西蒙地產 (SPG) 2003 Q1 法說會逐字稿

Please be aware that statements made will be deemed forward-looking statements. [lost audio] Participating in today's call will be Larry Siegel, Chairman and Chief Executive Officer, Jim Dausch, President Development Division, Ken Parent, Chief Operating Officer, and Greg Neeb, Chief Investment Officer. Now I'll turn the call over to Mr. Siegel.

Welcome to the first quarter 2003 earnings call and thanks for joining us. In 2002, each quarter brought more positive activity for Mills. And stronger financial results than the prior one. We continued that trend into 2003.

Our sensational accomplishments in development, acquisitions, we think, as well as further strengthening our already interested best leadership team enabled us to post strong gains in this year's first quarter. Our portfolio continues to perform well even while retailers face numerous challenges such as the weak economy, a harsh winter, particularly in the northeast and mid Atlantic regions where we have many properties, rising energy prices and of course, the war in Iraq.

Our performance in the first quarter of 2003 is another testament to the soundness of our three-point strategy of growing through development, acquisition and re-development, our portfolio of core landmark Mills centers, 21st century retail and entertainment centers and international retail and entertainment centers. Our pipeline of developing and acquisition projects is extensive and aggressive and as I'll describe.

But through careful planning, these projects are positioned to come online in a steady, orderly progression so we can execute them with a high level of precision we have historically accomplished. The management team and organizational structure we have assembled over the last two years is well-prepared for the tasks ahead that will provide increased value and gross for years to come.

Let me give you an overview of the quarters' happenings to help you see where we are headed. Let's start with development. The New Jersey Sports and Exposition Authority February 12 decision to award to Mills the exclusive rights to negotiate a redevelopment plan for the continental ring site at the Meadowlands Sports Complex is truly a watershed event for us.

Meadowlands Xanadu, this country's premier entertainment destination will be located on the best piece of real estate in the United States. Not surprisingly the top entertainment, media, sports and retail brands in this country and internationally are lining up for the opportunity to partner with us to create exciting new concepts.

In the meantime, the New Jersey Superior Court has rejected Hearts Mountain's attempt to stop our negotiations with the Sports and Exposition Authority on a master developers' agreement. We, like the state, are confident we shall have shovels in the ground this year.

In exactly one week we will celebrate the grand opening of Madrid Xanadu, or first international venture, located in the fastest growing region of Spain, Madrid Xanadu is sure to become one of the dominant consumer destinations in Europe. It features a 375 thousand square foot combination of department store and hypermarket, the spectacular Snow Dome, [inaudible] indoor sports and terrific highway access in more than 8,000 free parking spaces.

Madrid Xanadu will become a top tourist destination in Spain the day it opens. For this reason, Madrid Xanadu, with its 220 high quality, full price retail restaurant and entertainment venues will be open 365 days a year including every Sunday, unlike typical Spanish shopping centers for which Sunday openings are restricted. It's no wonder when we open we will be 96% leased.

Local enthusiasm for Madrid Xanadu is exceptionally high. We expect more than 250,000 visitors to attend the grand opening weekend. When fully built out it will be Europe's largest retail center.

Let me point out one more fact. Next week Mills will be the first U.S. to successfully open a dominant retail and entertainment mall in Europe and do it with double digit stabilized returns. With the broad spread between our expected yield and comparable cap rates in the region, Madrid Xanadu will create immediate, substantial value for the company.

We accomplished this fete through determination, ability to see outside the box, management discipline, strong partners, and steadfast governments support. Meadowlands Xanadu and Madrid Xanadu are our highest profile projects, however, we are making strides on our core projects as well.

St. Louis Mills is leasing well and is on target to open in November. Cincinnati interest has been strong and we expect to open early 2004. We have begun construction on Pittsburgh Mills and expect to break ground by June 16th on Vaughan Mills in Toronto and we continue to make progress in other development opportunities domestically and internationally. Jim will provide more details in a moment.

Now, let me talk about our acquisitions. We closed in January on the Cadillac Fairview properties and are busy integrating them into our portfolio. We expect to start our expansion efforts on several properties this year.

Our rigorous due diligence revealed and regulators recently have confirm that Broward Mall is entitled for an additional 1.2 million square foot of development. That's another example of our management team's ability to uncover and unlock asset value that others may not see.

As part of our expansion plans for Broward, we plan to add one or two department stores and complimentary specialty retail. [inaudible] Brookstone and an18 screen AMC theater.

At Galleria White Plains a lease was executed for a new Sears under construction and open in August. On May 1, 2003, we entered into an agreement to purchase for a price exceeding 400 million, an existing mall property in California that has sales of more than $400 per square foot. The agreement is subject to a confidentiality agreement, and continuing due diligence review of the property and other conditions.

Therefore, closing this transaction is not absolutely certain. However, if we are successful in adding this property to our portfolio, it fits very well with our strategy of acquired properties to which we can add value by expanding and enhancing with our unique mix of retailer entertainment.

The result will be one of the most dominant retail and entertainment destinations in California. We view this as a development, redevelopment project, but we will greatly enhance our going and cap rate with our merchandising plans consistent with how we viewed our other acquisitions.

As for leasing, we're still going strong on our re-merchandising efforts. At Gurnee Mills we're adding one of the first new Sears concepts, 200,000 Sears Grand, 10,000 square foot Casual Corner, a 12,500 square foot [inaudible] another new concept and many other great venues.

At Potomac Mills we're adding a 75,000 square foot AMC and a new [inaudible] Sportsman's warehouse. At Discover Mills, construction is underway at the state of the art AMC complex. Here's the statistic that shows how effectively we've been in our efforts.

Over the last year, 112 stores signed their first lease with Mills. Including Bombay Outlet, Bill-a -Bong, American Eagle, California Pizza Kitchen, Forever 21, Oakley, and Macaroni Grill. That accomplishment is attributed to Jim Napoli and the dynamic [ ] .

Finally, we've continued to build on already the strongest management team in the business. I'm pleased to announce the addition of MJ Moreo as the new Chief Financial Officer. MJ is a seasoned veteran with a distinguished reputation as CFO at [Craftco] and Federal Realty Investment Trust. Previous to this, she was a partner with Graham Thornton managing one of it's Virginia offices.

Nick McDonough, who has been serving as our CFO and lead Asset Manager will focus his efforts on negotiating key contracts and continue to have our asset management efforts.

Bringing MJ aboard and splitting the function previously held by Nick will enable to us bolster our corporate governance and fiscal responsibility initiatives.

Let's run through the numbers. FFO for the quarter grew 77 cents per share from 73 cents in the first quarter of 2002 a 5.5% increase. Same project NOI increased by 3%, when leased by (indiscernible) income is exclude. NOI increased by 1.5% [inaudible] included.

Gross specialty [inaudible] reported sales for the entire portfolio including our recently acquired judicial regional malls for the 12 months ended March 31, 2003, were $331 a foot, versus $325 per square foot reported one year ago. Stabilized portfolio occupancy at the end of the first quarter was 93.6% versus 92.5% in 2002's first quarter. And leasing spreads for inline tenants were 8.3% during the quarter.

Retailers strong interest in our projects will continue to increase rent spreads and same center NOI in the second quarter and beyond. The second quarter also will benefit from strong sales during Easter, which last year fell in the first quarter.

One final note. I'd like to remind everyone what Mills does and how we do it. We build value to asset level, not just via cost of capital arbitrage. Our development activities forced us to understand all aspects of real estate.

We know how to lease out large blocks of vacant space, we understand how to build and rebuild large projects. We have always instilled an entreupenurial environment at the Mills that inspires creativity and new ideas. No one in a traditional REIT [inaudible] this amazing project done.

Meadowlands Xanadu is yet another example of our innovation, know how implementation expertise. We also maintain an aggressive growth oriented corporate culture that sets high performance standards and provides high rewards for attaining those standards. This type of environment attracts the best real estate professionals and provides them with the incentives to achieve great things.

Our innovation, creativity and aggressive approach to business are grounded by our strong discipline and focus. During all the activity I described to you this afternoon, we've continued to train our sites on one thing we do better than anyone else. Create value in shopping and entertainment venues.

I'd like to personally invite each of you to join us during our investor tour June 12 and 13 in sights throughout Spain and Italy. I encourage you to come to Madrid Xanadu, our greatest accomplishment to date. The Mills Corporation always has and will continue to take long-term view of our business.

We have a terrific portfolio of operating properties and terrific projects in development and under construction. 2003 looks to be a very good year. Now, I'd like to turn it over to Jim Dausch.

Thanks, Larry. The first quarter has been marked by significant progress on a number of Mills development opportunities. As Larry mentioned, we opened Madrid Xanadu Friday, May 16.

I just came back from Madrid yesterday and I got to tell you, this project is going to be a knockout. In addition to the [ ] combination department store and hypermarket as a world class sports facility with the associated bars, restaurant and conference facilities developed by our partners, PBC, we have 96% of our retail and entertainment space leased.

We expect to open 85% of this space, including on the retail side, H & M, CNA, Forum, Nike, Zara and a number of its related concepts, Benneton, Maximum Duty, Aldolfo Dominguez, Tommy Hilfiger and a speal Real Madrid unit.

An entertainment will open a 70,000 square foot Paramount movie complex, a Formula One indoor go-kart track, two entertainment concepts specifically geared to children, 15 restaurants and a fully leased eight-unit food court. In addition, [inaudible] will open a new snow and ski sports unit of 20,000 inside our Snow Dome.

Road construction on the two interchanges and road connections linking the project to the N-5 super highway to Madrid was finished on Monday.

Looking ahead post opening, Zara will open its brand-new household unit with us, an imaginearium and others will join the project as well. We're also hard at work planning and beginning to lease our 150,000 square foot adjacent power center which should be in construction later this year.

For fall 2003, on November 13, to be precise, we have the opening of the St. Louis Mills. Here all of our anchor stores have either executed leases or are deep in the documentation process. Sachs, Off Fifth and Regal Cinemas will join Bed, Bath and Beyond, Burlington Coat Factory, Off Broadway, [inaudible] , Marshalls, Circuit City, Nike and in the new sports village part of the mall, a St. Louis Blues ice rink, an ESPN skate park and a Nascar speed park.

Specialty tenant interest is also strong at St. Louis Mills where CAN-AM (phonetic) is our partner. For spring of 2004 we have the reopening of the former [inaudible] Mall at Cincinnati Mills. We are positioning this well-located center as it should be in this market.

The interior of the center is being completely redesigned, redeveloped, and released as a full Mills destination at very attractive returns. Construction is underway as is specialty leasing.

Cincinnati Mills is already anchored by Biggs, Bass Pro, two cinemas, Sachs, Off Fifth, Kohl's, Media Play and a new Babies R US which opened in January 2003. These anchors will remain open during the redevelopment process.

Indeed, it is the strong sales performance of these anchors and our desire not to impact them were substantially or incur the cost of shutting them down temporarily that has caused to us extend the redevelopment schedule to spring 2004. By doing this, our construction activities can be conducted in a cost-effective way which does not create a war zone at the center, and unduly impact the anchors' ability to continue to attract and serve customers throughout the redevelopment process.

In 2004, we expect to open Vaughan Mills in the Toronto area. Demographically, this site is the most dense we've ever developed other than the Meadowlands. And this part of the Toronto market is still growing.

With our partner, Ivanhoe Cambridge with lease commitments from Bass Pro Outdoor World, Sachs, Burlington Coat, Bed Bath and Beyond, Children's Place, Tommy Hilfiger and now Lucky Strikes will break ground in early June for a fall 2004 opening.

During the first quarter of this year, we also began construction of a new Mills in the Pittsburgh area. All permits necessary to develop this site are now in hand. And a tip to help pay for site and infrastructure costs is finalized.

This site will open in fall 2004 or spring of 2005, anchor leasing interest is very strong with Cinemark, Bed Bath and Beyond, and Biggs already committed to the center. [inaudible], the landowner are partners in this center.

In the predevelopment stage of the following, first the Meadowlands, Larry covered this subject, but beyond the leasing and master development agreement efforts which he described, we've also begun meeting with the appropriate government agencies to move along the permit approvals necessary to start construction this fall.

Governor McGreevey has appointed one of his senior staff to coordinate the New Jersey agency actions with ours with the objective of having the necessary approvals on schedule this coming fall. In addition, we're meeting with and working cooperatively with the Army Corps of Engineers to coordinate it's permitting activity on the Empire tract with the necessary approvals the Corps must give to allow the Continental Arena site and redevelopment to move forward on schedule.

We are encouraged by progress to date and particularly with the aggressive and cooperative spirit with which the New Jersey Sports and Exposition Authority team has worked with us. Beyond the Meadowlands, our new business activities have the objective, and this is our three-point growth strategy, to produce a balanced pipeline of mills, conventional retail centers and international projects of all kinds.

No question, we are very busy with new development opportunities, expansions and redevelopments of existing centers. But we've scheduled these new business activities, some in site due diligence or acquisition, some in entitlements, some in predevelopment design and leasing at a pace which we can manage prudently and which can produce future growth for the company, which is both vigorous and responsible.

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 we've begun the entitlement process there as well. In Chicago, we were selected as master developer to redevelop lot 37 opposite Marshall Fields in downtown Chicago as a retail residential hotel project.

And have now executed a memorandum of intent with the city which governs the predevelopment and entitlement process which we expect to extend into the Spring of 2004. We're working with the city on a development plan and with potential retail and entertainment anchors, and residential development partners, on a development plan and economics for this exciting project.

Conclusion of a term sheet with one or more of these parties could be announced in the second quarter of this year. A joint announcement with the city of a development plan and the participants in that plan should come in the third quarter of this year.

Beyond Chicago, we continue to look at other new traditional retail development opportunities in places as diverse as northern California, northern Ohio, and northern Virginia. 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, Valencia and Barcelona and hope to have one of these opportunities for leasing infrastructure next year.

In Italy, our efforts are concentrated on several we will located sites. Two are in Milan where we have a strong local partner. One will be a mall like Madrid Xanadu in size and the other a mixed use retail residential hotel project.

The latter of these two opportunities has recently taken some very significant steps forward in its entitlement process and given this progress, we may well have this project in the ground next year in Italy.

We're also exploring opportunities on well-located sites presented to us by potential local partners in suburban Florence and in the environments of Rome. We hope you'll have a chance to see some of these sites on the investor tour in June.

We continue to pursue a careful, responsible, prudent course which will produce results in the coming years gradually but reliably. We're capitalizing on the real world experience we've gained and the credibility we've earned throughout Europe, with Madrid Xanadu, but we're avoiding scattering our attention and resources over an extended number of target markets. And potential projects.

We're optimistic about progress to date, and expect it to continue. And now I'd like to turn things over to Ken Parent.

Thank you, Jim. I'd like to discuss our operating financial results for the first quarter of 2003.

Fully diluted FFO per share increased 5% at 77 cents in the first quarter of '03 from 73 cents in the first quarter of '02, selected highlights of the quarter over quarter growth are as follows: a 1.5% increase in same project NOI generating representing you FFO to Mills of approximately 2 1/2 million dollars.

In the first quarter of '03, the company received $300,000 in lease buyout fees versus $1.3 million in the first quarter of '02, excluding these fees, the NOI would have grown by 3% in the first quarter of 2003, versus the first quarter of 2002.

An decrease of 3.6 million of FFO from new projects which had not stabilized in the first quarter of 2003 net of interest expense, namely Arundel, Discover, Colorado and Cincinnati. An increase of $5.6 million net of related interest expense from FFO related to the acquisitions of Simon and Gaylord joint venture interests.

An increase of $6.2 million net of related interest expense of FFO relate to acquisitions at Riverside Square and Cadillac Fairview. These increases were offset primarily by $4.4 million reduction in the company's proportionate share of land sale gains during the quarter.

There were minimal land sales in the first quarter of '03. Our land sales program remains very healthy, as we will sell parcel the across our entire portfolio.

In 2003 we expect to sell over 17 pads of 7 different properties generating in excess of $13 million of FFO.

G&A expenses increased by $1 million versus the same period in the prior year. This increase is related to the company's overall growth during the last 12 months and addition of experienced executives such as Jim Napoli, Nick McDonough, and Ken Parent to the management team.

These overall positive increases were offset by a decrease in the fully diluted share count of approximately 13 1/2 million shares over the previous year, primarily due to various stock offerings.

I'd like to spend a minute with our forward-looking earnings guidance for 2003. Projecting earnings is a difficult task for company as dynamic opportunistic and entrepreneurial as ours. We try to keep give you the best information we have as soon as we have it while being precise and realistic.

We are comfortable with our previously provided guidance or 2003 FFO per diluted share in the range of $3.54, to $3.58. Finally, a number of events have taken place over the last quarter which will exact FFO per share that I would like to address.

The company's calculation of FFO is modified from the [inaudible] definition to exclude all foreign occurrence exchange, gains and losses. This adjustment in the calculation is consistent with the objective of presenting FFO on a comparable basis between periods and is made to reflect the company's FFO on a comparable basis with the other REIT's that do not engage in the same types of transactions that give rise to these item.

Additionally it should be noted that our income statement and FFO calculation do not include the impact of FASB 1441 which requires leases that acquire properties to be mark-to-market and recognize an income over the life of the leases.

GAAP will allow us one year from the date of the acquisition to adjust for the impact of this statement. We anticipate that we will include income related to the statement for acquisitions of Riverside Square and the Cadillac portfolio in our second quarter income statement and FFO.

On May 5, 2003, the company issued 6,440,000 shares of 8 and 3 quarter% [inaudible] with a liquidation preference of $25 per share. Net proceeds from the sale were approximately $156 million, the company's initial offering was for 5.6 million shares, the company granted the underwriters an overallotment to purchase an additional 840,000 shares, this was over allotment option was exercised in full on the day the transaction closed.

The company believed it will be able to invest the proceeds in developments, redevelopments, improvements to the existing portfolio and new acquisitions including the two Atlanta properties which I will discuss in a moment. We believe the yield on these new investments will exceed the coupon on the preferred stock can which will prevent any negative impact on FFO in the current year.

In future years, this low-cost source of capital will facilitate our continued FFO per share growth. The company's under contract for a 50% general partnership interest in [inaudible] and Town Center at Cobb,traditional retail malls in the Atlanta market.

We're excited at the prospects of owning these interests for the following reasons: One we believe our acquisition price is very attractive providing initial yield above the initial yield we realized on the five assets we purchased from Cadillac in January. Two, our ownership interest in these assets will provide strategic benefits for our Discover Mills project located in Wilmette County.

Three, the Atlanta market is currently at the low point in the retail real estate cycle, and the acquired assets are well-positioned to benefit from positive demographic and economic trends in Wilmette and Cobb counties.

I will now address the balance sheet in our capital requirements where we continue to maintain a conservative position. As I mentioned earlier, we recently executed $156 million potential preferred stock offering.

This transaction was one of the largest nonrated preferred deals ever completed, highlighting the financial institution's understanding of Mills' conservative capital structure. Given our conservative financial matrix which I'll discussion now, is the facial stability of our assets, we are comfortable with the current level or slightly more preferred stock in our capital structure on a long-term basis.

Our preferred stock to total market capitalization ratio now stands at 7.6% and our preferred stock to equity capitalization ratio is 15.2%. Not only are financial institutions gaining a greater appreciation of our corporate capital structure, lenders' understanding of our assets has increase dramatically over the past years as the Mills concept has proved its viability.

During the past 12 months the company refinanced debt on several assets with loans that reflect quality and stability of Mills' landmark assets. In September 2002, Mills refinanced with outstanding construction loan on Opry Mills with $175 million loan that bears interest at lag or plus 1.2%.

Through a swap agreement this variable rate has effectively been fixed at 4.14% through October 2007 bringing the total rate of the loan to 5.34%. The structure of this financing allows the company to borrow an additional $25 million secured by Opry Mills at very favorable rates.

In November 2002, the Concord Mills joint venture obtained $181 million 10-year mortgage loan with a fixed rate of 6.13% replacing the original loan for the same amount. However, unlike the original construction loan, the collateral for this loan does not include approximately $20 million of feature tip proceeds and land sales. Effectively, therefore, this financing has monetized an incremental $20 million in value.

By May 22 of this year the Arundel Mills joint venture is expected to close on $187 million financing. Seven-year interest only loan will have a fixed rate of 4.55% until maturity. There are though learned fees associated interest the loan.

In accordance with the terms, the venture is permitted to obtain up to an additional 40 million of financing secured by the project. All told, we are able to monetize $80 million of our original equity asset secured debt at historically low interest rates.

The company is also in the process of refinancing its line of credit. We expect to increase our facility at more than 100% from its current commitment of $175 million to $400 million. Given the turnout we received from our lenders meeting last night we expect a very successful execution with a closing target for next month.

This combination of capital raising and debt refinancing activities has given the company a capital structure with the financial flexibility to pursue attractive investments on an opportunistic basis, while maintaining a conservative financial position which minimizes risks for our shareholders.

As of the end of the first quarter our capital structure has the following characteristics: 3.68 times interest covered ratio at March 31, 2003, versus 2.73 in 2002. A leveraged ratio of 57% as measured by line learned at March 31, 2003. A trailing 12-month dividend FFO payout ratio of 67% versus 69% one year ago.

Debt that has a fixed interest rate or hedged to maturity accounted for 67.2% of company's total debt, including it's prorata share of JV debt. This percentage would increase to above 90% if adjustments are made for the Arundel Mills refinancing, and debt that is hedged look the -- through the end of the year retreated -- were treated as fixed rate didn't.

The majority of the company's debt is secured by developments, redevelopments, nonstabilized properties and the Cadillac portfolio when the value of these assets increases, which will happen over the next two to three years as the development and redevelopment activities are completed, the company plans to place fixed rated debt on the assets at which time we would expect to monetize the increment the value due to increased borrowing.

The relatively short time horizon for refinancing these assets leads the company to avoid the use of fixed rate debt which often require potentially expensive yield payments upon early payoff.

A glimpse of our current liquidity as of March 31, 2003, cash and equivalents of approximately 16 million and $52 million available on our line of credit. These figures are not adjusted for the proceeds from our recent preferred stock offering.

This current liquidity, along with our current development project equity funded to date, which includes 100% of the needs at Madrid, St. Louis, Cincinnati, Vaughan and Meadowlands, leaves us in terrific shape to fund the cash portion of the three to five-year pipeline and pursue any new development when is the opportunity arises.

That concludes the summary of our operating financial results I'll turn the call back to Larry.

Thank you, we'd like to open it up for questions.

Thank you. Ladies and gentlemen, if you would like to register a question, press the one followed by 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question is answered and you would like to withdraw your registration, press the one followed by the three.

If you're using a speakerphone, please pick up your hand set before entering your request. One moment, please, for our first question. Your first question comes from the line of Ross Nussbaum with Smith Barney. Please proceed.

Hi good afternoon everyone. First question is on Madrid Xanadu. I know you talked about the solid leasing. But can you address, in the supplemental, it's showing project cost at 265 million and that's up from 239 million in the fourth quarter and 202 million in the third quarter. Can you address the rise there?

Well, some of it has to do with the expansion of the Snow Dome facility itself. I mentioned, with its associated bars, restaurants and conference facility which is we agree to do with our partners in order to make this market-dominant facility. Some of it also -- a modest amount had to do with the cost of making sure that the roads were done in the proper way and on time. I think that's the majority of it.

So what are you now expecting for an initial in a stabilized yield on that project?

Well, the project will stabilize at 11-plus%. The percentage rates kick in the way we think, much higher. Initially, since it is going to be above 90% with permanent occupancy at opening, and 95% plus leased, should stabilize at numbers that are close to that. I mean, should open at numbers close to that. It is a fully leased project.

One of the things that we did, Ross, was in the Snow Dome, we added a large anchor. It's a large sporting goods store so that was another reason for the increase in cost but we're getting substantial rent payment for that.

Okay. An accounting question. In your FFO reconciliation from net income, you're showing a gain on foreign currency exchanges as well as equity in earnings on a foreign currency change. Can you explain why one is consolidated and one isn't and where they're coming from?

It has to do with the -- it has to do with whether or not we are -- part of it has to do with whether or not we are invoiced in U.S. dollars or Euro dollar and whether or not the investment is being paid for out of a bank account in Spain or out of the U.S. bank account.

But almost all of it is related to the Madrid Xanadu project, some of it is related to Canada, but most of, the majority is related to Madrid. Where the payment originated, it's kind of complicate rules.

Hedging activity?

All hedging activity -- no, no, no, it's not hedged, it's all because it's not hedged.

Just straight gain and losses.

Straight gains and losses, yes, that's right. [inaudible], I wouldn't worry too much about the detail of line items coming through, you know, aggregate the two lines, 1.6 roughly and 2.2, give or take. That's the gain that we had in the quarter. It comes from various lines like Ken said for various technical reasons but that's, in fact, the total.

But you are -- you're paying in Euros -- isn't most of your debt in Euros, your payments in Euros and expenses in Euros.

Correct. Basically what you have, I'll come back and help Ross on answering the first question. You should probably, interestingly enough, disclose Madrid Xanadu's cost in Euro's, since it's U.S. based financial statement, it's disclosed in dollars. The Euro is now at an almost all-time high against the dollar.

What that's done is factor into the overall U.S. dollar cost. But we are, as we had said in the last conference call, we are denominating all of our debt in Euros, most of contracts but not all are also demoninated in Euros, and our exposure is on an equity basis.

We have chosen, because as we will talk about in a moment, we have construction loan, again, in Euros. We have a funding on that construction loan which is just about to be completed which will return a significant portion of our capital.

And, therefore, given where things are today, there was not an absolute requirement for a hedge on that piece. The balance, however, on the equity portion, which is the committed level of equity, again, is part of a long-term business view of what -- where we want to be in Europe and that's a committed level of capital for Europe and our philosophy is not to hedge that until there's a known capital event to repatreate that money to the U.S.

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

Good morning. Just a couple of questions. On interest expense, I was sort of surprised your expense level didn't go up given the Cadillac acquisition. Was that because of capitalized interest?

There was a lot of development activity in the first quarter where there was some capitalized interest. Of course the Cadillac assets weren't acquired at the beginning of the quarter so the debt wasn't outstanding for the whole quarter. I think that's the primary piece.

I didn't really focus on the various -- fourth quarter -- I'll have to go back and get more color, but I think that was it. I think there was a lot of development activity informant first quarter, particularly out of Madrid Xanadu, as we were ramping up the project. I'm sure that outweighed the debt to the time it was outstanding in the first quarter.

Okay. It would be helpful if you could get -- if you have it available, the capitalized interest for the fourth quarter and for the first quarter. It seems to me just doing my back of the envelope, which doesn't necessarily account fully for the time, but it seems to me, it was a big chunk of interest expense we thought was going to be there, didn't end up being there.

We'll provide that data for you.

Okay. Just in terms of trying to understand the Cadillac assets separately or I guess going forward, the conventional mall portfolio, can you break down a little bit more than did you in your supplement some of the separate matrix? As example, you gave sales per square feet for the whole portfolio, Mills and conventional. Can you break that down between the two different types of assets?

I think our philosophy is to, as we disclosed in our press release and 8-K is to sort of try to accumulate the assets and report them as a group. Given, I guess, that, you know, this is somewhat of a new venture for us, what we -- if you look at the Mills assets, for instance, on a gross basis, you know they were roughly flat on a gross basis.

You know, year-over-year. So the increase that you saw, the 325 to 331 or whatever it was, was largely attributable to the acquired assets. On a grows sales per square foot basis.

Is that true, there was any difference in sort of occupancy levels between the two different portfolios?

Yeah, well, I think, in fact, when you look at the occupancy level, hopefully what we did in the 8-K is hopefully you'll find is appropriate, we disclosed again, if you look at the stabilized NOIs, you have the stabilized occupancy levels so you can look at the same assets which of course were not in any acquired assets, because we didn't own those throughout those periods but you can look at those and compare the occupancies to the NOIs.

Okay. And I assume your same store NOI did exclude the Cadillac assets?

It did. Yes.

Is it possible for you to provide same store NOI comp for your conventional assets going forward at least until you have been in the business for longer?

I guess we could, you know, we'll continue to take a look at that as those assets come into comp.

Okay. And then just a couple final questions. One, on a conceptual level, in terms of a lot of activity, you guys are looking at a lot of things which you said in the past you would do. Larry can you give some sense for, is there a limit to the acquisitions activity you would consider doing in 2003?

Well, I think you got to remember that we've been busy guys since 1996 when we opened Ontario Mills, it's not like all of a sudden we're ramping up and opening a lot of projecting or doing a lot of things.

And I think that we have done a terrific job over the last year of adding some of the best-quality people in the industry to this organization and we talked about some of them during the conference call. But it really goes much deep are down in the ranks than that , including I think one of the best all-star leasing teams in the action right now.

So we feel, you know, very qualified, you know, to do what we have on our plate. And again, if you look at -- if you look at how -- what we're doing, a lot of these things are in, you know, are in approval stages, some are in development, predevelopment, some are in leasing.

And so, you know, to put all that down on a chart for you, which I'm glad to do, a piece of paper, I don't think the magnitude, even though it's a lot of work, is all in what you think it is.

The last things is this: Included in this California asset we just talked about, when something comes up that can add tremendous value to this company, of that ilk where we can take our talents and make it something special to add value to the company and for investors, we're going to look at it. Is there a ceiling on is it? Sure. And we'll take our capacity, you know, into account, you know, as the year goes on.

Okay. Last question, just more on the detail, in your supplement you talked about new rents for some of your new leases it looks like the levels for both anchors where there was a little bit of activity, but more on the inline stuff just in general, it looked like sort of starting rents were coming down a bit, spreads were coming down. Is there any sort of trend there that we should be focused on?

I think on the spreads, I think again it's in the first quarter, it's kind of hard to tell especially with the anchors. You don't have enough activity to give you a full-year's viewpoint. We think the spreads will be what they were in the last couple years we're comfortable with that.

The average base rents came down a bit in 2003, simply because we add Colorado into the reporting at $28 and a 1/2 or something. That brought the average down just a fraction. But taking that out, the numbers would have moved up like they have.

A good example is in the anchors, we have -- we inherited the deal but the with you [inaudible] deal that opened in Cincinnati, you know, that was the difference between the numbers that you see there. So it's just a timing thing as much as anything else. And I agree with Ken, you know, you're going to see during the year that go back to historic levels.

You're saying NOI guidance not year is low single digit range, 3 percentish if I remember correctly.

No, we've been out there saying above 5%, I think we're still going to be around those numbers.

Great, thank you.

Our next question comes from the line of Jay Leupp, please proceed.

[inaudible] just a few follow-up questions on leasing spreads and comparable specialty store sales. How much does the 3% decrease on the comparable same place sales for specialty tenants concern you and how much do you see it affecting same store NOI growth and rent growth in the coming year?

Well, you know, our portfolio is not quite as big as others and we do have a preponderance of assets in the mid Atlantic and northeast. I think what happened, Jay, there is that while maybe -- you know what a bad winter we had, and you know that, you know, with the blizzards that we had in the northeast and the centers may have been only closed a day or two or but people didn't shop or a week or 10 days.

And we think that had a tremendous impact on same store sales. Now with Easter falling into the second quarter, you know, we think things will pick up and the rest of the we're should be pretty good.

And on that same vein, heading into ICSC here with about 20% of your specialty tenant on the wholly owned properties leases expiring here in the next 2003, 2004, what do you think the mix will be in terms of renewing existing tenants versus trying new concepts and your holding on to properties.

We renewed, I think the number is on a rolling renewal, 77% that renewed. So I think you're going to see a lot of renewals. We're always looking for new concepts, new tenants that have never been in our projects before. Crossing boundaries, either from Mills to traditional or traditional back to Mills and we're going to continue to do that.

You'll see some of that happening. In terms of this year, you know, we'll relatively well leased for the year right now. We feel very comfortable about where we are for the year and you know, we're in the last throws right now of leasing for '03. The last you know, 20% or so. And leasing for next year.

Okay. And then just lastly on Xanadu and Vaughan, could you give us your best call as to what you think the mix of shoppers will be at Xanadu local residents versus tourists? And also, has there been any change to your yield expectations honored Xanadu or Vaughan at this point?

In terms of yield expectations, there have been no changes. In terms of the visitorship, I think that in Madrid Xanadu you're going to not only draw all of four or 5 million people who live in Madrid, but you're going to draw Spain.

This is the reason that we were designated a tourist attraction and the reason that we're open every Sunday as opposed to the rest of the malls, in Spain, which are open 12 Sundays a year or 10 or whatever the number happens to be, is because, you know, they expect us to draw people from long distances.

And it is the biggest, I think most important project to open in the country, I think people will come from far and wide to see it like they do the other market-dominant projects in Europe which of there are only a handful. So we expect to draw, you know, beyond Madrid, you know, and now, you know, with the visitorship in Madrid, hopefully in the summer season especially, to get a lot tourists coming to the mall also.

Thank you.

And in Toronto, that is one of the most -- one of the largest and best metropolitan areas in North America. And, you know, that site we will start construction on or before June the 16th there. And we expect that to really dominate the landscape in Toronto. It's in a great location.

Jim talked about the demographics being only second to Meadowlands. And there hasn't been a new project built there or in excess of a decade. So this will, I think, be a phenomenon there.

Our next question comes from the line of Patrick Beatty with Invesco. Please proceed with your question.

Yeah, Larry, you talked a little bit about this, but I wanted you to elaborate on it. With all the involvement, redevelopment acquisition activity, I was wondering if you could talk a little bit about how you balance all that stuff? and then as a corollary to that, is there a point where, say, our plate is full or overflowing and you shut it down [inaudible] anything?

Say the last sentence again? I didn't hear you, I'm sorry.

Is there a point where you say the plate is full and we just can't take on any more?

Yeah, well, you know, I think right now there's no doubt that we have a relatively full plate. And we are busy. There's no doubt we are busy. But, you know, with the people we have on hand here, I think all of us sitting in this room and the executive managers of this company, who I think are the best in the industry, feel very comfortable that we can execute, you know, what we have articulated to you guys today.

And, you know, it is interesting. I think the cross disciplining is actually going to help the various projects in terms of making them better and more productive for the company. I think really you take a look at -- you take a look at a project like Madrid, that no other U.S. company has ever been able to effectuate before.

I mean, here we are, you know, I don't know how many thousands of miles away, 5,000 miles away from where we are today in a new country, in a new place, we built a very full-priced project and people here are saying well, how you going to do full price in the United States? Well, you know, it's -- a mall is a mall here.

But we went over there with brand-new tenants, you know, a brand-new development situation, getting our entitlements, get everything done here we are opening exactly what we said we would open, to the yield we said we were going to open at in the high 90s leased, I mean this is a company that's a special company that does special things. And I can assure you the stuff we have on the plate will get done well and it will get done effectively over the next couple years.

I think it's also important to note that this is a business plan now that we've been developing four a number of years. A couple, three years. We have been planning for this in terms of infrastructure and personnel. It's not just a number of opportunities that fell in our lap and we had to rush out, see how we're going to staff up and do this.

Just to Larry's point, he spoke through the beginning, how we're splitting the CFO function in two, I think that's indicative of a lot of areas throughout the company where we've really developed a lot of specialization. Hiring great people and having people at the top of each department and very qualified people underneath them with more specialization.

You need that because you can't spread yourself out too thin. And I think that's part of the way that we plan for this, we've hired for it, we're almost fully staffed for it. And I think, you know, the other thing you need to understand, for 10 years, at least since I've been here, the corporate culture has been one where people are ready to step up to the challenge and engage the next opportunity out there.

It's not something new for the company at least culturally and from an infrastructure perspective, I think we've planned for it and I think we're well in position and well-staffed for it.

Two years ago, everybody questioned our ability to open Madrid Xanadu. And you know, we're going to open, Jim was just there yesterday, I was through three weeks ago, I'll be there next week for the opening.

This is the best project I've ever seen anywhere, anyplace, anytime in terms of the way it's leased and merchandised and the entertainment aspect of it. I know some of you will be over next week and others later and you're going to see something amazing.

It's a testament to this company and what this company can achieve and there will -- it's going to, you know, get us a lot more opportunities in Europe over the next few years.

As hard as it may be to believe, there are opportunities we do turn down.

Good point.

Thank you.

Our next question comes from the line of Josh Bederman with JP Morgan.

Can you talk a little bit about your timing and use of the proceeds from the preferred series E?

Yeah, sure. As you know, as we disclosed, we have the acquisition in Atlanta which we've been under contract with since last fall, in fact,. So that was the primary use for that capital.

Obviously, there was incremental capital beyond those needs because we're acquiring a 50% GP interest, give or take,off the exact amount, but 62 million give or take. We raised in excess of that. The balance of that obviously would be used to -- we did announce a potential acquisition which Larry talked about, so it could be used for that.

Or as you can see from our web schedules, we continue to fund and move our projects forward, our developed projects forward so ultimately we'd -- it would end up in those.

Okay. Great. And sorry, the potential acquisition, what kind of timing? You said you were in due diligence now?

Yeah, I think we actually in our 8 K filing we stated it would be an end of second quarter, early third quarter closing if we were successful.

And you guys, can you put any likelihood on that or?

I think we would -- if we could, we would and I think where we are -- we again, we're under confidentiality and in due diligence as we as we could. So it's difficult to say more.

Thank you.

Our next question comes from the line of Rich Moore with McDonald Investments.

Hi, good afternoon. Could you talk a little Larry or Ken about the concept of remerchandising? You talk about cross fertilizing from your old style Mills projects to some of the new traditional malls that you're getting into. Could you give us examples of tenants that move one way or the other?

Yeah, you know, I talked about the Sears that's now opening in Gurnee Mills that will, I guess, we opened next spring, under construction now, 200,000 square feet. I'll let Jim Napoli address some of the specialty stores in a minute.

You talk about adding stores like Bass Pro to, you know, situations like our center in New Orleans, our center in Jackson, and others. We're talking about one of our -- we're talking about now potentially adding a want to do to one of our new acquisitions in New York. So you're going to see people going in both directions.

We're waking to IKEA about several conventional opportunities that could be very interesting. Also, I think, you're going to start to see a handful, and I say a handful, as few as five or six, I guess I have six fingers on my hand, and as many as maybe 12 or 15 new tenants start to copulate our tenants from Europe.

So you're going to start to see some from our experience with Xanadu, so you're going to see start to see some cross fertilization over a period of time and Jim Napoli maybe you want to talk about some of the tenants that have moved across boundaries.

Yes. One of the things that we're finding is that there are a great number of tenants who are in traditional malls who are very, very highly promotional and they find our Mills concept very attractive to them, whether or not they have an outlet concept.

And the fact is that most of these that we're doing business with today run sales year-round. And they're highly promotional and at any time you can lock into their stores and find goods that are 20 to 70% off anyhow.

So that finding our centers as a great venue for further sales, I mean, people like Lane Bryant, like Deb Shots, like Demo, a division of Pacific Sunware, H & M is doing business with us today, American Eagle is putting in their regular stores in some areas because of how promotional they are. We've done four deals with Forever 21. People like Crabtree and Evelyn.

These are just some of the tenants that we've been doing business with and there are those who have actually made the cross over and have opened up outlet, real outlet stores like, for example, Todd's, the Great European Shoe Operator, or Tommy Hilfiger opened up a kid's store with us as an outlet. J Jill opened up an outlet with us. St. Croix and Bombay, and a number of others. They're opening up outlets for us because they see the venue as very attractive and a great place to sell their goods.

So there have a tremendous amount of crossover, both from the traditional to the Mills and of course we're getting those who are generally in the Mills who have approached us for concepts that they'd like to do in our traditional centers.

The cross fertilization has way gone past my expectations in terms of how it's working and how it's going to benefit our projects. I think you're going to start seeing it through the balance of this year and I think it's going to take some very positive meaningful effect next year.

Good, thanks. Looking at the financials for a second, are you comfortable with the amount of variable rate debt you have or are you going to do unhedge held variable rate debt, are you going to do something to bring that down even further this year.

We're comfortable. The way he disclose it is we don't -- the fixed rate debt, we don't include the variable rate debt that is held unless it's hedged all the way through maturity. We do have, and I think we're at 67% is that number.

And as we discussed in the call through hedgings and transactions that are going to occur in the next 30 days, we're going to be close to 90%. Some of those hedgings go out over two years. So, you know, I think that we're relatively comfortable with where we are, the debt that is variable, again, as I discussed, a lot of that's going to be refinance over the next two or three years, related to property where value is being created through development or redevelopment activities.

It doesn't make sense to have that variable. I think through the hedging strategy, I think we're pretty well protected and even without the hedges being nearly 70% fixed is not a bad place to be.

Okay, thanks. Are you going to have any FAS 141 at all this year or next year before we see any of that?

No, we will have something. As I said, we'll put it into the second quarter.

Okay, yeah. Great. And then just a couple line items. The G&A run rate, G&A's been bouncing around a bit, is this a pretty good run rate in here?

You know, I think, again, Rich, it's great. It going to come up a little bit, and I think, you know, the $17 million kind of range on an annual basis. Yeah, I think that's right. I don't think that the first quarter is the right run rate, I couldn't do the math in my head real quick. I think Greg is right, on an annual basis, we should be at (indiscernible) of net G&A.

Okay. Good. Thanks a lot, guys.

Ladies and gentlemen, as a reminder to register for a question, please press the one followed by the four on your telephone at this time. Gentlemen, I'm showing no further questions at this time. Please continue with your presentation or any closing remarks.

We appreciate everybody's attendance and we look forward to seeing you in Madrid, hopefully, on June 12 and 13. We'd love to see you all there and we'll be talking to you in -- next quarter anyway. Thank you.

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