Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Macerich Co. (NYSE:MAC)

Q1 2010 Earnings Call

May 04, 2010 11.00 a.m. ET

Executives

Jean Wood - IR

Art Coppola - CEO and Chairman of the Board of Directors

Ed Coppola - President

Tom O’Hern - Senior Executive VP and CFO

Analysts

Craig Smith - Banc of America/Merrill Lynch

Quentin Velleley - Citigroup

Michael Bilerman - Citi

Christy McElroy - UBS

Ross Nussbaum - UBS

Rich Moore - RBC Capital Markets

Paul Morgan - Morgan Stanley

Michael Mueller - JPMorgan

Tayo Okusanya - Jefferies

Nathan Isbee - Stifel Nicolaus

Jim Sullivan - Cowen And Company

David Wigginton - Macquarie

Ian Weissman - ISI Group

Ben Yang - Keefe, Bruyette & Woods

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Macerich Company’s first quarter 2010 earnings conference call. Today’s call is being recorded. At this time all participants are in a listen only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. Again, I would like to remind everyone this call is being recorded.

And now I would now like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.

Jean Wood

Thank you everyone for joining us today on our first quarter 2010 earnings call. 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.

As this call will be webcast for some time to come, we believe it is important to note that the passage of time can render information stale and you should not rely on the continued accuracy of this material. During this call we will discuss certain non-GAAP financial measures as defined by the SEC’s 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 the supplemental 8K filings for the quarter which are posted in the investors section of the company’s website at www.Machrich.com.

Joining us today are Art Coppola, CEO and Chairman of the Board of Directors; Ed Coppola, President; and Tom O’Hern, Senior Executive VP and Chief Financial Officer.

With that, I will turn the call over to Tom.

Tom O’Hern

Thanks Jean. Today we’ll be discussing the first quarter results, our capital activity, as well as our outlook for the rest of 2010.

During the quarter, the operating metrics generally improved. Occupancy levels were up. Retail sales increased and same center NOI was positive for the first time in six quarters.

The volume of leasing deals was also up significantly. Looking at leasing, during the quarter, we signed 413,000 square feet. That's almost twice of what we did in the first quarter of 2009. That was 250 leasing deals. The average re-leasing spread was a negative 2.9%. Some of the reason for the negative spread was that we did a significant number of shorter term deals at some of our less productive centers. We think spreads will improve over the balance of the year as we indicated when we gave guidance. We thought throughout the year that spreads would be flat to up modestly. We still believe that would be the case.

Many of the deals that we did sign in the first quarter had been negotiated and committed to tenants in the second and third quarter of 2009. So to some extent that was recession pricing that carried over into 2010. The average re-leasing spreads on a trailing 12-month basis for a positive 7%.

Looking at the occupancy, it increased portfolio-wide to 91.1% that was up a 100 basis points from March 31st of 2009. In addition, compared to yearend, which is usually our highest occupancy period, the occupancy remained even with yearend portfolio occupancy. That's a very positive sign as historically we've seen a 50 to 100 basis point decline between the fourth quarter and the first quarter.

Average rent in the portfolio was at 42.50, that was up from $42 at year end. Occupancy costs as a percentage of sales was 13.9% for the trailing 12 months. Looking now at FFO, diluted per share was $0.66 for the quarter. That was down from $116 last year in the first quarter. The first quarter 2009 did include $0.28 per share of gain from extraordinary debt extinguishment.

Same center NOI was up 1.8% excluding lease termination revenue and SFAS 141. The positive comparison was driven to a large degree by occupancy gains. Lease termination revenue for the quart was 1.6 million. That was down from 1.9 million in the first quarter of last year. We saw an improving expense recovery rate, which came in at 95.6% for the quarter that compared favorably with 90.5% for the first quarter 2009. That's including JVs at pro rata. This improvement was due to significant cost reduction measures implemented in 2009 and the positive impact of having over 70% of our leases now on fixed cam versus triple net. There was a big decline in straight lining the rents of 1.3 million during the quarter. And there was 1.2 million declined in SFAS 141 income for the quarter.

Looking now at the balance sheet, we continue to have a significant amount of capital activity, which is improved the balance sheet significantly. Recent financings include the closing of $135 million loan on Vintage Fair mall. That was a five-year floating rate transaction at a rate of LIBOR plus three. We also closed on a $105 million financing of South Plains Mall, Lubbock, Texas. That was a CMBS transaction. That was a very effective execution, and we closed that with a five-year deal at 6.08% interest rate.

We've also got financings in process in Panorama Mall and Wilton Mall. Once those are completed, we only have 155 million of remaining maturities for 2010. In April, the company executed our one-year extension option on our $1.5 billion credit facility. That credit facility currently has a zero balance on it.

The average interest rate in the portfolio at March 31st was 5.62% and average rate on the fixed rate debt was 6.2%. Debt to EBITDA at quarter end was approximately 9.0, however, factoring in the recent equity transaction, the net debt to EBITDA is approximately 7.5 times.

We recently declared a quarterly cash dividend of $0.50 per share of common stock, with dividends payable June 8th, to record holders as of the close of business May 10th. This represents our return to 100% cash dividend and at the dividend level we are very comfortable with both in terms of the current payout ratio but also getting back to our historical practice of increasing the dividend annually. That is our plan in this case as well as we move forward.

Also this morning we adjusted our FFO guidance. The FFO guidance range was moved to 2.60 to 2.80. The guidance range was moved exclusively as result of the upsized equity transaction and return to an all-cash dividend.

At this point, I like to turn it over to Art.

Art Coppola

Thank you, Tom. I'm going to comment on tenant sales by region, little bit about leasing activity, some updates on our Santa Monica place, development activity and then move on to the balance sheet. Then we'll open it up for Q&A.

On the sales front, sales for the year ended March 31, 2010 are up to $416 a foot on the portfolio. That’s up from the 12 months ended 12/31/09, which was a $407 per foot. Total tenant sales for the quarter were up 3.4% overall. Arizona was up 5.3%. The central region was up 5.1%. The Eastern region was up 3.1%. California and the Pacific Northwest lagged behind with Southern California being up 1.2% and Northern California and the Pacific Northwest being up just a little bit under 1%.

As Tom mentioned, with the quarter, we had very good leasing activity, very high volumes in terms of square footages that are leased and our occupancies remain strong. Our Santa Monica place development is proceeding along very well. We're moving forward towards a dual opening in August with Bloomingdale’s in the malls scheduled to open August 6th and Nordstrom scheduled to open August 27th.

Leasing is doing terrific with 93% of the space committed and we're very, very bullish on the addition of Santa Monica place to our portfolio, as it will continue to upgrade the quality of the overall portfolio. Our portfolio is in great shape right now and well positioned for growth.

If you take a look at our top 20 properties in the portfolio, they average a little over $610 a foot and generate 46% of the EBITDA of the company. Our top 50 properties average $490 a square foot and generate a little over 79% of the EBITDA of the company. So from the viewpoint of the composition of the portfolio and the quality of the portfolio, we feel like we’re in a very good place to generate solid growth going forward.

As you know, on the balance sheet, we’ve had a tremendous amount of activity over the last 14 months. 14 months ago we laid out a plan that was an ambitious plan to delever the company hopefully by a level of over $2 billion over the following three years. In fact, we’ve been able to accomplish significantly higher deleveraging of the company in a much shorter period of time as we executed on our disposition and joint venture programs that generated over $600 million of cash, our October 2009 equity program which generated just under $400 million of cash, our stock dividend which between the stock dividend that was in place for a year and the dividend reduction generated $200 million of cash. And then our April recent common equity issuance generated just over $1.2 billion of cash to pay down debt.

These sources generated $2.4 billion of total cash available to pay down debt and to put cash on the balance sheet. Then when you add in pro rata share of debt, that went over to the new partners of the new joint ventures, just under $500 million there. We have total deleveraging of $2.9 billion. That puts our balance sheet in the best position that it has been in, in a very long time in terms of the various metrics that you might measure it by.

Total debt to total enterprise value is right now in the mid-40s, around 45%. And debt to EBITDA is currently at a run-rate of around 7.5 times. When you look at our balance sheet and you look at these ratios and the fact that we’re sitting on significant cash from our recent equity offering, we are very confident about our opportunity to grow our company potentially through external growth and/or to reinvest that capital into the existing portfolio. It was with the confidence of that -- of the balance sheet being in such a strong position that our Board of Directors elected to go back to a full cash dividend, at the level of $0.50 per quarter on this most recent dividend announcement.

We're very pleased to be in this position at this point in time and to be in a position where we can take advantage of potential opportunities as they may arise over the coming months and coming year.

At this point in time, we'd like to open it up for Q&A

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) Our first question today comes from Craig Smith of Banc of America/Merrill Lynch.

Art Coppola

Hey, Craig.

Craig Smith – Banc of America/Merrill Lynch

Hey, good afternoon or good morning, I guess. Just looking at the sales information, looks like by looking at 12/31/08 through the end of the first quarter consolidated sales per square foot sales felled 10, 2 [ph] and the unconsolidated felled about two three. Is there anything that accounts for that a difference in drop?

Art Coppola

I think those are really just coincidental. I don't see any real reason to point to the differences there?

Tom O’Hern

Craig, that your question why did they drop more on the wholly owned than the joint ventures?

Craig Smith – Banc of America/Merrill Lynch

I guess. It just seems a pretty significant difference but I don't see the same kind of differences, let's say occupancy or some of the other metrics. I just wonder if there was a concentration at one part of the region that might have fallen harder?

Art Coppola

But we do have a lot of joint ventures in California and in the west coast. So there is a significant amount of joint venture activity there.

Craig D. Smith – Bank of America Merrill Lynch

Okay. And then, in terms of potential acquisitions, do you see that opening up in the second half of the year or, no different than the first year? You just want to be ready to start for opportunities?

Art Coppola

You know our policy is not to comment specifically on acquisitions or dispositions, but look, we think that there could easily be some opportunities for us to profitably invest this excess cash that we've raised, and we're confident that there will be opportunities, and we wanted to be in a position to participate and those opportunities should be arise. So, we'll just have to see how it plays out. But we are very happy to be in a position where if an opportunity were to present itself through us to make an attractive acquisition that we can do so without putting pressure on our balance sheet.

Craig D. Smith – Bank of America Merrill Lynch

Great. Thank you.

Art Coppola

Thanks, Craig.

Operator

And next we'll hear from Quentin Velleley – Citigroup.

Quentin Velleley – Citigroup

Hi, I'm here with Michael Bilerman as well.

Art Coppola

Good morning.

Quentin Velleley – Citigroup

Good morning. Just in terms of the short-term license you comment around that would dragging the spreads down, I'm just curious how much leasing you did in the quarter that was actually short-term as a proportion of the title?

Art Coppola

It was about 66% of the leases in the first quarter, Quentin, were less than five years which is unusual for us, was something we did more of in 2009 than we've historically done. We didn't want to lock in rates for long term when we’re negotiating in the midst of a recession. So, from a tenant standpoint, our standpoint the short-term leases made sense.

Quentin Velleley – Citigroup

Do you have a breakdown on what the spreads were on that shorter term leases versus the longer term leases?

Art Coppola

Not at my fingertips, no. But obviously, the majority of the leases signed were under five years. So it was going to have a very heavy influence on the spread.

Quentin Velleley – Citigroup

And so, the shorter term you are expecting that to drop off through the year?

Art Coppola

Yes. A lot of these deals that we signed in the first quarter were deals that had been negotiated and agreed to as the tenants and ourselves were working on way through some pretty tough times in 2009.

Tom O’Hern

The shorter term leases are going to have lower spreads because the tenant is not making a long-term commitment. And, you're both just doing a shorter renewal and the spreads tend to be lower.

Quentin Velleley – Citigroup

Yes. I just got a modeling question as well. I think on the last call, you said this year there would be about $0.10 of additional upsides from Mervins in your guidance number. How much that came through in the first quarter?

Tom O’Hern

First quarter that was probably about $0.01 of the $0.10 came through in the quarter.

Quentin Velleley – Citigroup

Okay.

Tom O’Hern

Part of that is some straight line rents related to move in that went the other way to reduce that? Greater straight lining in 2009 than we do now as it relates to that portfolio.

Michael Bilerman – Citi

It’s Michael Bilerman, speaking.

Tom O’Hern

Hey, Michael.

Michael Bilerman – Citi

Just a question, as you think about putting capital to work. Obviously, you are monitoring the M&A situations that are happened in your sector, but outside of that as you are evaluating deals. How much do you see is being proprietary book, where you may have access to deals that others don't. As you think about the timing putting the scaffold [ph] to work those transactions earlier rather than waiting for assets to come up to market?

Tom O’Hern

I don't want to comment in particular on the breakdown there. There are a number of different uses that we can put that excess capital to. You know, to the extent that we might be in the middle of conversations with some proprietary situations; it really doesn't serve us well to comment specifically on that. So I'd prefer to stay with that policy of, not really giving specific guidance on acquisitions or dispositions until we're much more certain where we're closed.

Michael Bilerman – Citi

As you think about, having brought in joint venture partners last year and potentially bringing either buying in partners or finding other assets in the marketplace. Is your desire to own those wholly or to bring in new joint venture partners to acquisitions?

Tom O’Hern

It really depends on the size of the transaction. If we were presented with a large transaction, then we might be more inclined to bring in a partner to that. If we're consolidating ownership of an existing asset, I don't see us bringing a partner into a situation like that. It really depends on the size. I think, the first use of capital would primarily be to own assets wholly owned, given the cash that’s sitting on our balance sheet. We’ll have to just measure the opportunities by the size and where they came from.

Michael Bilerman – Citi

What’s the status right now of the warrants to GI in to Heitman?

Art Coppola

Well, obviously the stock prices move fairly significantly even since quarter end. So at this point, the GI warrants are in the money and I believe Heitman for us are not at this point but then they’re getting close.

Michael Bilerman – Citi

They haven’t shown any desire to exercise them?

Art Coppola

I can’t speak through them on that, Michael. I am not sure. But again it’s not -- these aren’t terribly big numbers we’re talking about. Much adieu is made about the warrants but the reality is in total. There’s not that many shares that, that they are related to them. Even as they get in the money, you account for those in the treasury method. It's not likely to be a big dilutive [ph] impact even when they are on the money.

Michael Bilerman – Citi

Right, but there is just more cash in your balance sheet and it sounds like you already believe you may have a little bit more cash than you need, so that --

Art Coppola

Generally, I would say that if they were to opt to exercise the warrants, they have opportunities to elect net share or net cash settlement the company can offer can elect net cash settlements, so I don't see it is bringing in a lot of new -- bringing in new capital to the company if they exercise the right to do a net cash or net share settlement.

Michael Bilerman – Citi

I’ve just got one last question. In terms of the construction in progress, I think last quarter you gathered a breakdown of what the elements of construction in progress were. Tom, do you have that at your fingertips what Santa Monica was and Mervyns’, etcetera?

Art Coppola

When the development pipeline now there’s really just two projects, Santa Monica, which we’re all pretty familiar with, the total project size is 265 million and through March 31st, 191 million had been spent. And so that's the bulk of what remains for development, redevelopment spending this year. There's also a much smaller project, and that's in Los Cerritos where we have a small expansion and we are adding a Nordstrom. And our share of the project costs there about 28.5 million and about 22 million have been spent. And in fact that has its grand opening later this week.

So that's completed and I imagine by the end of the second quarter, the full 28 million will have been spent, so that's it. We've got 129 million to spend on those and the bulk of that is Santa Monica place. I'm sorry -- 129, I misspoke. I think it's about 80 million left to spend with about 75 million of that being Santa Monica place.

Michael Bilerman – Citi

And were there any Mervyn's boxes in CIP?

Art Coppola

Not much. One or two.

Michael Bilerman – Citi

Thanks, guys.

Tom O’Hern

Thank you.

Operator

Our next question will come from Christy McElroy with UBS.

Art Coppola

Hey, Christy.

Christy McElroy – UBS

Good morning, guys.

Art Coppola

Good morning.

Christy McElroy – UBS

Just following up on Quentin's question. Besides from Santa Monica and Los Cerritos just looking at the rest of your CIP balance, looking at everything else that's in there, is there anything in there that's currently revenue generating?

Art Coppola

No. If it's revenue generating, it gets moved out of CIP and into operations.

Christy McElroy – UBS

Okay. And then just with a few projects in there still that had previously been put on hold, how do you think about the cost associated with those projects from an impairment testing standpoint? Any plans to start new development projects over the next 12 to 24 months?

Art Coppola

We're revisiting our re-development pipeline right now. And most of those were really in the entitlement phases, the different projects that we had been examining, and we don't see it breaking ground on those internal expansions any time soon, but in the horizon of 12 to 24 months, we could be breaking ground on some of those, but we need to get a few more months and quarters of good strong leasing activity to really have it make sense to pull the trigger on those. But there is definitely future opportunities within the portfolio to do some expansions and redevelopments. Historically, those have been great NAV producers for the company. And we're keeping an eye on the different opportunities, but we don't see it breaking ground on any additional expansion this year for sure, but it could happen as early as next year.

Christy McElroy – UBS

Okay. And then wonder if you could comment on Valley View in your plans there given the 125 million of debt coming due in January. And what's the quarterly or annual FFO drag from the center if any?

Tom O’Hern

At this point in time -- there is some small FFO drag from the center. And, yes, at this point in time, I really have no comment on that at this point in time on Valley View.

Christy McElroy – UBS

Okay. And then just lastly with regard to the refinancing of Vintage Faire, can you discuss your decision to put floating rate debt on the asset as opposed to fixing it? And as you stand today, given the changes we've seen in the debt markets and reemergence of CMBS market, what are your different options look like for raising debt capital and what do you consider to be your most attractive sources of capital today?

Tom O’Hern

Christy, I'll address the Valley View part of that first -- excuse me, Vintage Faire part of that first. In Vintage Faire, we have a – that was a deal that kind of evolved in 2009, when the life companies were really making some pretty nice deals for themselves, very big spreads. A number of our banks said, hey, we're going to get into that business of doing some long term and intermediate-term lending.

The Vintage Faire deal evolved from that. That was one of our lead banks. They came in with a deal that looked like almost like a life company deal. The difference was it was floating. And the great thing about that is we have the choice of whether to swap it to fixed or leave it floating. As a result of the equity raise and taking our line of credit to zero, we don't have a lot of floating debt left on the balance sheet. We're comfortable with that currently floating and that was kind of the decision process.

But really in the last six months, the debt markets have improved significantly. As I mentioned, we participated in what I believe was the first CMBS deal to be done certainly this year, and that was a transaction and we had 500 million CMBS deal in total. Ours was 105 of that 500, pretty effective execution. There is definitely a demand there, and I'm sure the sector will see additional CMBS deals done as we move through the year.

The life companies generally are saying they have an appetite that's four to five times larger than it was last year. So, there's little competition this year. And of course the bank market has been pretty resilient. They were active last year, that's even gotten better. So the market is not only far better than it was a year ago, it's far better than it was three months ago in my opinion and we’ve got a lot of choices out there.

Art Coppola

The property specific non-recourse debt markets remain our most attractive source of debt capital, Christine. And as Tom was saying proceeds levels are going up significantly from a lender's viewpoint and the debt consequences are coming down significantly. So that market is improving dramatically from a borrower's perspective. And again, on Vintage Faire we felt very comfortable letting that float given that it is a five year deal and also given that we have very little floating rate debt in the portfolio now that we’ve paid off the line of credit and as well as some other matters.

Christine McElroy – UBS

Okay. Great. I am on with Ross, he has a question as well.

Tom O’Hern

Hi, Ross.

Ross Nussbaum – UBS

Just two quick questions. One, Tom, what are the spreads that you’ve been quoted in the last 30 days or so on the new financings you will finance?

Tom O'Hern

They vary based on duration and quality of asset. The floaters are looking like LIBOR plus three with no floor. The fixed rate has varied depending on how far off the curb you go. I think realistically probably 250 to 300, maybe better, that's tightening.

Art Coppola

Yeah. As rates have gone up, actually the spread has narrowed. So it’s probably more like 225 to 250 today depending on how much leverage you go for.

Ross Nussbaum – UBS

Okay. And then….

Art Coppola

That’s for longer term money.

Ross Nussbaum – UBS

Understood. All right. Two quick questions. One is, is it safe to say on Valley View that you are in discussions as to what you really ultimately want to do there, and it’s not just a -- it’s not a straight forward solution?

Art Coppola

That would be, yeah, we’re examining a lot of different alternatives throughout this point in time.

Ross Nussbaum – UBS

Okay. And as I think you know, we were at Northpark a few weeks ago. I thought your partner told me that there were plans to expand that center and you are going to be involved potentially not in a equity investment but as a lender to help expand that asset. Did I hear any of that wrong?

Art Coppola

No. I don’t know. We wouldn’t be participating as a lender in something like that. But there is expansion land at that property and, you know there is an opportunity down the road to potentially invest money on an equity basis to help expand that property.

Ross Nussbaum – UBS

Okay.

Art Coppola

Thank you.

Operator

Next we move to Rich Moore, RBC Capital Markets.

Art Coppola

Hey, Rich.

Rich Moore – RBC Capital Markets

Yes, hi, guys. How are you?

Tom O’Hern

Great.

Rich Moore – RBC Capital Markets

On the bankruptcy front, how are you guys seeing things are and I guess in general tenant interest in the first quarter in particular which is what I think of is bankruptcy season?

Tom O’Hern

Yes, far less than usual, Rich. I mean, I think we’re probably have one or two or three tenants that are on the bankruptcy list, you know, none of which are significant. Tenants like Kiddie Kandids for example where I think we have 10 small locations. So if you go to the next level of concern is the tenant watch list, and last year that was probably two and a half pages long. We do credit monitoring every month on our tenants. And today, I’m happy to say there’s only about 12 tenants on that watch list. Those tend to be tenants where we don’t have a lot of locations, Rite Aid where we have three Cost Plus where we have five Borders. We have got 16 locations they’re on the watch list for us.

Art Coppola

And that’s our own proprietary watch list by the way. It’s something we keep a pulse on, given costs of occupancies as percentage of sales and a lot of other issues.

Tom O’Hern

So it's improved significantly, Rich. You can tell from the volume of deals we mentioned, we did 250 deals in the first quarter. Typically, your first quarter is your slowest quarter because you've got a lot of retailers at January yearend and they kind of just back off the transactional activity as they close their year out. So it's a very good sign, I mean the occupancy pickup, the leasing volumes and fewer tenants that are of concern to us far fewer than a year ago.

Art Coppola

And you are seeing a fair amount of private equity transactions with some private equity sources helping to recapitalize. Some of these retailers, I mean there was a certain jeweler that I won't mention but has been on the watch list, for everybody's watch list over the last year or two, and they just got an equity infusion from a private equity firm. So you know, I'd say right now, if you take a look at the retailers overall, the health of the retailers is as good as it has been in a number of years, because they've recast their entire cost structure. Many of them have recapitalized. Many have gone from having large outstandings on their lines of credit to having cash on the balance sheet. They're beginning to get ready to make commitments to start to grow again.

Rich Moore – RBC Capital Markets

Thank you, Art. On that note, it seems that you would want to begin thinking about redevelopments at this point, but it sounds like you are a little hesitant still, so maybe it's not the tenant environment is not that great yet?

Art Coppola

No, I mean, like I said, we need to get some momentum here. We don't have it yet. I'd say we clearly feel like we've bottomed out in a lot of markets and we're gradually seeing improvement. But we want to see that we're making long-term investments in these redevelopments. We prefer to be doing a leasing in a strong, robust environment. But, you know it's on the horizon. It's in the pipeline. I don't see us starting anything this year. By the mid to latter part of next year on redevelopments, it's a possibility.

Rich Moore – RBC Capital Markets

Okay. Good. Thank you. And then on the straight line rent, Tom, that was Mervyns that dropped from 4Q to 1Q?

Tom O’Hern

It wasn't all Mervyns. Again, keep in mind, Rich, our straight lining has been dropping, you know, for years because we're moving away from fixed bonds to CPI, and that's one of the byproducts is you are no longer building up the straight line rent number. It is actually declining over time.

Rich Moore – RBC Capital Markets

Sure, I got you. And then on the depreciation side, it seem that we kind of missed our projection for first quarter for both, you know, the JV portfolio as well as the consolidated. Was there something unusual that happened to D&A in the fourth quarter in both portfolios?

Tom O’Hern

I think there may have been some component depreciation, Rich, in there. But I'll have to look at that and get back to you.

Rich Moore – RBC Capital Markets

Okay. Alright, and Tom, on G&A, is the run rate for this quarter, do you think a reasonable rate going forward?

Tom O’Hern

No, I mean, there's always some lumpiness in there, Rich. I mean you will notice management company expenses were down a million versus a year ago 1.3. G&A was up too, and that was about a million [ph] because there's overhead components in both line items and it can be a little bit lumpy. I think if you do use a run rate of 6 to 6.5 million a quarter, you are going to be pretty close at the end of the day. But it won't be, it won't be straight line. That one is always lumpy quarter-to-quarter.

Rich Moore – RBC Capital Markets

Okay, good, thank you. When do you expect to file the Q?

Tom O’Hern

Within the next two days. Friday at the latest.

Rich Moore – RBC Capital Markets

Great. Thank you, guys.

Tom O’Hern

Thank you.

Operator

Paul Morgan with Morgan Stanley has our next question.

Paul Morgan – Morgan Stanley

Hi, good morning.

Art Coppola

Hi, Paul.

Paul Morgan – Morgan Stanley

On the spreads, you talked about the compression in the rent spreads attributing it to shorter term deals in some of the less productive malls. As you think about kind of B malls, and given that it's pretty tough in this environment from a leasing perspective, how does that – I mean, does that, when you think about opportunistic investment, is it just primarily A malls or would you consider lower quality assets?

Art Coppola

Well, I mean, look, if we can take a B mall and turn it into an A mall, we'll do that all day long. And there are a number of properties in our portfolios that at one point in their lives they were B malls and we converted them to A malls. Good examples are properties like Modesto, Vintage Faire, Fresno Fashion Fair and there are number of assets like that. But we are clearly focused on owning highly productive, high barrier to entry properties that are really fortress type of assets.

Over the years, we found that we've been able to drive the income from these larger properties at a faster rate than the secondary and tertiary markets that we've been involved in. So I think that over time we're going to continue to try and have, even greater percentage of our EBITDA come from the A assets. And as part of that plan we'll be creating some A assets through development and redevelopment like Santa Monica place will fairly become an asset, but we'll also be looking at times to opportunistically dispose of some B and C assets. And we can do that we're going to do it because we do want to overtime continue to upgrade the weighted average productive of the portfolio. So that the vast majority of that is coming from A type of assets. And we're in a unique position to be able to do that in terms of the size of the company.

Paul Morgan – Morgan Stanley

And would you consider any of those asset sales this year?

Art Coppola

Yes.

Paul Morgan – Morgan Stanley

Okay. Just on Santa Monica, you mentioned real quick, where do you expect to -- what lease rate do you expect to open at? Kind of how's the mix coming versus what your expectations were originally?

Art Coppola

Well, we've got less luxury than what we had originally thought we might have. And that was to a great extent caused by the fact that we were doing the leasing during a time when the luxury tenants were in a state of depression, not recession. But we are very happy with the tenant mix that we got there. I think all of the retailers, starting at the top with Bloomingdales and Nordstrom and just moving through the list of retailers that we've got lined up here, are extremely excited about the sales that they're going to generate at the property. I'd say that we'll open up probably by fall we'll be around 75 to 80% occupied in terms of small store space. We're currently 93% committed but some of the retailers will be opening up later into the year as well as into the spring of next year. We're very, very excited about the tenant mix and the retailers themselves are very bullish on the productivity that they expect to generate from the property. Like we’ve said before, we think it’s going to be, you know, one of the best projects built over a ten-year span 2005 and 2015 if not the best anywhere in the US. We think it clearly it’s going to be one of our top handful of properties and potentially even, you know, flagship type of property for us.

Paul Morgan – Morgan Stanley

Great. My last question, as we’re just a couple of weeks from ICSE [ph] and year was obviously a tough time to have that. You have any color on how the meeting book is shaping up and whether the recent sales improvements we’ve seen might change the tone considerably or a little bit?

Art Coppola

You know, we expect a very good tone. Retailers are in, again, their balance sheets and their profitability is in very good shape. You know, we were fully booked in terms of last year’s system. Some of the conversations were more hand holding than new deal making. So, you know, I think we’ll go from hand holding to handshaking this year.

Paul Morgan – Morgan Stanley

Thanks.

Operator

Our next question will come from Michael Mueller with JPMorgan.

Tom O’Hern

Hey, Michael.

Michael Mueller – JPMorgan

Hi. You talked a little about redevelopments. Can you give us a sense as to a year or two down the road when they start to come back which projects may surface first?

Art Coppola

They’re scattered around -- really around the whole portfolio so you know, again if we are ready to announce that we were, you know, if we’re ready to move forward, we would do it, but you know we really just need to see a lot more traction. Again right now, as we continue to work on entitlement activity on various properties. At this point, we're not really ready to go out and come out with the revised pipeline, but the opportunities are there.

Michael Mueller – JPMorgan

Okay. Switching gears a little bit, looking at the supplemental kind of allowances, et cetera. I mean they are still trending fairly low relative to prior year's levels. Can you talk a little bit about how tenants are viewing the tread off in terms of lower rent versus lower TID in dollars? Is it changing at all for margin heading back to like more normalized levels?

Art Coppola

I think there have been a secular shift, frankly on tenant allowances in 2009, and it was caused by a number of factors, including the fact that you had one very large landlord that quit giving tenant allowances in 2009, and that tended to, you know, infiltrate its way throughout the other large landlords such as ourselves and others. I think that tenant allowances are definitely at lower levels than they were clearly in 2007, 2008, and I don't see any significant changes there. You know, again, the retailers are -- they are getting to be very well capitalized. I think the landlords are being more disciplined in terms of the allowances that they're granting.

Tom O’Hern

Mike, if you look at total 10 allowances, in '08 it was about 35 million including JVs at pro rata in 2008, 2009 was about 25 million. We would expect to be at that level perhaps even less this year. Current run rate would be more like 15 million.

Michael Mueller – JPMorgan

Okay. Last question on the JV transactions you did last year, I think the blend of pricing was mid-sevens, maybe a little more to that. If you are looking at transactions happening today for the different types of categories, the As, Bs, maybe the Cs, Can you take a stab at where you think cap rates have moved to for those components, for those types of properties?

Art Coppola

On the As, I would say, its pretty easy to say that cap rates have compressed by at least by 100 basis points. And, you know, on the Bs, I don't know but there's been, I think, a year ago there really wasn't much of a market for the Bs and Cs. And today, I think there is capital for those types of property. Certainly the B type of assets and Cap rates may have even come down more on the B just because there wasn't a market or there would -- again the market was, you know in the high single digits. It's hard to say on that. And it is easy to say that on the A type of properties, the cap rates have easily compressed to 100 basis points.

Michael Mueller – JPMorgan

Okay. That's it. Thanks.

Art Coppola

Okay. Thank you.

Operator

Tayo Okusanya with Jeffries has your next question.

Tayo Okusanya – Jefferies

Yes, good morning. Couple of quick questions. In regards to lending terms you've seen for secured financing, I know you talked about the rates a little bit, but could you talk about a little bit more about like LTVs and service coverage ratio is that some other banks are asking for?

Tom O’Hern

Well, you know if you go back into the fourth quarter, I think people are still targeting LTVs closer to 50%. But that has change somewhat. The terms on our CMBS deal that we closed a few weeks ago is probably most indicative and that was an asset that was underwritten, probably fairly conservatively and based on their underwriting it was a 60% loan-to-value. The LN rate was 6.08% and that was a five-year term. So I still think the underwriting is conservative but it's certainly better than it was last year in terms of proceeds.

Tayo Okusanya – Jefferies

Okay. That's helpful. Could you also talk about what your occupancy costs were this quarter?

Tom O’Hern

It's hard to do on a quarterly basis, you really need to 12 months to get that number and for the 12 months ended March 31st, they were 13.9% which is down slightly from year end. I think year end we were at 14%.

Tayo Okusanya – Jefferies

That's helpful. And then, last question, when I compare some of your trends for the quarter, such as the same-store NOI growth and rental sales growth, it's somewhat below what some of the other are peers reported during the quarter, specifically Taubman and Simon. I was wondering whether that is more of a mix issue of if there was something unique to the quarter and that resulted in your numbers not as strong as theirs?

Tom O’Hern

Well I’ll speak the NOI, and Art can comment on sales. In terms of NOI, each company does that somewhat differently. Ours is basically strips that straight lining of rent SFAS 141, it strips out development activity because that can obviously skew the number as you bring a development in.

So I think what's really relevant for us is we had forecast same-center NOI growth for the year to only be up 50 basis to 100 basis points and the first quarter came in positive 1.8. So it was a strong quarter. It was a positive quarter. And that was a reversal of a trend that existed for the four to five quarters before that.

Art Coppola

In terms of tenant sales, it's hard to comment on the comps other than the first quarter of last year was tough on the luxury type of tenants. And the first quarter of this year, the luxury tenants generally did much better. That may be reflected in some of the results that you referred to at one other company there. On another big company that you made reference to, I believe that they're now combining all of their business segments into one number and it could be that one business segment performed differently in the more segments.

Tayo Okusanya – Jefferies

Okay. That's fair enough. All right. Thank you.

Tom O’Hern

Okay. Thanks.

Operator

Next is Nathan Isbee with Stifel Nicolaus.

Tom O’Hern

Hi, Nathan.

Nathan Isbee – Stifel Nicolaus

When you look at your, first offered that levels into the 7.5 times debt EBITDA, is that like a target level where you want to keep it or would you let it trend up with acquisitions?

Tom O’Hern

Well, I mean, we feel very comfortable at that level. We certainly operated at higher debt EBITDA levels in the past. But, I think that we are looking to keep our leverage ratios certainly in the dip code of where they are right now. We feel very good about having our balance sheet to be as well positioned as we do today. And while the acquisition activity could cause those numbers to go up if any potential disposition activity could also cause the debt to total enterprise value levels to actually go down and the net debt to EBITDA levels to actually go down, too. So I see us remaining in this zip code for the foreseeable future.

Nathan Isbee – Stifel Nicolaus

Is that mean, if you had a $500, $700 million acquisition coming down and break [ph] this year. Do you think you’d go back to equity markets?

Art Coppola

I don’t see any need for that. No.

Nathan Isbee – Stifel Nicolaus

Okay. Thank you.

Art Coppola

Thank you.

Operator

Our next question will come from Jim Sullivan, Cowen And Company.

Jim Sullivan – Cowen And Company

Thank you.

Tom O’Hern

Hey, Jim.

Jim Sullivan – Cowen And Company

Question on same-store NOI kind of a follow-up to some of the earlier questions here. Tom, I wonder if you could comment. The shopping center expense line on the consolidated was, of course, down and part of that, I guess, is attributable to some of the movement in the assets. But I just wanted to what extent, if at all, the favorable comparison was attributable to lower bad debt provision?

Tom O’Hern

Bad debts were down a bit, Jim, probably not enough to really move the numbers in a meaningful way. I think if you look at consolidated bad debt it was down about 500,000 from a year ago. So it had a little bit of an impact but not really as much as moving those JVs from wholly owned to the joint venture category. That was the biggest cause of the drop.

Jim Sullivan – Cowen And Company

Okay. And you had referred earlier either you reminded us that your guidance of the year assumed same-store NOI positive 50 to 100 Bips and of course your plus 1.8 in the quarter. What is your current expectation for the full year?

Tom O’Hern

Well, again, I have for many years’ cautioned people not to take one quarter and come to too many conclusions, especially when that’s the first quarter so and that goes for spread as well as same-center NOI. At this point, this early in the year, we’re not prepared to revise our guidance on that.

Jim Sullivan – Cowen And Company

Okay. Fair enough. And comment, well really, a question I guess for Art. You were talked about the regional sales variation with the relative weakness I guess we characterized it in that way in Southern California. I'm curious what your guestimate is for the year? Do you think that current lagging trend in terms of sales it's going to continue for the full year or do you think it's going to turn around sooner than that?

Art Coppola

I wish I could predict that for you. If I could predict things like that I might take up the different proportion. I think there's some real issues that we're dealing with here in the California and really the whole Pacific Rim, that have caused sales to remain modestly flat to up a little bit. It could be a while before you see a recovery here. It's hard to say.

Tom O’Hern

The good news is the assets that we own in the region are all generally very, very strong assets. It's not adversely impacting our leasing activity or our EBITDA results, but we would much prefer to see those sales to be up 5% to 10%, but they are not there yet.

Jim Sullivan – Cowen And Company

Okay. So it's probably fair to say that at least in the first quarter there may be some positive offsets in Northern California and the Pacific Northwest that you're not seeing for whatever reason in Southern California?

Tom O’Hern

Actually, our Northern California and Pacific Northwest, those sales were very identical to Southern California with the Northern California, Pacific Northwest being up just under 1% and Southern California being up just over 1%.

Jim Sullivan – Cowen And Company

I'm sorry. I must have take it down incorrectly. When you spoke that sooner. Okay. Great, thanks

Tom O’Hern

Thanks, Jim.

Operator

And next, we'll hear from David Wigginton, Macquarie.

David Wigginton – Macquarie

Good morning guys. Couple of questions for you. Drawing down on the same store inline growth for the quarter, how much of that was attributable to CPI escalators?

Tom O’Hern

Not as much as prior years. I think that the differential between the first and second quarter was probably about 800,000, something like that. So…

David Wigginton – Macquarie

Okay. And then just to make sure I understand. You guys have not for those numbers right, its not just purely based off the index?

Tom O’Hern

Well, Every deal is different, Dave. It's generally CPI not it can never go negative. Sometimes -- CPI not to exceed a certain number and if there is a cap on it. Generally, we have a makeup provision where if we get capped out one year. But the following year or years does not reach the cap then we can make up what we missed out on. So, in this case, obviously inflation was very low if not even negative for parts of 2009. So, that just wasn't as much to roll. But what we did pick up was the amounts over the cap from prior years. It was a low CPI-rolling year for us this year compared to prior years.

David Wigginton – Macquarie

Okay. And then just my final question is with respect to capitalized interest jumped in the quarter. What was the cause of that?

Tom O’Hern

Spending Santa Monica place.

David Wigginton – Macquarie

Okay. Great. Thank you.

Tom O’Hern

Thanks.

Operator

And our next question will come from Ian Weissman, ISI Group.

Ian Weissman – ISI Group

Yes, good afternoon. Quick question on Luxury, Luxury has clearly been leading the recovery here, yet this week we had announcement that Saks is closing the stores and Sant Diagos, I was wondering if you could maybe just comment on the department store consolidation. Do you think that would be a continued trend?

Art Coppola

Well, it has been for 35 years that I've been in the business. The department store consolidations, you picked out a name in particular Saks, which I think openly acknowledged that they're going to reduce their store count overall and concentrate on fewer markets. The Luxury has generally done better here, but I think they need a few quarters underneath them also, to say that they're in full recovery.

The good news is that when you look at the relative financial health of a lot of our department stores and traditional anchors, they're in much better shape today than they were a year ago or even two years ago. I think maybe our largest department store anchor, Macy's is feeling very good about their new my Macy's program, where they are targeting merchandise more to the region and they’re putting up good numbers and talking about raised their guidance in terms of sales increases that they're forecasting nor upcoming year and even beginning to talk about new stores.

So, you look across the board, I think our anchors are in certainly much better shape today from the financial held viewpoint than a year or so ago. But consolidation is the nature of the beast and we're always going through consolidation. We had a new one come out this week where Gottschalks who went away into bankruptcy two years ago now started talking about opening new stores again. That's a new one on me.

Ian Weissman – ISI Group

I guess what I'm surprised about is, you have Sachs closing at the A-quality, I know there is analytical in real estate alert talking about Neiman-Marcus also high end luxury retailer selling a couple of stores in Las Vegas. I guess the consolidation and I'm concerned about is in the better quality markets to better quality mostly when I say accelerating, do you see that occurring in your A-quality malls? And would you be in a position to buy back those boxes if presented today?

Art Coppola

First of all, I think the Neiman's real estate alert article that was misleading. I think those were sale leasebacks into a long time ago when Neiman-Marcus was owned by credit how we are doing. I think it's the landlord that's actually selling their position, not Neiman's selling their store. Again from a health viewpoint, I see our anchors as being in relatively good health and looking to grow their business.

Ian Weissman – ISI Group

Okay. Thank you.

Art Coppola

Thank you.

Operator

Next we'll hear from Ben Yang with Keefe, Bruyette & Woods.

Ben Yang – Keefe, Bruyette & Woods

Hi, good morning.

Tom O’Hern

Hi, Ben.

Ben Yang – Keefe, Bruyette & Woods

Art, I recalled you previously stated in the next vacation that lease term fees would total about 12 million for the year which sounds about high given that very little was reported during the first quarter and also your earlier statement that the tenant list was a lot smaller than with year ago. I mean, are you expecting lower term fees this year and if not I wonder where the weakness might come from your portfolio?

Art Coppola

Ben, as it relates to term fees and we typically don't see that much in the first quarter. For example, last year, we had total term fees for the year of 22 million and only 1.9 million was in the first quarter. We have average about going back to 2006 we’ve been on average about 16 or 17 million a year. And most of that tends to come in the latter half of the year. So we’re still comfortable with that. It’s not always a function of bankruptcies. Sometimes it’s just a tenant downsizing space or we see an opportunity and we go after proactively. We're so comfortable with that assumption.

Ben Yang – Keefe, Bruyette & Woods

So your tenant watch list is clearly bankruptcy related as opposed to maybe risk of store closure?

Tom O’Hern

If they’re not going to go bankrupt, they still have a financial obligation if they decide to close the store and then it becomes the negotiation.

Ben Yang – Keefe, Bruyette & Woods

Okay. Makes sense. And just finally, the 31 million common shares that you sold last month, does that include the overall allotment or did you end up increasing the share sale by another million?

Art Coppola

That includes the over allotment.

Ben Yang – Keefe, Bruyette & Woods

Great. Thanks, guys.

Art Coppola

Thank you.

Tom O’Hern

Thanks.

Operator

And that does conclude our question-and-answer session. I will now turn the conference over to our host for any closing remarks or additional remarks.

Art Coppola

Thank you very much for joining us. You know, we are very confident about our results and we are looking forward to reporting to you over the upcoming year. We look forward to seeing a lot of you in Chicago and a month at NAREIT. Thank you very much.

Operator

That does conclude our conference call. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Macerich Q1 2010 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts