistic remerchandising slate in the second half of '07 that we're focusing in on.

We've added many high-profile restaurants, a couple operated by [Sam Fox] in conjunction with signature chefs, as well as a [mastrow's] and an ocean club that will add to the excitement of Biltmore as it occupies the Camelback Corridor, where we have high concentration of office workers who will get a daytime and a nighttime business coming from those restaurants.

As well as we have active discussions and commitments from a flagship Brooks Brothers and a J Crew and we have tremendous interest from reestablishing Banana Republic in Biltmore and tremendous momentum from other first to market type retailers, such as Roberto Botticelli from Italy, as well as interest from tenants that are unique, such as Six Star Brazilian, Calypso has opened to tremendous reviews and [King and Duck].

Okay, great.

Thanks a lot.

And just as a follow-up, have you guys provided any color regarding the expected costs or potential yield on the residential there?

No, we have not, but I can tell you that the returns that we're projecting from that are very dramatic.

We're entering into an agreement.

We'll be announcing the codeveloper with a residential developer, who essentially will be taking on virtually all of the development risk, and then we will -- we'll have a sharing of the profits up to a certain number and then we see the lion's share of the profit after that number.

But under any scenario, the prospects look great and we're only going to pull the trigger on that when the market's ready.

So the entitlement's in place.

We have the plan in place.

We now are going to remerchandise the retailing on the far east end of the property, because we know what we're doing in terms of where the towers were going to be.

We weren't sure if we were going to tear down those towers -- tear down building J or not.

And for that for me, that's a slam dunk because those will not be built spec.

They will be built presold.

And you really have arguably the most valuable residential location in the entire Arizona marketplace.

You've got the Camelback Corridor there at Biltmore, it's one of the most attractive intersections and locations in Arizona.

It's probably the closest thing you get to a 24/7.

And my anticipation would be that we would start looking at doing some premarketing of the residential next -- later this year, early next year, with deliveries in '010, '011, but it will really -- the deliveries will only happen after enough has been presold and the returns that we're looking at are very dramatic.

And even before on the remerchandising side of it, even before we brought in the new tenants and the new ones to come, this is a center that today now averages in excess of $800 a square foot, which is substantially higher than what it was when we acquired it a couple years ago.

And really again, a lot of that is a function of that tremendous growth that we've seen in the Phoenix market in '04, '05, '06 in sales per foot, and also we did a very dramatic aesthetic and cosmetic renovation of the center.

So we're now ready to tap into a tremendous amount of opportunity there and we're very excited.

I mean we control the luxury market in the whole Phoenix marketplace between Biltmore and Scottsdale, and the expansion of Scottsdale, the remerchandising of the Biltmore, very exciting in terms of what we're doing there.

Great, thanks.

We look forward to an update next month as well.

Great, absolutely.

You'll be staying right between the two of them there.

Great, thank you.

Thank you.

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

Please go ahead.

Hi.

Hi, Mike.

Hi.

First of all, I want to say that the development disclosure is great this quarter.

And maybe this is a question for Tony.

Can you talk about, I know most of your development, redevelopment pipeline is the dollars are being put into the redevelopment component of that.

But how are tenants thinking about the decision to go into an existing center, say that's doing $450 or $500 a foot versus going into new development?

Well, when we look at the comparison of what we have on the table for '08 or '09, we thought unique opportunities in The Oaks and in Scottsdale and Santa Monica Place.

We have tremendous demand and tremendous interest for those projects.

So it's tough to compare an existing center, or an existing location, to a high profile redevelopment.

You can say qualitatively that we're getting a lot of buzz, a lot of demand, because we have the inventory at this point into leasing Santa Monica Place and Scottsdale Fashion.

We're pretty far along on The Oaks.

It's a tough comparison, but we're very delighted with the reception retailers have given us regarding those redevelopments.

And further to your question, on the new development side, the retailers, when they look at those, essentially everything that we are doing in the Phoenix marketplace, they are must-have locations for the retailers.

I mean they know, the retailers know that we only build when the market is ready and the timing is right.

They know the success that they have achieved from the new centers that have been built in the marketplace, the most recent new center obviously being six years ago, seven years ago at Chandler, the fabulous success they have achieved there.

They know that when we build, it's for -- the timing is right and it's really must-have.

And so the commitment to SanTan, for example, was well over 90%, and already as we looked at Estrella of virtually all of the tenants that are at SanTan are saying, well, I also have to be at Estrella because we know that if you're building it and when you're building it, the timing will be right and we have to be there.

So on those, they are really must-haves for the retailers, and of course when you look at the quality of the redevelopments Tony made reference to, The Oaks, (inaudible) Fashion, or at Santa Monica Place, I mean those are must-haves for the retailers also.

So it's really our decision on who we want to go ahead and bring into the center.

Okay.

And for Tom, it's probably safe to say there is no Mervyn's transactional income in earnings for this year, correct?

Aside from just the acquisition of it?

Very little, Mike.

I think we closed on December 17th, so there was a week or two in there.

That's about it.

Okay, great.

Thanks.

Thank you.

And we'll take our next question from Ambika Goel with Citi.

Please go ahead.

Hi, this is Ambika with Michael Bilerman.

Can you provide --

Where's John, where's John?

Hi, Ambika.

Hi, Michael.

Hi.

Can you provide some more color on occupancy and your decision to take specific space off line, was it concentrated and with any specific retailers or any specific locations, and then some guidance on how long it would take to release that space?

Yes.

We talked about Biltmore and that was an opportunistic remerchandising play.

For example on Biltmore, just to give you some specifics, the occupancy at Biltmore at year end dropped to 70% from about 85% as a result of those merchandising decisions, so they were fairly significant.

Short-term impact, long-term benefit.

I think Ambika, to answer your question, you have to remember the focus that we have that Tony has brought to bear here in the last year, is that our entire focus is on deal quality, not deal quantity.

And so it's not really deciding to take a space off line, per se, other than for example in a remerchandising situation like Biltmore, where you're deciding what you're going to do in terms of where you're going to do it.

The key here is deal quality and not deal quantity.

When you're doing that, sometimes your occupancies will drop a little bit, but your spreads go up and the inherent value of the asset that you create when you are patient and you get the right retailer at the right rent as opposed to just filling space, is something that reflects itself in the NAV of the portfolio and reflects itself ultimately in the productivity of the portfolio, which as you see with us has been going up dramatically and as measured by sales per foot over the years.

And then I guess could we kind of characterize this as measured going forward more focused on, okay, we want to see our occupancy costs really increase because they are below market and maybe you might see occupancy slip a bit?

We've been monitoring occupancy in conjunction with our pursuit of higher quality deals, and we're focused on bringing you the best tenants that generate the highest sales that are able to pay the highest rent, at a cost of occupancy that's fair for us and fair for them.

So that focus on quality is manifesting itself in our guidance and as well as we're delivering to the market the right tenants for these projects that have a high degree of success as opposed to focusing in on just filling space.

Maybe Art or Tom, just on the Mervyn's stores, if you take at $400 million, can you just put broad strokes in terms of the three buckets, the boxes in your centers, the boxes in the other landlords and then the strip, and off strip center assets?

Sure.

Roughly 35% or so would be in -- let me just take a look at that.

Hang on.

Yes, 35% or so would be in our portfolio, roughly.

Roughly 40% or so is sitting in the 14 malls that are controlled by the other public companies, and the balance of the valuation is sitting in the other 17 really strip center and privately held mall locations.

And then when you look at, you talked about a 7.25% going in yield.

What sort of bumps are built into those leases?

I'm glad you asked that, because I forgot to bring it up.

They are actually very attractive.

Mervyn's, when they presented this, this was a package.

It was kind of, here's the deal, you either buy it or you don't buy it.

It was very competitively bid on.

And the offer that was put into the package was essentially, they recognize that landlords want -- need to have increases in growth.

So there's fixed increases of 10% every five years.

And so what does that -- 7.25% translates to what on a GAAP basis that you'll be recording?

7.25% is cash.

Right.

And so what will the GAAP be?

Going in, GAAP, Tom?

Michael, I think it probably ticks it up 25 to 50 basis points.

Again, we're focusing on the cash aspects of the transaction, but certainly the straight-lining effect will pick it up probably mid to the high 7%s.

A math major could do it quickly though.

Right.

I'm not very good at numbers, so -- What does -- did you guys finance it at all or you took it all down on your line?

We just took it down on our line.

Do you have plans to finance the boxes?

No, no, no.

And then I guess you talked a little bit about selling the balance, I guess 25 and maybe the other mall landlords are going to want to buy some of those other boxes so that they can control their destiny a little bit.

I guess it nets down to you talking about a 5% to 6% cap rate on your purchase price.

How do you sort of get comfortable with that relative to spending money in redevelopment and development, and did you sort of look at those 13 sites and say, I'm buying them for $120 million, but I know I can invest maybe $150 million and net-net it's going to equalize to an 8% over time?

Sure.

First of all, the going in return was very acceptable, cash return at 7.25% with good bumps.

When I said the 5% to 6% to the 10%, that's really just the range of internally, if you add -- if you made me sit down and write down on a piece of paper the way I valued it, again, this was a bulk transaction, so there's no pure science to it.

Some of these assets, clearly, we would have in the open market valued them at a 5% to 6% cap rate.

Overall I would say generally in the strong mall locations, you are looking at 6% to 6.5% type cap rates that we're using in the valuations.

In terms of comparing it to being able to spend the money on redevelopment dollars from my viewpoint, this really enabled redevelopment.

Had we not bought these properties, then who knows who would have bought them.

Could have been a complete stranger who has no alignment of interest with us whatsoever, and embedded in the agreements of any department store are the rights to approve expansions and developments.

We got, as part of this transaction -- first of all, we were able to make sure that a stranger didn't get introduced to the equation, but very importantly, very importantly, essentially the approval rights of Mervyn's have now been prenegotiated down to essentially they have adjacent parking that is now committed to be available to them, but we have the right to do anything that we want to do in the balance of the center.

Right.

So that opens up a tremendous amount of redevelopment opportunities.

I mean essentially you look at the 12 malls that we own, you're probably looking at $3 billion worth of real estate.

Right.

And really they are tremendous redevelopments that have now been freed up at places like [Ceritos] for example, where this frees up a massive redevelopment, that is now available to us.

So the going in return is acceptable and from a redevelopment viewpoint, the flexibility that we get is dramatic, and at the end of the day of the $400-some million of total investment, that could easily be shrunk over the next couple of years down to under $200 million.

Right.

So we'll see how it plays out.

The only thing I can tell you is I'm very excited about accomplishing it.

I know it's a unique investment for us.

It's certainly diverse, but I can assure you that you that I wouldn't want to be on this call today and have you ask me how do you feel about the fact that XYZ syndicator just bought 12 stores in your centers and now have something to say about what happens at those centers.

Right.

I wouldn't want to answer that question.

Right.

My last question, just on the 17 that are owned by the other public landlords, how many of those are in direct competition to malls that you own?

None.

Okay, thank you.

Thank you.

Thank you.

And we'll take a question from Ben Yang with Green Street Advisors.

Please go ahead.

Hi, good morning.

Good morning, Ben.

I have a question on the Wilmorite redemption.

You talked about that being equivalent to a $430 million sale of your assets at a roughly 9% cap rate.

For a portfolio that does roughly $360 million in sales, something that we would consider to be maybe a B-minus, C-plus in quality, it seems a little high.

Is that reflective of what the market would bear, or was there something in the partnership agreement that dictated lower price for that sale?

Are you saying is the cap rate higher?

The cap rate seems a little high.

Yes, it is.

And why is that?

Because that's what was negotiated in 2005.

Okay.

So that's the marketed rate from roughly three years ago, instead of what we're seeing in the open market today?

Yes, and, well, and the other side -- other thing is that if this redemption would have happened a year ago, the cap rate would have been a 7% because our stock rate was at $100 per share.

Okay.

So it was really dictated by your share price and what you had laid out roughly in '05?

Yes, in '05 basically the deal that was made was we handed them 2.9 million units, essentially, and the deal was any time 30 months later, they can give us back the 2.9 million units and just assume the debt in place and get the assets back.

So really the -- it's really the actual cap rate as a function of our stock price at the time, so that's part of the reason that it's dilutive, but this was prenegotiated two and a half years ago.

From my viewpoint while it is from a cap rate viewpoint potentially viewed as being a little bit high, which causes some cash flow FFO dilution, from an NAV viewpoint the opportunity of essentially taking over $200-some million of equity out of noncore assets that don't have the same growth characteristics that we like it at and immediately essentially the equivalent of doing a stock buyback of 2.9 million shares at the current stock price is very attractive.

If I said to you that we just bought 2.9 million shares and did it by exchanging property per share so we didn't have to come up with cash, you would say that's pretty exciting, and that's the way I view it.

Okay.

That makes sense.

And then finally, it looks like you're losing your SVP of mall development, [Macerich] development at Westcor.

You have a lot of ground-up developments in the pipeline there.

Any concerns with that loss?

How are you going to fill that position going forward?

Yes, Dave, is going to move on and he's ready to do something else with his life.

He's going to do great.

Chances are he'll be involved with us in some way going forward we have a very, very deep (inaudible) at our Westcor development team there in Phoenix..

Doesn't sound like there are any concerns.

Do you have anyone identified for fill his position at this point?

Yes, we have two young fellows, Scott Nelson and Garrett [Newland] who will be taking over as the Senior Developers there in the market, and I'll be working closely with them, as well as Tracey Gotsis is there in the Westcor office and Bobby Williams and the team is -- look, we'll miss Dave.

He is a tremendous, tremendous contributor, but he was ready for a life-style change.

Which when somebody wants to change their life-style, I can't argue with that.

If he was going to a competitor, I would have some heartburn, but he wants a life-style change, and we're blessed with having two young folks here with Scott and Garrett that really have been tutored by Dave and Mike [Tredwell] that are ready for the challenge, ready to step up and take on the responsibilities of what we're doing there, and we feel very, very comfortable.

It's testimony to the legacy of Westcor, which is really the history of Westcor, is that it's a training grounds for young developers and they come -- young folks join us there and they get seasoned and then they become very strong developers, and that's really -- this is an ongoing evolution that's been going on since the start with Rusty [Lyon] back 20, 30 years ago.

Great, thank you.

Thank you.

Thank you.

It appears there are no further questions at this time.

And, Mr.

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

Well, thank you very much.

Again, as Suzanne said, we look forward to seeing you in Phoenix next month if you can join us, and look forward to talking to you again soon.

Thank you very much.

Thank you.

That concludes today's conference.

We appreciate your participation.

You may now disconnect.