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Executives

Art Coppola – Chief Executive Officer and Chairman of the Board of Directors

Ed Coppola – President

Tony Grossi – Senior Executive Vice President and Chief Operating Officer

Tom O’Hern – Senior Executive Vice President and Chief Financial Officer

Jean Wood – Vice President of Investor Relations

Analysts

Michael Mueller -JP Morgan

Jeffrey Spector – UBS

Jay Habermann – Goldman Sachs

Craig Schmidt – Bank of America

Vincent Chao – Deutsche Bank

Ben Yang – Green Street Advisors

Rich Moore – RBC Capital Markets

Michael Bilerman – Citigroup

David Wigginton – Mcquarie Capital

Anar Ismailov – Gem Realty

Macerich Co. (MAC) Q4 2008 Earnings Call February 11, 2009 1:30 PM ET

Operator

Welcome to the Macerich Company fourth Quarter 2008 earnings conference call. (Operator Instructions) 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 fourth quarter 2008 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 filing. 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 scale, 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 8-K filings for the quarter, which are posted in the investor section of the company's Web site at www.macerich.com.

Joining us today are Art Coppola, CEO and Chairman of the Board of Directors, Ed Coppola, President, Tony Grossi, Senior Executive VP and Chief Operating Officer, and Tom O'Hern, Senior Executive VP and Chief Financial Officer. With that, I would like to turn the call over to Tom.

Tom O'Hern

Today we'll be discussing fourth quarter results and full year results, recent financing activity, our plan for 2009, 2010 as it relates to financing, as well as our outlook for earnings in 2009 and the reduction in our development pipeline. The operating metrics generally remains solemn in the fourth quarter with continued high occupancy levels and strong releasing spreads.

We did see a decline in mall sales per square foot for the past 12 months ended December 31, 2008 sales were down 5.9% to 441 per foot. We did see good releasing activity. We signed 231,000 square feet of releases during the quarter, and the releasing spreads continue to be strong with a 23% positive spread, the new rent versus the expiring rent and for the full year 2008 that positive spread was 24%.

Taking a look now at sales and spreads by region, the central region declined 1.2% in sales, but had a strong 23.4% that releasing spread. The Eastern region declined 2.4%. We had a very strong 41.4% positive releasing spread. The Northern California Pacific Northwest region declined 5.3% and had releasing spreads of 14% positive.

Southern California had a decline of 5.8% in terms of sales and releasing spreads of 20.1%. Arizona had sales declines of 15%, but continues to have very strong releasing spreads of 25% positive. Occupancy levels remained high albeit down from last year-end with mall occupancy at 92.3% down about 80 basis points versus 93.1% a year ago. Overall occupancy, including non-mall properties, was 92.3% down from 93.5%.

Most of the reduction in the non-mall properties was related to big box spaces with Linens 'N Things accounting for about 40 basis points of the decline, CompUSA accounting for about 20 basis points of the decline. Neither one of those tenants are very big rent payers with Linens 'N Things having an average rent of about $12 a foot, CompUSA having an average right at about $11 a foot, both well below the Macerich average of $41 a foot. The average rent went up 8% to $41.68 compared to $38.58 a year ago.

Looking now at FFO, FFO per diluted share was $2.08 for the quarter compared to $1.45 for the quarter ended December 31, 2007. Consensus was $1.92 and our guidance was $1.94 with a primary difference being on the last call when we raised guidance, we factored in about $55 million of gain on early extinguishment of debt.

We continued to buy back our debt in late December and we retired an additional $80 million or so of convertible debt at a $40 million gain. Offsetting the additional gain was about $8.6 million of write-offs on predevelopment projects that we're no longer pursuing and also an impairment charge of about $19 million on land held for future development.

Same center NOI for the quarter, excluding termination revenue in SFAS 141 was down about 2.5% compared to the fourth quarter of last year. The negative comparison was mainly driven by a $7.3 million decline in fourth quarter percentage rent and a two point million increase in bad debt expense. That combined with the occupancy decline previously discussed drove the negative same center comparison. Year-to-date same center NOI was up 1.4%.

Lease termination revenue, including JV's at pro rata was $3.6 million up from $1.2 million in the fourth quarter of last year. The expense recovery rate, including JV's, for the quarter was down to 83% compared to 92% in the fourth quarter of last year. This reduction was due primarily to high non-recoverable expenses, including bad debt expense and legal fees related to the Mervyn's bankruptcy.

If we take a look at recoveries as a percentage of just recoverable expenses, they came in at 98.4% in that compared to 99.7% a year ago. CPI rent increases were $1.7 million higher than in the fourth quarter of last year. Straight line rents during the quarter were down $3.7 million to $0.9 million compared to $4.6 million in the fourth quarter of last year.

SFAS 141 income was at $13 million up from $4 million in the fourth quarter of last year. Both the decline in straight lining of rents and the increase in SFAS 141 were largely driven by the Mervyn's transaction. Gain on sale of undepreciated assets during the quarter was $1.7 million. That was down from the $10 million gain recorded in the fourth quarter of last year.

Now taking a look at the balance sheet, we continue to have a significant amount of financing activity. Our average interest rate is 5.19% and our average rate on fixed rate debt is 5.95%. The interest coverage ratio for the quarter was a healthy 2.11 times. At quarter end we had a total of $7.9 billion of debt outstanding, including JV's at pro rata.

We have over $400 million of capacity on our line of credit today, plus over $150 million of cash on the balance sheet. During 2008, we financed 13 projects with our pro rata shared loan proceeds being $1.3 billion. In the fourth quarter we were able to take advantage of market conditions and retire $220 million of our convertible notes at a cost of $127 million. That was a 45% discount to the face amount and we recorded a $95 million gain on early extinguishment of debt. It was a very effective step in reducing our overall leverage.

Included in today's 8-K supplement, on page 14 and 15 are schedules that show our 2009 and 2010 financing plans. We've already made great progress on the 2009 maturities with over $289 million of new loans done already, and those generated in excess of $100 million in excess loan proceeds.

In addition, we've obtained a commitment for a $62 million loan on our Redmond Town Center office buildings. If you take a look at page 14, which shows the 2009 maturities, excluding the deals that are already done or have been extended or have extension options, we have $406 million remaining.

And if you look down that list, there are some of our top-performing assets such as Biltmore Fashion Park, Paradise Valley Mall, North Ridge Center and the Village at Corte Madera in the San Francisco Bay area. These centers with loan maturities in 2009 are top quality assets and they average over $565 per square foot in annual sales. Those assets are also lightly leveraged with average maturing loans at under 40% loan to value.

The financing plan we have here for 2009 shows us generating an excess of $300 million of excess proceeds, and this is our best estimate based on what we're seeing in the market. And we're very, very active in the market with daily conversations taking place with banks and life companies.

If you take a look now at the 2010 maturities, which show up in the supplement on page 15, excluding the loans with extension options, we have $766 million in maturities. These are nine property-specific loans, none of which are over $78 million, and if we look at the financing expectation for those, we expect to generate over $373 million of excess proceeds. Also maturing in 2010 is a $450 million term note. It's difficult to determine the bank capacity for an unsecured REIT loan in 2010, so we're assuming that will need to be reduced.

We had assumed a $100 million reduction in that loan at refinanced. We expect that there will be ample cash generated from the other financings in 2009 and 2010 to accommodate that reduction or even a complete repayment. In addition, we do expect other liquidity events to occur in the next two years, which will allow us to de-lever and potentially pay the term notes off early.

In summary, we continue to make good strides on our balance sheet. We've had a very busy and successful year on the financing front in 2008, and we expect that to continue this year. We're fortunate we have many long-term relationships with our bank group and many life companies and pension funds whom we have been doing business with for many years.

Shifting now to earnings guidance for '09, we put it in our press release this morning. Our guidance range is $4.50 to $4.75 per share. The main assumptions included in that guidance are same center NOI growth of 0.5% to 1% breaking that down to the key components it's driven by strong releasing spreads in '08 and the expectation for strong releasing spreads in '09, as well as our built-in CPI increases on about 60% of our leases.

This is offset in our forecast by a decrease in occupancy, which we're expecting to reach 91% as of year-end 2009. So, we're forecasting throughout the year to drop from 92.3% to 91% by year-end. We've assumed that the empty Mervyn's locations that were not leased by Forever21 or Kohl's will remain vacant all year and cost us about $0.25 per share.

That's a combination of lost minimum rent as well as common area expenses and tax expenses that we're going to need to pick up, as well as some primary leases to landlords. We've assumed no lease up or sale of those stores during 2009. That's a conservative assumption and we certainly hope we can do better than that.

We have assumed two major non-cash items in our guidance. First, we forecast non-cash interest expense for the new accounting rules on convertible debt to increase our interest expense by about $25 million. And then offsetting that to some extent we've assumed net gains from early retirement of debt in 2009 of $20 million.

So, again those are two non-cash items that do hit FFO and would have a negative impact of about $5 million based on our forecast. We've had not assumed any asset dispositions or new joint ventures on existing assets in our guidance, so to the extent those liquidity events happen, we will modify guidance accordingly.

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

Art Coppola

We're obviously facing a very challenging retail environment and in particular a tough fourth quarter, as Tom had indicated. In spite of that, though, as Tom outlined, we had extremely good operating results for 2008. As Tom pointed out, our releasing spreads in 2008 were very strong at 24%.

And as we look to 2009, we are currently projecting continued double-digit increases in leasing spreads based upon early indications of our releasing, and we've got a significant amount of the portfolio already released in 2009.

As we looked at sales and occupancy trends, in particular luxury has been hit hard. And that shows up in terms of the sales impact that's happened in particular in Arizona with the presence of Biltmore and Scottsdale Fashion Square occupying a big piece of our Phoenix portfolio, and with the luxury component that these two centers have, they both were hit hard in the fourth quarter. In particular, you take a look at luxury retailers such as Neiman Marcus and in particular you can see that they were hit hard.

But in spite of that, rent spreads for us in Arizona during 2008 remains strong at 25%. So, our Arizona portfolio, while it has been hit by tourism, on the one side the tourism decreases as well as luxury being hit hard in particular. Rent and occupancy levels have performed in balance basically with the rest of the portfolio.

As Tom mentioned, Mervyn's is a big piece of our 2009 guidance. We were very pleased to have the opportunity to recycle 22 of our Mervyn's stores in the fourth quarter of last year to Kohl's and Forever21. Kohl's took ten locations, Forever21 took 12 locations. We had originally forecast in our last conference call that we had anticipated that we would be able to recycle roughly two-thirds of our locations, and in particular we had in mind that these would go to Kohl's and Forever21.

And Kohl's and Forever21 scaled back their appetite in general a little bit that we ended up recycling half of the locations to Kohl's and Forever21. We’re pleased with that. We’ve got work to do on the balance of the Mervyn's location. There are a number of retailers that we're looking at, including the possibility of Kohl's and Forever21 taking additional locations to lease up the balance of the space. That will be a challenge for 2009. We do not have any income assumed in our 2009 numbers there, but there is activity that is taking place and they'll be upside as we are able to re-merchandise those locations.

As we look to our development pipeline, we've scaled back significantly our development pipeline so that we are only pursuing developments at this point in time that are mission critical to us. In 2009, we have remaining to spend $94 million of projects to be placed into service in 2009, and another $250 million approximately to be placed into service in 2010.

Our ground up projects in Arizona had been deferred at this point in time and moved out of our previous opening date of late 2010, in particular Estrella Falls has moved out of the 2010 opening date and currently is under review as we're thinking about remerchandising, adding an additional anchor to that center, and thinking about the new opening date.

Currently it has been moved out past 2010. We're looking at 2011, 2012 basically as market and financing conditions dictate. We had had very strong new leasing activity in that center. But in today's capital environment and just the overall environments we felt it prudent to move that development out.

Looking at the developments that are to be coming online, they are all in fill and great centers. The majority of the spend is located in Santa Monica Place, Scottsdale Fashion Square and The Oaks. Santa Monica Place you'll notice on our 8-K that we've moved the grand opening in placing of service Santa Monica Place from late 2009 into 2010.

We have indicated and given you a heads up on that in the last conference call, but due to Macy's making a decision to convert their store from a Macy's to a Bloomingdale SoHo concept, which means that they will be closing down by the end of this year and recycling that store and reopening it in the late Spring to mid part of next year, that we have determined to lay the opening of the mall itself to coincide with the opening of Bloomingdale’s SoHo, as well as Nordstrom.

Nordstrom is scheduled to open up in August in the next year. So, that was a big move in terms of coinciding our opening with the anchors at Santa Monica Place. At The Oaks, we opened up the first major phase of that expansion, a very successful opening for Nordstrom in November of 2008, and the second phase of that expansion will be opening up here later on in the first quarter as Muvico Theaters is are scheduled to open up its first West coast location as the entertainment anchor of the 130,000 square foot lifestyle expansion of the Oaks.

Finally, at the Scottsdale Fashion Square, the other major project that we have underway, hat continues on schedule towards a fall of 2009 opening. This is anchored by a 60,000 square foot Barney’s New York, which is an Arizona exclusive.

Today, we announce that new fashion retailers at Hardy, French luxury retailer, home wear retailer Arthur, Forever21 will join previously announced true religion restaurants Marcella and Modern Steak in the new wing. Recent additions to the center’s interior merchandise mix include the [Cardia] and [Vogure]. So Scottsdale Fashion Square’s expansion is coming along online and will open up in the fall of this year.

As Tom mentioned, now looking at liquidity events from a financing viewpoint, we had a very good year in terms of the recycling of the properties that we had in terms of property financings for 2008. We’re off to a very good start for 2009. As we look at what’s left to be financed in 2009, these are very, very strong centers that we have currently negotiations well underway on.

And then we look at the two major properties that are coming up in 2010. Great centers with Santa Monica Place as well as Vintage Faire up in Modesto, each of which we anticipate will be very strong re-financing candidates. Looking at acquisitions and dispositions, we’re obviously not in the acquisition market at this point in time, and we are looking at a number of different disposition opportunities.

We have been approached by a number of our existing partners, as well as new potential partners that have shown interest in pursuing new joint ventures with us. Between non-core dispositions and potential new joint ventures over the next twelve months, we expect that we could easily generate in excess of $500 million of new proceeds from these two potential sources.

And we think that this is a great source of equity capital for us to de-leverage, since this equity would be coming in at roughly 12 to 15 times cash flow when at the present time, we are trading at just over three times FFO.

In summary, we are very pleased with our operating results for ’08. We’re looking forward to ’09. Again, our releasing activity and our re-financing activity is already well under way in 2009.

And at this point in time, I would like to open it up for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your question comes from Michael Mueller – JP Morgan.

Michael Mueller – JP Morgan

A couple of things here, first of all, the $20 million gain on debt extinguishment that’s in guidance, I’m assuming that relates and it converts, is that correct?

Tom O’Hern

Yes, it does, Michael.

Michael Mueller – JP Morgan

And, that’s done already?

Tom O’Hern

No. But we’re in constant contact with the holders and it’s something we feel is very achievable.

Michael Mueller – JP Morgan

Secondly, I guess on the prior call, the guidance for the Mervyns it was about $0.10 now it’s $0.25. Is there anything else that’s in there because you mentioned that you had two-thirds of the locations leased before and now that’s down to about a half? So am I looking at that correctly where it’s the $0.15 difference on that extra portion of the box coming off?

Tom O’Hern

It’s a combination of that and then picking up the extra operating expenses on the vacant stores that we’re not receiving, as well as third-party rent expenses on the vacant stores that we are currently paying out, and then factoring in the final ramp that was received from Kohl’s and Forever 21 on the new leases. So it’s a combination of all three of those.

Michael Mueller – JP Morgan

Okay. Can you give us some sort of sense as to how much NOI, what the NOI trend has been, for example for Q3, how much of it was booked, how much of the drop off that we saw in Q4, and how much subsequent drop off there will be in Q1 going forward to get to that $0.25?

Tom O’Hern

Well, Mervyns was in place through year-end. Those leases were rejected, I believe, at the very end of December, so Mervyns was in place and paying rent in all locations through year-end, so really the drop off starts 1/1/09. So that $0.25 would be ratable through the year.

Michael Mueller – JP Morgan

Okay. So that’s $22 million of NOI that comes out effectively?

Tom O’Hern

Right. And, again, that assumes that we do nothing with those locations, so if my colleague here to my left, Tony Grossi, and his group does their job, we’ll do better than that.

Michael Mueller – JP Morgan

You brought up Tony. Can you provide any collar? You talked about the Q4 leasing spreads being 23%. What are you seeing in early ’09?

Tony Grossi

For our portfolio, we are over 70% committed on the leasing we have to do in ’09. We’re seeing good spread. We’re seeing a little bit of softening over the 24% we see this year, but if I were to peg the range for the balance of the year, it would be between 18% and 20%.

Michael Mueller – JP Morgan

Okay, and last question, Tom. What’s the game plan? You have seen the excess proceeds expectation come in some, what if that comes in materially more for 2009, 2010. What’s the game plan if you don’t want to run up the credit line balance?

Tom O’Hern

Well, these are based on some pretty conservative assumptions, Mike. One reason they came in is we decided to take a bird in hand in December when we had a chance to re-finance Queens, albeit for less than we thought we could have gotten. We decided not to wait and we took $130 million loan when we thought we probably could have perhaps done more like $160 or $170 had we waited.

But we were conservative. We took the loan that was in hand and that moved our numbers down a little bit. But we think these are pretty conservative assumptions and we’ve got no reason to think there’s going to be major changes. Obviously, we’re in the market daily and quarter-by-quarter we’re going to make some adjustments. We may pull some loans off. We may put some on. But, as you can see, there is more than ample liquidity there to, not only take out the maturing debt, but also fund the development pipeline.

Tony Grossi

As Art said, we’re exploring other liquidity events and they could happen. Although, we’re not, at this point, going to count on them and put them in our financing plans. But to the extent they do and we find ourself with excess liquidity from an asset sell or a joint venture, then we’re going to be using that to de-lever and pay down more of this debt.

Michael Mueller – JP Morgan

Okay. And the last question, on the Mervyns boxes, is there a goal or a target of which you think that you could reasonably release by the time you get to 2010?

Tony Grossi

Michael, it’s Tony here, we’re looking at an additional four to six boxes being dealt with in ’09, but given the lead time of big boxes, we can transact this year, but any impact to NOI will be realized in 2010.

Operator

Your next question comes from Jeffrey Spector – UBS.

Jeffrey Spector – UBS

Art, you talked about luxury, and clearly luxury is struggling against. Can you answer the question is luxury dead for the foreseeable future?

Art Coppola

I wouldn’t say that. I think that it is very cyclical, and in particular the last six months luxury has been hit hard. But, that is still a relatively thin market, no. Luxury is as cyclical as any other form of retail, and in particular it got hit hard in the fourth quarter.

And Neiman Marcus is a very good litmus test for how luxury is doing and they got hit hard as well as all of the other luxury retailers that had been standing up quite frankly very well all the way through the middle part of 2008. But towards the third quarter of ’08 and then in particular in the fourth quarter of ’08, luxury got hit hard.

Tom O’Hern

To add to that, Jeff, on the luxury side of things, first of all, you’re dealing with fairly healthy margins, perhaps the healthiest in the business. So the decline in sales, you would really have to look at the margin picture to see the decline in EBITDA. But we’re talking to a lot of our luxury clients right now and they’re going through what they call a transitional period to deal with the realities in the marketplace because the consumer wants lower-priced goods. So their entry-level pricing, most likely would be much lower during this transitional period.

Jeffrey Spector – UBS

Then just talking about the recession, cycle indicators are signaling a deep recession here. Can you just talk about your budgeting and planning and what you’re thinking about here for a rebound or expecting a rebound?

Tom O’Hern

It’s hard to predict that. I mean there are economists all over the world trying to do the very same thing. One thing we do when we go through and do our guidance, it’s based on our detailed budget for 2009 and we look at every tenant space by space and take a conservative view of what we think they’re going to do in terms of sales, what’s going to happen with occupancy. And I think we’ve tried to factor that in to our thinking, as we put together our forecast for 2009. And as I mentioned before, we’re assuming a reduction in occupancy, the likes of which we’ve never seen, Jeff.

I mean even going back to the late 80s, early 90s we never saw 130 basis point drop in occupancy in any one year. So, we’re assuming it’s going to continue to be a pretty tough year and we’ve considered that in both the occupancy levels as well as tenant sales expectations for purposes of estimating percentage rent.

Jeffrey Spector – UBS

So in your leasing strategy, I guess, are you preparing that this will continue into 2010?

Tony Grossi

We forecast two years out and in our 2009 mindset, from a qualitative perspective, the marching orders are renew and retain. We’re not doing anything dramatic with respect to merchandising. We’re maximizing retention. We’re keeping leases on a short-term basis if we don’t feel the rate or the tenant is not proper for the space or the shopping center.

We’re saving our opportunities for the future and the future will start after 2009 at some point and whenever you do any kind of planning, you hope for the best. And 2009 is what it is on a conservative release and retain mindset. In 2010, we hope to get to some of our remerchandising goals and create a more dramatic growth, but that will be reviewed later this year as we get a clearer picture for 2010.

Operator

Your next question comes from Jay Habermann – Goldman Sachs.

Jay Habermann – Goldman Sachs

I just want to start off with the comments you made, Art, with regard to JB partners and looking at some asset sales. And I know it’s something you’re considering down the road but you mentioned, I think, 12 or 13 times cash flow, which would indicate maybe 8% cap rates. I’m just trying to get a sense of maybe the types of centers you would consider, whether sales per square foot, Class A, Class B or occupancy in looking at geography?

Art Coppola

Well, I believe I said 12 to 15 times cash flow, so that would be sub eights. We’re looking at some non-core dispositions, some strip centers, we’re looking at selling off some single asset net leases, some of the Kohl’s stores that are in freestanding locations, which there’s still a very good 1031 market for that type of thing.

And then when you add into that the level of interest that we’ve got from both our existing, as well as new partners, to come in and do some joint ventures on some of our core assets, then it’s very conceivable that we would be generating new proceeds over the next 12 months of roughly $500 million give or take from all of those sources.

Jay Habermann – Goldman Sachs

Just following on the logic of capital, have you given any thought to the dividend change, the stock versus cash?

Art Coppola

Dividend is something that we look at quarterly, obviously. As far as stock dividends, at this point in time, stock dividends would be very dilutive and a very expensive source of equity liquidity for us at three times FFO. And we think that there’s a number of different ways to raise equity, that’s one way. And another way is to sell some of our core, as well as to bring in some joint venture partners into some of our core assets, and we think that is, at this point in time, a very attractive thing for us to be pursuing.

Jay Habermann – Goldman Sachs

And also, question for Tom specifically on the debt re-financings. What rate are you assuming, I guess, as you build your ‘09 guidance?

Tom O’Hern

The rates we’ve seen in the last 30 days, Jay, have typically had a floor in there on long-term fixed rate deals of seven, so we really factored in the 7.5% interest rate on anything that we’re assuming on a long-term basis. Any short-term transactions are going to be LIBOR plus something in the neighborhood of 300 to 350.

Jay Habermann – Goldman Sachs

In the expense recovery, are you expecting that to rebound a bit with the, I guess, the occupancy on Mervyns really doesn’t pick up until 2010?

Tom O’Hern

Well, it will be hurt a little bit there. We had a high level of non-recoverable expenses in the fourth quarter that I don’t expect to be recurring, and so I think we would see a trend back more towards historical level, maybe off a 100 basis points, but not much more than that.

Operator:

Your next question comes from Craig Schmidt – Bank of America.

Craig Schmidt – Bank of America

On the SFAS 141, would ‘07 be a better run rate than the numbers that were generated in ‘08?

Tom O’Hern

You saw a big fluctuation there, again, part of that was Mervyns and also the decline in straight lining of rent was also Mervyns.

Craig Schmidt – Bank of America

So they went opposite directions but those big changes were as a result of Mervyns, so a better rate would be what we saw for 2007 on both straight lining and 141? And if Tony was active this year, would that number possibly go up from that lower rate then?

Tony Grossi

That’s hard to say. It depends on which transactions, how much straight lining rent was in there but it could go up a little bit, 141 could go up a little bit.

Craig Schmidt – Bank of America

On page 16 on the [inaudible] page, I’m looking at the difference between pro rata, total project cost and the pro rata spent to date and I’m getting about $511 million, but when I look at the bottom line of the report and I add the 94 with the $247 million, I’m getting $341. I’m just wondering what that difference is, if it is maybe money spent in 2011 and I guess that’s surprising just given that most of these projects look like they’re going to be done in 2010.

Tom O’Hern

Well I think some of the money was spent in 2008, Craig.

Craig Schmidt – Bank of America

Wouldn’t that show up in the pro rata spent to date then?

Tom O’Hern

It probably would, it probably would. I’ll have to circle back with you on that one, Craig. So you’re saying when you do your calculation of the pro rata cost, you’re not tying out to the online years.

Craig Schmidt – Bank of America

I’m curious what that number is, if it’s $510 or say more like $340?

Tom O’Hern

I mean on the surface it looks like it’s about right there. I mean the total there of the two projects is about $580 compared to the estimated total project cost of $757 and some of those are 5050 JVs. I’ll have to get back to you on that.

Operator:

Your next question comes from Vincent Chao – Deutsche Bank.

Vincent Chao – Deutsche Bank

Sticking with the development pipeline, can you guys just remind us what kind of yield you’re expecting on the remaining projects and how that may have changed given the current circumstances, sort of where we’re at with the lease up of the projects? I know you’ve given specific companies but just maybe on the square footage basis or occupancy percent.

Tony Grossi

Are you talking about returns on investments?

Vincent Chao – Deutsche Bank

Yes.

Tony Grossi

On Santa Monica Place, on the new investment, we’re looking at an incremental return there of just over 9% and on Scottsdale Fashion Square, as well as The Oaks and the others, generally in the 6% to 9% range.

Tom O’Hern

Craig, Tom O’Hern getting back to you. Again, I think the difference in the way you’re looking at this Craig is on The Oaks, we placed 170 million of The Oaks in service in 2008 so that’s not on the schedule and I think that’s what’s causing the difference in your calculation.

Vincent Chao – Deutsche Bank

Just on the lease up of the projects, and can you give us a sense on a percentage basis where we’re at?

Tony Grossi

Sure. At The Oaks, we’ve opened it in phases. We opened a Nordstrom phase and the lifestyle phase. The Muvico is opening in a week’s time and the project is already 85% leased at this point. Scottsdale Fashion, we’re 80% committed in the expansion and Santa Monica Place is coming along nicely and it’s also 80% committed.

Operator

Your next question comes from Ben Yang – Green Street Advisors.

Ben Yang – Green Street Advisors

Just going back to the financing plan, I know, Tom, you mentioned bird in the hand argument [inaudible], but it's also the case that you reduced your outlook for nearly all your '09 and '10 mortgage financings. Can you comment on what changed? You threw out a 7.5% cap rate earlier in the call, were you assuming something lower? Are you assuming lower LTVs at this point?

Tom O'Hern

No, I didn't throw out a 7.5% cap rate, I think that was a 7.5% interest rate.

Ben Yang – Green Street Advisors

I'm sorry. But can you tell us what you're seeing differently this time around?

Tom O'Hern

Well, I think clearly in the last 90 days the life company underwriting and bank underwriting has gotten more conservative, and we're just staying current with where their underwriting is. I think pound for pound we have probably been the most active in the market.

Certainly in '08 it was that way and we're really in the midst of underwriting six or seven deals right now. So, we're fairly current on how they're looking at things in underwriting and without a lot of trades out there. It's tough for these guys to peg a value. So, they're going to err on the conservative side.

Ben Yang – Green Street Advisors

And how are those life companies underwriting today?

Tom O'Hern

They're looking at coverage. I mean, they're looking at coverage. They're looking at the quality of the asset. I think they're taking their best estimate of what a value is. They are getting appraisals, but that's pretty tough to do when there's not a lot of comps. But they are getting appraisals and coming up with a value and it's a combination of healthy coverage and something [inaudible] a 50 or 55% LTV based on their conservative underwriting.

Ben Yang – Green Street Advisors

Art, you commented that you’re expecting a 9% incremental recurrent on Santa Monica Place, but in the past I believe the number you guys have thrown out there was more in the 8% range. Are you defining it differently this time around?

Art Coppola

No. Santa Monica’s always been in the 9% range. I think I may have in the past talked about new develops being 8 to 10% but Santa Monica in particular has always been just north of nine.

Ben Yang – Green Street Advisors

And that number hasn't changed given the fact that you've essentially delayed the project for six to eight months and it sounds like lease up is slower than you might have expected.

Art Coppola

No.

Tony Grossi

The lease up is not slower. The delay in opening is really to coincide the Bloomingdale's opportunity with the Nordstrom opening and the small shop opening.

Art Coppola

Well, we're delaying the spend also. So, I mean, so the interest carry gets delayed a little bit also.

Ben Yang – Green Street Advisors

And then also going back to the Mervyns that you talked about earlier, what type of rent are you getting from Kohl’s and from Forever21 compared to what you were getting from Mervyns.

Tony Grossi

In our negotiations with both Forever 21 and Kohl’s, there was a give and take, a plus minus on each. And for the most part were materially the same on what we had in place and what we have in contract with both Forever21 and Kohl’s.

Ben Yang – Green Street Advisors

You didn't have to reduce the rent for those spaces?

Tony Grossi

Well, on some we did, and on others we increased the rent.

Ben Yang – Green Street Advisors

And on the spaces that you had reduced rent on, were you able to get maybe longer terms in exchange for that?

Tony Grossi

We got other terms. For example, on a few we got percentage rent. And that percentage rate was not on any of the Mervyns leases. It was a negotiation.

Operator

Your next question comes from Rich Moore – RBC Capital Markets.

Rich Moore – RBC Capital Markets

On the percentage rents, Tom, was that drop strictly a result of the lower sales volume?

Tom O'Hern

Yes, it was, Rich. I mean, we took a look at that and that was part of our guidance in the fourth quarter. We reduced percentage rent by about $3 million, but it wasn't enough.

Rich Moore – RBC Capital Markets

So none of that moved into base rents or anything, it wasn't conversion of some leases or anything.

Tom O'Hern

Well, there's always some of that, Rich, but I’m talking about in terms of where it went versus where we thought it was going to be at the beginning of the year. And it was primarily a result of the sales decline, a large part of which was in the fourth quarter.

Rich Moore – RBC Capital Markets

And then going back for just a second, Tom, to the pages you have here in the supplemental. When I look at like South Plains for example, South Plains I think you guys got done for an amount that was roughly the amount of the previous loan where you had estimated $30 or $40 million higher.

Tom O’Hern

No. Actually, that's not true, Rich. On South Plains that actually is open to prepay this year, but it's got a loan maturity that's down the road. So, inappropriately it was probably on that schedule. We may go ahead and proactively refinance that early before maturity. But, no, that was just a correction.

Rich Moore – RBC Capital Market

So in other words you still think you could get $90 to $100 million in proceeds possibly for that?

Tom O'Hern

Hard to say on that one and we won't put it on there until we actually get it done, but it's something we're considering. It's pre-payable. The center’s doing well. It's possible, but we're not going to put it on the schedule just yet,

Rich Moore – RBC Capital Market

Are you seeing the strength if there is any in the credit markets with the life guys? Is there any hope for the bank guys? Is anything at all getting better there?

Tom O'Hern

I would say things are significantly better than they were in December when by and large that market seemed to be shut and there just wasn't a lot of activity. We've got seven loans right now that are actively being underwritten, and this is not an eagerly underwritten.

So, the attitudes of most of the lenders we're dealing say they’re out there to do business with good sponsors on good assets, and this is a great time for them to pick up some quality business on their terms, conservative loans, low loan to value.

Obviously with treasuries as low as they are we're not even really getting a quote over spread, so they're getting a very healthy return and realizing it's a good time for them to do business on good assets with good sponsors. So, they're pretty active.

Rich Moore – RBC Capital Market

Tony, on the same sort of thing on the tenant side, is there any strength, any pockets of strength with certain tenants that you're seeing, any hopeful signs of new openings on from any in particular?

Tony Grossi

As a trend and as a point of strength is that right now the consumer wants value and price and we're doing more business with Forever 21, H&M, [inaudible], these are all lower priced merchants. On the big box side we're doing a couple of Nordstrom Rack deals and a couple of Costco’s and these are merchants right now, given their pricing and their retail strategies, it's flourishing in this environment.

Operator

Your next question comes from Michael Bilerman– Citigroup.

Michael Bilerman – Citigroup

I want to search some occupancy costs for a second. It's obviously something that you guys have been pretty active in trying to push over the years both moving to fix cam but also just increasing in base rent. And with the decline in sales productivity, obviously, the ratio has gone up a little bit more relative to last year probably half due to sales decline and half due to increase in rent.

And I'm just wondering how, on the tenant side, if they're still in the difficult sales environment how they're sort of looking at that ratio today and how you're sort of penciling out deals in this sort of environment.

Tony Grossi

We're still seeing the positive spreads from rents in place. We've realized $3 a square foot in our average rent and our sales per square foot went down 6%, that is what you alluded to. As a target of the portfolio as a whole we think 15% is reasonable. So there's still a little bit of head room from where we are today, and at some point sales will turn around and take that head room a little higher.

Michael Bilerman – Citigroup

So there's no concern that at this sort of level that they're pushing back at all.

Tony Grossi

Well it's always a negotiation, and at this point in time, negotiations are tougher and spreads are softening somewhat from 24%, as I said, to between 18 and 20%. And that'll be reflected in the cost of occupancy.

Michael Bilerman – Citigroup

Tom, just on the recovery rate you talked a little bit about the bad debt and legal, and just using the numbers that you threw out I back into it about a $10 million shift year-over-year in fatality. That's $18 million of unrecoverable in this quarter versus $8 million in the prior quarter. Does that sound about right or do you have the actual numbers that you can sort of break out?

Tom O'Hern

It was $11 million this quarter versus $6 million fourth quarter last year and up about $12 million for the year.

Michael Bilerman – Citigroup

And the majority of that increase was due to the bad debt, the $2 million bad debt and the rest is this legal cost?

Tom O'Hern

Well cost is a combination of things, including the higher legal fees as a result of the Mervyns bankruptcy.

Michael Bilerman – Citigroup

And then on Mervyns specifically you talked in response to Mueller's question that it would be ratable so is this a larger hit in the first quarter than towards the end of the year?

Tom O’Hern

No I think the $0.25 is going to be ratable through the year because they gave that back up space right at year end. And we haven’t assumed any lease up of that vacant space.

Michael Bilerman – Citigroup

And Kohl’s and Forever21 starts day one?

Tom O’Hern

Right and to the extent that there was a change there the straight lining of rent would mitigate any difference, so really it's going to be felt throughout the year unless we're able to mitigate by filling up some of that space or selling some of those buildings.

Michael Bilerman – Citigroup

And what exactly happened on the accounting of SFAS 141 in a straight line with Mervyn's I was trying to understand?

Tom O’Hern

Well when they leave you got to write it off and in some cases it's a reduction, which is what happened in straight lining rents and in some cases it's an increase, which is the case in SFAS 141.

Michael Bilerman – Citigroup

Because you had booked a premium on the rents and you have to effectively amortize it all into earnings right away?

Tom O’Hern

Well when you build up a straight lining of rent receivable from a tenant when they leave you got to write that off.

Michael Bilerman – Citigroup

And versus the SFAS 141 where you had the liability.

Tom O’Hern

We have a liability to write-off the income, which is revenue.

Michael Bilerman – Citigroup

Okay, and then on just a couple of things on guidance, is there anything for G&A just levels of G&A?

Tom O’Hern

We expect it to be about the same level it was this year.

Michael Bilerman – Citigroup

And then anything other one-time items, like land sales or lease term fees that would be different from 2008?

Tom O’Hern

No we typically use historical levels there so if we're using the average we've had over the last two or three years. I think we had $10 million in there for land sales and $12 million to $15 million on lease term.

Operator

Your have a follow-up from Michael Mueller – JP Morgan

Michael Mueller – JP Morgan

Tom, in the past you've talked about a quarterly split in terms of guidance, anything we should be thinking of this year with respect to the timing of the bond gains?

Tom O'Hern

I'd assume ratable throughout the year on that Michael, and so I think we're going to see a similar split to what we've seen in the past where the first two quarters at 21% or 22% of the total third quarter’s in the 24% range with the balance in the fourth quarter.

Operator

Your next question comes from David Wigginton – Mcguarie Capital.

David Wigginton – Mcguarie Capital

With respect to the dividend just circling back to that, you guys obviously announced the cash dividend last Friday. Have you given any thoughts to maybe cutting the dividend at this point?

Tony Grossi

Yes it's something that we look at every quarter. In 2008, that was not a possibility because of the 100% of our dividend was taxable in 2008. And it's something that we look at every quarter, but at this point in time we feel comfortable with where the dividend is, but it something that we reserve the right to look at on a quarterly basis going forward.

David Wigginton – Mcguarie Capital

Even in spite of the fact that the stock isn’t really gaining any traction with the 20% plus yield that is well covered, you haven't it's not really a higher probability right now than say it was six months ago?

Tom O’Hern

Well if you look at it, there's not a lot to be gained from a liquidity standpoint by a cut. In a year when there's no gain on asset sale and there's no gain on early extinguishment of debt there might be of the $3.20 annual dividend $1 of that might be return of capital that could be cut and still maintain REIT status. That’s at the most, so in the event should you cut it $1 on a annual basis that's a quarter on a quarterly basis we'd only save about $20 million in cash a quarter.

Then of course the obvious problem with that is if you make that kind of cut and then later in the year you're successful selling an asset at a gain, and you create more taxable income. Then you got to turn around and pay that back out. So from our standpoint looking at the tax implications of the dividend it just doesn't make sense to make a cut, there's really not much to be gained.

David Wigginton – Mcguarie Capital

And I apologize if you mentioned this earlier, Tom, but with respect to buying the debt back, are you still actively buying back that other market place?

Tom O'Hern

We will opportunistically and quietly do that from time to time as liquidity permits.

David Wigginton – Mcguarie Capital

So does the $25 million related to the, I guess, the increase in interest expense related to the new accounting pronouncement for converts. Is that net of any plans or already bought back debt so far this year?

Tom O'Hern

That's what we think the net increase is going to be for us end of year.

David Wigginton – Mcguarie Capital

Okay and then just one last question the $0.25 reduction in the rental revenues and expense recoveries from Mervyns, is that net of the letter of credit that you guys had mentioned on your last call?

Tom O'Hern

Yes.

Operator

Your next question comes from Anar Ismailov – Gem Realty.

Anar Ismailov – Gem Realty

I just want to confirm, what is the amount outstanding on your convertible senior notes right now?

Tom O'Hern

The converts I think the face amount was $9.50 and we bought back $2.22 less what may have been allocated to the deal cost, it's about $725 million.

Anar Ismailov – Gem Realty

Okay so it's similar to what it was outstanding as of December 31st about $725 million?

Tom O'Hern

Oh, I'm sorry, we're not going to give any incremental information we're just providing year-end information, we're not providing incremental information.

Anar Ismailov – Gem Realty

Okay then you said budgeting additional $20 million gain on retiring the convert in '09 so that would imply $40 to $50 million of face value to convert, how do you arrive at that $40 or $50 million? Why is it that number and not higher and not lower?

Tom O'Hern

Well we thought that was a number that we could comfortably achieve given our liquidity, it's more liquidity driven than demand driven. Where we think there's plenty of note holders interested in getting liquid, it's more a function of how much liquidity we thought we could spare towards that cost.

Anar Ismailov – Gem Realty

Then on your dividend, is the current dividend you're paying it is higher than what you have to pay to maintain REIT status?

Tom O'Hern

Well this goes back to the question we just answered, in 2008 100% of our dividend was taxable, so we would virtually gain almost nothing there by a cut you got to pay out 90% of your taxable. So if $3.20 was our taxable the most we could have reduced it to was $2.90 and stay within REIT compliance. Two thousand nine, it will depend on whether we sell any assets at a gain where there's any taxable income, but there's not a lot of room there for a cut, to maintain the REIT compliance.

Operator

At this time I'd like to turn the conference back over to our speakers for any closing or additional remarks.

Arthur Coppolla

Okay well thank you very much for joining us, and we look forward to reporting to you as the year goes on, so thank you very much have a good day.

Operator

That does conclude today’s teleconference. Thank you for your participation. You may now disconnect.

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