西蒙地產 (SPG) 2003 Q2 法說會逐字稿

Welcome to the Mills Corporation second quarter 2003 earnings results conference call. (CALLER INSTRUCTIONS). I would now like to turn the conference over to Mr. Larry Siegel, Chairman and CEO. Please go-ahead sir.

Thank you. Good afternoon and welcome to our second quarter 2003 earnings call. In this year's second quarter, we made major strides in our strategy to develop world-class projects from the ground up, acquire productive properties we can transform into market dominant trophy destinations and leverage our extensive portfolio of merger relationships to boost the value of all of our properties. The Mills Corporation sees retail differently from the way others see it. In our view, shopping isn't just about conducting a transaction. It is an interactive experience. Our core competency, what we do better than anybody else is creating innovative highly productive consumer venues that timely integrate retail and entertainment. We build and operate successful properties where shopping transcends the retail transaction and really becomes an event.

The grandest incarnation of this concept to date is the spectacular Madrid Xanadu, which we opened on May 16. Major retail anchors include Spain's dominant department store El Cort--(indiscernible) with a Hypermarket, Forum, H&M, C&A, Zorra, Mango, San Malie (ph) and Riamadrid (ph). The story (ph) soccer franchise opened a store also. Retailers new to the Spanish market come from around the globe and include Xton (ph) from Italy, Sketchers (ph) from the U.S., Maison Du Mon (ph) from France, Golden Point from Italy, Tommy Hilfiger from the U.S., River Woods from Portugal, Six (ph) from Germany, Qui Grammer (ph) from Portugal and Nike from the U.S. and also Zorra Home (ph) from Spain. In addition, Madrid Xanadu is the first center in the world to have all the retail concepts of leading-edge retailers in the (indiscernible) Spain and Britain's Arcadia group. Entertain offerings include a 15 screen paramount (indiscernible) theater, Formula Zero indoor go cart race track, Taz (ph), a ball and billiards and nightclub concept from Argentina, Billabar (ph) a multi entertainment complex with restaurants, bars and a nightclub, and of course, Parkay (ph) (indiscernible) Europe's large indoor snow sports facility.

Only Mills could have conceived and executed this stunning example of the fusion of full price retail and interactivity. In fact, we are the only U.S. REIT to open a major consumer center outside of the United States. The immediate over the top success of Madrid Xanadu is a testament not only to the fact that we are the most creative and innovative developers in the real estate industry, but that our vision of retail is right on target. Madrid Xanadu is a triumph too because of its phenomenal location. Spain is one of Europe's strongest economies and one of its fastest-growing. The trade area for this A+ asset includes the vibrant and cosmopolitan capital city Madrid and the surrounding region. Within a 30 minute drive from Madrid Xanadu with more than 6 million people, the retail and leisure definition is located at Royal Millinus (ph) one of the fastest-growing cities in Spain. In the next five years, more than 30,000 housing units are to be built within six miles of the center.

Madrid Xanadu benefits greatly also from its designation as a tourist destination which enables it to remain open 365 days a year unlike the majority of centers in Spain which must close on most Sundays. Traffic has also been outstanding. During the first three day grand opening weekend, more than 200,000 visitors flocked to Europe's dominant retailer and entertainment destination. When the new M50 highway opens later this year or early next year bringing in visitors from the wealthy northern suburbs, traffic will really ratchet up.

In addition, many of our merchants reported June sales well above their projections. Among majors, H&M's June gross volume was more than at (indiscernible) Aronda (ph) Mills or Potomac Mills. CNA (ph) Clockhouse and San Louie (ph) reported sales well over plan. The Snow Domes revenues were 22 percent over plan. Specialty tenants reporting sales over plan include names like Nike, Purification Garcia, Blanco, Foot Locker, By the Sally, McDonald's and ECI sports which has sold more skis at Madrid Xanadu than in all of the rest of their stores in Spain combined. Currently, more than 20 tenants project to do more than EUR600 per square foot, including four of the six sporting goods and or athletic shoe stores as well as merchants in nearly all other categories.

Turnovers for July are starting to come in and there are significant sales increases over June's figures, in most cases double-digit increases. The strong performance and immediate success of Madrid Xanadu has significantly raised interest in Europe among prospective partners, merchants, governments and communities and we continue to evaluate a number of very promising development opportunities elsewhere in Spain, Italy and other locations. Jim Dausch will elaborate in a few minutes.

Then there is the other Xanadu. Meadowlands Xanadu will truly define the retail industry in the United States as an interactive experience. Named (ph) regions of what will be the East Coast top consumer destinations will merge entertainment, retail and also activities. Fashion retailers will be intermixed with the luxury spa and a design school that puts on fashion shows. The food and home region will feature a cooking store. Sports retailers will be supplemented with indoor skiing, ice skating, skateboarding and surfing venues. A YMCA with an aquatic center will be there, ballfields and gyms, a minor league baseball facility and also much more. In the children's area, we will feature Wanado (ph), a massive interactive children's play city and an interactive PBS kids zone. Each region will be a retail and entertainment portal.

Our vision for the Meadowlands Xanadu is advancing towards reality. We continue to make progress on our developer's agreement with the New Jersey Sports and Exposition Authority for the most ambitious project in our history. We expect to finalize that agreement shortly and begin construction later this year. In fact, the President of the Sports Authority just publicly announced his intention of completing the developer's agreement by mid-September. Work upon the various permits necessary for construction also continues in the strong partnership with the Sports Authority in the state of New Jersey. We will transform an already productive megamall into the western United States dominant retail destination.

The demographics around the site are incredible. Within a 10 mile radius of the property with more than 1 1/2 million people and 20 percent of the households have incomes of $100,000 or more. Palas Verdes (ph) and other nearby beach communities including Manhattan beach, Redondo and Huntington Beach are extremely wealthy, yet residents have to drive some 40 minutes to reach high end retailers.

Moreover, future competition is out of the question. It would be impossible today to get entitlements for a center that dominant in any densely populated area. This is especially true for urban areas in California which traditionally are hostile to new developments. Given these demographics and circumstances, it is no wonder the asset is performing well with sales of approximately $400 per square foot. Yet Delamo (ph) among the four largest mall properties in the United States, is the one with the greatest unrealized re-development potential.

We will enhance the property's appeal to its existing customer base of middle and upper middle shoppers. We will also bring in a new set of high price point tenants to appeal to its underserved local affluent residents. High-end department stores share our view and we are working on potential deals with several of them. Large assets need to be destinations and Mills is the master of developing large retail and entertainment destinations. Our track record of developing and operating 14 centers of more than a million square feet attest to our ability to make large properties successful. Mills is perfectly positioned to add value to Delamo (ph). The economics of this deal continue to look better and better. We should end up with development like returns with far less risk. We vastly underestimated the likely proceeds from the sale of adjoining land for apartments. The residential market there is red hot. We're finalizing permits for about 1000 units but we may get much more. When the land sale is included our initial yield on the project may approach 9 percent and we expect double-digit returns on the incremental capital we invest on the project. After redevelopment is completed and we re-grand open the property, we expect to yield in the mid nines. Delamo will be viewed as one of the Company's trophy properties.

Great mall of the Bay Area in Melpeddes (ph) California holds great potential for us. It is doing well reaching sales of $319 a foot and it attracts 18 million visitors a year. But in this market it should be doing much much better. It is located in an affluent densely populated area with terrific access to the South bay and also Silicon Valley. More than one million people with a median household income exceeding $70,000 live within ten miles of the Great Mall. That's one of the best demographic profiles in our or anyone else's portfolio. This acquisition provides us an entree on very good terms into one of the best markets in the country. The nearby Silicon Valley is emerging from its recent economic troubles and we feel it's on the verge of a strong comeback. Given the demographics of the area, the property could become one of our most successful centers.

We will leverage our leasing, operations and marketing expertise to boost the occupancy, increase rents, create ancillary sponsorship revenue and expand the trade area. By virtue of our extensive relationships, we will add exciting new shopping and entertainment venues. 70 retailers, that's 7 0 retailers have locations in 4 or more Mills properties and are not in this property. And many of them have indicated strong interest in coming to the Great Mall. There are four vacant anchor spaces, unheard of in a Mills property, providing us the opportunity to enrich the tenant mix with highly productive Mills type retailers. Already, we are in negotiations with three anchors and next year we plan to finish the lease of partially completed 60,000 square foot expansion space.

To further boost the value of this property, we will bring the quality of the interior finishes up to our high standards and broadcast our sponsor supported Mills TV programming. The success of our existing properties is what drives our growth and continued success requires constant refinement and improvement of our tenant mix. Our innovative approach to real estate and our ability to develop relationships with nontraditional retailers uniquely positions us to replace underperforming tenants across our portfolio with more productive exciting new concepts.

The financial community clearly supports our vision. As you know, we recently secured a new $500 million credit facility that replaces our previous $175 million line. 21 institutions are participants in the new facility which gives us the financial flexibility to adequately take advantage of opportunities that fit our growth strategy and create value for our shareholders. The large number of participants in the facility and the size of the credit line which was largely oversubscribed, reflects the financial community's confidence in our plans, our asset performance and our management team.

In short, we continue to grow our portfolio of innovative and productive retail and entertainment centers through development, acquisition and redevelopment. With properties like Madrid Xanadu, Del Amo Fashion Center, Great Mall of the Bay Area and future projects such us Meadowlands Xanadu, we're building value for the future while delivering strong financial results today.

Now, I would like to turn it over to Jim Dausch, our President of development. Jim?

Thanks Larry. We've seen solid progress on a number of Mills development opportunities during the second quarter of this year. As Larry described to you, we opened Madrid Xanadu on May 16, 2003. Since May 16 however, we have opened another entertainment anchor along with several new specialty retail merchants and restaurants and indeed, all 18 of our restaurant spaces are now fully operational. But there is more development work to do at Madrid Xanadu. We are now planning and leasing a 150,000 square foot power center adjacent to the El Corte--(indiscernible) end of the mall and we are working on plans and about to begin basic site work on a 60 acre out parcel already entitled for entertainment, hotel and retail uses.

In North America, we broke ground on two new projects in the second quarter of this year and now have 4 Mills projects in construction. St. Louis, Cincinnati, Toronto and Pittsburgh. On November 13 of this year, we will open St. Louis Mills. (indiscernible) Fifth and Regal cinemas will join Bed Bath and Beyond, Burlington Coat Factory, Off Broadway, Books A Million, Marshalls, Circuit City, Nike, Rainforest Cafe and in the new sports village part of the mall, the St. Louis Blues ice rink and ESPN XGames Skatepark and a Nascar speed park.

Despite a relatively weak economy during the last 12 months, we still expect to have our specialty store 75 percent leased at opening and to open 11 of the 12 leased anchors. The 12th would open in the spring. The progress which has been made so far in developing St. Louis Mills as a powerful magnet has resulted in strong interest in the peripheral land there with more restaurant interest than we have land to accommodate and big box interest as well.

For the spring of 2004, we have the reopening of the former Forest Fair Mall (ph) at Cincinnati Mills. We're positioning this well located center as it should be positioned 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 now fully underway as is specialty leasing. Cincinnati Mills is already anchored by Bigs (ph) Bass Pro, 2 cinemas, Saks, Kohl's and Media Play and a new Babies 'R Us which opened earlier this year. These anchors remain open during the development process. We're now working on a re-use, re-lease plan for the Elder Beerman (ph) space which we recaptured during the second quarter. The economic use of part or all of this space was not calculated in our return analysis and should provide additional financial benefits to us by 2005 when its released and reconstruction are completed.

In the fall of 2004, we expect to open Von Mills (ph) in the Toronto area. Construction of this project finally began in June and demographically, the site is one of the most dense we've ever developed. It has more than one million residents within a ten mile radius, just about twice the similar density for El Rondo (ph) Mills and this part of the Toronto market is still growing. With our partner Ivanhoe Cambridge handling the specialty leasing and we are advised by them that interest is very strong and with anchor leased commitments already obtained from Bass Pro Outdoor World, Burlington Coat, Children's Place, Tommy Hilfiger, Winners, Lucky Strike Lanes, ESPN Skatepark, Forever 21, we are on our way to a successful entry into the Canadian market.

We also began site work construction for a new Mills in the Pittsburgh area during the second quarter. All permits necessary to develop the site are now in hand and tift (ph) to help pay for sight and infrastructure costs is finalized. This center will open in fall 2004 or spring 2005. Anchor leasing interest is very strong. Actually it was the interest of several large box retailers which sparked our interest in the site. Cinemark, Bed Bath and Beyond and Dicks (ph) have already committed to the center and we will announce others shortly. Interest in the peripheral land is already strong, not only among the traditional freestanding big boxes but surprisingly, among some large users more typically found anchoring regional retail centers.

In the predevelopment stage we have the following opportunities, the first of course, the Meadowlands. Larry covered this subject adequately and I can say that we are all encouraged by our progress on this front. Beyond the Meadowlands, our new business activities have the objective, this is our three point growth strategy, to produce a balanced pipeline of Mills, conventional retail centers and international projects of all kinds. On the Mills side -- on the non-Mills side of the business excuse me, other than the Meadowlands, we continue our negotiations with the port of San Francisco on a lease document for piers 27 through 31 and are well along in the entitlement process there as well. During this past quarter, we successfully navigated the state waterfront land trust process without a dissenting vote. We expect to conclude the entitlement process for the pier (technical difficulty) by early next year.

In Chicago where we were as you know, selected as master developer to redevelop block 37 office at Marshall Fields in downtown Chicago as a retail residential hotel project, we've now executed a memorandum of intent with the city of Chicago which governs the predevelopment and entitlement process which we expect to extend into the spring of next year. We are 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.

Much of our development work on non Mills traditional retail venues is concentrated on redevelopment and expansion work of our newly acquired centers. This work continues on all these centers. Our board recently approved a program to enhance physically the Riverside Square project in Bergen County concurrently with some re-teneting of this center. We continue to make encouraging progress on the redevelopment and expansion of Broward (ph) Mall especially in our discussions with potential new department store anchors. And now with our acquisition of Del Amo, we are working on several concepts to expand, redevelop and release this center in short, to realize it's incredible potential. If Costames (ph) can boost South Coast Plaza, then soon Torrence (ph) will be able to boost a Del Amo Fashion Center as a sort of North Coast Plaza.

Our Mills new business program also continues as we identify our post 2005 pipeline in markets around the country. We also continue our work expanding existing Mills properties where market conditions warrant. Larry mentioned the Great Mall of the Bay Area. We will also continue in the beginning of 2004 to work on a major renovation of our flagship Sawgrass Mills project in the Fort Lauderdale area where we're also planning a major expansion, an expansion which is already successfully through its state entitlement process.

Our international new business program continues its focus in Spain and northern Italy and having recently returned from visiting a number of these sites and discussions with our prospective partners, I am encouraged by their prospects. It's also clear that Madrid Xanadu's success has opened the door to a number of opportunities for us in these focus markets, as well as elsewhere in Europe. In Spain, we are exploring follow-on opportunities beyond Madrid Xanadu in Seville, Valencia and Barcelona and hope to have one of these opportunities in leasing and construction next year. In Italy, our efforts are concentrated on several well located sites in Milan, Florence and Rome where we have strong local partners and where the partners continue to make encouraging progress through the government entitlement process.

We continue to pursue a careful, responsible, prudent course which will produce results in the coming years gradually but reliably. We are capitalizing on the real world experience we've gained and are continuing to gain and the credibility we've earned throughout Europe with Madrid Xanadu. We are optimistic about progress to date and expect it to continue. Now, I will turn the speaker over to Ken Parent.

Thank you Jim. I'd like to bring you all up-to-date on our operating and financial results. Fully diluted FFO per share increased 14 percent to 82 cents in the second quarter of '03 from 72 cents in the second quarter of '02. Collective highlights for the quarter growth are as follows -- same project NOI increased 8.2 percent in the quarter, generating incremental FFO to Mills of approximately $6.7 million. The quarter's NOI growth has been impacted by certain items that while recurring on an annual basis tend to fluctuate from quarter to quarter. For the full year statewide (ph) NOI growth should be more than 4 percent, an increase of $4 million of FFO from new projects which has not stabilized in the first quarter of '03, net of interest expense namely, El Rondo (ph) Discover, Colorado, Cincinnati and Madrid Xanadu. An increase of $2.4 million net of related interest expense from FFO related to the acquisitions of the Simon and Gaylord joint venture interest. An increase of $11.5 million net of related interest expense of FFO related to the acquisitions of Riverside Square and Cadillac Fairview assets including the 50 percent joint venture interest in Town Center at Cobb and Gwinnet Place.

These increases were offset primarily by a $3.5 million reduction in the Company's proportionate share of land sale gains during the quarter. You will recall that 2002 had higher than normal land sales for the first six months. Our land sale program remains robust and we're currently in negotiations with a number of adds (ph). In 2003 we expect to generate $15 million of FFO from these transactions, consistent with previous guidance.

Preferred dividends increased be 6.6 million as a result of the perpetual preferred stock offerings in the fourth quarter of '02 and first half of '03. G&A expenses increased by 1.6 million to $4.8 million for the quarter. This increase is related to the Company's overall growth during the last 12 months and certain onetime costs related to Sarbanes-Oxley and other items. Despite the onetime costs, we believe this quarter's G&A is a reasonable run rate for our anticipated level of overhead and staffing as we have told you in the past.

These overall positive earnings increases were offset by an increase in the fully diluted share count of approximately 8.1 million shares over the previous year, primarily due to various stock offerings.

In review, we had a strong quarter propelled by our core property performance which helped to offset quarterly land sale variances. We expect these impressive property level results to continue to drive NOI higher through the second half of the year.

Moving onto the six month numbers, fully diluted FFO per share increased 10 percent to $1.60 (ph) per diluted share as compared to $1.46 per diluted share for the six months ended June 30, 2002. A 4.9 percent increase in same project NOI generating incremental FFO to Mills of approximately $9.2 million, an increase of $17.7 million net of related interest expense of FFO related to the acquisitions of Riverside Square and Cadillac Fairview assets including 50 percent joint venture interest in Town Center at Cobb and Gwinnett Place. These increases were offset primarily by a $7.9 million reduction in the Company's proportionate share of land sale gains during the first six months of 2003.

Preferred dividends increased by $11 million as a result of the perpetual preferred stock offerings in the fourth quarter of '02 and first six months of '03. G&A expenses increased by $2.6 million versus the same period in the prior year.

I would like to minute on our forward-looking earnings guidance for 2003. New accounting standards will likely impact the next six months of earnings which will impact our full year reported FFO. Specifically, I'm speaking about FASB 141 and Fin 146. Regarding FASB 141, we collected to defer adjustments until next quarter as permitted by the FASB. Accordingly through the first six months of our financial statements, we will not reflect the adjustments. As you know, FASB 141 requires us to mark to market leases at acquired properties and recognize the income over the life of the lease. The calculation is cumbersome and highly subjective. Recently the SEC has been issuing comments in this area causing the accounting industry and affected companies to refine their approach. As such, while we certainly expect a positive adjustment upon implementation of 141, we will wait until the guidance becomes more clear on the timing question.

Another new accounting pronouncement is Fin 46, which deals with the consolidation of joint ventures and would likely require us to consolidate certain of our unconsolidated partnerships that are in the development or construction period. The effect of this consolidation would be to differ some of the development fees we've received from (indiscernible) and other joint venture partners. Under Fin 46, we will be required to consolidate ventures until all capital is committed to the project which generally happens when equity is committed and the construction loan closes. At the present time, we believe that Fin 46 would require the consolidation of Von (ph), Pittsburgh and the Meadowlands although further consolidation is possible. Fin 46 becomes effective for the third quarter coming forward.

We estimate that as a result of the accounting change we will differ between six and $7 million of development and leasing fees from 2003 into the next year. In 2004, we will return to our more normal run rate of 10 to $11 million in fees. It's important to realize there is no cash implication from the accounting change as we will continue to receive fees from our partners for development and financing activities.

Now to the 2003 FFO guidance. We previously had reported a range of $3.54 to $3.58. Despite Fin 46 which reduces FFO by 10 to 11 cents, we continue to feel confident we will be in the previously reported range. Albeit more than likely at the lower end. Obviously, were it not for Fin 46 we would have significantly beaten the earnings guidance thanks to strong operating results and the acquisition activity. Therefore, despite these changes, most analyst estimates for 2003 are accurate on a full year basis. However, we have noticed that consensus estimates for the third and fourth quarter do not match our projections. The impact of deferred fee income and our land sale schedule which is heavily weighted to the fourth quarter, implies that our third quarter FFO should be close to 82 cents per share and our fourth quarter FFO per share should be approximately $1.12. While it's impossible to precisely predict FFO we feel fairly certain that we should be within a few cents of these estimates.

Moving from accounting to operations, gross specialty tenant report sales for the entire portfolio including the 21st Century Retail and entertainment centers with the exception of the assets acquired during the second quarter for the 12 months ended June 30, 2003 were $332 per foot -- per square foot versus $326 per square foot reported one year ago. These figures reflect a healthy second quarter for sales with slight positive increases bringing our six month comparable tenant sales decrease to 1.5 percent, improving from a 3 percent decrease in the first quarter. Stabilized portfolio occupancy at the end of the second quarter increased to 93.8 percent versus 91.9 percent in 2002 second quarter. Leasing spreads for the first six months of the year were 8.8 percent.

Our leasing team had a great quarter as evidenced by our leasing spreads and increased occupancy rates. We are beginning to reap the benefits from Cadillac acquisition (technical difficulty) traditional regional malls with the energy and excitement of retailers from our landmark Mills centers. At Broward for instance and Taylor Loft (ph) has signed a lease and a new 18 screen AMC theater has agreed to be the first key tenant in our previously discussed expansion. At the same time, the acquisition has been a catalyst for increasing the number of traditional mall tenets in our landmark Mills properties. Just a sampling of retailers that are expected to be in Mills projects include American Eagle, which has opened five shops in Mills projects in the last 12 months and they open three more in the near future, Forever 21 has leased space in Ontario, Concord, Gurnee and Potomac, Hot topic which is present in 7 Mills properties is negotiating leases at two landmark centers, Layne Bryant will likely open stores in two landmark Mills before too long, Bath and Body is now in most of our centers, Hollister (ph) is looking at spaces in our portfolio and Eric Bastale (ph) has six stores in our centers and is in negotiation for additional space.

While new traditional mall tenants in landmark Mills will enhance these centers the continued success of these properties requires constant refinement and improvement of our tenant mix. Our anchor leasing efforts continue to pay rich dividends as we evolve our tenant mix and enhance our landmark Mills properties. At Sawgrass Mills, Florida's first Nordstrom rack, opens tomorrow and the Want to Do children's play center play city opens next spring. At Colorado Mills, the Waldon's Family playhouse and the 8000 square foot Yard (ph) House restaurant have opened. At Discover Mills, we will open a new AMC theater and we are working to bring Want to Do there. At (indiscernible) Mills, a midevel times themed dinner theater featuring live jousting opens this Friday. At Grapevine Mills, we will open Nautica and Joan's New York. We also are in negotiation to open Underwater World, a 99,000 square foot, 1200 foot long tunnel aquarium that will be the world's largest tunnel based water exhibit. The gated attraction would allow visitors to go snorkeling among the sea life and would have areas for children as well as professional divers. There also will be a snorkeling school and a bar and grill. City officials in Grapevine have approved the zoning change for this exciting interactive attraction and it should open next year. At the Galleria at White Plains, a new Sears will open in a few days. We've executed a new deal with Paxon (ph) for an expanded space and we've renewed Walden Books, Victoria's Secret, Radio Shack, G&G, and Yankees Clubhouse.

Across our portfolio, retailer's confidence in our properties can be seen in our improved occupancy rates. Our centers thrive in today's competitive retail environment because they contain many of the most successful retail formats that are typically found in a stand-alone format. I recently read an article in CNN Money which said that department stores specialty retailers and other chains that fill shopping malls accounted for just 19 percent of retail sales in 2002 down from 38 percent in 1995. It went on to say that 80 percent of sales from the 40 largest retailers in the U.S., in the United States came from stand-alone stores such as Target, TJ Max and Lowes. Between 1998 and 2001, the ten largest stand-alone retailers saw sales increases at an annual rate of over 15 percent. During the same period, the largest traditional department stores saw annualized sales growth of 1.8 percent. This was less than the rate of inflation. In the coming years, these trends will lead to further consolidation of the department store industry. As department stores consolidate and their sales decline, alternative uses for other anchor pads will need to be found. Today it is imperative to involve retailers that are typically found in a stand-alone format in larger retail projects because of their popularity with consumers. The quality of our proven relationships with these stand-alone retailers and other nontraditional mall retailers is unparalleled. Many of the most popular big box retailers such as Kohl's, Linens and Things, Bed, Bath and Beyond and Circuit City are present in our centers as anchors. Others like Costco and Wal-Mart are located on pads within our site's ring roads (ph). These relationships are continuing to pay dividends as Target is committed to lease a vacant pad at (indiscernible). Additionally, Want to Do has expressed a significant interest in the side of Del Amo. Many more of these types of tenants will be moving into our conventional mall assets in the near future.

Now to our capital structure where we continue to maintain a conservative posture and retain the flexibility we need to implement our strategy. As Larry mentioned, the new $500 million credit facility offers us tremendous liquidity and flexibility. Additionally, institutional interest in our (indiscernible) assets is extremely high and we expect to access equity capital via direct investment. In fact, we're finalizing an agreement with (indiscernible) to increase their ownership interest in Orondo (ph), Concord and Grapevine to 41 percent, allowing us to pull $30 million in equity out of these properties. This deal was priced using an 8 percent cap rate, generating over 30 percent economic gain on our previously interest from Simon.

This transaction which reflects -- this transaction reflects a growing understanding of the stability and inherent value of Mills landmark assets. As of the end of the second quarter, our capital structure had the following characteristics -- Interest cover -- interest coverage ratio excluding the benefits of foreign currency gains of 3.53 times versus 2.91 times a year ago; a trailing 12 month dividend FFO payout ratio of 67 percent versus 68 percent one year ago. Included in the debt that was recently placed on the great Mall of the Bay Area, 64 percent of the Company's debt including its pro rata share of JB (ph) debt is fixed or hedged to maturity. This percentage would increase to approximately 72 percent if adjustments are made for debt on the Cadillac portfolio that is hedged through February of 2005.

Finally, a glimpse of our current liquidity at June 30, 2003 has cash and equivalents of approximately $82 million, including our share of joint venture cash and $380 million available under our line of credit. With this kind of financial muscle, we're well positioned to fund our development pipeline and the redevelopment of our acquisitions for the next several years.

That concludes our discussion of operating financial results. I would now like to turn the call over Norm Saxonhouse (ph) our Vice President of Investor Relations for a brief statement.

Thanks Ken. Before I turn the call over for questions, I would like to remind everyone that statements made during this call that are not historical may be deemed forward-looking statements. Although the Company believes expectations reflected in any forward-looking statements are based on reasonable assumptions, they can give no assurance that its expectations will be obtained and it is possible that their 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 and local economic climate, competitive market forces, changes in market rental rates, trends in the retail industry, the inability to collect rent due to bankruptcy or insolvency of tenants or otherwise and changes in the market rates of interest. We direct you to the Company's various filings with the Securities and Exchange Commission, including Form 10-K and Form 10-Q for a detailed discussion of risks and uncertainties.

Acknowledging the fact that this 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 13, 2003. This call will include statements and presentations of certain financial measures that have not been calculated in accordance with generally accepted accounting principles which are commonly referred to as non GAAP financial measures. Such non GAAP financial measures include but are not limited to funds from operations and EBITDA. Additional information regarding such non GAAP financial measures including the definition of such non GAAP terms, presentation of the most directly comparable financial measures and calculated in accordance with GAAP and reconciliation of such non GAAP financial measures to the most directly comparable GAAP financial measures as required by regulation G is set forth in our supplementary information in the Company's current report on form 8-K, as furnished to the SEC on August 13, 2003. The supplementary information is also available on our website at www.millscorp.com under the heading corporate and financial reports 2003. I will now turn the call over to the operator for questions.

(CALLER INSTRUCTIONS). David Bronco (ph) of RBC Capital Markets.

Good morning guys. First question relating to same store NOI growth of 8.2 percent, surprisingly strong there. I know it was 1.5 percent in the first quarter. It looks like same store occupancy was up about 20 basis points. I wondered if you could talk about that number a little bit and what drove it?

This is Ken Parent. As we said in the first quarter NOI growth was depressed because of term fees that were actually recognized in 2002 that were not recognized in 2003 and actually flipped in the second quarter we had some term fees going the other way quarter over quarter. There is also some other items, some adjustments that were made, some onetime charges that came in to offset that so when you lump all that together, we had an 8.2 percent growth which again, as I said in the call, was higher than it will be for the year. For the year, turn fee income and all these other adjustments are going to be about what they have been averaged over the last two or three years but from quarter to quarter, they can cause some funny fluctuations and they did in the second quarter of this year and the first quarter, which as I said was actually reduced because of these kinds of adjustments.

Great thanks a lot. Second question was on the residential land sale near Del Amo. I know Larry you indicated that you're surprised by the economics there, on the good side. I wondered if you could expand on that a little bit.

We went in knowing there was an opportunity to do a residential play next to the shopping center. We just realized how large it could be and the demand there for residential has been enormous and we literally have five or six residential developers who are vying now, competing to build the residential there so we are in a process of just about running an RFP process there to see who will pay us the most and we are going through the process with the local municipality and also, with the state. The one with the local municipality is just about done and I think we are in pretty good check with the state too, although it may take some months more to get that done to see just how dense we can make it. We are envisioning 1000 units but it could be much more than that. The demand is certainly much more than that.

Okay. Final question I guess is just a bigger picture question. With so many strong development, redevelopment and acquisition opportunities, I wonder if you could talk a little bit about use of capital and whether your thoughts on use of capital have maybe changed at all during the second quarter and beyond?

I think David, we always look at our capital obviously as a precious commodity and the acquisitions have come on strong for us. We view that we can make very attractive acquisitions on a risk-adjusted basis and that competes obviously with our development pipeline. Nonetheless the development pipeline is I think is robust as it has done because the opportunities are significant, particularly with all the international development. So we look at these things, we look at these opportunities one off and if they meet -- if on a risk-adjusted basis, the return is sufficient relative to the cost of whatever the capital might be at the time the capital is available to us, we will go forward with the transaction. That's the best I can say. We have a three prong approach as you know. We have growth in each of the three prongs and we manage those based on opportunities and cost of capital at the time the opportunities arise.

Thanks. Good quarter.

Thank you.

Craig Schmidt (ph) of Merrill Lynch.

Good afternoon.

Hi Craig.

I just -- the fee adjustment, is that going to be occurring both in the management fee line and other fee line?

No, that is in the development fees. It's related to consolidating the development and some of the development properties, partnerships excuse me, and the ones under construction and as a result of consolidating those, we will not be able to recognize the fees because they are under consolidation until the time we put the construction loan in place all the commitments are provided. At that point in time this is a crazy (indiscernible) but that's the way it is, at that point in time, we will deconsolidate the partnerships and you will be allowed to recognize the fees and the earnings.

Okay great. I also wondered, given the tremendous success at Madrid, are you seeing any of the European tenants interested in coming and joining some of your Mills projects here in the states?

That's an interesting question. Jim is sitting here, he can answer that question probably better than I can but from my perspective, the relationships are terrific because they've opened a very successful store with us in Madrid. They've seen what we can do as developers and I know Jim and his team over there are working with probably up to a dozen retailers that he can bring back into not only our Mills landmark centers, but also into the more traditional malls that we've acquired over the past eight or ten months or so. So we expect I think over the next six months to a year hopefully you'll see some of them start populating our shopping centers. Do you want to add anything Jim?

All of the retailers that we have been in close contact with have asked us that we keep them in the loop as to how our projects, some of our new projects are proceeding and to continue to speak with them because they all anticipate at some point in the future, to be able to launch a full expansion in the U.S. and they would like to do it with us. So we are very very excited about it and we think that it'll bring a lot of new blood into the retail community. So we are keeping them posted and we are going to continue to work with them.

Great. I also see there is a pickup in occupancy on the comparable properties. Are you seeing a pickup in Sawgrass as well? I know that had some 9/11 disturbance?

There has been an uptick. There has been an uptick in Sawgrass. We were just down there as a group I guess a few weeks ago, looking at the renovation plan that Jim talked about and the potential expansion opportunity and what we were going to do with it. We are finding leasing in that shopping center very strong and we went through a list of stores that could occupy the expansion and also, a list of stores that we're working with in the existing shopping center and there are a list of maybe I think 15 or 20 new retailers that haven't been in Sawgrass before that we are currently negotiating deals with for spaces in Sawgrass, some of which we have and some of which we are going to have to wait for until leases expire but we expect Sawgrass I think occupancy to continue to flourish.

Great and then just one last question. How is the second phase I guess you call it, at Colorado Mills coming along?

We are in the process now of -- we are in predevelopment on it now. We're working with several anchor stores. We are exchanging letters of intent with them to see if we can make a deal and we are also working with various specialty stores and restaurants and other uses to extend that street so hopefully we will have something to talk to you about later this year.

Great, thanks a lot.

Ross Nussbaum (ph) of Smith Barney.

Thank you, good afternoon everyone. Ken, let me start with a clarification on Craig's question on Fin 46. The fees that you are going to be differing, those were hitting the other fee income line or were they in equities and earnings of JVs?

No, those were in the other fee income line, not management fees, they are the development leasing finance fees relating to our products under construction and development.

And the 6 to 7 million you talked about getting deferred, that is specifically in the third and fourth quarter getting deferred?

That is in the third and fourth quarters. We will have a little bit more fee income for the balance of the year but we're almost done.

Okay, so then you think next year you are at a 10 or $11 million run rate, is that correct?

Yes absolutely.

The next question is on the Canam (ph) joint venture stepping up the interest in Orondo (ph), Concord and Grapevine, what is the total, I guess gross size of what's going to be sold Canam?

The sale is about $30 million and what's the interest?

17 percent.

17 percent of what we acquired from Simon.

They are going to step up 17 percent of their share of the debt as well --

It's approximately 6 percent of the total.

They end up about 40 percent of the total assets.

Okay. Is there any way you can quantify what that number works out to be? What I am trying to figure out is this essentially will act for modeling purposes as a disposition. I'm trying to get a sense of what that gross size that's coming out of your balance sheet is going to be?

In terms of NOI, FFO?

No, in terms of the amount of debt that's getting pulled out in addition to the amount of equity.

It's about 6 percent of the total from those assets.

Okay. Next question deals with your occupancy line and that is I understand occupancy is up nearly 200 basis points year-over-year but what I am having trouble reconciling is that there is a schedule in your supplemental that shows tenants who have closed versus tenants who have opened year-to-date as well as last year and the past couple of years and I look at that schedule and you've had more tenants closing than opening for the past 18 or 24 months. I'm having trouble reconciling that fact with the increase in occupancy.

The last six months of 2002 actually flipped. You can't see that on the schedule but for the full year I believe in 2002 on specialty at least, the change wasn't that significant if I am right. I am not looking at the schedule, I think that's the number and what happened was the first six months you had more closings than openings and in the last six months, you had more openings than closings and when you compare that variance versus the variance in the first six months you actually moved up.

Okay, that answers that. On the development side, St. Louis you're 67.5 percent preleased today and you are targeting 75 percent at opening. That seems to be significantly below what you guys have done historically. Is this an asset that you think is going to stabilize at levels below what you've done before?

No. I think what has happened is that leasing is actually going relatively well. We are going to open at 75 percent but it should be higher leased than that. You're going to open at 75 percent occupied. You'll have a bunch of tenants that will open three or four months later, at the beginning of the spring that'll bring that level up into the low 80s someplace, 82, 83 percent or something like that, which is a little bit above actually where we traditionally open a center. So it's more the timing of the openings than it is of the openings (indiscernible) stores than anything else and as Jim said, we only have 12 anchor pads. 11 of the 12 of those are going to open, which is I think a new high for us and the land sales have just been -- the land sale part of our program there has just been very strong and on fire, in terms of that so we expect it to be a very good center. There really is not a strong project on that side of town because of its accessibility by roads to the better suburbs, other part of the city. You can virtually get there anywhere in the city in 15 minutes and the other good thing about the project is while other cities have other off-price (indiscernible) competition St. Louis is really, doesn't have any whatsoever. So it will really be new and special and not have a lot of competition and post six or eight months after, we expect to lease it up pretty strongly.

Okay. Final question, Town Center Cobb and Gwinnett, can you talk about what the status is of those with respect to what you will or will not do with Simon?

In fact, we're having our first meeting with Simon I think towards the end of the month in Atlanta so we will be able to tell you better after that meeting.

Okay thank you.

Michael Mueller of J.P. Morgan.

Hi. Most of my questions have been answered but with respect to the Del Amo debt, do have any plans to hedge that out?

We are looking at that right now. As you know we have got a fairly ambitious plan. What we're probably going to do Mike is look to go out a year or two for a significant portion of that debt. We can actually hedge the Del Amo debt or a big piece of it, we can hedge some of the other variable-rate debt we have through 2004 at a very nominal cost and we can it through 2005 at also a pretty reasonable cost and we are certainly going to look to do that.

Okay. And you've given guidance on 2003. Two questions about that, or actually one. Does that include -- that is excluding FAS 141?

That's right. FAS 141 adjustment once it is made, will make those numbers bigger.

Okay. And any insight you can provide at this point into what 2004 should look like?

I think 2004 numbers, I think consensus estimates have us going up 8 percent. Of course, we haven't gone through our budgeting process. We are about to start that. Who knows where interest rates are going to be. I would like to differ until we get through all that until we get more towards the end of the year. I feel good about it though, at eight percent with all the acquisitions we have done, with the products coming online I certainly feel good about that number.

Okay, great. Thanks.

Rich Moore of McDonald Investments.

Thank you. Hi guys. I'm a little confused. Ken maybe you can help clarify this for me. The 10 to 11 cents roughly that you're taking out for Fin 46 this year, that gets added in in addition I guess over the next couple of years basically?

What happens Rich is the 10 to 11 cents is really the dip this year because I think most of you had numbers that I think would reflect JV fees of about 10 to $11 million. We are not going to get that. We are going to be short by 10 or 11 cents. What is going to happen is the whole thing kind of gets pushed back so it's not quite a permanent defferal of the fees. I actually think the fees next year are going to be a pretty solid number but there is some element of these fees almost permanently being deferred if you will because they will be recognized, they will all be recognized later in the development cycle than they have been in the past.

Okay. And so some of that will occur in addition in 2004? I'm trying to think should we--

I think there is a possibility of that, depending upon which projects come online when, but for right now, I would like to hold it as I said and tell you we feel comfortable with the normalized rate we've had in the past which is more of that 10 to $11 million number.

Okay fair enough. Looking at the international developments, is there any sense from you guys that the percentage rate contribution from Xanadu could be higher than you had anticipated because sales may be stronger?

We only have the month of June in so far Rich, so we hesitate to say. The center, we just had a partnership meeting that Ken and Jim Dausch and others were at just a few weeks ago and their reports of sales are just over the top in terms of everybody's performance but it's too soon to let you know right now, just how strong that percentage is going to be. We expect it to be strong but to give you numbers after only one month of sales being in, would not be the responsible thing to do. You're going to have to give us -- and also we are in the summer months where its slow there. Back to school will start the beginning of September and you get into the holiday season and that's when you are really going to see how things skew over there. Also they have different cycles. They have a very strong -- they have only two sale periods a year where in the U.S. we are on sale all the time. They have strong sales in February and again in July so their month of February is almost as big as the month of December, so there are all kinds of things that we have to see and see how they come out before we know for sure but we should know better I would say mid fall how things are going to come out.

Okay and still looking internationally, there were a couple of projects Larry that in particular, I think you were focused on as possibly coming online next year. Do you still feel there are certain ones and maybe you could give us an update on which ones those are that are most likely to occur the soonest?

Jim, you want to answer that question?

Yes, we're still very positive on several things in Spain and Italy. I think the opportunity in Valencia could very well get going next year, by that I mean to be on the ground and I think that one or even two of the projects in Italy, one in Milan which is moving very quickly through its entitlements, that's quickly by Italian standards and even the one in Rome could be gotten going by the end of next year.

That was the big site you saw Rich in Rome, that he is talking about.

Yes, I figured, Okay great, good. Thanks. And last thing, actually two last things Ken. Termination income, did you say what that was this quarter?

I did not but I could. It was $5 million in the quarter -- it was $5 million from the big tenets.

As far as the debt level and the percentage of debt that you have, are you comfortable with that level and would you be taking any steps to reduce it further other than obviously the Canam transaction?

I think we are comfortable with the level. I think it will be reduced through growth obviously and if we do some of these transactions that we alluded to with the JV investments going forward over the next 6 to 12 months, I think it will also be reduced but obviously we look at our coverage ratios, I feel we are in pretty good shape.

Okay great, thanks guys. Great quarter.

Thank you.

(CALLER INSTRUCTIONS). David Fick of Legg Mason.

Good afternoon, a very nice quarter. Most of my questions have already been asked. I just really have one fairly big question and that is you have gone through the most rapid period of expansion that the Company has seen so far. And yet you still have a lot on your plate so I am wondering about systems and people. You brought in JN (ph). You've done a lot of other reshuffling of the executive suites. What is this going to mean from a G&A perspective number one, but more importantly how do you feel about where you are positioned now in terms of resources, both on the human capital side and computer and operating systems side?

I feel good. I'll start with the G&A and anybody else is free to jump in. The G&A, as I said the run rate is what it was this quarter. I mentioned there were some onetime charges in there that won't be repeated but given the annualization of some of the additions we brought in from the past, I think the run rate will continue about what it has been at this quarter so that's that. As far as the level of people, (technical difficulty) think we brought in some of the top talent. We've been doing this for over a year now, so we did it well in advance of some of the hypergrowth if you will over the past 12 months and people now aside from MJ (ph) who has managed to slip in very nicely but most of the rest of us have been here operating as a group for some time. We've gone through a couple of restructures at the top level to accommodate the growth, to provide specialization in areas where we think we think need it, very strong people focused on specialized aspects of the Company to make sure the growth is handled well. I mentioned that we are -- that we have some costs on the second quarter from Sarbanes-Oxley. I think we're probably one of these -- now that the SEC has allowed us another year, we've taken a position we want to be ready this year so we've gone well out ahead, documented things and we've analyzed things, we've looked at systems. I feel pretty good about where we are.

And also David, I think if you look at the sequence of when a lot of these jobs are going to start it's not all happening next month. In San Francisco, things are moving along extremely well but we're not going to be able to start until next year. In Chicago, it is going to be a period of time. The European thing as Jim said, it takes time and we can kind of plan some of that so it doesn't all hit at the same time. The same thing with the renovations here, you don't have to do them all day one. We are going to pick the ones we want to do now and we will plan some for next year and maybe some for the year after and we will get our anchors committed now and move ahead with those things but it's not like we're going to have all these projects under construction and in development in October. I think it's planned well. I think it is going to be sequenced well as Ken so eloquently said, you've got the right people here for the job. We built lots of Mills, you've some of the best regional mall people in the country that have built and leased many regional malls in the company working here and doing the job. It's a great mix of talent and people and one by one like we did with Xanadu, we knock them off the plate and go on to the next one and that's what we're going to do systematically and sequentially here.

Are you still in the market for a new CIO and related to that, are you looking to upgrade or replace computer systems at this point?

We have hired our CIO David, so we are in a good position there. We're looking at computer systems for a possible conversion to get something that is more institutionally accepted but the systems that we have in place right now are pretty well in place and what we have -- as you may know, we have a recent administration system that was custom designed to provide specialized reporting that we felt was important for us and was not there off-the-shelf. But as we moved more into the institutional markets and have to communicate with others we're looking at possibly going to a system that is more institutionally accepted but we have hired our CIO and he is onboard right now.

Great, thanks guys.

Thank you.

(CALLER INSTRUCTIONS). Gentlemen, I am showing no further questions. Please continue with your presentation or any closing remarks.

We appreciate everybody's attendance and I guess we will be talking or seeing most of you during the next quarter. Thank you very much.

(CALLER INSTRUCTIONS).

(CONFERENCE CALL CONCLUDED)