西蒙地產 (SPG) 2002 Q2 法說會逐字稿

Welcome to the Mills Corporation Q2 2002 Earnings Conference Call. Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumption, it can give no assurance that the expectations will be attained. It is possible the actual results may differ materially from those indicated by these forward-looking statements. Due to a variety of risks and uncertainties. Those risks and uncertainties include, but are not limited to the national regional, local and economic climate, competitive market forces, changes in market rental rates, trends in the retail industry, the inability to collect rent due to the bankruptcy or insolvency of tenants or 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 10K and form 10Q for a detailed discussion of risks and uncertainties.

Acknowledging the fact that this call may be webcast for some time, we believe it is important to note that today's call includes time sensitive information that may be accurate only as of today's date, August 12, 2002. The company's supplemental information package has been filed as a form 8-K. This filing is available at www.MillsCorp.com. It is available via mail or e-mail. If you would like to receive the supplemental information, please notify Amanda Ladd at 703-526-5102.

Participating in today's call will be Larry Siegel, Chairman and Chief Executive Officer, Jim Dausch, President of Development Division, Jim Napoli, President of Operating Division, Kenneth Parent, Chief Operating Officer, and Greg Neeb, Chief Investment Officer. And now I will turn the conference over to Mr. Siegel. Please go ahead, sir.

Good morning. Welcome to our second quarter, 2002 call. Thanks for joining us.

This last quarter has been one of the most productive and the most forward-looking, too, in recent years. I would like to walk through this activity in momentum with you including transactions, new developments and progress, and operations update and some management news. Then we can walk through our earnings and operating numbers and discuss where we are today and where we are headed.

First, transactions.

We completed three key transactions this quarter. Number one, the well document acquisition of our Simon JB interest closed in this quarter. Number two, we closed on the action significance of Gaylord's JB interest in [Opry] Mills in Nashville, a very good purchase of a high-growth asset for us. Number three, we recently announced our acquisition of the Forest Fair property in Cincinnati.

This is a very strategic, well-placed [Insel] asset in a top 30 market. Today it has a declined specialty tenant and consumer position but with an excellent anchor foundation including Bass-Pro, Cole's, and Fax-[INAUDIBLE]. We'll bring a Mills mix brand package and our multi-dimensional disciplines and we'll turn this around quickly, effectively and financially.

I am excited about the exploration of these types of opportunities. It speaks highly to our brand, ability and our vision.

Second let's discuss new developments and progress there. With our Mills brand product the development pipeline hums along. Colorado was on track to open this fall. We broke ground this quarter in St. Louis for 2003. Forest Fair should come on line late in 2003 or early 2004. And Von Mills is on page for 2004. Jim Dausch will walk you through the details in other markets and opportunities.

With new formats, we continue an exciting and opportunistic period.

With last year's win in San Francisco and this quarter's win in Chicago, we now stand two and zero in big-time urban RNPs in the last twelve months. As the city of Chicago recently announced we won the competition for 108 North State Street in the Windy City. The city and Mills continue to work on packaging a project that would include Harrod's, Canyon Ranch, and a world class caliber Retail,Residential and Hospitality. We are proud that two of the world's leading cities have selected our company to bring a level of needed accomplishment, creativity and muscle to two very important urban opportunities. Meadowlands progresses, too with a Corps or Engineers completion of its published environmental report and a fast-paced timing of the state's planning and political process. Jim Dausch will add a lot more detail in a minute. With the definitive progress by the Corps or Engineers and the state's tight time line, we believe that we are today in the right position to successfully include this arduous process and move ahead in short order.

In Madrid, construction work is at a maximum and we remain on track for an opening next spring while we continue to explore multi-venue programs in Spain and Italy.

Overall the Mills development factory is buzzing with activity and productivity. We are operating on all shifts and the product line looks strong, secure and inventive.

Operationally 2002 has become a very important year for us as we grow our business and reinforce the building blocks for our future. This is the third year of our portfolio enhancement initiative and we are continuing to evolve our merchandise mix, add or relocate tenants to meet our plans, expand some centers and complete a number of refurbishments and construction due to the flurry of on property activity. In 2002, in particular, our theme has been a push of new next generation big boxes and we are successfully executing that strategy. This effort has resulted in some slight declines in our occupancy and NOI numbers in 2002, but, and this is the key, it is tangibly reinforcing our foundation for 2003 and beyond. In 2002, a myriad of new anchor users are opening including Neiman's, Nordstrom, Crayola, ESPN and others. High quantity activity and high quality offerings. Also this year we began work at many of our properties to add new occupancy next year with new leases from names like Coale's, Nordstrom, ESPN, HMN, Medieval Times, Sears and NASCAR Speed Park and also others.

Overall this meets a slightly lower occupancy or NOI number in 2002 all of which we have discussed and forecasted. The good news, however, is this. The foreshadowing of sweeping positive trend of 2003 where we are looking at NOI increases in 2003 of 5% and occupancy at 95% or better. This continued focus on operations also brings us to our management news.

To meet our continued growth our product diversification and to build our bench, I'm pleased to announce today the appointment of Jim Napoli as President of Leasing and Property Operations. As many of you know, Jim was former leasing chief for Simon and he will bring extraordinary depth, talent, experience and resources to our team. In his career he has leased over 50 centers from the ground up and has the savvy and know how to enhance merchandise relationships, new revenue opportunities and development merchandising. Jim is a dual citizen of the U.S. and Italy and I expect him to be an important asset as well in our growing European initiative.

In addition, Kenneth Parent has been appointed as our Chief Operating Officer. And we have added Nick McDone, the former CFO of McArthur Glen on you as our CFO. Greg Neeb has been promoted to Executive Vice President and Chief Investment Officer, and Jim Dausch has been named President of Development, overseeing our expanding domestic and international programs. Jim Napoli's arrival and our other reinforcements are an important signal that we place great importance on our current and future operations and we value the depth and strengths of our management team.

Today is literally Jim Napoli's first day on the job. I asked him to join us for a few minutes of the call and share some brief thoughts. Jim?

Thanks, Larry. I am thrilled to be here today. And this literally is my first day on the job.

Clearly this is the most exciting opportunity that I have seen in all my years in the business. Mills has a powerful foundation in place and limitless opportunities as a company. The Mills brand format is terrific, it's durable, it's competitive and it's a magnet for consumers. Its growth options are many. This recent Forest Fairplay is one example speaks specifically to how the mills is able to strategically enter into markets and find growth and productivity.

Finally, I am energized by the creativity and strength of this organization. Its work in Europe and pipeline of potential new formats in major new markets. I'm ready to get to work and help this company create value and execute a superior vision. Thanks and I look forward to hearing from many of you on this call.

Now let's walk through the numbers.

Overall the second quarter results were in line with our expectations. Through the second quarter we are reporting evenings per share of 72 cents versus 70 cents for the same period in 2001. This is a FFO increase of 3% for the quarter. The number is slightly lower than our historical figures due to some capital transactions that Kenneth Parent will detail.

On the operating front, same center NOI is up 1% for the quarter and up 2% for the year. Which is in line with our projections for the year. Occupancy is 92% for the year versus 94% for the previous year. I discussed that in detail and we still expect to conclude the year at 94% or above. Releasing spreads for in line space were 8%. Comparable space in line sales are down 4%. Interestingly our analysis of the trend tells a unique story. In sensitivity, we excluded Sawgrass and Arizona because of continuing well known challenges of the tour and travel industry in those markets. Then we added Opry and Arundo, not quite in comp because they have less than two years of operating history and are rent paying anchor and major tenants. The result portfolio sales up 2%. All in all, we see a performance in line with our expectations. Finally, before I turn it over to Jim Dausch, a brief comment on the important issue of the day. Corporate disclosure and governance.

Here at Mills, we hold our role and responsibilities in the highest regard. Historically, senior management and our board have unequivocally embraced a culture and policy of disclosure and compliance. Over the years, it has been our standard procedure to provide the most complete reporting package. And for governance, we insure that major decisions involve our senior management and our board on a regular, oftentimes daily basis. So needless to say we fully embrace the New York Stock Exchange new procedures and guidelines. We will continue to pursue and execute our commitment to integrity, oversight and the actual interest of our shareholders. Ken will talk more about this in a few minutes.

Now I would like to turn it over to Jim to talk about our development pipeline.

Thanks, Larry. And let me add a welcome aboard to Jim Napoli and Nick McDone.

The second quarter has been marked by progress on a number of Mills development opportunities. First of all Colorado Mills continues on schedule and on budget for a November 14, 2002 opening. Sak's Off Fifth, Neiman's, Last Call, United Artists, Gillian's, Borders Books and Music, Off-Broadway, Garts Sports, Eddie Bauer, and now, an ESPN skate park, join a 180,000 square-foot Super Target store in anchoring this center. Colorado Mills specialty store mix will be equally as stunning.

Rents remain at or above budgeted levels. And land sales are also running well ahead of budget. We are hard at work planning the follow-on lifestyle wing at Colorado Mills which will follow the grand opening of the Mills project itself.

For Fall 2003, domestically, we have St. Louis Mills. Groundbreaking occurred there on June 27 and we are hard at work and in full construction. Saks Off Fifth and Regal Cinemas join Off Broadway Shoes, Books a Million, Bed, Bath, and Beyond, and Marshalls in committing to the center already.

St. Louis Mills will also be the site of our first full scale PBS Kids facility. Fruit of our collaboration with PBS to develop a learning, entertainment and retail cluster themed with the great characters from public broadcasting's lineup. Ken Am is our partner in the center.

In spring 2003 internationally, Madrid's Xanadau opens. This project is also on scheduled and on budget. [El Corte Inglais] is also under construction and on schedule with its 350,000 square foot combination department store and hyper market. And the indoor ski facility has also begun its construction and is on schedule.

Apart from these anchors, the project is 64% leased, both executed and in documentation. Including Cinesa Paramount, our cinema, a Billabong Skate Park, CNA, HNM and Xara. In fact, Xara is doing eight concepts with us. Arcadia, from the UK, six concepts. We now have a commitment from Aldolfo Dominguez, a leading Spanish label, Benaton from Italy and many others. A really exciting pan-European mix.

We are working to close our construction loan led by Hypo Bank later this year. The support and encouragement from the local municipality of Arroyo Molinos, and from [Cuinidad] of Madrid, the regional government, continues to be very strong.

In 2004, we expect to open Von Mills in the Toronto area. With our partner Ivanhoe Cambridge with lease commitments from Bass Pro Outdoor World, Saks Off Fifth, Burlington Coat, Bed, Bath and Beyond, Van's and Children's Place we expect to break ground and set an exact opening date depending on weather this first winter and the schedule of certain related road infrastructure work.

In the pre-development stage are the following.

First the Meadowlands. In the past quarter, the long-awaited, 3,000 page final environmental impact statement was published by the Army Corps or Engineers on the Empire tract. This study confirms our assertion made over many years that development on the Empire tract, as we have proposed would not cause any substantial adverse environmental impact.

The Corps has set October 3 as the end of the comment period by Federal and state agencies. At the end of which a 45 day clock starts to tick, during which a record of decision on the field permit should be forthcoming.

This schedule puts the core permit decision roughly coincident with the decision making process of New Jersey's Sports and Exposition Authority on a request for proposals to develop a mixed use entertainment complex on the site now occupied by the Continental Arena.

Implementation of the proposal ultimately chosen by the sports authority may require implementing legislation from the New Jersey legislature, and may also require the cooperation or approval of the current user of the arena, assuming the teams do not leave the arena on their own in the interim. And of the New York giants. The state intends to make a selection of a development team before the end of December of this year.

While we will continue to vigorously pursue entitlement and development of the Empire track, Mills does intend to submit a proposal to the state in answer to the RFP. And, as part of the proposal, to swap the Empire track which has a very large economic value to the state for use as an environmental preserve and mitigation bank in exchange for the right to develop a comparably sized project on the Arena site.

In addition to this offer, which is unique to Mills' proposal, our proposal will also enable the state to achieve all of its financial objectives and then some, and allow Mills to recover our existing investment in pursuing this development opportunity with a competitive double digit return. We are optimistic that whether on the Arena site or the Empire tract, Mills will soon develop a entertainment, retail, hotel, and office project at the Meadowlands.

Beyond the Meadowlands our new business activities have the objective, within five years, to produce a pipeline that is one-third Mills, one-third non-Mills, more traditional but non-mall retail product and one-third international projects of all kinds. In that connection we are pursuing new mills opportunities in Pittsburgh, Cleveland, Minneapolis, Salt Lake City and elsewhere.

As Larry mentioned we are also pursuing the redevelopment as a Mills in Forest Fair Mall in Cincinnati, which we have agreed to acquire before the end of the year. That project would reopen as a Mills with a new name and a new brand identity between Fall 2003 and Spring 2004 at the latest. This center, disadvantaged competitively as a traditional mall, is very well located in one of the top 30 markets in this country.

Most of the current anchors including Bass Pro, Coale's, Biggs, Media Play and Saks Off Fifth do solid business there. The specialty stores are only 15% leased, and therein lies the significant upside opportunity for us to coon vert this transaction to a Mills. This transaction also involves sales on attractive terms with redevelopment will give us above average yields. We believe this sort of redevelopment will be a model for other Mills in the future and will give us yet another way to grow our company.

On the non-Mills side of the business, we continue our negotiations with the port of San Francisco on a lease document for Piers 27 through 31 and have begun the entitlement process there as well. In Chicago, as Larry mentioned we were selected as master developer to redevelop Block 37 opposite Marshal Fields in downtown Chicago as a retail, residential and hotel project. And we continue to look at other new opportunities in places as diverse as northern California, northern Ohio and downtown Nashville.

I should mention that this week the South Florida regional planning council approved a development order that entitles us to add an additional 550,000 square feet of retail space to Sawgrass Mills. This entitlement enables us to pursue new merchants to bolster our leading position in South Florida, and to add a full price lifestyle wing anchored by a major department store to this center.

Our international new business program continues its focus on Spain and northern Italy. In Spain, we are pursuing follow-on opportunities beyond Madrid Xanadau in Seville, in [Bilbaugh], and in Barcelona. And hope to have one of these opportunities in leasing and construction early 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 mall, and the other a mixed use retail residential hotel project. Given progress to date on entitlements in Milan, we may well have one of these two projects in the ground next year in Italy. The third site is in Tuscany in the suburbs of Florence at the intersection of two major auto stratas and will come on line later. We keep in mind our key standards, a good location, strong local partners, strong interest from prospective tenants and support from local government.

The sites I mentioned all satisfy the first three standards, and we are exploring and have begun to feel comfortable with the government support on all three sites. But more work needs to be done in this area. When all four tests are met, the opportunities are worth further investment by Mills and hopefully will produce a solid pipeline from which to grow our business elsewhere in Europe. We are optimistic about progress to date and expect it to continue.

Now I would like to turn the speaker over to Ken Parent.

Thank you, Jim. I would like to bring you all up to date on our operating and financial results. Fully diluted FFO per share increased 3% to 72 cents in the second quarter of '02 from 70 cents in the second quarter of '01. The components of the quarter-over-quarter growth are as follows: A 1% increase in same project NOI, generating incremental FFO to Mills of approximately $.7 million.

An increase of 3.3 million of FFO from new projects which had not stabilized in the second quarter of 2002 net of interest expense namely Kay Dee, Concord, Opry, Arundel and Discover. An increase of $4 million from consolidated land sales and our share of joint venture land sales. A decrease of 3 million of interest expense primarily relating -- primarily due to significantly lower overall company leverage levels and lower interest rates.

I will address the impact of this de-leveraging in a moment. Increase of $1 million in management and development fees primarily due to Mills now earning additional fees previously earned by Simon and the joint ventures where the company acquired Simon property group's joint venture interest. The increases in FFO were primarily offset by a $2.6 million reduction in NOI relating to our ten sold community centers for which we have no income in '02. Fully diluted FFO per share increased 9% to $1.46 for the six months ended June 30, 2002 from $1.34 for the six months ended June 30, 2001.

The components of the year-over-year growth are as follows. A 2% increase in same project NOI generating incremental FFO to Mills of approximately $1.2 million. Increase of 4.9 million of FFO from new projects which had not stabilized in the six months ended June 30, 2002, again, net of interest expense, namely Katy, Concord, Opry, Arundel and Discover. An increase of $8.2 million from consolidated land sales and our share of joint venture land sales, all of our 2001 land sales occurred in the third and fourth quarters of that year.

A decrease of 4.9 million of interest expense primarily due to overall lower leveraged levels and lower interest rates. A decrease of $2.1 million of abandoned project costs was primarily related to prior year's write-off of the company's investment in a project in midtown Atlanta. The increases and decreases in FFO, primarily offset by a $2.6 million reduction in NOI relating to the 10 community centers and the $1.7 million reduction in leasing and development fees for the six months.

As we analyze these results, it is extremely important that everyone consider the company's current leveraged possession. For the first six months of 2001, we were 54% leveraged on average, including our share of JB debt as measured by our line lenders. For the same period in -- for the same period -- for 2002 we were 54% leveraged. The same period in 2001, we wer approximately 59% leveraged. A full five point differential representing what is probably the lowest leverage level in our sector.

Based on published reports, our leverage is a full five points below the peer group average, and upwards of 17 points below the upper end of the peer range. If we were to restate our FFO to reflect the prior year leveraged level of 59%, we would increase our two quarter results by over 10 cents per share. Given our future opportunities, many of which Jim has discussed, we strongly that maintaining this conservative balance sheet, although clearly dilutive in the short term, and contemplated be this low in the previous call, will greatly enhance shareholder value over the long-term.

Secondly, Larry discussed our property operating results for the quarter. I want to re-emphasize that although current NOI growth for the full year 2002 should log in about 2% or so, below our traditional 4% plus, the reasons for the current decline, which relate primarily to an upgrade of our big box mix, accompanied by relocation of in line tenants, and an overall improvement in our merchandise mix, will have a long-term benefit for our shareholders. Our occupancy is expected to hit 94% plus by year-end and continue to descend into 2003 generating in excess of 5% NOI growth.

I expect to look back on 2002 as a bit of a occupancy and NOI aberration, with a projected portfolio average occupancy for all of 2002 at 92% versus a 96% weighted average for the previous four years. The net impact of this program coupled with the de-leveraging that I previously discussed, leaves us forecasting FFO in the range of $3.12 to $3.18 of a full year of '02. The upper end of the range, can be achieved with a potential acquisition, agressive timing of the anchor box openings, and a big-risk landfill program through the balance of the year. Looking into '03, the outlook is very healthy, and we feel very comfortable with the published FFO range of $3.44 to $3.46. Before I turn my attention over to the balance sheet, I wanted to add a few points to Larry's discussion on the current environment in corporate governance.

To re-emphasize we continue to have the most comprehensive and most timely quarterly package in our sector including the area of capital expenditures. As a policy, we have always disclosed both property oriented and tenant oriented recurring and non-recurring capital. These disclosures are entirely comprehensive and include 100% of our share of all capital incurred in our operating centers, including any development in leasing costs and overhead. The only exception to the disclosure is capital expenditures which are capitalized and related depreciation charge to Cam. This Cam capital has historically been in the 1 million to $2 million range for the whole portfolio for the year. We charge this depreciation to operating expenses that are not added back for FFO calculations.

With respect to nonrecurring capital our policy is to include all expansions in larger deals, where we will earn an incremental return above our internal hurdle rates, which is property specific. We believe this allows our investors to derive a recurring capital expenditures level appropriate for AFO calculations.

You will also see they quarter we have made further disclosures to be responsive to our selective polling including adding occupancy carried out to one decimal point. Comp center sales, to match the [ICFE] definition, construction and progress detail, pre-leasing percentages for development projects, percentages occupied for stabilized and new properties and lease expiration detail, among others. Second with respect to stock options the company has disclosed the impact associated with expensing stock options on a pro forma basis in the footnotes to the audited financial statements in our year-end 10K and annual report.

To summarize FAS 123 requires us to disclose if the company accounted for its employee stoke options granted subsequent to 12-31-94 under the fair value method using Black Shoals operating pricing model. The impact of adopting 123 is very material to the company. Had we adopted FAS 123, post 12-31-94, EPS would have been reduced by one penny in 2001 and the same amount for the full year 2002. We have, in fact adopted FAS 123 for the current year and expects to have a decrease in earnings of less than $5,000.

The reason for these diminimous numbers is that over the past few years the company has migrated to a long-term set of plans exclusively utilizing restricted stock grants which are now and always have been, recorded as compensation expense as they vest.

I would now like to address the balance sheet and capital requirements where we are in a strong as a position as we ever have been since becoming a public company in 1994. As a quick recap the second quarter of '02, we issued $204.4 million in new common stock and refinanced our existing $75 million line of credit facility with a new $175 million line. The end result was a very conservative capital structure with the following characteristics. A 2.84 interest coverage ratio in June 30, '02 versus 2.4 in '01. Leverage ratio of 54% as measured by line lenders versus 58 percent one year ago. 75 percent fixed rate debt as a blended rate at 6.7 percent versus 62 percent one years ago.

A trailing 12-month dividend to FFO payout of 67 percent was 75 percent one year ago. Additionally, a glimpse of our current liquidity at June 30, 2002 yields unrestricted and restricted cash of $36 million on a consolidated basis that doesn't include the same amounts of cash on unconsolidated basis. Approximately $140 million of unused balance on our $175 million line of credit.

This current liquidity coupled with our current development project equity funded today which includes 100% of the projected needs at Colorado, St. Louis, Von, Madrid and Meadowlands, leaves us in terrific shape to fully meet the needs of the three to five year pipeline. In fact, based on our current leverage, our ratios indicate we can raise in excess of 500 million of incremental debt while keeping leverage within our conservative goal of 60 percent and raise almost $800 million and live within the restrictions of our 62.5 percent cap rate. As I indicated in our last call I promised to keep you all informed on the [Can Am] fundraising, particularly since their receipt of the open end fund license. To date they have raised over 75 million of this vehicle and continue to raise more funds than at any time in their history. We will continue to be the preferred use for [Can Am] and the only outlet for their domestic retail investments, so this is a very positive trend for us.

In addition to the significant improvements to the balance sheets, we expect more good news to come as we capitalize on the low interest rate environment with several planned refinancings of construction debt this year. Currently we are working towards closing a five year permanent loan at Opry with an all end fixed rate financing of 5.34 percent. We anticipate similar results as we leak to finance Kay Dee, Arundel and Concord with five to 10 year permanent loans, with fixed rates, ranging from the low fives to low sixes.

Once concluded this will leave us with a fixed rate portion of our portfolio of nearly 90% in an incredibly low 6% of our debt portfolio maturing in the next three years. All tolled the balance sheet is almost as well positioned as the opportunities said, generating a tremendous vehicle for our investors.

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 and we are obviously very enthusiastic about our position and future. I would like to open it up to any questions that you might have.

Thank you, sir. Ladies and gentlemen, if you 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 your request, you may do so by pressing the one followed by the three. If you are on a speaker phone, please pick up your hand set before entering your request. One moment, please for your first question. Matthew Ostrower with Morgan Stanley, please go ahead.

Morning, just a couple questions. Larry, you spoke a little bit about the management changes to begin with. Could you sort of layout a little bit more what the vision is and sort of what the justification is for hiring more people?

It's not really more people. Judith Berson, who ran all these things for many years, retired. She just turned 60 and decided she wanted to spend more time with her children and grandchildren. And we went out and were able to land, we think the best guy in the industry.

I have known Jim Napoli for a long, long time. There's nobody who understands this business or has better tenant relationships than he does. They even exceed mine. And I don't say that lightly.

And in terms -- in terms of the, you know, the structure here, Jim is going to run leasing and operations. So he'll not only run the leasing of our projects, but also run the operations of our projects. Jim Dausch will continue to run development and both international and domestic and new business. And Kenneth Parent is stepping unto be Chief Operating Officer of the company. They will all have various people reporting to them. But we are not adding much, if any GNA and just replacing people, we think with upgrades. And to make it a better company.

Could you talk a little bit about Nick McDone, for those of us who aren't that familiar with him?

Why don't I let Ken do that, he's known Nick for a long time.

Nick spent eight to nine years or so as the CFO of McArthur Glenn, I'm sure you're familiar with that company before venturing out to do really his own development and consulting on the site. He took over the redevelopment opportunity for a couple of malls and did this on his own. So he really has a very deep breadth of experience in both the financial world which is obviously where we need him, as well as the operational world and the development world having done that on is own.

We are real excited about him coming to the company. He has well over 20, I guess 20 years or so of experience. I believe he started off in the public accounting form before he headed off to McArthur Glenn.

He has been here now for -- he's only been here as CFO for a short time. But he's been here as a consultant for longer. I have never met anybody who understands the numbers and the business combined as well as he does. And it's been a great fit for the company because he's been here longer, he's just fit in incredibly well with Ken and Greg and Nick, I think our financial team here is as strong, if not stronger than anybody's.

Okay. Just to follow-up on that a little bit. Ken, you gave a little bit of description of your assumptions for your new '02 guidance. It sounds, Larry, like is it correct to assume, first of all that GNA expense will not change dramatically from our previous assumptions?

I think that's correct.

Okay. And then, the occupancy, obviously I think our financial model will be very sensitive to the occupancy assumptions. Can you give us a little bit more detail on the ramp-up in occupancy, when that's expected to happen, and if that timing has been pushed out a little bit. I sort of -- things might be being pushed out a little bit on the occupancy front.

Maybe slightly, Matt. It's a matter of major boxes opening one month versus the other. Most of these leases are signed. The rest of them are about some be signed. That's why Ken's outlook for next year was so bullish. We are very happy with where the portfolio is today. When I do this much moving around and this much building in a portfolio, it does cost some disruption.

I'll of give you a good example. We doubled the size of IKEA in Potomac Mills to 300,000 square feet. They are doing 50 or $60 million more business. There's 158,000 square foot box there at a very low rent we are breaking up into very good opportunities for the company. One of which is open, another which is under construction.

Those types of things not only cause, you know maybe slight occupancy declines and you have to wait for these things to open for the NOI's to pick up but some disruption, also to your customer and them getting to the mall, et cetera. And that's all cleaning up now between now and I would say through the first and second quarter of next year. And then I think we are going to have a very, very strong, you know, operating portfolio on a going forward basis.

Do you expect to see a sequential occupancy increase in the third quarter?

You know, Ken?

I think we will. I think we will probably gain about a percent a quarter.

Okay. And then finally, can you spell out a little bit more your land sale assumptions?

Land sales through the first six months were $8.2 million. We have a lot of inventory that we can move through. We talked about last year the decline in land sales would slip into this year which obviously has happened. The number could be $12 million plus. There's a lot of opportunity for land sales.

$12 million total for the year?

It could be 12 plus.

Okay. Great. Thanks very much for your help.

Thanks, Matt.

The next question comes from Russ [Nussbaum] with Salomon, Smith Barney. Please proceed with your question.

Good morning, everyone.

Hi, Ross.

Couple questions on releasing spreads. First on the anchor front with the occupancy tick-up are you expecting still to see potentially doubling the rents on the anchors?

Right now our anchor leasing spreads are well over 100%. The last numbers I looked at, and Ken you can correct me, about 125%.

They are 125% for all space. I think, though, for the new spaces, it's probably not -- for the same exact spaces going into the future it's not going - [ INDISCERNIBLE ]. It will be about 25 perhaps 50 percent increase in the spreads for these anchors going forward.

In terms of the TIs that are associated with that occupancy, is that what's reflected on your Cap Ex schedule in work in progress?

Yeah. If it hasn't opened yet, yes, it would be in there.

Okay. Are those TI costs generally in line with what you have been spending over the past couple years, or has there been any increase there?

No. I think it's come -- the work in progress has come down. The actual numbers, Ross, as you know which are reported 8 K, has worked into the nonrecurring tenant improvement lines for the big boxes. And that number has come down somewhat, too. Back in 1999 and 2000 we did a lot of retenanting of Gurney and Franklin so it was kind of high back then.

Last year, I think it was almost 30 million, 27 million, and then last year it came down to $12 million for the total nonrecurring costs. This year through six months we are just over $4 million. And we'll have to get back to you what the number is. It will probably double that by the end of the year for 2002.

Okay. The other side of the equation on the specialty stores, the releasing spreads there, looks like they are running about 8% in the first half of the year. That's below what you have been seeing for the past two years. What are you expecting there over the next kind of 12, 18 months?

I think the releasing spreads for this year should get back up into the low [digit] number by the end of the year. We had couple of unusual stories for the lower leasing spreads this year. A couple of big boxes that really took the number down. It was sort of an anomaly if you will. Next year I think you will definitely be back into the mid-teen range.

What will happen next year, Ross as the better, much more quality anchors open you should see some nice bumps in the releasing spreads.

Okay.

Leasing off the anchors.

On the development pipeline, I think Jim mentioned on the Meadowlands if you swap your Empire tract over to the state you would be able for recover your costs there? I guess two questions. One, what do you have as of June 30 invested in the Meadowlands? I guess I would infer from that if you can't swap this land to the state, that double digit return would be tough to achieve on the Meadowlands?

Jim?

Well, answer to the second question is no. It wouldn't -- I mean you could still do it. If you do the swap and you go to the Arena site, the numbers there will generate, you know, all the money the state needs plus get our costs out and get us a decent return. The Empire track numbers still work. You just don't have to generate quite as much money for the state and the projects are comparably sized so the yields are there.

Right.

We have done preliminary pro formas that we have updated over the months, Ross, and we have to walk you through those. We were very surprised in a good way in terms of the returns on Meadowlands, even with all the costs in the numbers.

What happens if the RFP, your RFP is not accepted on the sports complex site? You have a decision to make whether to proceed on the Empire tract; is that correct?

Well, you do. The -- as I mentioned in my prepared remarks, the RFP proposal, as good as it is, and aggressive as it is, is like everything in the Meadowlands these days, subject to a good deal of uncertainty. It may require legislation from the state, the teams that are there have some approval rights and it is also subject to certain phasing requirements which may affect the winning proposal. Ours would not have that, but there may be others.

And therefore, even if our proposal is not accepted, that does not foreclose an ability to develop the Empire tract. And, in fact, as the recent delays with respect to getting an arena built in downtown Newark show, the Empire tract, if the Army Corps or Engineers and the state can [complete] their work on a schedule they ought to be able to achieve the Empire tract could go first. I think it's unlikely that both would happen. I think given our discussions with the state, I think both sides recognize it ought to be one or the other, but neither technically nor practically is the development of the Empire tract foreclosed by whatever the state tries to do up on the Arean site.

Okay. What's the dollar amount you have invested right now?

A little over $90 million.

Okay. Final question from me. San Francisco the negotiations there seem to be going on and on and on. Is there any problems there, or is this just standard fair when you are dealing with a project of this type?

It's standard fair. You have -- we have a series of benchmarks that we are following, which have, in fact been followed. We have the key economic terms now approved by the port which was last quarter, and now you are in a process of trying to get all the things incorporated into a relatively lengthy document that goes through the port bureaucracy before it goes to the San Francisco City Council. At the same time you start the environmental review which involves a Federal part and a state part. So it's going fine. It will take a little while.

What's your game plan in terms of putting a shovel in the ground?

Um -- I don't see us -- I think the entitlement process will take another 18 months. And I think by -- well before that time we'll have the lease done. So you could start there, after if you wanted to, the arrangement with the port gives us some leeway to deal with market and economic conditions if we decided we wasn'ted to slow it down a little bit. At the end of that period of time, you could get started.

Okay. Thanks. We appreciate the additional disclosure this quarter.

Thank you.

Thanks.

Next question comes from Greg Schmidt with Merrill Lynch. Please proceed with your question.

Good morning.

Hi, Craig.

What is the total cost of the St. Louis Mills in your budget at this point?

Jim, do you remember that number exactly?

Should be in the 8K, right?

I don't remember the exact number it's 200 and change. 226, Craig.

That project seems to be getting some momentum, is it related to PBS or other factors?

No we got our anchor stores now committed, Craig. We got our movie theater done. There's very -- in this environment it was an excellent movie theater deal. It's a ground lease. It's an excellent ground lease where they are going to build and take the risk. It's Regal, which is [INAUDIBLE], now. And we -- you know, we broke ground a few months ago.

PBS is kind of the icing on the cake. It's gratifying we were able to put that together, and that PBS will have their first themed environment and children's area in a mall in the United States. We are leasing around it now, I think very successfully.

But you have really good anchors with Sak's and Bed, Bath and Beyond and Burlington and Target and usual cast of characters, but we think it's going to be very strong center, because there's nothing else in the market place to compete with it. There are no other strong centers of its kind in the region. So it should differentiate itself and should do very well. It will open the end of next year.

Okay. Was there any reason why there isn't a Bass Pro at Colorado Mills?

Yes. You know, the leasing there went so incredibly well with so many strong anchors, and I don't think Johnny was ready to move that far west yet. Now, he has and we are talking to him about that. So he could be an addition in the future. We are talking to him about some California things now. But at the time this all was coming about, I don't think he was ready to go in that direction.

But you might be able to backfill there and sounds like maybe some California assets?

Yeah. We have in Colorado, we have a lifestyle expansion opportunity that could contain a department store or two, or another anchor and you have some big boxes like Bass Pro, and Ikea and others that are looking. And so as strong as that market is today and I think it will be our strongest to date, since we went public, Ontario has done unbelievably well. I really predict this could do better than that faster. And with some of the guys we have waiting on the sidelines to take space there, I think it will only get better over the next couple of years.

Okay. Thanks a lot.

Next question comes from Rich Moore with McDonald Investments.

Hi. Good morning. When you guys are looking at the various European sites, you gave some timeframe as to when you thought you might do something. But is any of that contingent, I guess on how well Xanadau does, or is this kind of a bunch of independent sort of approaches to each of the sites?

You know, we kind of have a precurser to sedan due because as Jim explained before it's leasing incredibly well.

They are on two hands you can count the number of projects that are like this in all of Europe including the UK. And think all do extraordinarily well. So we have no reason to believe that this one will not do extraordinarily well, either the way it leased up. We are very confident when we open it in March it has all the requisite pieces and parts to just dominate that entire Madrid region and maybe Spain in terms of a mall.

We are looking at these other opportunities and moving ahead, taking all of the things that Jim said before into, you know, into our thoughts, you know making sure that the sites have good anchor commitment and strong local of support and strong political support and all the things that Xanadau had. We are looking at those things in a sequential way, fairly aggressively.

There's no need to wait six months to see how Xanadau actually performs following the opening?

Well, we won't start another project, Rich until that other project was very well leased, too. It's like doing business here. If you have the right players attached to and committed to your project, then it's going to do well.

So, for example the deal we are looking now in northern Spain is a million square feet and there's -- it's a million square foot big box center, basically with very little specialty and there's ass for every seat, so to speak, or even a couple, so those are the types of things we are going to be looking at. We are not going to start unless there's an element of safety associated with it and one of those things will be how Xanadau does in the future, which we anticipate very well. Another one will be if we can get a very large percentage lease-up before we have to commit.

Okay. Okay. As far as this new German law goes that makes it easier for open ended funds to invest in U.S. real estate. Does that impact Can Am or you guys in any way you think?

We hope so. They cave just bought their first asset in the United States which is this office building we are sitting in now. Now they are negotiating with us to stay since our lease ends in 3.5 years or so. So that's an interesting situation. But yes, they will be looking for retail opportunities here, too. And I think since, you know, they can only invest from a retail perspective with us in the United States, it gives us an enormous leg up as they start to -- as those laws loosen up and as they start to bring more money to the United States.

Okay. And looking at other ventures like Forest Fair, have you gotten anything in the pipeline, something similar to that?

We have been looking. The Forest Fair thing fell into our laps in terms of its ability to be done quickly. The great thing about it is it has a tremendous anchor line-up already with most of our -- a lot of our anchors in place all doing, actually either relatively in some cases exceptionally well.

For example it's Coale's number one store in the Cincinnati market place doing close to $30 million. That was in place. All we really needed to do, Rich was poll our specialty store tenants to see how quickly we could lease up. You have to remember a typical Mills has about 550,000 square feet of specialty. This has less than 400,000 square feet.

So we have -- we are going to have tremendous demand. Hopefully we can drive rents up over and above what our pro forma says. The yields on this thing are terrific. We are excited about the prospects of that deal. We think it's a very, very safe one for us to do. We will be looking at others slowly and carefully. There's one we are looking at in California. But, you know, we want to have as much of a leg up on those as we did on this one.

Okay. And Ken, I have a couple small line items here. Did I understand that you thought maybe management fees would remain roughly at the current level? Is that a good approximation?

Um -- management fees, you are talking about the management fees should double from what they were for six months. I'm not sure if I understood the question, Rich.

The run rate I'm looking at in Q2.

Yeah.

Is that a good run rate for the quarter? Or do you think that will go significantly higher, I guess?

It will go a little bit higher as we have the full impact of the Simon fees -- taking those on. We'll lose a little bit of fee off of operating [INAUDIBLE] now going to be consolidated. So we will not recognize that fee. But with those things blended out, I would assume the second quarter fees should be about what the run rate would be for the rest of the year.

Interest and other income were both up. Anything special there?

Other income at property level? Or are you talking about other income on the consolidated income statement?

Exactly.

That's interest being. As you know we did the $200 million stock rates. And we didn't put the money to the Simon purchase for 30 days later.

Right.

We had some significant interest income.

Part of the land sales are in the other income line item that, you know the operating land sale of $2.5 million of sitting in there. That's the reason for the second quarter. So that's the reason why that number went up so much.

Okay. Okay. Right. Great. Last thing is do you have the JV and the consolidated income producing properties line item from the balance sheet by chance?

The JV, let me just see if I can get it for you real quick. The JV, the equity in earnings?

No, the actual property that you guys, Ken, disclose in the 10Q? Because we use that in the model from the balance sheet.

The investment in the JVs?

JVs and for the consolidated as well.

The construction --

I'm not sure what you are asking for.

Are you asking for the CIP and the whip numbers or are you asking for the investment in the join ventures?

On the balance sheet since we don't have any balance sheet information, just the line, you know, total property, total income producing property.

Oh, total income producing property on the consolidated balance sheet now with Opry being consolidated will be with $950 million.

Okay. And on the JV side do you have that, Ken?

Um -- the JV sites is going to be about a billion 148.

Great. Thank you guys.

Yes.

Ladies and gentlemen, as a reminder to register a question, please press the one followed by the four. Matthew Ostrower with Morgan Stanley, please proceed with your follow-up.

Just one follow-up question on Meadowlands. If my memory serves it looks like your expenditures on that seem to be going up by somewhere between 5 and $15 a quarter. Could you describe what's driving the costs up? More importantly, how long can you keep doing that before it eats into your expect heed double digit returns?

I don't think it's on average, certainly not $15 million a quarter, Matthew. Maybe it's closer to 5 million. But, you know, you do have carry, obviously in the numbers. You have real estate taxes that you are paying. You have some consultants. People who are helping you with the process. It's a complicated and, as a result, expensive process.

Over the last year, anyway, you had the engineering and environmental consultants that helped the Corps finish the final environmental impact statement as well as the concurrent process of working with the state to explore what might happen on the Continental Arena site which resulted in a request for proposal that looked very much like what we were talking about.

Yes. We also [INAUDIBLE] gear up to build what we believe to be a project, hopefully in the near run, we are starting to incur some design dollars, too.

That's a good point, Ken. Certainly, on the Empire tract you have basically almost a complete set of working drawings.

Yes.

So are we at a point now where, you know, the expenditures, up until now and when you break ground, should things sort of slow do I know in the $90 million range besides the carry costs that you referred to?

Yes, Jim, I mean outside the carry costs can you imagine us spending a lot of money between now and breaking ground?

Well, I hope so. [ LAUGHTER ]. That means we will be getting ready to do it. You'll spend some money getting from now to the break being of ground, but in the sense of your question, which is if you are going to spend a lot of money between now and the time you know you are going to break ground, the answer to that is no.

Right.

Okay. Great. Thanks.

Once again, ladies and gentlemen to register a question, please press the one followed by the 4 on your telephone. David Fick with Legg Mason, please proceed with your question.

Good afternoon, gentlemen. I also would like to congratulate you for your enhanced disclosure. The -- Larry, you term the Forest Fair returns yields as being terrific. Can you elaborate on terrific a little bit more in terms of IRR and cash? Or cash yield on cost?

Yes, David this is Ken. We think that the cash on cost returns are going to be in excess of 12%. You know, we have been building in between 11 and 12% for the past. This one is going to be in excess, we believe of 12%. It could hit 13% or even creep up over that. You know. The wider range in is because it is in some part of redevelopment.

And you know there are some uncertainties. It's a little bit new but I would be shocked if this thing didn't exceed 12%. The total return, obviously with a project that has that high of a cash on cost return is going to be pretty substantial. You know when we typically hit 18 to 20% without the benefit or 18 to 22%, let's say total return basis without the benefit of the Can-Am promote. I haven't calculated it, but this one will certainly be better than that.

Again the risk is mitigated because your anchors are basically in place. You only have 380-390,000 feet of specialty and the facility is in pretty good shape. We will make it an exciting Mills project, but in terms of what's there, I think we are pleasantly surprised.

David this is Jim Dausch, too. You have most of the risky part of the building the project is in the site work which is already done. The yields that Ken is talking about are could be conservatively projected with specialty rents 1.50 to $2 below what we are getting for Colorado Mills. There's an upside.

With less space, David.

I understand that. But is that going to mean that it will draw from as large a region? You guys really know that market well because of having been the developers on Kenwood Town Center. Which I guess is the closest competitive project to this one. How do you feel -- what do you think the radius is going to be for this? Is it going to be Mills standard being a smaller size? Is it going to be more like a regional mall?

You should know, David this project is over a million and a half square feet because so many anchors and so many large anchors. Biggs, for example, the hyper market is, you know 170,000 square feet or something like that. 65, $70 million in sales or some number. So you have that going for you. You are going to draw -- we know Cincinnati really, really well because of Kenwood. We think it's a terrific market for this.

And we think it will fit in very well. Not only throughout the greater Cincinnati area. You are very close to Dayton. We think it will draw Dayton. You are a hop, skip and a jump from Columbus, also. Which doesn't have anything like this, either. So we think it can be very regional, people can get here quickly.

As you know about this because you probably remember as you know about this shopping center, it's very well placed in the market place. It has excellent access attributed to it. With it. And, you know, you know we were very lucky to go in and pick it up like we did and get the response that we de to it.

Great. Can you talk about the current budget for Madrid in terms of gross dollars, and how much of that is your investment in the ski dome?

Jim?

Um -- I don't have the numbers right here in front of me. But it's roughly the gross investment is a couple hundred million dollars.

It's just over 200 million, Jim.

Yes. And our investment in the ski dome is somewhere between 20 and $25 million.

Right.

And as it stands today, you are still a one-third owner of the ski dome with your partner in the ski dome being a one-third partner in the mall?

That's correct. And the investment in the ski dome is secured by the partners' interest in the retail center.

That relationship is still healthy and moving forward?

As healthy as it's ever been.

Okay. Couple staffing things. Is Jim Napoli relocating to the DC area?

Jim Napoli is actually going to live three doors away from Jim Dausch so they will commute together. Just by coincidence.

There goes the neighborhood.

Yeah, right the neighborhood's going downhill. Just by coincidence, Jim found a house in Jim's neighborhood. Which is just five minutes from me. So we can all commute in together. And we are -- again I have known Jim for a really long time. I can't tell you how happy I am to have him here. He's sitting to my left and it's a nice security blanket to have sitting next to you. We couldn't be more pleased to have him, he's going to fit in great. Everybody here knows him, really likes him. And, again, his history in this business speaks for itself.

Okay. And where does -- as Jim is taking over the operations side is of does Ken report to him now?

Ken will report to Jim as will leasing report to Jim.

Okay. Can you briefly comment on the potential for ongoing consolidation in the Mills sector? The other five or six projects out there that you guys don't control?

They -- you know, they are an opportunity out there and you know we'll continue to, you know, we think that the most of them have more potential than they have been afforded, and that we can, you know, do some very nice things with them. We know them well and we will continue to look at those opportunities. And if they come, you know, if something happens, you know, we'll be happy. Right now we are, you know, we are just in a thought process.

Great. Last question. Operating performance at Discover. How is it doing against pro forma? What are you hearing from tenants at this stage?

I think a couple things. I think that, again, you know Atlanta has a lot of retail there. And I think Discover has had to compete with an awful lot of things that are going on. That was a strong competitor in terms of amount of GLA in that entire area south of us and Mall of Georgia, God knows there's a lot of retail there.

But we are pleased with Discover's performance so far. Again, I think it has as strong an anchor group as we could possibly have. In a shopping center with Saks and Neiman Marcus and Bass Pro. We have several anchor pads left we are going to be announcing anchors for soon. We also have a very large outparcels we are negotiating with several impactful players that hopefully we'll also be announcing soon. One of them will be in my office later this week. All of those things coming together. It's like the rest of our Mills projects, you know over the next year or two, I think it will stabilize and become a dominant project in that market place.

The NOI, David is very close to pro forma as I recall. It's very, very close.

How about sales?

We don't have a-- sales are projected just fine.

Okay. Thanks.

Gentlemen there are no further questions. Please proceed with your closing remarks or any further presentation.

We appreciate everybody for joining us today. And listening to the conference call, and please call Greg or any of us if you have any questions. Thank you very much.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your line.