西蒙地產 (SPG) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Mills Corporation first quarter 2002 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session, and that time if you have a question, you'll need to press the one followed by a four on your telephone. As a reminder, this is being recorded, Friday May 10, 2002. Please beware that statements made during this call that are not historical may be deemed forward-looking statements. Although the company believes the expectations reflect in any forward-looking statement that are based on a reason assumption, can give no assurances that the expectation will be obtained. That is possible that our actions may differ maturely from that those indicated by the forward-looking statements, do to a variety of uncertainties. Those risks and uncertainties include by are not limited to the national, regional and local economic climate, competitive market forces, changes in market rental rates, trends in the retail industry, the ability to collect rent due to the bankruptcy or disolvency of tenants and otherwise and changes in market rates of interest. We direct you to the company's various filings with the Securities and Exchange Commission, including form 10-K and form 10-Q for a detailed discussion of risks and uncertainties. Acknowledging the fact that this may be webcast for some time, we believe it is important to note that today's call includes times-sensitive information that may be accurate only as of today's date, May 10, 2002. The company's supplement information package has been filed as a Form [10-K]. This filing is available on our website at www.millscorp.com. Once again, that's www.millscorp.com. The packet is available via mail or e-mail. If you would like to receive supplement information, please notify Amanda Ladd at 703-526-5039. Participating in today's call will be Larry Siegel, Chairman and Chief Executive Officer; Jim Dausch, Senior Executive Vice President, Development; Kenneth Parent, Executive Vice President, Finance and Chief Financial Officer; and Greg Neeb, Treasurer. And now I'll turn the call over to Mr. Siegel. Please go ahead, sir.

Thank you. Good morning and welcome to our first quarter 2002 call. Thanks for joining us. I'd like to get right into our earnings for the quarter. Then I'd like to update you on a number of exciting and meaningful developments within our company. Overall, I report that the first quarter results are predictably in line with our expectations. Fundamentally, our assets continue sound performance and productivity. So let's discuss the numbers. For the first quarter, we are reporting earnings per share of seventy-three cents, versus sixty-four cents for the same period in 2001. This is an FFO increase of 14% for the quarter. On the operating front, same-center NOI is up 2.2%. Occupancy overall was relatively flat for the fourth quarter. I will walk you through that in a moment. Releasing spreads for in-line space were 10%. However, if we compare same-space versus same-space, the spreads log in at 14%. Comparable space in-line sales decreased approximately 4% for the quarter. If we exclude Sawgrass in Arizona, however comp sales declined one half of 1%. As I mentioned, March offers the best indicator, comparable in-line sales bounced upward to 2.5% for the entire portfolio. Another interesting trend in the area of comparable sales exists with our entertainment and anchor tenant. For the quarter, they produced comp space sales increases of 3.5% and 2%, respectively. In our Mills format, these represents about 55% of the comparable GLA, and 40% of our -- of the economics. We own these anchor spaces and the tenants are rent payers, so these increases are significant and meaningful. Importantly, this performance helps demonstrate the comprehensive health of the shopping center and shows us attractive productivity, even as many of the traditional anchor prototypes struggle. The movie theater category, inparticular, is on fire for us. Comps up across the board and major traffic gains in the malls, supporting to our food and beverage and associated retail uses. Movie [INAUDIBLE] as one example is truly one of the world's premier multiplexes. It showed a comp increase this quarter of over $2 million. That's an additional two hundred thousand customers in the center during this ninety day stretch. Let's look ahead, then, to the year on insights into some of the numbers. As we indicated in our last call, we expect to see our occupancy increase in 2002 and 2003. Much of this is concentrated in a big box push of thirty tenants this year. These additions are economically important and incrementally additive. When you look at how and why we have made these additions, you'll see a stratic story line emerge. This year's openings of Neiman Marcus at Grapevine and Nordstroms in Ontario, for example, bring fire power to our specialty mix. As an example Neiman's only off price offering in their Dallas hometown and location, their biggest customer base is a lynch pin to the broadening of our fashionable appeal at that shopping center. Crayola Works at Arundel, Kid City in Sawgrass, and ESPN and X-Game Skate Parks will add brand-name consumer experiences and entertainment that are crucial magnets for the families attract. New upcoming deals for tougher target expansion at Sawgrass and Kohl's at [Gurnee] shows our flexibility to consumer trends inserting red hot mass merchants. This flurry of new rent payers, new marketers, new brands and new attractions bring high quality and energy to our properties. They support our promotional ability and our ongoing leasing momentum and round-out our offering, With all of this focused activity, we fully expect the year and occupancy number at or about 95%. The bottom line for us, we have confidence where we are today on the business plan for 2002 and remain on target to achieve our objectives. Some other news, We announced last week the acquisition of our JP partnership interest from the Simon Property Group. We have raised all of the capital necessary to fund this transaction by a way of a common stock issuance. This transaction offered us three key components. One, it was accretive. Two, it demonstrated an attractive cap rating at 9.1%. Three, it offers us natural upside. Increased ownership this year will have upward sales and NOI trends. And we have big-time merchant interest and expansion potential that we are aggressively exploring at four of the five centers. Simon was a great partner for us during the early stages of our growth, and we maintain the corporate friendship today. I credit David, in particular, for his strategic vision and leadership with our partnerships, and I will miss our often-animated discussions. But seriously, I hope that we'll have the chance to collaborate again in the future. At this stage, we have a level of development of operational and financial maturity that is best suited to grow the assets and continue to elevate our game as a sector leader. Before I wrap it up, I would like to spend a couple of minutes on our total approach to development. This is a good chance to offer clarity and insight into our contemporary strategy. As we see it today, the Mills Corporation is a company with three distinct and disciplined development programs. First, our traditional Mills format, which remains a high-growth evergreen product type with continued extraordinary potential in North America. Second, our international effort which today is on the verge of becoming a truly multiple development program. And third, our metro lifestyle initiative, which focuses on opportunistic retail driven development in major U.S. metro markets. The Mills format is indeed our main frame. Its pipeline is secure, it's future bright, and it's a really durable performer. Internationally, Madrid has proven to be the beachhead we have hoped for. It will open in about ten months; light speed for Europe, And we expect it to become one of the continent's dominant consumer destination. Our work there has yielded new opportunities in Spain and Italy, which Jim will detail in a moment. I'm very proud of our team for successfully executing here and unlocking immense value. What no other American retailer developer has been able to do. And we're going to build upon it. With our metro lifestyle, we actually have an expanded foundation in the place starting with the piers in San Francisco. We are exploring other opportunities, too. Many of you know that we were recently short listed in a bid by the city of Chicago for the development of an entire city block on State Street, opposite Marshall Field. We are partnered with Chicago's MCL, developer of the enormous River East Mixed Use Center and Canyon Ranch, the venerable hospitality and wellness interest. There is still a long way to go on this and a wide range of other projects and markets that we are zeroing in on. But already, we are seeing that the expertise, flexibility, and vision of this company come to life as an emerging force in this genre. Interestingly, we are also evaluating prospective acquisition opportunities. The addition of existing blue-chip properties, especially in the metro lifestyle segment may accelerate and enhance that program. We may have the ability to broaden our geographic reach, retail relationships, and add depth to our management bench. Still, we are first and foremost, a high-growth development company, and we will remain so. Altogether, our vision is crystal clear: To grow the Mills Corporation as best suited and best positioned to engage in and influence every form and function of retail real estate in the world today. Finally, an up-to-the-minute report from the battle front in the Meadowlands. We are encouraged and optimistic about our status today, very much so. With this week's announced [INAUDIBLE] deal, attention and energy have now been shifted to the resolution of the sports and exposition authority situation in Bergen County. Mills has been all along and remains so today the viable and immediate creative environmentally attractive development for that region. The timing and conclusion of this extended process will bear that out. We know that. Jim Dausch, will now give you a development update.

Thanks, Larry. The first quarter has been marked by progress on a number of Mills development opportunities. Colorado Mills continues on schedule and on budget for a November 14, 2002 opening. Saks Off Fifth, Neiman's Last Call, United Artists, Julian's Borders, Books and Music, Off Broadway Shoes, Gart Sports, Eddie Bauer joined a Target store of one hundred- eighty thousand square feet in anchoring this center. Rents remain at or above budgeted levels. And land sales, although we only have a modest amount of peripheral land to sell, are also running well ahead of pro forma. All but one of the anchor boxes are leased, and there are competitors for that one. Our movie theater at Colorado Mills will have the first year-round professional theater dedicated to live children's theater. It's called Walden's Family Flay Playhouse, and it's a collaboration between Philip Anschutz's Walden Media and his the United Artists chain, which is building the cinema complex which will include the children's theater at Colorado Mills. We are hard at work planning the follow-on Lifestyle wing at Colorado Mills, which will follow the grand opening of the Main Mills. The parking deck, which will accommodate this wing, and the parking that would be displaced during its construction is now under construction at the site and is accommodated within the Colorado Mills budget and economics. For 2003, we have St. Louis Mills in the United States. Ground-breaking will occur on June 27th. Saks Off Fifth has committed to this site. We also have a commitment from Movie Co. for 107,000 square foot 20-screen Egyptian-style movie palace, similar to the Homerun facility at [Arundel] Mills. Off Broadway Shoes, Books-a-Million, Bed, Bath and Beyond, Burlington Coat, and Marshalls have also now committed to the center, and we are working on others to be announced at the ground-breaking. This will be a Fall opening and Can-Am is our partner. In the Spring of 2003 outside the United States, Madrid Xanadu opens. This project is on schedule and on budget. El Corte] and [Gelez] is also under construction and on schedule, and our indoor Ski facility has now begun its construction. Since last time we talked, we now have a Cineplex movie commitment from [Sedesa] Paramount, an AMCO family entertainment center, and a skate park commitment from Billabong. All of which we expect to make the opening. On the fashion side, H&M, [CA, New Yorker, Forum], and the Zara collection of stores will join El Corte and Gelez. Rents continue to run at or above pro forma levels. On the financing side, a board of hypo [INAUDIBLE] bank has approved construction loan financing for the project. The support and encouragement from the local municipality of [INAUDIBLE] and from the community guide of Madrid, and the regional government continues to be very strong. In Spring 2004, we expect to open Vaughn Mills in the Toronto area. With our partner Ivanhoe Cambridge, with lease commitments from Bass Pro Outdoor World, Saks, Burlington Coat, Bed, Bath and Beyond, and Children's Place, we expect to break ground this Summer and set an exact opening date depending on whether this first Winter of construction, and the schedule of certain related, quote, "infrastructure" work. In the predevelopment stage are the following: Meadowlands. You may beware of this week's announcement by Governor McGreevey related to the proposed New York arena, the proposed methods for financing it, and the possible future scenarios for redevelopment and refinancing of the Meadowlands Sports Authority. We have engaged in discussions in the recent past with the Governor's staff and have shared with them plan concepts and possible financing concepts and pro formas, which would enable the state to deal immediatly with the issues covered by the Governor's announcement, as well as to mitigate somewhat the difficult financial straits in which the state and the Meadowlands Sports Authority find themselves through no fault of this governor. It will also would enable the governor without having to face eminent domain issues to satisfy the concerns of the environmental community that the empire tract be dedicated permanently to public open space and be converted to a genuine wetlands refuge. We believe that the Governor and his staff recognize the strength of these proposals and the good faith with which they were made. Not withstanding a lack of agreement on certain aspects of the plan, these discussions continue, and we will evaluate seriously and in good faith whatever requests, proposals, comments we may receive from the State. However, we've made it clear to all that accident agreement with the State, we intend to pursue and indeed have continued to pursue our state and federal permits to develop retail, entertainment, office and hotel uses on the empire tract. We believe these permits are legally, scientifically and environmentally justified and long overdue. As an update on our federal permits, we have been advised that the final environmental impact statement has finally been completed by the core and is going through inter-agency review. Its publication in the Federal Register should come within about 30 to 40 days and a permit decision shortly thereafter. One way or the other, we have no reason to change our belief that Mills will soon develop its entertainment, retail, hotel and office project in the Meadowlands, a project that will be good for us and for New Jersey. Beyond the Meadowlands, our new business activities have the strategic objective, as Larry mentioned, to produce a pipeline that is one-third Mills and one-third non-Mills Metro Lifestyle retail product and one-third international retail projects of all kinds. In that connection, we are pursuing new Mills opportunities in Pittsburgh, Cleveland, Minneapolis and elsewhere. On the non-Mills side, we continue our negotiations with the Port of San Francisco for Piers 27, 31. During the past quarter, the Port Board voted to approve the heads of terms, that is, the key economic and other terms negotiated as the base for the lease documents. We entered and our finalists, as Larry mentioned, in competition to develop lot 37, opposite Marshall Fields downtown Chicago as a retail residential project with MCL of Chicago, a major residential developer. We continue to look at new opportunities in places as diverse as Northern California, Northern Ohio and downtown Nashville for Metro Lifestyle centers. Our international new business program continues its focus on Spain and Northern Italy. In Spain, we are exploring follow-on opportunities beyond Madrid Xanadu in Seville, Bilbau, and Barcelona. In Seville, our site will accommodate over a million square feet of GLA. We already have a executed joint venture agreement with strong local partners, and most of the government approvals, but not all necessary to make this center go into construction next year. In Italy, our efforts are concentrated on three well-located sites. Two of these are in Milan. One of which will be a large, enclosed mall and the other, a mixed-use retail/residential/hotel project, very much like the Metro Lifestyle centers we're looking at here. The other site is in Tuscany in the suburbs of Florence at the intersection of two major auto strides. In all of these projects, we keep in mind our key standards: Good location, strong local partners, support from government, and an interest from key merchants. The sites I mentioned all satisfy the first two standards, and we are exploring and have begun to feel comfortable with the government support merchant interest in all the sites. Although, more work still needs to be done in this area. When these four tests are met, the opportunities are worth a commitment and investment for Mills. I am optimistic that these efforts will, in fact, produce a solid pipeline from which to grow our business elsewhere in Europe. We are optimistic certainly about progress to date. And not I'll turn things over to Ken Parent.

Thank you, Jim. I would like to bring you all up to date on our operating financial results. Fully diluted FFO per share increased to 14% to seventy-three cents in the first quarter of '02, from sixty-four cents from the first quarter of '01. The components of quarter-over-quarter growth are as follows: A 2.2% increase for same-project NOI, generating incremental FFO to Mills of approximately $0.5 million dollars. An increase of $1.6 million of FFO from new projects which had not stabilized in the first quarter of '02, net interest of expense, mainly JD, Concord, Opry, Arundel and Discover. An increase of $1.4 million of FFO were related to the acquisition of the remaining joint venture interest in the Oasis of Sawgrass which occurred in the fourth quarter of 2001. An increase of $4.2 million from our share of joint venture land sales. As we told you about 45 days ago when we had our 2001 year-end conference call, this is simply a time issue, as certain planned 2001 sales slipped into 2002. In a moment, I will give you guidance to the full year 2002 outlook. A decrease of $1.8 million of interest expense, primarily due to lower interest rates and lower average balance on the company's line of credit. A decrease of development project writeoffs of $2.7 million. GAAP requires us to recognize these losses as incurred, according with the timing can be so unpredictable, but we tightly manage our exposure in this area. These increases to FFO were offset by a reduction in leasing and development fees of $2.2 million. As you recall, these fees are contractual-based and will fluctuate quarter-to-quarter based on specific development activity and specific spaces leased. This is in contrast with our management fees, which are clearly recurring and increase as new projects come on line. We expect the developments fees to increase by the second and third quarters, when we expect to begin earning fees on St. Louis and Vaughn. Now, I would like to quickly summarize the components of our growth for the full year of 2002 over 2001. As we look further into '02 and acknowledge the impact of the acquisition of the Simon Property Group's joint venture interest in five our joint venture assets and the possible short-term diluted impact of the $204 million of common stock that we just sold, we feel comfortable with the range of FFO estimates of $3.18 to $3.21, which is the same range of guidance that we gave in the recent press release. However, many factors weigh into these forecasted numbers, such as timing of the completion of the acquisition of the Simon joint venture interest, which we assume to be completed within the next thirty days. The state of the economy and interest rates, both of which we have assumed to remain relatively unchanged until the second half of the year when we forecast a slight recovery. During this period, we anticipate interest rates to remain flat, attendant sales and percentage rates to flat to slightly up, occupancy to improve slightly, releasing spreads to remain firm, and new project lease-up to occur according to plan. This translates into the following year 2002 guidance: 3.5% stabilized at the same-property NOI growth. 10% growth from stabilizing properties. Leasing and development fees of $10 million. And land sales of approximately $10.5 million, which of course exceed their historical annual average amounts for reason I already discussed. To achieve this same-property growth, we expect significant lease-up in our anchor boxes, as Larry discussed at the beginning of this call. We have 30 boxes that we expect to open through the end of next year. Two-thirds of these boxes are first generation spaces from open projects of expansions. We expect to open 18 spaces of these 30 spaces this year, including twelve of which are -- twelve of which are already signed. Including only the signed leases from this group, we are over 94% leased today, and our current projection is for 95% occupancy by the end of the year. It is noteworthy that we expect to experience only nominal impact from this leasing effort in the second quarter of this year as the bulk of the spaces begin to come on line in the third and fourth quarters. Furthermore, our second quarter is somewhat set back by the timing of our recent equity offering, which closed in early May, and for which we will not have accretive use until June 1st at the earliest. Furthermore, in the second quarter of '01, we recorded a one-time pickup of $2 million in income resulting from the receipt of property level income that relate to the Community Center portfolio that was sold in 2000. These factors will result in a rather flat quarter-over-quarter NOI [and MFO] growth in the second quarter of'02 when compared to the comparable quarter of '01. Now I would like to spend a minute on our recently announced repurchase of the joint venture interest. As we reported last month, we entered into an agreement to acquire all of Simon's joint venture interest in five of our joint venture assets for $430 million, which includes approximately $255 million of assumed project level debt. These projects include Ontario Mills, Grapevine Mills, Arizona Mills, Concord Mills, and Arundel Mills. We anticipate that the transaction will close by the end of this month. Based on the purchase price, the combined initial unleveraged return -- unleveraged return for us from this transaction is expected to be 9.1%. Just this week, we completed a $204.4 million offering of which the net proceeds of $202.1 million will be used to fund the cash portion of this acquisition. As we were successful with the green shoe, this range this provided excess capital above our need for this transaction, as I will discuss in a moment. In addition to the earnings accretion this transaction will produce, it greatly simplifies our capital structure, allows us to solely reap the benefit of the Can-Am promote structure in four these assets, and gives us greater control over five of our better assets, including forging forward with our valuable expansion plans. I know would now like to address the balance sheet and capital requirements, where I believe we are in the strongest position we have even been since becoming a public company in 1994. As a quick recap of the first quarter of '02, we issued $50 million in new common stock and obtained two construction facilities in connection with our Colorado and Madrid projects. The end result was a very conservative capital structure with the following characteristics: 2.69 times interest coveraged ratio at March 31, 2002, versus 2.39 in 2001. A leverage ratio of 54% is measured by our line lenders versus 60% one year ago. 82% fixed rate debt at blended rate of 6.8, versus 58% fixed rate at 7.4% one year ago. A trailing 12-month given an FFO payout ratio of 69% versus 76% one year ago. Additionally, a glimpse of our current liquidity of March 31, 2002 yields cash and equivalents of approximately $6.5 million and a $25.5 million balance on our $75 million line of credit. Considering the additional 7.5 million shares of common stock we just issued earlier this week at $28.60, prior to discount and fees, a pro forma leverage test including only this equity offering yields a restated quarter-end leverage ratio of 51%. Layering in the expected closing of the Simon transaction, our pro forma leverage ratio would become 53%. Also, we expect to have in place shortly a new line commitment between 150 million and $175 million to replace the existing $75 million line. Our current equity needs for Colorado, St. Louis, Vaughn and Madrid, and the retail component Meadowlands are completely funded. Furthermore, our balance sheet is in terrific shape to meet the funding needs of our three to five-year pipeline. Our capacity and capital access is greater than it's ever been. As an example of the financial strength, assuming the successful closing of the Simon transaction, our ratios indicate that we can raise in excess of $500 million in incremental debt while keeping leverage within our conservative leverage [INAUDIBLE] of 60%. Finally, a note on Can-Am, our captain private equity partner. As many as you know, Can-Am received their open-end fund license a couple of months ago, allowing them to access this 55 billion marketplace. This license is typically reserved for large German banking institutions. Indications since the launch of this fund are very positive, and we expect Can-Am's fundraising for Mills to begin to accelerate going forward. We will add greater clarity to the effects that this license may have in our capital structures and future quarters as they begin to establish a track record. With that, I would like to turn the call back over to Larry.

I want to thank all of you for your continued support and interest. We are very enthusiastic about our position and future. And now I'd like to open it up for questions.

Thank you. Ladies and gentlemen, if you would wish to register a question for today's question and answer session, you will need to press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request If your question has been answered and you wish to withdraw you polling request, you may do so by pressing the one followed by a three. If you are on a speaker phone, please pick up your handset before entering your request. One moment please for the first question. The first question comes from Jay Leupp with Robertson Stevens. Please proceed with your question.

Hi, guys It's actually David Ronko with Jay Leupp. Terrific quarter. Wanted to talk about sales trend. It looks like comp sales and growth sales were both down during the quarter. Wondered if one, could you talk about whether the trends have continued in April and May, whether you have any visibility into those things. And whether your occupancy or same-store NOI estimates for the remainder of the year are very sensitive to sales trends?

Sensitive to the sales trends? Well, first of all, in terms of comp sales, guys, we were hurt a little bit by the performance of Sawgrass and Arizona. We think those are momentary glitches. Sawgrass continues to be a terrific asset. We continue to improve the tenant mix exponentially every year. It was just a tough year for tour and travel in South Florida. Sawgrass picks up a big piece of that. We actually expect to come back -- start coming back in May and June of this year in Sawgrass. Arizona, you know, we have recently looked at lots of shopping centers in the Southwest, and I think the whole Arizona market has affected not only us, and are off -- it's been off considerably. And so taking those out of the equation which are momentary glitches and the portfolio was only down .5%, which I think is very good. You see, I think very good stores especially a lot of the newer centers that we' ve opened recently.

Yeah, and I think with respect to the NOI the occupancies, I think our occupancies cost are still one of the lowest in the industry. So I think we certainly have some cushion in those numbers. We are in the low to mid-12, I believe and given, you know, our huge number of projects in major metropolitan areas, it's an affordable occupancy cost. Percentage rent is not a big number in our numbers to begin with. So I don't see a big impact on our occupancy cost in the NOI's this year from the recent sales trends.

Also, as you see as Sawgrass starts to improve we think through the end of this year and as some of our newer centers, and most of our centers are newer centers continue to stabilize, I think you will see the growth sale number go north.

Okay. Great. One more question just relating to releasing spreads. It looks like they were close to 10% in the first quarter versus about 16.5% for 2001. Should that number pick up a little bit over the course of the year or is 10% a good run rate?

Well I think first of all, the first quarter is quirky, because you don't have the bulk of your leasing done. Last year, it was a wild number. It always comes in, by the end of the year, you won't be able to tell. I would think that it would be in that range, if not higher by the end of the year.

Okay. Thanks a lot, guys.

Our next question is from Craig Schmitt with Merrill Lynch. Please proceed with your question.

Good morning. I was wondering if I could get some more color on the Bond Mills. How has the project changed from the original conception?

I will answer that, Craig. It hasn't changed a whole lot. You know, we were waiting for several key merchants to commit and be executed before we wanted to start that project. And we are building, I think, primarily the same project that we have been talking about for the last several years. I think we finally have our anchor committed and we are happy with where that is. And so we feel comfortable with starting the project. The other thing is that I think the specialty store mix will be -- the anchor store mix is primarily U.S. merchants. I think you are going to see the Canadians, the specialty store mix, Craig, be Canadian in terms of ownership. Although, a lot of them will using U.S. brands, be the licensing for U.S. brands in line. So a lot of the names will be the same that you see in the Mills projects. They just might be run by Canadian companies. So really more than anything else, it has just been, you know, going through all of those gyrations and getting all of those things done for us to feel very, very positive and comfortable in starting this project in another country. I think one of the things that just happened which is terrific Bass pro has had terrific comps with us this year and is doing wonderfully well around the United States in most of our projects, and having them get committed and signed very recently was one of the things that we absolutely wanted to do to make this place a destination before we broke ground. Now that we do that, -- now that we've done that, we'll, I think we'll break ground within the next few months.

Okay. Great. Regarding the St. Louis Mills, which of your existing projects will that be the most similar to?

I think if you look at Concord or if you look at Opry, they'll be vert much in line with those projects.

Okay. Thank you.

Our next question is from Matt Ostrower with Morgan Stanley. Please proceed with your question.

Good morning. Larry, could you talk about the Urban Lifestyle project that you're talking about? You've been talking about it for awhile, but one thing that strikes me is We've seen some companies who have stubbed their toe on that product type, and I wondering, sort of, how your approach is differing from a lot of the other intercompanies out there?

Well, you know, I think that our organization, Matt, is really strong and skilled in all forms of retail. We have people here that have done it all, you know. I mean, I have been very involved, not only in the Mills projects the last couple of years, but in my -- the former company, we did mixed use retail downtown, Georgetown Park, Market Square, The Harbor, Washington Harbor. Jim Dausch has done -- most of the festival market places at Rouse and has been involved in numerous regional malls. Jim Whitcome has built, I think, seventy regional malls, who is our Head of Construction. Ken Bigby with Rouse cut his teeth on managing full price centers. So there's a really a bit array of people here that have done all kinds of retail. And really experienced management and relationships across the entire spectrum of retail I think that's really important. If we do this stuff, we will look to do it strategically. You know, we're already supplementing our pipeline with diversified product. We are talking about the Piers in San Francisco. Jim brought up Downtown Block 37 in Chicago, the Meadowlands which we talked about a little while ago, and also Madrid Xanadu. And I think Madrid is a perfect example. You know, we do things a little bit differently than everybody else. And we go out and we make sure that we have a very good idea of what we want to do with the project before we ever get started. Before I talk about Madrid, in block 37, for example, we walked into our presentation with the City of Chicago, with the 7,000 square foot Canyon Ranch prototype as a part of our project, because we think that'll be a very important factor with the residental and in helping round out the retail mix. You know, we're going to look at things on a one-off thing. We're not going to jump into any project unless we think we fully understand it, we understand the economics, we understand how the merchandising is going to go and that it works. And so, as I said, we're doing this over a period of time. And these are not easy projects. You said that before. But we are going to continue to attack them the way we have, which is deliberately, and I'm sure that they're going to be very successful.

Matt, this is Jim Gouge, I was going to say that having been through this once already during the Festival Marketplace thing, while those are great projects, I understand what it means to stub your toe, and so We are being very, very careful as we evaluate whether these things work financially. And because we have the other aspects of our pipeline, both Mills and International, it's not something that we desperately have to do in a hurry, rather, get it right.

But, I also think, Matt, the way we did Madrid and you were there with us, is a perfect example of how we attack new things. We want to make sure that we have-- it's going to be the same thing. Strong local support, good local partners like we have at in Chicago with MCL and with Canyon Ranch. And then very strong merchant commitment and without [INAUDIBLE] With our other merchant deals and commitments and signed leases in Xanadu, I think we cut down the risk in that project exponentially by doing all the right things first. And we will continue to do that with this project type, too.

If these projects have, like, you know, for example, like a multi-family component or whatever, will you be looking to the partners to do that for you?

Yeah. We're not going to do large scale office ourselves. We're not going to do hotel ourselves. We're not going to do retail ourselves.

You mean residential.

Residential, I'm sorry.[INAUDIBLE]. Residential office, thank you. Residential, office and hotel, we will not do ourselves. In Chicago, for example, this MCL group, a guy by the name of Dan McClain has been a very -- he has really reshaped the Chicago downtown residential landscape. And this River East project that he built is one of the most dynamic retail projects, really a mixed-use project, but primarily mixed-use projects -- primarily retail projects that I'v ever seen. And he's going to be --it's what? It's primarily residential, right. He is going to be our partner, our residential partner in that project.

Okay. And then, Ken, for you. The other income line item, we have $30 million -- I'm sorry -- $30,000 reported this quarter versus $3.4 million the year before. Oh, I'm sorry, that was - I'm sorry.

It was negative, Matt.

I'm sorry. The year before, right. What -- can you just talk about what is in there now and what we can expect for the rest of the year?

Well, you know, we had $2.7 million right down in that category last year. We're budgeting about that number, you know, in the $3 million, I think it is somewhat of a run rate for us in terms of project abandonments. The other thing, there is a little bit -- there is a slight difference in that line item in that in the past, you know, our food brand operations were run through that line item. Now that we sold an interest in food brand to Panda, that number will come out of other income. The operational income will come out of that other income category and move up to equity and partnerships. So that will change, but other then project abandonments the land-fill being the wholly-owned projects, which I don't think we have much of any for this year this year. Not significant anyway.

Not significant.

It's probably gonna be you know, from the negative $3 million number, I suppose, by the end the year.

Okay. Thanks very much.

Our next question is John [Lynne] with Solomon Smith Barney. Please proceed with your question.

It's [Ross Nesbaum] here with John. To following up on that question, how much income flowed from food brand during the first quarter?

I believe that we had about a couple hundred to $300,000 of income operationally offset by, you know, probably half that much in G&A, so my guess it was about $100,000 to $200,000. It wasn't a significant number across.

Okay. Turning to the development side, it looks like last week the news on Meadowlands was positive with the Newark Arena agreement, but I read yesterday a quote from Governor McGreevey, which said quote, "The mills plan as it is presently constituted clearly is unsatisfactory." That, to me, isn't fabulous news. Can you talk a little about what the concerns of the Governor's office are here?

Well, first of all, you have to realize that the Governor is a very, very independent guy. A very bright guy, but very, very independent. He has, as far as we can tell, and we haven't gotten back all of the comments from them, has some concerns that the project that's eventually developed up there have as much entertainment capacity as possible and that it include a Convention Center. And so they have come back to us and said that they may want to see a little more entertainment and a little less retail up there. That's about basically as much detail as we have gotten back from him. I think, at least the story I saw, which had that quote in it had a line above it in which the reporter mentioned that he wanted to see more entertainment and a little less retail. But that's all, essentially, that we've gotten from them.

Matt, if you read the Bergen record story, instead Bloomberg thing, per quote, you'll see that it's [INAUDIBLE] by the public by his first comment after his second.

Right, I have the Bergen article in front of me. Let me ask you a hypothetical. What happens if you get the approvals on the Empire Tract and then the Meadowlands site doesn't go your way? Would it be your intention to still go ahead and build on the Empire Tract against a competing next door?

Well, sure.

First of all, it's not clear that -- and one of the reasons that we are continuing to go after the Empire Tract, it's not clear exactly what will happen on the Meadowland Sports Authority site. As you probably picked up from looking at the press this week, there is still some skepticism, particularly in Bergen County and in some areas of the Jersey Legislator that this overall plan that the Governor's announced can, in fact, be brought through successfully, the Jersey Legislator. That will require a good deal of support from people in Bergen County, many of whom have supported us in the past. And from the environmental community, who want to see the Empire Tract Preserve. If it -- and there have been plans, as you know, to do some, roughly similar stuff up there on the Sports Authority Tract in the past that has not happened for one reason or the another. So it's not clear that the Meadowlands Sports Authority play will work at the end of the day. If we get our permits on the Empire Tract, they will come this year. And so our project is going to go one way or the other relatively soon and not wait if there is a long problem with the Meadowlands Sports Authority. Right at the moment, I think, we're not worried about competition. We are worried about making it go forward.

The other thing, Ross, is that I think, you know, the State, if they do move the arena and it moves into Newark and with the other debt problems that the Governor was saddled with when he took office, one of the main concerns is going to be speed and getting this opened and paying taxes as soon as -- substantial taxes to defray the debt, as soon as possible. And you know, again, you know, we feel extremely good about our position. You know, we have the Empire Tract. A lot of people want to see that preserved. It's a very valuable piece of land. Our permits are moving along on it. And nobody can open this thing, on this sports and exposition site with the speed and the clarity and I think give the Governor what he wants as quickly as we can. So I think all of those things do point in our favor. And, you know, like everything else, we just have to play the process out. But we do feel very bullish about what is happening there, both in the press, but even more so, behind the scenes.

Okay. Great. That's helpful. In terms of what is going on at Madrid, how many anchors do you have that are not leased or committed yet?

I think that we only have one. We have about 20 or 22, but I have to count them. I think we have about 22 boxes in the project, Matt. And we have a one box that's not committed. And actually, it was committed and the tenant is -- I don't know if he is negotiating or re-thinking or doing what he's doing. So basically, all of those anchor boxes that you saw when you were over there with us are either signed or committed tenants.

Okay.

I mean, that includes the entertainment site, too. Which we needed to firm up. When you were there, those were not firmed up, and since you weren't there in the first quarter, as Jim said, we have a Paramount [Senesa] deal, which the number-one movie theater. The skate park's being done my Billabong, which is a very, very big brand in Europe, based in Australia, you know, one of the biggest extreme sport brands. We are happy that they took that and they are going to do that. The ski facility is going extremely well. Then we have a variety of other entertainment uses that have all fallen into place, so this thing now can hopefully move as quickly as we can to get built and open the first quarter of last year.

Okay.

It's John [INAUDIBLE]. How much do you have into the Empire Tract at this point?

The Empire Tract's about -- our share is about $75 million all told in the project.

Invested so far?

Right, yes, that's correct.

Sorry, [Ruska.] Uhm, Ken of Greg, what is the total construction of progress, including share of [JV]?

You know, what, why don't I get back to you on that, Rob. I don't have it at my fingertips?

Okay. And then second question, the project abandonment costs that you discussed, potentially $3 million, when do you expect those to hit this year?

You know, there's nothing in the short-term horizon that would suggest that it's going to be a 2nd or 3rd quarter event. You know, we evaluate them every quarter. We look at where we are with each project. And, you know, historically, it has been in the fourth quarter, but I think that's just coincidence. But you know, right now, if there is going to be a project abandonment, it will likely be in the fourth quarter, or the third quarter, perhaps. I don't see anything that would generate a second quarter writeoff.

Okay. Great. That's all I had. Thank you.

Thanks.

Ladies and gentlemen, as a reminder to register for a question, press the 1-4. Our next question is from Rich Moore with McDonald Investments. Please proceed with your question.

Thank you. Hi, guys. I'm sure as you get closer on Madrid, are you seeing any press in the city regarding the Snow Dome? Any excitement being generated around that?

Oh yeah. Absolutely. In fact, in the last two weeks, there have been four or five days of very, very positive exciting press on the Snow Dome. In fact, a delegation of the Spanish press went to a similar facility in [Nois] Germany to see it, and came back very very excited about it. And then this week, of course, following that excitement, there was a visit by the President and Vice President of the Regional Government of Madrid with press out at the site to see how it's coming along. So, yeah. The Snow Dome has generated an inordinate amount of excitement.

Okay. Great. Thanks. That's good to hear. Also, on the purchase of the Simon interest, first of all, what is Toddman paying for their share? I think I got it out of the "K" correctly, but I'm not sure. And then also, where do you stand with the possibility that Can-Am might take some additional pieces of those.

INAUDIBLE] is paying roughly $14 million for half the Simon interest that is being acquired at Arizona.

That's what I thought I saw. Thanks, Ken.

Yeah, and regarding the Can-Am proposal, right now we are looking for them to acquire 20 to 30% of what we acquired. That will probably happen in the next three to four months. But that could be upsized, depending upon, you know, what the other capital needs are of the company and where we really need to resource their capital.

Okay. Great, thanks.

Our next question comes from Joel Goodman from Legg, Mason, Wood Walker. Please proceed with your question.

Hi, good morning. How are you guys? Just some clarification on a couple of things. In the supplemental packet from Madrid, you have eight anchor tenant stores. Can you reconcile that with the previous comments for me?

We have more than eight. I don't have it in front of me, Joel, but what I will do is -- I will be glad to pull out a plan and walk through tenant by tenant after the phone call.

Greg, you may want to take a look at that.

Also, in terms of funding for the projects, Ken, you'd talked about that you have the equity required for the immediate pipeline. Has all of that been funded or --?

Most of it has. Joel. In fact, I mean, it's all funded. Our share has been funded at Madrid. Our share has been funded at St. Louis. In fact, we are expecting to get a big check back from Can-Am next week. We signed a partnership agreement there. Obviously, we're completely funded in Denver. And with the money that we have in the Meadowlands, once we get going with that project, our equity needs are -- have basically been funded. Our equity requirement has been funded.

Just a clarification on that, just so you know, I think that typically what we put in there is fully executed, and as you know, and I think we discussed it the process, the leasing process in Spain is a little bit different. You move to a heads of terms, which is a substantial agreement on the finances and the key terms of the lease. And then you move, and then the tenant executes, and then we execute. So I think that it's just, you know, once you have the heads of term is what Larry primarily is referring to. You feel strongly about it. I think that's primarily the difference.

Okay, okay. That's great. Can I follow up on Madrid in terms of overall leasing? Can you give a percentage lease at this point committed? Any kind of data there?

I think the specialty, beyond the anchors and the department stores and the entertainment box, I think the specialty is well over 50% committed. And I think the 50% is just leases that are in execution form. It is going pretty good.

Okay. What level do you expect it to open?

We want to open it, Joel, as close to 100% as possible. I mean, we really do. It's important for us to do that. We are going to be -- like our traditional Mills projects, we will be in the 90s.

Okay.

You know, we want to be as close as we can possibly be to perfect there the first time.

Okay. Just a couple of last questions. In terms of occupancy, any kind of quarterly targets for this year in terms of the ramp up to the 95% or so at year-end?

Yes. I think, again, we will be at 95% at the end of the year. I think we going to go about 93% in the second quarter and get close to the 95% probably at the end of the third quarter and then maybe moving up a few more bases points. We'll be, let's call it 94 to 95% in the third quarter and up to 95% in the fourth quarter.

Okay. And then the last question, as it relates to the new three-prong, this is new, but kind of your explanation is the three-prong development program spending about a third in each category. When do you see that really coming to fruition in terms of it actually being a third to each type of development?

I think you are going to see that it's going to transition, I think, Joel over the next couple of years, over the next three or four years.

Okay.

You are going to see that transition. You know, it will probably ramp up a little bit faster here than it will in Europe, just because it's harder, you know, in Europe. I think, Jim, he even got me excited when he was going through all the development opportunities and where we are. I mean, and I think that as those international opportunities fall into place and get their approvals, you will start to see that happen over the next three or four years.

In terms of the Metro Lifestyle, do you anticipate significant hires to kind of ramp up that business?

You know, I don't think there're going to be significant hires. I think they're going to bring in some strategic people to help effectuate that business. I think we have some of those people, a lot of those people already in place on the development side. I think that we will probably have to add a few more on the leasing side to make it work as efficiently as we want it to. We are evaluating all of that now. Now, you are going to see some of those moves and we'll be announcing some of those moves in the next quarter.

Joel, part of the bulk-up comes when you have a site and you start construction. You put all the folks, you know, that are assigned to the project on-site.

Okay. That's very helpful. Thank you.

As a reminder to register for a question, press the 1-4. Mr. Siegel, there are no further questions. I will turn the call back to you. Please continue with your presentation or closing remarks.

All right. I'd just like to thank everybody for joining us today. We are around to answer any further questions that you might have. Talk to you all again next quarter.

Ladies and gentlemen, that does conclude the conference call for today.