The Macerich Company (MAC) Q4 2007 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Macerich Company Fourth Quarter 2007 Earnings Conference Call. Today's call is being recorded. At this time all participants are in a listen-only mode. [Operator Instructions]. I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Suzanne Karpick, Vice President of Investor Relations. Please go ahead ma'am.

Thank you. And thank you everyone for joining us today on our fourth quarter earnings call. If you don't have a copy of our earnings release, you may access it at the company's website macerich.com. During the course of this call, management will be making forward-looking statements, which are subject to uncertainties and risks associated with our business and industry. For a more detailed description of these risks, please refer to the company's press release and SEC filings. Management will also be discussing certain non-GAAP financial measures as defined by SEC Regulation G. The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the press release and supplemental 8-K filings for the quarter, which is posted in the investing section of the company's website. Joining me today are Art Coppola, President and CEO; Tom O'Hern, Executive VP and CFO, and Tony Grossi, Executive VP and COO. Before we begin though, let me announce that as I have announced in the past, we will be holding over 2008 Investor Outlook Forum in Scottsdale on March 12th and 13th. This event will be very different from the program we held last November, so please call me or e-mail today after today's call if you'd like to find out more. With that I would like to turn the call over to Tom

Thank you Suzanne. Today we'll be discussing the 2007 results, recent transactions, the status of our redevelopments and development pipeline, and our outlook for 2008. The operating metrics for our business generally remained strong in the fourth quarter with continued high occupancy levels, very strong releasing spreads, but with some softening in retail sales during the quarter. Looking at the sales numbers, the total portfolio of sales for the quarter were down 0.7% in the quarter, year-to-date those sales were up 1.7%. Looking at it regionally, the eastern region remained strong up almost 4% for the quarter, 5.3% for the year. The central region was up 3.2% for the quarter, 2.8% for the year. Southern California was down 4.3% in the quarter, down 0.7% for the year. Northern California, down 1% for the quarter, up 1.7% for the year. Arizona, down 4.9% for the quarter and flat for the year. Total mall sales per square foot for the year increased to $472 per square foot that was up 4.4% from the $452 a foot in the portfolio at December 31, 2006. As I mentioned, the occupancy level remained strong at 93.5%, down 10 basis points from a year ago. Looking at the occupancy at a same center basis, the occupancy was 93.4%, down from 93.8% a year ago. Leasing activity continue to be robust in terms of both volumes and spreads, did approximately 283,000 square feet of leases in the fourth quarter, we saw average new rents at $46.20 a foot and there was a positive spread of 34%. Year-to-date, we did 1.3 million square feet of shop leases, and that was at a positive spread of 28.6%. Average rent in the portfolio was up almost 5% at $39.51 that compared to $37.75 at the end of 2006. Looking at FFO, diluted for the quarter was up 7% to $1.45 that compared to $1.36 for the quarter ended December 31, 2006. For the year, FFO per share diluted was $4.62 that compared to $4.35 in the year 2006. These results were in the middle of our guidance range. Noteworthy, in those results is that the preferred units issued on the Wilmorite acquisition were dilutive to FFO per share for the quarter but were antidilutive to FFO per share for the year. We will discuss later in the call those units, which were redeemed on January 1, 2008, and will not be a factor as we look forward into the results of 2008. EPS diluted was $0.53 per share for the quarter, and that compared to $1.98 in the fourth quarter of 2006, when we sold some non-core assets and recorded $133 million gain on asset sale. Reflected in the quarter were same center NOI growth excluding lease terminations of 2.05% compared to the fourth quarter of '06. We made some merchandising decisions during the quarter that hurt the fourth quarter occupancy, as was reflected by that dip in same center occupancy, but these are the decisions that will benefit us in 2008 and beyond. Year-to-date, same center NOI growth was 2.4%. We expect this to see a significant pickup in 2008 as we are giving guidance that includes the range of same center NOI growth of 3.5% to 4%. Lease termination revenue, including JVs at pro rata was $1.2 million for the quarter. That was down significantly from $7.8 million during the fourth quarter of 2006. Our year-to-date terminations were $13 million, and that compared to $20 million during 2006. Expense recovery rate, including JVs at pro rata was 92.3%. That was down from 94% in the fourth quarter of '06. PPI increases were 1.3 million higher than the fourth quarter of '06; a trend that continues as we convert more of our leases to PPI increases rather than fixed bonds. Straight-line rents were $4.6 million compared to $2.8 million in the fourth quarter of last year, primarily due to the addition of Twenty Ninth Street as well as Deptford and the expansion of Fresno Fashion Fair. SFAS 141 income was $3.5 million down from $4 million in the fourth quarter of last year. Gain on sale of undepreciated assets was as forecast and came in at about $10 million for the quarter that compared to $3.6 million of similar gain in the fourth quarter of last year. Now focusing on the balance sheet. At year-end, we had a total of $7.5 billion of debt outstanding including JVs at pro rata. Our average interest rate is 5.73% and the average interest on our fixed rate debt is 5.65% with an average remaining term on that debt of 4.8 years. Our debt to market cap at quarter end was 46%, and we enjoyed a very healthy interest coverage ratio of 2.4 times for the quarter. As you can see in the detailed debt schedule in the supplement that was issued this morning, we have a very manageable maturity schedule. In some of our top assets with low leverage loans on them that are maturing this year such as Fresno Fashion Fair, Broadway Plaza and Westside Pavilion. In 2009, we also have a light maturity schedule about $700 million, but low loan to value mortgages on high sales per foot centers such as Queens Center Washington square. We expect that by placing conventional 55% to 60% non-recourse loan-to-value mortgages on our 2008 maturities, we will see between $300 million to $500 million of loan proceeds in excess of the debt that's expiring on those properties. In addition, we have a number of unencumbered asses such as the Oaks and Santan Village that lend themselves very nicely to permanent loans should we so chose any time in the next 12 months. As you can see our balance sheet remains in very good shape. Shifting now to 2008, this morning, we issued our initial guidance for 2008, the range for FFO per diluted share is $5 to $5.15, which at the mid point is a 10% increase over 2007. Our assumptions reflect our positive outlook for our portfolio in 2008. Included in those assumptions are same center NOI growth in the range of 3.5% to 4%. This growth, which is up from 2.4% in 2007 is a function of our focus this past year on the quality of the leases that we execute. Strong 28% releasing spreads, we achieved in 2007 are helping to fuel this 2008 growth. As of today, we are… over 70% of our 2008 lease expirations have already been negotiated, we feel very comfortable with our space-by-space revenue forecast for 2008. Lease terminations in the forecast are at $12 million that's down from $13 million in 2007 and $20 million in 2006. We forecast gain on undepreciated asset sales of $10 million and that's approximately the same level that we've had in 2007 and 2006. The Mervyn's acquisitions are forecast as accretive during 2008, that accretion is offset by the disposition of poor Rochester assets, which were lower quality assets that were redeemed… Art will be speaking about that transaction in more detail in a few moments. Straight-lining of rent and SFAS 141 income are forecast to be down $7 million in 2008 compared to 2007. Keep in mind, we do have seasonality in our earnings, so our forecast spilt of FFO by quarter is 22% in the first quarter, 22% in the second quarter, 24% in the third quarter and the balance in the fourth quarter. This guidance is based on management's current view of current market conditions in our regional mall business. At this point, I would like to turn it over to Art to discuss our recent transactions, the strength of our business, our pipeline and other events impacting our business.

Thank you Tom. I am going to focus on our mall fundamentals and the results of the fourth quarter a little bit and my view on 2008. Secondly, an update on our development and redevelopment pipeline, and thirdly a comment and some further color on the acquisition and dispositions activity during the quarter and the first few days of 2008. I would categorize the quarter as well as my outlook for the year as being very solid, but also very unique and diverse. On the solid side, our releasing spreads in 2007 ended up at 28% over expiring rents. That compares to an average of 20% some over the period of 2002 through 2006. As I outlined actually on our previous call... on our last call from the last quarter from 2002 through 2006, our spreads were 25% in '02 and 20% in '03, and 24% in '04, 20% in '05, 19% in '06, and 28% now in '07. So, we're continuing to realize very strong releasing spread, which we anticipate. And now we'll continue in 2008 expiring rents in 2008 are just under $35 per square foot and as Thomas indicated, we've already got commitments for over 70% of that space, we're very comfortable that we're going to be able to continue our releasing spreads in 2008 to be in excess of 20%. The reason that we're able to generate these kind of spreads is because of the strength of the portfolio both in terms of the sales per square foot as well as the make up and the location of the properties. Our properties are located in high growth, high barrier to entry markets, and consequently we've been able to mine the embedded growth from those assets through our strong releasing spreads and remerchandising of these centers. Our portfolio today at the end of the year has average sales per square foot of $472 per square foot. Of note, over 10 of our centers have sales over $700 per square foot. If you look at our top 50 centers, our sales are in excess of $500 per square foot. If you take a look at the quality of the income stream that we have coming from our portfolio, well over 70% of the NOI in the portfolio is definitely in A quality malls, with the balance in B type and C type of assets. And as we look at the growth that we've been able to historically, as well as perceptively realize from our portfolio, we generally are seeing at least 200 basis points higher growth in NOI per year from the A quality properties than from our lower asset properties, lower quality properties. And as you know, over the last couple of years we've done a very good job in terms of pruning our portfolio, disposing of non-core assets and underperforming assets, and we are continuing to do that. I'll be discussing more of that when we get into the acquisitions and the disposition activity for the quarter. So, from a fundamental viewpoint, I'm very pleased with the results for '07 and I've every reason to be confident in '08 because of the current releasing activity that we've already realized, because of the location of our properties and high barrier to entry unique and fast growing markets. And because of the strength of the portfolio in terms of the sales per square foot that it's generating. Looking at the development and the redevelopment pipeline, we've provided a tremendous amount of details for you in the supplement, so I'm not going to get in to actual numbers, but in looking at the bigger picture, the fourth quarter saw the most active opening period for us in our history with the opening of the mall at SanTan Village, which opened up to rave reviews with tenants doing very strong businesses, with the opening of our retail regional center at Casa Grande, with the opening of our large lifestyle center Freehold New Jersey, which has been tremendously well received as well as the 400,000 some [ph] square foot power center at Flagstaff. As we look to 2008, we will have continued phases of SanTan Village and Casa Grande opening, these are both open air centers that are being built essentially in phases, one of the reasons we're doing them open air is that enables us to have the tenants open up over a period of time when you're adding diverse tenants and unique tenant centers like this where it is really a combination of San Tan, of a lifestyle center and a traditional regional center in terms of the tenant mix, it's important to be able to allow the tenants to open up over a period of time. As we look forward to '08 and '09, we have a very exciting development and redevelopment pipeline with the bulk of our activity in the redevelopment category. We will be seeing the opening of our expansion of the Oaks later on this year, and we are all very, very excited about that. Our Scottsdale Fashion Square expansion is well underway, we've demolished the Robinson's May building... as you know, we are going to be adding new Barney's there. The leasing of the new luxury wing is going extremely well, virtually 100% done and we are extremely excited about that expansion and the entire market is eagerly awaiting that to happen. Probably the most exciting project that we have is, right here in our backyard and that is Santa Monica place. I have said that our activities and our prognosis for the upcoming year is solid, unique and diverse, well this is certainly unique, just a couple of weeks ago we closed Santa Monica place, it is funny when you go there today, you walk by and still people walk up to the doors and they are trying to open the doors to get in, they shake their heads, but as we talk to people in the community and they realize what happened, they are all excited and very thrilled to see something new come to the community. There's probably no stronger demographic location in the United States than Santa Monica in terms of our portfolio and frankly in terms of mostly any portfolio and essentially to have the opportunity to build a new 600,000 square foot retail center in the heart of the highest demographics in Southern California and in the highest of all barrier to entry types of markets is unbelievably exciting. The returns are also very exciting with as you can see our cost we projecting an excess of $260 millions, $250 million to $260 million of new cost to remerchandise the center. But we are projecting that based upon this year's current income of being zero since we have closed it down, in excess… well in excess 10% incremental returns on the cost here. More importantly, from a merchandising viewpoint this is going to be a fabulous center with one of the most unique high end merchandising mixes anywhere in the country. We will be announcing the replacement for the Robinson's May store later on this spring and I know you all be excited to see that announcement. Further in '08, we’ve started the commencement of a new lifestyle expansion at our center in Modesto, California, we're very excited about that. At [inaudible] we have started the construction there of the urban village that we are creating there which is a combination of the power center and the regional center that we will be building there, and the power center component has commenced, that started here, it will be coming up here this year with openings into next year with the regional mall to follow essentially even during the construction of the power center and opening shortly thereafter. Also in the upcoming year, we will be seeing the openings of the new Costco stores at Lakewood Center, which will open up later on this year. New Costco store at Paradise Valley, which will open up either later this year or early 2009. Target is opening up in Pacific View, and as you look at basically all of the Federated boxes that we bought 2.5 years ago or so have now been spoken for and/or have been remerchandised. One of the most exciting announcements we have during the quarter was we announced the addition of the new Neiman Marcus to join us at Broadway Plaza in Walnut Creek. This is one of the highest end markets in the United States, Neiman Marcus has really targeted Walnut Creek has been their number one new location that they have targeted in U.S. for the several years and we are pleased to welcome them to the tenant mix and to our lineup there at Broadway Plaza, we are underway with our entitlements, anticipate them opening in the next two to three years and there will be substantial upgrading in the merchandise mix of that center as a consequence of Neiman Marcus. Looking to the future in Arizona, we received our entitlements at Prasada in surprise to do this project, which was in excess of a 2.5 million square foot retail project. We're starting on the power center components of that project this year with the power center components actually being very large comprising over a 1.3 million square feet and the mall to follow thereafter. As we talk about our power centers, this goes back to my comment about our prospects being unique and diverse. You have to keep into context, we are not out there building power centers on a stand-alone basis. What we're doing is, we're building power centers as part of large, retail, regional cores that we are building. We are taking control of large tracks of land at SanTan Village and Gilbert we had control of over 500 acres upon which we ended up with the conclusion of the regional center building almost 3 million square feet of retail. At Estrella Falls we have control there of over 300 acres of land upon which we will have retail build there of up to 2 million square feet between the power centers, other commercial and then ultimately the regional center. And then at Prasada, which is a 3000 acre project, the urban retail core of that is over 2.5 million square feet of retail. The power centers really come before the regional centers, because the anchors in the power centers which are generally Wal-Mart Supercenters and Target Supercenters are able to open well before the department stores because they are able to open without the complete growth being there for them. In many cases, the power centers come coincidentally with the regional center. At SanTan the power centers came about a year before the opening of the regional center. At Estrella Falls that will be seamless, we are under construction with the power centers and as they are opening, we will already have been under construction on the regional centers with the opening of the regional centers essentially within a year of the power centers. At Prasada, the power centers are under construction right now, they will be opening in '09. On that one, given the growth in the market, little slightly the regional centers will lag roughly two to three years behind that, that will again be built as we always build in Arizona at a market rate and timing and when the retailers and the market are both ready for it. So again you have to keep into concept this power center activity that we have that it is really part of a larger retail development because we're taking… the unique thing is we get control of large tracks of land in Arizona, we plan them well in advance and then we are able to essentially prime the pump with the power centers and then build the regional. The nice thing about this is obviously that the power centers generate generally very nice returns, generally double-digit types of returns, so that rewards us for our planning efforts. In the acquisitions and dispositions area, that certainly has been something that’s been very solid, unique and diverse. On the solid side, we completed the acquisition of Northridge center, earlier this... in January. You all know Northridge center in Chicago, its home to the second highest volume, Nordstrom store in the United States. With the acquisition of Northridge center, Macerich now has the five of the top 10 volume Nordstrom stores in the world in our portfolio, so we are thrilled to add Northridge to our portfolio. On this disposition front, we effectively disposed of our Rochester assets. Now as you may remember when we bought Wilmorite, we announced at that the time that the founders of Wilmorite had the option to redeem the Rochester assets and that that option kicked in roughly two and half years after the acquisition. When that option came up, they elected to redeem the assets, [inaudible] selling these assets which are really non-core to us in a lower growth area, in an area that does have…it is the home to Wilmorite and to the Wilmorite family and they will do extremely well with these assets, but it is not traditionally the type of market that we have sought out. We essentially have sold these assets at roughly a nine-cap rate, as we’ve seen in the press release the average sales of these assets are roughly $360 per square foot. As I view this transaction, we roughly made a sale of around $430 million because what we did is that... in redeeming 2.9 million shares of OP units or preferred units, we effectively... this is equivalent of selling these assets at around $430 million taking the equity of around $220 million. And then immediately consummating a stock buyback of 2.9 million shares, that's what happened in the Rochester disposition redemption. That's the way that I view it, that's the reality of it. So, as you look at the balancing of the introduction of Northridge to the portfolio and the disposition of the Rochester assets, that's consistent with our goal of redeploying non-core proceeds into high-quality assets whether they be through acquisition or they be through development or redevelopment. Probably the most unique and diverse deal that we just consummated at the end of the last year was the Mervyn's transaction. As you've seen in the press release we're buying little of... roughly 43 Mervyn’s stores at price just over $430 million upon consummation of it. This is a very interesting deal. In roughly June... May or June of last year, Mervyn's came out with a sale-leaseback transaction on these 43 stores. Now, 13 of the Mervyn’s stores that were involved in this transaction are located in Macerich malls, we immediately went to Mervyn’s and the broker and attempted to buy those 13 stores because we certainly did not want to have a traditional buyer of both big boxes for example, all of a sudden become the owner of the Mervyn’s stores in our regional centers and in many cases of large tracts of land connected with the Mervyn’s stores where they might control as much as 5,6,7 acres. Furthermore, we were concerned about having a third party be involved in buying the Mervyn’s stores in our regional centers, because while Mervyn's have something to say about the redevelopment... the expansion of these centers and while they see things roughly the same way that we see things when we go about the process of bettering a center. A big box buyer who would be a non... would have interest non-aligned with the center per se, may not have the same view towards redevelopment and may not be as cooperative in the redevelopment of our centers. As we have got deeper into the transaction, we’ve got more intrigued with it, because we realize that we will be able to buy both our stores as well as these others stores at a very attractive return. But, more importantly we are able to open up redevelopment opportunities at all of our existing properties, by initially taking the Mervyn's agreement and giving them a restricted parking area surrounding their store, but then, beyond that they essentially have given its Carte Blanche to do anything that we want at the center, which is a tremendous, tremendous redevelopment, amount of freedom that we have been able to obtain as a result of that. As you look at it, there are roughly 1 million square feet of Mervyn’s stores that we were acquired as part of this transaction that exist in our portfolio, and if, you know, God forbid, something were to happen to Mervyn, essentially what we have done is that we've picked up 1 million square feet of FAR in some of the best centers that we own across the United States. And if you take a look at the ability to redeploy and recycle that 1 million square feet, which we as the owner of the Mervyn’s store and the owner of this center would be the only one that could do that that entitlement alone would be incredibly valuable. As I mentioned, returns on the overall portfolio turned out to be very attractive, roughly up 7.25% going in return. This ranges from some of the centers internally on our books, and our minds being valued at 5% to 6% cap rates, depending on where they are, to some of the strip center types of locations being valued at 9% and 10% types of returns with an average of 7.25%. As far as where these stores are, as I've mentioned 13 of them are in our centers. Of those 13, two of them we've been able to obtain early terminations of, which we're very excited about, one in Phoenix at Camelback Colonnade, which we see as an opportunity for a large commercial development there. And the other one in Mesa… in Grand Junction, Colorado, where a life-style center was proposed to compete with us and by acquiring the Mervyn’s store, we're going to able to essentially add a life-style component to our center there and to address that competition. Outside of our portfolio, we're also picking up 17 other Mervyn's stores that are located in regional malls. Of the... there are 14 of those stores that are located in regional malls controlled by public… other public companies, there are roughly another 17 Mervyn's stores throughout the West Coast here that are located in well-located strip and community centers, and some free-standing. As I look at our prognosis for this portfolio, the non-mall type of assets, my guess, is most all of them will have been disposed of within the next 18 months to two years. We've already received interest from some of the strip center types of owners on those and we'll see what happens on the others, but we're very thrilled about that transaction. Again, it's very unique, very diverse, but it really reflects our very protective view of our portfolio in terms of the fact that we just were not willing to allow some stranger to end up owning 13 of department stores located in 13 of our regional centers across the United States and we were able to take control of that, open up big redevelopment opportunities, and do it all at a very attractive return. So, with that we would like to open it up for Q&A and welcome you to the call. Question and Answer

[Operator Instructions] And we'll take our first question from Lou Taylor from Deutsche Bank. Please go ahead.

Hi, good morning guys.

Hey, Lou.

Hi. Art can you explain a little bit on Mervyn's. And maybe Tom talk a little bit about the accounting. So, it sounds like in terms of the 17 West Cost strip centers that you'll overtime.

That's my prognosis.

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

Well, obviously when I can sell the ones in our mall.

Yes, of course yes.

There are, as I mentioned there is 17 in regional centers, 14 of which are owned by other public companies, general growth has... we have… now own Mervyn's stores and six general growth malls, three Simon malls, two CBL malls, two four city malls [ph]. From our viewpoint, we've bought them for investment purposes, so I have no idea what will happen with them.

Okay. And then Tom how would the accounting work in terms of presumably, you would be able to sell these things with the development rights and that's going to be pretty valuable. And does this go to just reduce your basis or is it something that you're going to be able to recognize as... kind of gains over time?

Every one of those assets will be allocated to some of our purchase price, and obviously we're buying wholesale and to the extent we sell these one-at-a-time, we'd be selling retail. So, I would expect there would be some gain that would be recognized from these transaction.

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

It remains to be seen. I mean... some of these assets clearly will fall in the category of assets held for sale and they get different treatment than assets that are depreciated over time.

Okay. Then just two other questions. In terms of the Santa Monica Place, in terms of what was the '07 FFO contribution. I know it was small that you're not getting an aid to... would be I guess a slight drag on the '08 number.

Yes. That was about $3 million Lou for the year. So $3 million that was in '07 that's out of '08.

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

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

Great. Thank you.

Thanks Lou.

Thanks Lou.

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

Hi, Jeffrey?

Good morning. How are you?

Good morning. Great. Thank you.

There's a lot of concern about the Phoenix market and the housing downturn there. Can you just comment on your view of Phoenix for '08, '09?

Sure. The Phoenix market, you have to keep in mind as far as housing starts that traditionally the Phoenix market has enjoyed, housing starts of between 30,000 and 40,000 housing starts per year. In 2004, 2005, and 2006, we had spikes where all of a sudden the housing starts went up dramatically to roughly 60,000 starts per year. For 2007, 2008 we're looking more at normal scene where we're looking at housing starts are being roughly 30,000 to 40,000 units per year. So, it's a drop from that dramatic spike that we had but it's still probably the most robust market in the United States in terms of new housing starts. The economists that are employed in the... they most closely followed through University of Arizona and Arizona state, and the state of Arizona are projecting growth in Arizona, population growth for 2008 of 2.7%, employment growth in '08 of 2.0%, personal income growth in '08 of 5.5%. So, there's still strong growth here, and then when you look at the markets in which we are doing the business, they're either already completely built-up markets, but they're very well established market and the growth opportunities that we're pursuing have already got the housing and the population there to support the development activity that you've got. So, yes housing starts are down dramatically, there's a lot of press that comes out of all of the public home-builders, that have been doing business in Phoenix and Arizona, and they're very visible. And so if you look at the world through the eyes of the homebuilders the world looks pretty gloomy, but if you look at it from our eyes it's very positive.

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

Sure. Well, this is a very core asset for us. So we acquired it at what we view to be an attractive going-in return of just over 5.25%. Remember we acquired this in partnership with the Alaska Permanent Fund, which is our partner at Tysons Corner. It's a very powerful property that we think has just got continued growth available to it. As you look at Michigan Avenue with the closure of Marshall Field and the reflagging of Macys, frankly, this now has established Nordstrom as being the most powerful retailer on Michigan Avenue and the retail activity on Michigan Avenue has now become balance toward the south Michigan Avenue is now getting a great big deal of interest in terms of retailers and we just see a tremendous opportunity over time to continue to expand upon the brand and we are just sitting there with the second-highest volume Nordstrom in the United States, we are sitting on Michigan Avenue and you've got a retail shift to this end of the street, really got an expansion into this end of the street. We are just very excited about the prospects there. It's definitely a core asset with, we believe, very good growth characteristics for us and it's part of our philosophy of buying extremely high barrier to entry market and owning very highly productive assets which will perform extremely well in any economic times. So we're very, very bullish on that acquisition in terms of the specifics of it, in terms of that property, but also in terms of basically the... it's just one more arrow to put in our quiver as we look at putting together one of the most productive portfolios in the United States of any regional center company.

And last question on Tysons Corner, I have recently seen some press articles about the rail, can you just provide an update on that redevelopment expectations there?

Sure. We are currently in the planning process for the initial 1.5 million square feet of expansion and I can't predict what's going to happen, what the rail there has been essentially a cooling-off period that's been put into place. Politicians have asked the secular transportation to really revisit all of this in terms of the federal government's contribution. If the rail does not come to Tysons Corner because of lack of funds, then our 1.5 million square foot expansion which is really the one that we've been counting on, which is at the prime location, right there on the Beltway, that is entitled with or without the metro link and if the metro link does not come that essentially leaves us with probably the single most valuable entitlement in Northern Virginia. So, I can't predict what's going to happen with the metro link. We will see what happens over the next 30 to 60 days.

Okay. Thank you.

Thank you.

Thank you we'll take our next question from Jay Habermann with Goldman Sachs. Please go ahead.

Hi, Jay.

Hey, how are you?

Great. How are you?

Good. Here with Tom Baldwin as well. Just a question on the development deliveries, you provided the detail on the supplemental. I think on the last call you had mentioned it sort of ramped from the 330 million to roughly 490 million and then 700 million over the next several years, well actually going out to 2009 and now it's sort of 540 million and then 540 in '08 and '09. Have you made any changes in terms of expectations or any changes I guess in the last several months?

No. Not really, Not really. The phasing, no… not really, no. Certainly '08 and '09 are still pretty much exactly what we've been looking at, so no.

Okay. So there hasn’t been any changes, I mean whether it's sales or simply just holding off on particular projects?

No. You have to remember the vast majority of these projects are the dollars that are involved here are Thousand Oaks, Scottsville Fashion Square expansion and Santa Monica remerchandising. So it's really... that as usual is the bulk of our dollars and, no. So certainly for '08 and '09 in terms of the expectations of deliveries there has been no change. What happens in '10, '11 and '12, I can't really predict at this point of time. But we've got very good visibility for '08 and '09 and it's... that visibility is now on paper for the first time.

Okay. Thanks for that. And then also, obviously Tom commented the start about the… sort of sales declines in the most recent quarter, Southern California as well as Arizona. What are your expectations? I mean do you expect to see that sort of magnitude of decline for the first-half of the coming year? And what really turns that around?

Well. If I knew the answer to that, I wouldn't do what I do today. If I could predict what the consumer is going to do. But most resellers I think are forecasting '08 to be a soft year. And I would say that we're ready for a soft year. When you look at Arizona, for the entire year we were roughly flat, we were off may be 1%. But you have to look than in perspective, that compares to 2006 and 2005 and 2004, all three years where we were up double-digits every single year of 10% to 15% every single year. So being flat compared to do that kind of growth is still pretty good. In terms of a prognosis for the year, I would say we have to be ready for a soft year and that's why for example, that we have taken our leasing activity and we got all the...70% of our leases committed on the roll over, and we feel very comfortable about our prospects. One thing I didn't mention that we are very unique in our portfolio, for example, which we initiated about eight years ago because we started converting all of our leases to CPIs and over half of... roughly 50% of the minimum rent in our portfolio now is tied to essentially CPIs and, so that gives us kind of a hedge on that side of it also. We're prepared for a soft year, but that's all baked into our guidance.

And then just on guidance. Can you comment what was your occupancy assumption for year-end and then do you have a sense of... I know you talked in the past about pushing sort of… looking at sort of occupancy cost and where that lever can move. Any thoughts there?

Yes. I'll start on that Jay and Tony may want to jump in. But in terms of the forecast, and again we rolled this up from the most granular level, we look at every single space in our portfolio. And we have occupancy neutral in that guidance, the forecast actually came up with some occupancy gains and we dial that back to be conservative. But part of our focus this year has really been on the quality of the deal and we've improved our systems to try to reduce the timeline it takes to get a lease signed. So if we can cut the period of time it takes a lease negotiated and signed we're going to see the benefit in occupancy.

Jay. This is Tony here. The quality of our portfolio has tremendous embedded growth. And when you have 10 assets doing more than $700 a square foot and our top 50 doing 500. The real shift in our thinking goes from deal volume to deal quality. And that was the approach that we took throughout '07 that's giving us momentum into '08. As Eric mentioned, we are 70% complete for '08, and that type of thinking and that type of focus on deal quality is helping to achieve better spreads and over a period of time, higher cost of occupancy.

Okay. I think Tom has a question too.

Hi guys, could you just provide an update on the leasing at Biltmore and how that's been going recently?

Oh, it's, yes, that's we are very excited about that. As you look at the Biltmore, there were, east... through this east building there, we have those in limbo because of what we were deciding, how many towers we were going to build in terms of... and whether they are going to be residential or office. We now have come to the conclusion on exactly what we are going to build in the way of the mixed used commercial there. There will be two residential towers that will be built. So we currently are in the process now of recycling building... what we call Building J, which is the far east building there, and the line up of tenants that we have coming over the next 15 months at the Biltmore are... it's very exciting. It's interesting, we met with Federated last night and two of the highest performing stores on a comp basis as they had in their entire company for 2007 with a Macy's store at Biltmore and a Macy's store at Scottsdale Fashion Square, and the same holds true for Saks for example. That's one of the highest performing Saks stores on a comp basis. So, and we've got a tremendous number of retailers that are coming over the next 15 months. Tony, do you have some of domains on those that you'd like to share?

Sure. We had an opportunistic re-merchandising plate in the second half of '07 that we're focusing in on, and we've added many high profile restaurants, a couple operated by Sam Fox's [ph] in conjunction with Signature Chef's as well as a Mastros and Notion Club that will add to the excitement of Biltmore, as it occupies the Camelback Corridor where we have a high concentration of office workers, who will get a day time and a night time business coming from those restaurants, as well as we have active discussions and commitments from flagship Brooks Brothers and J.Crew and we have tremendous interest from reestablishing Banana Republic in Biltmore, and tremendous momentum from other first to market type retailers such as Roberto Botticelli from Italy as well as interest from tenants that are unique, such as Six Star Brazilian, Calypso is opened to tremendous reviews in King & Duck.

Okay, great. Thanks a lot. And just as a follow-up, have you guys provided any color regarding the expected cost or potential yield on the residential there?

No, we have not. But I can tell you that the returns that were projected, the returns we are projecting from that are very dramatic. We're entering into an agreement, we will be announcing the co-developer with a residential developer, who essentially will be taking on virtually all of the development risk, and then we will have a sharing of the profits up to a certain number, and then we'll see the lion share of the profit back to that number, but under any scenario, the prospects look great. And we are only going to pull the trigger on that when the market is ready. So the entitlements in place, we have the plan in place. We now are going to remerchandise the retailing on the Far East end of the property because we know what we are doing in terms of where the towers are going to be. We weren’t sure if we would tear down those towers... tear down buildings or not and for that... for me that's [inaudible] they will built to pre-sold and you have really arguably the most valuable residential location in the entire Arizona marketplace. You've got the Camelback Corridor there at Biltmore, is one of the most attractive intersections and locations in Arizona. It is probably the closest thing to get to 24x7 and my anticipation would be that we would start looking at doing some pre-marketing of the residential next... later this year, early next year with deliveries in '10, '11 but it will really only be… the deliveries will only happen after enough has been pre-sold and the return that we are looking at is very dramatic. Even before on the remerchandising side of the... even before we brought in the new tenants and the new ones to come, this is the center that today now averages in excess of $800 a square foot, which is substantially higher than what it was when we acquired it a couple of years ago. And really again a lot of that is a function of that tremendous growth that we've seen in the Phoenix market in '04, '05, '06 in sales per square foot and also we did a very dramatic study, cosmetic renovation of the center. So, we are now ready to tap into tremendous amount of opportunity there and we are very excited. I mean, we control the luxury markets in the whole Phoenix marketplace between Biltmore and Scottsdale and the expansion of Scottsdale, the remerchandising of the Biltmore, very exciting in terms what we are doing there.

Great. Thanks. We look forward to an update next month as well.

Great, definitely, they will be staying actually right between the two of them there.

Great. Thank you.

Thank you. And we will take our next question from Michael Mueller with JP Morgan. Go ahead.

Hi. First of all I want to say that the development disclosure is great this quarter and maybe this is a question for Tony. Can you talk about, I know most of your development... redevelopment pipeline is the dollars have been put into redevelopment component of that, but how are tenants thinking about the decision to go into an existing center say that is doing $450 or $500 a foot versus going into new development?

Well, when we look at the comparison of what we have on the table for '08 and '09, we have got unique opportunities in the Oaks and in Scottsdale at Santa Monica Place. We have tremendous demand and tremendous interest for those projects. So it is tough to compare an existing center or existing location to a high profile redevelopment. You can say qualitatively that we are getting a lot of bug, a lot of demand because we have the inventory at this point into leasing Santa Monica Place and Scottsdale Fashion, pretty far along on the Oaks. So it is a tough comparison, but we are very delighted with the reception that retailers have given us regarding those redevelopment.

And further to your question on the new development side, the retailers when they look at those essentially everything that we are doing in the Phoenix marketplace, they are must have locations for the retailers. They know, the retailers know that we only build when the market is ready and the timing is right they know the success that they have achieved from the new centers that have been built in the marketplace, the most recent new center are obviously being six years ago, seven years ago at Chandler, the fabulous success they have achieved there. They know that... when we built the timing is right and it's really must have, and so that the commitments at SanTan for example was well over 90% and already as we look at Estrella, virtually all of the tenants that are at SanTan are saying, well I also have to be at Estrella, because we know that if you're building it when you're building it the timing will be right and we have to be there. So on those that really must-haves for the retailers so and of course when you look at the quality of the redevelopments Tony made reference to Oaks, Scottsdale Fashion, Santa Monica Place, I mean, those are must-haves for the retailers also. So it's really our decision on who you want to go ahead and bring into the center.

Okay. And for Tom, it's probably safe to say there's no Mervyn's transactional income in earnings for this year correct? Beside from just the acquisition of it?

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

Okay, great thanks.

Thank you and we'll take our next question from Ambika Goel with Citi. Please go ahead.

Hi, this Ambika with Michael Bilerman. Can you give or provide some more color--

Where is John? Where is John?

Hi, Ambika. Hi, Michael.

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

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

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

I think, Ambika, to answer your question you have to remember the focus that we have that Tony has brought to bear here in the last year is that our entire focus is on deal quality, not deal quantity. And so its not really deciding to take a space of line per se other than for example in remerchandising situation like Biltmore what you're deciding what you're going to do in terms of where you're going to do it. The key here is deal quality and not deal quantity and when you're doing that, then sometimes your occupancies will drop a little bit but your spreads go up and the inherent value of the asset that you create when you're patient when we get the right retailer at the right rent as opposed to just selling space is something that reflect itself in the NAV of the portfolio and reflects itself ultimately in the productivity of the portfolio, which is you seen with us about has been going up dramatically and that's measured by sales for further [ph] use.

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

We've been managing occupancy in conjunction with our pursuit of higher quality deals and we're focused on bringing the best tenants that generate the higher sales that are able to pay the highest rent. At a cost of occupancy that's fair for us and fair for them, so that focus on quality manufacturing itself in our guidance and as well as we are delivering to the market the right tenants for these projects that have a high degree of success as supposed to focusing it on just billing space.

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

Sure. Roughly 35% or so would be...let me just... just hang on. Yes, 35% or so would be in our portfolio roughly, roughly 40% or so is sitting in the 14 malls that are controlled by the other public companies and the balance of the valuation is sitting in the other 17 really strip center and privately held mall locations.

And then when you look at... you talked about 7.25 going in yield. What sort of bumps are built into those leases?

I'm glad you asked that, because I forgot to bring it up. They are actually very attractive. Mervyn's, when they presented this...this was a package... this was kind of...it is the deal you either buy it or you don't buy it, it was very competitively bid on, and the offer that was put into the package was essentially... they recognized that landlords want to...need to have increases in growth. So there's fixed increases of 10% every five years.

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

7.25 is cash.

Right. And so what will the GAAP be?

Going in GAAP, Tom?

Michael I think it probably picks it up 25 basis points to 60 basis points. And again we're focusing on the cash aspects of the transaction, but certainly the straight lining effect will pick it up mid to the high sevens.

A math major could do it quickly though.

I am not very good at numbers. So what is... did you guys finance it at all or you just took it all then on your line? Do you plan to finance the boxes?

No.

And then I guess you talked a little bit about settling the balance I guess 25 and may be the other mall lenders are going to want to buy some of those other boxes so that they can control their destiny a little bit. I guess it nets down to...you talked about a 5% to 6% cap rate on your purchase price. How do you sort of get comfortable with that relative to spending money in re-development and development and did you sort of look at those 13 sites and say I am buying them for $120 million, but I know I can invest maybe $150 million and net and net is going to equalize to an 8% over time?

Yes. Sure. First of all the going in return was very acceptable cash return is 7.25 with good bumps. When I said the 5% to 6%, the 10% that's really just a range of internally if you add... if you made me sit down and write down on a piece of paper the way I'd valued it... I mean again this is the bulk transaction, so there is no sure signs to it. Some of these assets clearly, we would have... in the open market valued them at a 5% to 6% cap. Overall I would say generally in the strong mall locations, you're looking at 6% to 6.5% type slow cap rates that were used in the valuation. In terms of comparing it to being able to spend the money on re-development dollars. From my viewpoint, this really enabled re-development, right, if we've not bought these properties, then who knows would have bought them. Who knows who would have bought them if it been a complete stranger that has no alignment of interest with this whatsoever, and embedded in the agreements with any department store are the rights to approve expansions and developments. We got as part of this transaction, first of all we were able to make sure that a stranger didn't get introduced to the equation. But very importantly, very importantly, essentially the approval rights of Mervyn's, have now been pre-negotiated down to essentially they have adjacent parking that is now committed to be available to them but we have the right to do anything that we want to do...

Right.

With the balance of the center. So that opens up a tremendous amount of re-development opportunities. I mean, Essentially you look at the 12 malls that we own, you are probably looking at $3 billion worth of that real estate and really there are tremendous re-developments that have now been freed up at places like Cerritos for example, where this frees up a massive re-development that is now available source. So regarding end returns, it's acceptable and from a re-development view point the flexibility that we get is dramatic and at the end of the day of the $400 million some of total investment, that could easily would be shrunk over the next couple of years down to under $200 million.

Right.

So we'll see how it plays out. The only thing I could say is that I am very excited about accomplishing it, I know it is an unique investment for us, it's certainly diverse, but I can assure you that I wouldn't want to be in this call with you today and have you asked me how do you feel about the fact that X, Y the syndicator just bought 12 stores in your centers and now have something to say about what happens to those centers.

Right.

I wouldn't want to answer that question.

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

None.

Okay. Thank you.

Thank you.

Thank you. We'll take our question from Ben Yang with Green Street Advisors. Please go ahead.

Hi. Good morning.

Good morning.

I have a question on the Wilmorite redemption. You talked about that being equivalent to about $430 million sale of your assets that are roughly 9% cap rate. For portfolio that does roughly 350 in sales something that we would consider to be, may be B-, B+ quality. In quality it seems a little high. Is that reflective of what the market would bear, or was there something in the partnership agreement that dictated a lower price for that sale?

Are you saying that the cap rate high?

The cap rate seems a little high.

Yeah, it is.

And why is that?

Because that's what was negotiated in 2005.

Okay. That's the market rate from roughly three years ago instead of what we were seeing in the open market today?

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

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

Yeah, in '05 basically the deal that was made was we handed them 2.9 million units essentially and the deal was anytime 30 months later they can give us back the 2.9 million units and just assume the debt in place and get the assets back. So really the... it is really the actual cap rate is the function of our stock price at the time. So that's part of reason that it is diluted, but this was pre-negotiated two-and-half years ago. From my view point, while it is from a cap rate view point potentially viewed as being a little bit high which causes some cash flow after full dilution from an NAV as you'd point the opportunity of essentially taking over $207 million of equity out of non-core assets that don't have the growth characteristic that we'd like to have and immediately, essentially the equivalent of buying ... doing the stock buyback of 2.9 million shares at the current stock price is very attractive. If I said you are one off, that we just bought 2.9 million shares and did it by exchanging property for shares so we didn't have come up with flip cash, you'd say, that is pretty exciting and that is the way I do it.

Okay that makes sense. And then finally, it looks like you are losing your FDPA development, mall development at Westcore, you have a lot of... ground up developments in the pipeline there, any concerns with that loss, how are you going to fill that position going forward?

Yes, Dave is going to move on and he wants to... he is ready to do something else with his life, he is going to great... chances are he will be involved with us in some way going forward. We have a very, very deep bench at our Westcore development team there in Phoenix.

So it doesn't sound like there are any concerns, do you have anyone identified to fill his has role at this point?

Yes actually we've identified... we've two young fellows, Scott Nelson and Garrett Newland who will be taking over as the senior developers there in the market and probably working closely with them as well as Tracey Gotsis there in the Westcore office and Bobby Williams, the team is… we'll miss Dave, he is tremendous, tremendous contributor, but he was ready for a life style change which, somebody wants to change their lifestyle I can't argue with that. If he was going to a competitor, I'd have some hard feelings but he wants a life style change and we were blessed with having two young folks here with Scott and Garret that really have been tutored by Dave and may tread well that are ready for the challenge, ready to step up and take on the responsibilities of what we doing there and we feel look very, very comfortable with testimonies, the legacy of Westcore which is really the history of Westcore is that it is a training grounds for young developers who may come, young folks join us there and they get seasoned and then they become very strong developers and that is really... this is an ongoing evolution that's been going on since it started with [inaudible] in fact 20, 30 years ago.

Great thank you.

Thank you.

Thank you, it appears there are no further questions at this time and Mr. Coppola, I would like to turn the conference back over to you for any additional or closing remarks.

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

Thank you. That concludes today's conference, we appreciate your participation. You may now disconnect.