Macerich Co (MAC)

Q2 2010 Earnings Call

August 09, 2010 01:30 pm ET

Executives

Jean Wood - VP, IR

Tom O'Hern - SEVP, CFO and Treasurer

Art Coppola - Chairman and CEO

Randy Brant - EVP, Real Estate

Analysts

Craig Smith - Bank of America/Merrill Lynch

Rich Moore - RBC Capital Markets

Michael Bilerman - Citi

Christy McElroy - UBS

Ian Wiseman - ISI Group

Paul Morgan - Morgan Stanley

Tayo Okusanya - Jefferies & Company

Jay Habermann - Goldman Sachs

Michael Mueller - JPMorgan

Vincent Chao - Deutsche Bank

David Wigginton - Macquarie

Alexander Goldfarb - Sandler O'Neill

Ben Yang - Keefe, Bruyette & Woods

Cedric Lachance - Green Street Advisors

Presentation

Operator

Good afternoon ladies and gentlemen thank you for standing by and welcome to the Macerich Company’s second quarter 2010 earnings conference call. One note that 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 and instructions will be provided at that time for you to queue up for your questions.

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

Jean Wood

Hi, thank you everyone for joining us today on our second 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 web cast 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 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 in the supplemental 8-K filings for the quarter which are posted in the investors section of the company’s website at www.macerich.com.

Joining us today are Art Coppola, CEO; Ed Coppola, President; Tom O’Hern, Senior Executive VP and Chief Financial Officer and also joining us today is Randy Brant, Executive VP, Real Estate; Randy overseas our department store and retail leasing.

I want to invite you all to attend our Investor Day on October 5. And with that I would like to turn the call over to Tom O'Hern.

Tom O'Hern

Thanks Jean. Today we’re going to be discussing second quarter results, our capital activity, the opening of our fantastic new malls Santa Monica Place marketplace and our outlook for the rest of 2010.

Our operating metrics were strong for the quarter, our occupancy levels were improved, retail sales increased and same-center NOI was positive for the second quarter in a row. The releasing spreads turned positive after being negative in the first quarter of this year.

Looking at the spreads, we signed leases on 331,000 square feet of space that was 224 deals, on average this includes consolidated as well as joint venture assets. The average new starting rent was 39/34 a foot for a positive releasing spread of 4.6% over the expiring rent.

Occupancy levels increased to 130 basis points compared to a year ago, we were at 91.8% at June 30 compared to 90.5 in June 30 of '09. Average rent in the portfolio increased to 42.31, that’s $42.31 compared to just about $42 even at year end. Occupancy cost was 13.9% and that’s based on the trend 12 months ended June 30.

Looking now at FFO, FFO per diluted share was $0.57 for the quarter that compared to $0.67 for the quarter ended June 30, 2009. It’s important to keep in mind that as a result of our stock dividends of last year and our equity offerings of October and April, that we now have over a 141 million shares outstanding that compared to 89 million shares outstanding for the quarter ended June 30, 2009.

As a result of that we had quarterly earnings dilution of approximately $0.17 per share from the additional shares outstanding in the second quarter of 2010 compared to the comparable quarter a year ago.

Same-center NOI was up 2% compared to the second quarter of 2009. This was mainly driven by occupancy gains as well as lower bad debt expense. The expense recovery rate also improved, that includes joint ventures that was almost 96% that compared to 92% in the second quarter of last year. This improvement was due to significant cost reduction measures that were implemented in 2009 as well as the positive impact of having about 70% of our leases today based on fixed cam compared to triple net.

We mentioned bad debt expense dropped significantly compared to a year ago. Bad debt expense was down over $2 million at $1.4 million for the quarter compared to $3.8 million in the second quarter of last year, yet another sign of renewed tenant health.

Looking at the balance sheet, we continue to have a significant amount of financing activity. Our recent financings include Stonewood Center, where we arranged a $114 million financing on this joint venture asset. The new loan is a seven year loan with interest rate of 4.6%, that pays-off the old loan of $71 million that had a much higher coupon of 7.41%, and we expect that to close in September.

Upon completion of the Stonewood transaction, we only have a $118 million of remaining loan maturities in 2010, and one of the maturities is the old CMBS loan on Santa Monica Place. That’s $76 million at the rate of 7.8%, and we plan to pay that off in October and leave that asset unencumbered.

In addition, we have started on our 2011 maturity schedule, and we have arranged a $250 million loan on Danbury Fair Mall. The new loan has a fixed rate of 5.5%, a ten year maturity and it will payoff the existing loan of $160 million that has a coupon of 7.51%. There is other transactions, other 2011 maturities we are working on and are up for bid right now. The market is strong, and we are going to take advantage of that activity.

In addition in April, we executed a one year extension on our $1.5 billion credit facility that takes it out to April, 2011 and we currently have a zero balance on that line of credit.

Our average interest rate for the quarter was 5.69% and the average fixed rate was 6.15%. The interest coverage ratio was a very healthy 2.141% for the quarter, and debt to total market capitalization today is 46%. We recently declared a dividend to $0.50 per share on our common stock to dividend as payable in-cash on September 8 to stockholders of record on the close of business on August 20th.

Now focusing on earnings guidance, we are reaffirming our previously provided FFO guidance range of 2.60 to 2.80, no change there. Taking now a quite look at tenant sales, sales per square foot was $421 for the year ended June 30, 2010, that’s up 3.4% compared to year end which was $407 per foot.

Looking at tenant sales, total tenant sales were up 3.3% for the quarter compared to the second quarter of last year. Seen here a quick look at that by region, Arizona was up 5%, the Central region was up 2.9%, the Eastern region was up 2%, Northern California in the Pacific North West was up a very strong 4.8% and the Southern California region was up 1.1%, again on average a total increase for the whole portfolio was 3.3% compared to the second quarter of last year.

And with that I’d like to turn it over to Art.

Art Coppola

Thanks, Tom. As you know over the past couple of years going back to September of 2008, when the capital markets crashed, we had to begin to make some difficult decisions and as we moved into the fall of 2008 one of the first decisions we had to make was the conservation of capital. And the biggest place to conserve capital for us is in our development program and our redevelopment program, and at that point in time in September, October, November of '08 we had 30 to 40 projects in our shadow pipeline. Some of them were fairly eminent, some of them were under construction, and some of them were a little bit further out.

We sat down and we said all right we are in a very capital constrained market, and we have a financial crisis, retail sales are plummeting, and we need to cut this back to mission critical, and we cut it back to Scottsdale Fashion Square as you know, which was open last year very successfully to Cerritos the completion of the Nordstrom relocation, and we are now in the process of remerchandising the old Nordstrom wing, finishing up on Northgate in New York, but most importantly in the real key decision that we had to make with Santa Monica Place.

Read the rest of this transcript for free on seekingalpha.com