The Macerich Company Q2 2009 Earnings Call Transcript

| About: Macerich Co. (MAC)

The Macerich Company (NYSE:MAC)

Q2 2009 Earnings Call

August 04, 2009; 12:30 pm ET


Art Coppola - Chief Executive Officer & Chairman

Tom O’Hern - Senior Executive Vice President & Chief Financial Officer

Tony Grossi - Senior Executive Vice President & Chief Operating Officer

Jean Wood - Vice President of Investor Relations


Nathan Isbee - Stifel Nicolaus

Rich Moore - RBC Capital Markets

Michael Mueller – JP Morgan

Ian Weissman - ISI Group

Quentin Velleley - Citi

Alexander Goldfarb - Sandler O'Neill


Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Macerich Company second quarter 2009 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. I would like to remind everyone that this conference is being recorded.

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 second quarter 2009 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 8-K filings for the quarter, which is posted in the investor section of the company’s website at

We’re looking forward to seeing you in November 10, at the Macerich conference in Phoenix. You will be receiving more details shortly. Joining us today are Art Coppola, CEO and Chairman of the Board of Directors; Tony Grossi, Senior Executive VP and COO; 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 second quarter results, recent financing activity, and the status of our liquidity plan for 2009 and 2010, as well as our outlook for the remainder of 2009. The operating metrics generally remain solid in the quarter with continued respectable occupancy levels and strong releasing spreads.

Mall sales per square foot for the 12 months ended June 30, 2009 were 428, down approximately 7.8% from a year ago, when they were at 464. We had average releasing spreads versus expiring rents, up 21.2% for the quarter. Occupancy levels have remained high, albeit down from last year, with occupancy at 90.5%. That was down about 210 basis points from a year ago which was 92.5%.

Most of the reduction versus a year ago, however, related to big box closures with five tenants making up 1.7% of the decline. Circuit City was 50 basis points of the decline, and Linens ‘n Things, 40 basis points. Steve & Barry’s, 30 basis points, KB Toys, 30 basis points and CompUSA, 20 basis points.

All of those tenants were big box users, paying relatively low rent on average less than $12 a foot compared to our average rent of 42, 72 is the average rent at 6/30/09. That compared to 41, 13 in 6/30/08 up 5.4%. Occupancy costs as a percentage of sales remained healthy even with declining sales, occupancy costs was 13.9%.

Looking now at FFO; FFO as reported for the quarter was $0.67 compared to $1.12 a year ago. Included in the quarter was an impairment charge of $27 million or $0.31 of share. The impairment related to a write-down of non-core assets that have been sold in the third quarter. Excluding the impairment FFO per share for the quarter was $0.98, consensus was $1 our guidance was $0.98.

During the quarter, same center NOI excluding lease termination revenue and SFAS 141 revenue was down 1% compared to the second quarter of ‘08. The negative comparison was driven primarily by the decline in occupancy, as well as the $2.8 million increase in bad debt expense. Without the bad debt expense, same center NOI was actually up 0.6%.

Lease termination revenue during the quarter was $1.3 million, down $1 million from the second quarter of 2008. The expense recovery rate included JVs at pro rata was 92%. That compared to 94% the second quarter of last year, but compared very favorably to the full year ‘08 recovery rate of 89%.

CPI increases positively impacting the quarter was $1.9 million. Straight line rents were also down during the quarter, down $550,000 to $2.1 million compared to $2.6 million a year ago and SFAS 141 income was also down about $900,000 for the quarter. The impact of Mervyn’s during the quarter was approximately an $8.05 a share drag on earnings relating to the Mervyn’s big box space, vacancy compared to 2008 in the second quarter.

On the balance sheet we made some very significant progress this quarter. Our average interest rate is 5.17% and the average rate on fixed rate debt was 6.08%. Interest coverage was a healthy 1.91 times. At quarter end, we had $7.9 billion of debt outstanding including JVs at pro rata. As of today, we only have $55 million of remaining 2009 maturities if you exclude extensions and loans where we’ve got term sheets and have agreed to terms on re-financings.

We have $100 million of cash on the balance sheet at quarter-end, and as of last week, we closed on the Queens JV as well as $66 million in non-core asset sales. With the liquidity provided from those events, we paid down the term notes by $200 million this past week. With the closure of other liquidity events and cash conserved by continuing with the stock dividend, we expect to be able to pay-off the remainder of those term notes fully by the end of the third quarter.

During the quarter we were also able to retire another $27 million of our convertible notes at a cost of $20 million. We recorded a $7 million gain on early extinguishment of debt on average it was about a 25% discount. We included a $0.30 a share in our guidance of such gains and through the first quarter, we’d recognized about $0.22 a share. So, this round out our expectation for the year and what we had factored into our guidance for gain on early extinguishment of debt.

Included in today’s 8-K supplement on page 14 and 15 are schedules that show our ‘09 and ‘10 financing plans. As I mentioned, we’re almost completely done with 2009 with over $1 billion of new loans committed or closed during the year. Estimated loan proceeds on those schedules have been modified to reflect the underwriting conditions that we see today.

Included in the press release were some specifics, such as Corte Madera where we’ve got a commitment on an $80 million fixed rate loan for seven years at 7.20%. Financing on Paradise Valley Mall, which is unencumbered asset at $90 million at a rate of Libor plus 4% and that is a three year term extendable to five, as well as the construction loan on Northgate for $80 million, that’s also an unencumbered asset and that’s at Libor plus 4.50% for a term of three years extendable for one.

Looking at the 2010 maturities, if you exclude the term notes which we have indicated will be paid-off by the end of the third quarter, excluding loans with built in extension options, there’s $318 million of loan maturities. Even using today’s very conservative underwriting, we should easily be able to take out the maturing debt and generate some significant excess proceeds on those financings for 2010.

Looking now at earnings guidance, we are not adjusting our guidance for FFO. We are staying within the range of $4.25 to $4.55. We will addresses the guidance range once we’ve closed on the next series of joint ventures. If you were to calculate the ‘09 impact for Queens, it’s a reduction of $0.05 a share. That will keep us within the range and there are other factors that are going the other way.

Consistent with last quarter, as part of our ongoing effort to conserve cash and to de-leverage, we again declared a quarterly dividend of $0.60 per share payable on September 21, to stockholders of record on August 12, and 90% of that dividend will be paid in stock.

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

Art Coppola

Thank you, Tom and welcome to our call. As you have observed with other companies and you can get from ICSC, retail sales report, sales remain tough, but they are not getting worse and we really don’t see this trend changing much through the end of the third quarter, with high single digit types of comp sales decreases.

One thing that I do believe that will be a key measure will be the fourth quarter. This year in particular, because the fourth quarter of last year had such a negative drop, compared to the fourth quarter of the previous year. So our belief is that sales decreases will moderate in the fourth quarter, but we’re running our business to manage our business and lease our space in the current environment.

We’re doing a very good job of maintaining occupancy and leasing in this environment. One thing that I would point out to you that you can pick up on, if you listen to other public retail companies, the retailers themselves conference calls, they are clearly managing their businesses and their expectations to the level of sales that they are doing.

So in this environment, even with 8% to 10% decreases in comp sales, they can actually be making significantly more money than if their sales were flat to even up, if they had miscalculated their inventory.

So the key really is for a retailer is whether or not he’s achieving or it’s achieving the sales that they expect and a big budget for 10% decreases and they hit the 10% decrease, then they’re going to hit the margins that they had projected and while retailers are notoriously famous for being tied into their daily, even their hourly sales with today’s information systems.

They’re managing their business to this level of sales, making money, and therefore, making commitments to us on new leasing, which is reflected in the leasing spreads that we continue to enjoy, which is a function of the fact that our sales overall in our portfolio remain extremely strong.

Our occupancy levels remained extremely strong. So on a core fundamental basis, our business is as expected. It’s not what we’d love it to be, but it’s as expected. There’s a sense of stability out there with the retailers where they do have a sense that there is a sense of bottoming out here.

We don’t know when sales are going to trend back up or and how fast and at what levels, but business is stable enough that retailers are making new commitments and they’re talking about new business. They’re not anxious to spend a lot of new capital right now on new tenant build-outs, nor are we.

We both are keeping mindful of that in the way we do our leases. So in this environment, we do tend to do some shorter leases for each of us, because we’re essentially deferring the time that the tenant needs to spend capital to redo, expand their store.

As Tom pointed out on the financing front, we’re making terrific progress, both with like companies as well as banks and in that context, I know we were mentioned along with a couple of other companies, as being in the queue for TALF financing. Look, like anybody, we’re keeping, we’re mindful of the opportunities to do TALF financing, just to remember, we would never, ever tied to the syndicated mortgage market.

We have always tended to focus more with lenders that we can talk to and that leaves us with like companies and banks as being our primary relationships, primary source that’s we’re going to be borrowing from so I would not really anticipate Macerich to be a big player in the TALF market if at all.

On the development front, we have a very tight or narrowed focus on development. We have Santa Monica Place is coming along terrifically. We’re just finishing up on Scottsdale Fashion Square, which we look forward to highlighting for you at the upcoming nervy.

On the fundamental side of the business, I feel good about where we are. We are at least as far along on operating results as we anticipated, if not stronger, in the context of that also, on the Mervyn’s front, results are as expected year-to-date.

We are extremely focused on the remerchandising of the Mervyn’s boxes outside of the malls in which Mervyn’s used to have stores within the Macerich malls, which as you know were all fully committed with either expansions, redevelopments or new tenants and we’re very focused on the recycling of those spaces, the selling of certain of those stores.

That’s not going to hit this year’s numbers, but it will definitely flow through next year’s numbers and roughly I would say, if we had to say a $0.25 drag on earnings from Mervyn’s this year, compared to where rents were pre-Mervyn’s bankruptcy from the Mervyn’s boxes.

I’d say, we could recapture roughly half of that amount next year as we go about the re-leasing and remerchandising of space both with some single user big boxes as well as in some cases a multi-tenant redemise. A few days ago, we made a very significant announcement as it relates to the joint venture that we entered into with our long time partner, Cadillac Fairview on Queens Center.

If you remember back in February, we announced that given the marketplace and the disparity between public market valuations and private market valuations that we were going to dispose of and tap into roughly $500 million of equity from selling assets and doing joint ventures during the upcoming 12 months from February of ‘09 through February of ‘10.

There was a lot of skepticism along the way as to whether or not we would be able to achieve those goals. A lot of boogie men were put in front of us in terms of we wouldn’t be able to do joint ventures for about 42 different reasons and the reality is that we always knew that we were going to be able to tap into the joint venture market because of the fact that it’s in our DNA it’s in our history, it goes back to the days when we founded our company.

We’re the only company that was founded on the premise of doing business with joint ventures with financial institutions and it’s in our DNA and we have a great list of existing partners. On Queens in particular, we had probably over two handfuls of people of unsolicited interest from different investors that wanted to join hands with us on Queens.

These joint ventures are tough deals to do, but we are very, very pleased with where we are between the Queens closing and the other non-core asset dispositions, we raised over $225 million of equity to date towards our earlier stated goal of at least $500 million. So we are way ahead of the timing curve and we would anticipate that as time goes on, that we will exceed that $500 million, significantly.

Again, I mentioned that these joint ventures can be tough deals to make because you’re taking an existing asset and you’re bringing a new partner into an asset that you’ve owned for a while. Also, because of the fact that you’re forming a partnership and you’re not selling an asset, you also want to be very careful about who you do business with, you want to make sure that their yield expectations and their vision for the property itself that you’re talking about matches your yield expectations.

As a consequence, when you sit down and you structure a deal, you end up, again, forming a partnership and not running an auction. If we were to run an auction in terms of doing the joint ventures that we’ve been working on, I’m sure that we could have easily achieved 5% to 10% better pricing, but that’s not the way that you conduct a partnership. We see these partnerships, they’re not one-off transactions.

They are really the beginning of a new business opportunity for us and our partner that can yield positive results both from that partnership, but also from many other different activities. The choice of Cadillac Fairview, which is owned by the Ontario Teachers pension plan, one of the largest institutional investors in Canada, has been someone that we have talked to about joint venture in Queens for a number of years.

Cadillac has been a key strategic partner of Macerich for 11 years we did our first joint ventures with them in 1988 in 1989. They’ve been a terrific partner. We wanted to select a partner on Queens that we felt have the vision that we have for Queens going forward and somebody that we can count on to make the right decisions going forward and we’re just thrilled to have partnered with Cadillac Fairview on Queens.

As you may know, Cadillac is the premier owner of retail centers in Canada. So, they’re able to bring a lot of operating synergies and sharing of knowledge base between the two companies as we have done over the last 10 years. So, the transaction goes way beyond the cap rate of the deal.

The cap rate of the deal in Queens has been closely monitored and asked about and several analysts have indicated that they had back of the envelope guesstimated that the real estate cap rate was somewhere in the 7% to 7.25% cap rate and again, cap rates are really in the eye of the beholder in terms of what NOI are you capping, but clearly by almost all institutional investors as well as owners such as ourselves.

I would validate that the range of the real estate cap rate on Queens was in that 7% to 7.25% basis. As far as where we are going forward, and today on joint ventures, our total focus is on completing the joint venture program that we initiated several months ago.

Once we’ve completed that joint venture program, we’re going to assess where we are and we’re just in the process now of reevaluating and opening up the opportunity for additional joint venture conversation and a new round of joint ventures that we very well may enter into.

The joint ventures that we are working on that we would anticipate would close over the next 30 days to 60 days with institutional investors that are household names, in terms of the people that they represent. We’re not in a position today to disclose who those institutional investors are, but they’re household names, some domestic pension funds, possibly a global investor, global sovereign fund that could be involved also.

The types of properties that are involved in the new round of joint ventures that will close over the next 30 to 60 days are very strong regional malls, Class A regional mall that’s Macerich owns. That currently generates sales, on average sales per foot of just over $450 a square foot and our anticipation is that once we’ve completed the current round of joint ventures, that we will have raised in excess of $450 million of equity from the joint ventures about the combination of Queens plus two others.

Also when you take into consideration the offloading of mortgage debt to the partner, in terms of their pro rata share of the debt that they assume, the total deleveraging that will come from those transactions will be just under $1.1 billion. So there will be an excess of $600 million of mortgage debt that will be allocable to the joint venture partner as part of those transactions.

Again, our focus today, it’s totally on consummating the deals on the other joint ventures. We will announce those transactions, as well as additional non-core asset sales as they close. This is our policy to announce these deals as they close, not before the fact, but again we are much further along in timing than where we would hope to be on the joint venture side in terms of the identity of the partners.

We are thrilled to have the opportunity to do this deal with Cadillac Fairview and the other two major partners that we’re talking to are partners that we have known for a long time. Going back to partnerships, I want to reemphasize that the formation of partnerships are not one off transactions. They are really the entering of new business ventures.

Some of our existing partners have been involved with us in a number of different ways. Northwestern Mutual Life Insurance Company has been involved with us as a partner, as an investor in Macerich, as a big mortgage lender to Macerich. Cadillac Fairview through Ontario teachers, we’ve been involved in the number of ways that we’ve talked about.

We entered into a joint venture with Caliper’s through their Miller Capital Advisors, going back just under 10 years ago and now that deal today has grown into four joint ventures and there’s a possibility of that growing in the future. We have another strong partner, the Alaska Permanent Fund, was our partner at Tysons Corner, when we bought Wilmorite. Since, we form that deal with them, that relationship expanded into the ownership of North Bridge Center in Chicago beyond that.

There’s been a lot of questions asked of us about cap rates in general on these deals. I’ve given you the cap rate information on Queens and that’s all that I am going to give you. Previously, I had indicated the cap rate ranges on the joint ventures in our last earnings call would be between a 7.5 an 8.5 cap rate.

Today if I were to average out the joint ventures that I believe will close between Queens and the other two over the next 30 to 60 days. The average blended cap rate on the real estate income from those three transactions will average in the mid 7s. As far as common equity, there’s been a lot of speculation about where that fits in our overall roadmap and financial plans.

I’ve been consistent in saying to you for over six months now, that we see the common equity as something that is a possibility, but it’s really a matter of sequencing and we believe that it should be the final piece of the equation of a deleveraging process, after other pieces of the puzzle that we have total control over have been put into place. The size, the timing of additional asset sales and additional joint ventures will dictate whether, and when, and how much of an equity raise that we could make in the future.

Again, I want to reemphasize today that our focus is totally on closing the new joint ventures that are underway right now on the additional couple of assets. On considering a new round of joint ventures and asset sales and so long again, as we see the disparity between the private market valuations and the public market valuations being as great as they are today. We think our shareholders are best served for us to tap into real estate equity as opposed to common equity in this environment.

At this point, I’d like to open it up for questions, operator.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Nathan Isbee - Stifel Nicolaus.

Nathan Isbee - Stifel Nicolaus

Few quick questions, just going back to your comments you made just a few minutes ago about the JV that you expect to close over the next few months. You expect those to have blended caps of about 7.5, is that correct?

Art Coppola

No, I said that the combination of Queens and the other joint ventures would average in the mid-7s is exactly what I said. Queens is, it’s 7 to 7.25, so that would infer that the other two are just north of 7.5 and the blended rate is in the mid 7s.

Nathan Isbee - Stifel Nicolaus

Can you just talk about, I mean when you look at Queens generating 867 a foot as of year end versus what you’re looking to sell now in the mid-400. Why the spread would not have been wider?

Art Coppola

We basically are pricing the transactions at prices that our partners feel comfortable with and Queens is clearly a Class A asset. Macerich owns 75 malls out there and a lot of investors would view at least two-thirds of them to be Class A malls. When you look at coming into an investment, the investor makes decisions that they make for a multitude of reasons.

The new deals that we’re doing are very solid citizens, where their sales are at 450 a foot today and the portfolio is off 10% and that means roughly a year ago, their sales were $500 a square foot. The centers that we are working on are diverse geographically, with one of them in the middle part of the world, of the U.S., one of them in the Western part of the U.S. and one of them in the Eastern part of the U.S. and I did try and give you some guidance in terms of the sales per foot.

So, you didn’t end up speculating that the next joint venture would be Tysons Corner or something like that fairly not. I wanted to give as much specificity as possible to you all, because I know those questions have been asked in the past, but they’re clearly Class A assets with great anchors, great demographics and great futures.

Nathan Isbee - Stifel Nicolaus

On the Queens Center, was the Cadillac offer the only offer you received on that?

Art Coppola

No, as I indicated, we had probably at least a dozen of folks that showed unsolicited interest and the way that we, we don’t run auctions on joint ventures. We gauge where the interest levels are without casting the net out to the world, because we know the players in the world in terms of the institutional investor marketplace.

We choose, who we want to do business with. Our track rate, in terms of picking a partner and consummating a deal is virtually 100%. Once we decided, who the right partner is, we know what their yield expectations are, what their hopes and their goals are and we offer them the opportunity that’s virtually 100%, certain that they’re going to step in and shake hands and say let’s do this together and move forward. We chosen to run an auction, we could have had dozens of offers on Queens but we didn’t do that.

Nathan Isbee - Stifel Nicolaus

Just switching to the portfolio, your same store guidance was positive 50 bips to up 1%. You’re trending to about down a little less than 1% through the first half of the year. Are you still comfortable with that original guidance?

Tom O'Hern

If you exclude bad debt expense, we were exactly where we had forecast. We’ve gone through and taken a look at that and primarily what rolled through as bad debt expense in the first six months was related to one of two things. One being, bankruptcies that happened in the last half of 2008, most of which have incurred the system now and then second being mom and pops just struggling in this economy and not having the balance sheet to endure.

So, where we’ve incurred about $7 million in bad debt expense year-to-date, we expect that to taper off dramatically through the rest of the year. We don’t expect it to exceed $10 million for the year and we still think that legitimately we’ll be between flat, same center NOI or up 1% and again there’s some other factors coming in, get in an environment like this and you tend to see some acceleration of lease termination revenue, which is something we are expecting in the second half of the year.


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

Rich Moore - RBC Capital Markets

A question for you, Tom, on the line of credit, it expires I believe in 2011 with the extension and I’m wondering if you’ve had any early negotiations or early conversations with the lending group?

Tom O’Hern

Rich, consistent with what Art had indicated, sequencing is very, very important and that line of credit is unsecured and I think we will be in far greater position once we’ve paid off our term notes. Reduced our line of credit and/or paid off some of the unsecured debentures to go in there.

So we’re not in a rush right now, Rich. We have great relationships with those banks. In fact, many of the banks in the line of those banks that are stepping up and making loans on Paradise Valley and Northgate and some of these other project loans so it’s definitely something we’re sequencing and now is not the right time to jump in and do that.

Rich Moore - RBC Capital Markets

So clearly, Tom, you have some time and you’re thinking that you do the joint ventures, then you start having the line discussions and then maybe you think about whether or not you want to do a common equity offering, that kind of thing?

Tom O’Hern

In terms of the debt, Rich, I think we’ve said before that we view ourselves going forward as ahead being almost exclusively a secured property level borrower with the one exception being a line of credit of some size to give us the latitude to handle construction projects and periodic acquisition activities.

So that’s the direction we’re heading and at the right time we will address the line of credit. As Art indicated in his comments, we’ve got a sequence here and if there were to be an equity transaction, it would be in the proper sequence, which would be at the end, after these other things have been accomplished.

Art Coppola

Tom, I’d like to add on to that. Look, we’re running our business, Rich, is the way that we would normally run our business in normal times and that fits perfectly with the business plans of the major banks that are in our line of credit. Under normal times, with a revolver that doesn’t come due for almost a year and a half with an extension.

You and the banks would sit down six months to nine months in advance of that and talk about the terms of the extension. There’s no reason to talk about it a year and a half in advance. Even in talking to the banks today, they say, hey, there’s no reason. The answer they say is look, we are there for you.

We’re going to be there for you, but frankly, you’ll be crazy to sit down with us right now and start talking about an extension because undoubtedly your spreads would go up and the only reason that you would want to go ahead and talk to us about an extension is if some investment banker was putting a gun to your head as part of you doing a common equity deal saying you needed to extend your revolver before it needed to be extended.

So we’re running our business the way that we feel is prudent and appropriate give our relationships with our banks and our banks feel very comfortable that we are making the right decision, even though it’s to their interest to try and encourage us to renew the revolver today and get a higher spread today.

Rich Moore - RBC Capital Markets

Whereas you look at the redevelopment scene, the group of projects you have under way, how is that going in general? I mean, are you seeing any positive sort of momentum on the leasing front? Are tenants getting more interested in those projects or maybe just an update on those would be great.

Art Coppola

Sure. Well, right now today, by far, the major focus in dollars that towards the other two is Santa Monica Place, just the other two, you’ve got Scottsdale Fashion Square, where or it has its major grand opening at the middle of October, which we look forward to showcasing for you all. Leasing is there it’s coming along fine. It’s coming along good. We had targeted more of the luxury market as part of the expansion, but that’s the market that’s been hit hardest so, we scale back on that, but it’s doing just fine.

Northgate is doing just fine in terms of it’s well over 90% committed, be opening up in phases later on this year, the small shop space, even though the anchors have been open throughout and then into the spring. That by far, Santa Monica Place towards the other two in terms of importance to the company, in terms of size of the capital spend and it’s a very legitimate question as to where we are, given that we’re spending well over $260 million, $270 million on that project.

On a cost side of it, project is coming along roughly on time, on budget. The project grand opening is August 7 of next year with the opening of Bloomingdale’s SoHo, it’s their SoHo concept, which you will see in Manhattan there. So, it’s really truly one of a kind with the only other Bloomingdale’s concept store of that nature being in SoHo and then Nordstrom opens up three weeks later the small shops space opens up on August 7 with Bloomingdale’s, leasing is fabulous and we’re just I couldn’t be more excited about that project.

It has the potential of truly being one of our flagships, one of our three or four flagships in the entire company, so I’m truly excited but I’m also very aware of the fact that it’s an irreplaceable location and we’re leasing into a tough environment. So, it’s the type of a center that we have the ability and we have the willingness to be patient in terms of the rents that we’re willing to accept.

If we end up opening at less than 100% occupied, that’s okay on a center like that. Because we know how fabulous the center is going to be and if our knowledge of the success of the center surpasses a tenant’s belief in terms of their expectations to the point to where they’re not willing to pay the rents that we want and that we demand, then we’ll hold some space off the market but the leasing is terrific, going along fabulous.

I couldn’t be more excited. We went through that project, it’s two blocks from our office every week and I get more and more excited as each day goes by so I couldn’t be happier and again, Santa Monica comprises well over 75% of whatever development, redevelopment activity we have and we’re looking forward to showcasing that next fall.


Your next question comes from Michael Mueller – JP Morgan.

Michael Mueller – JP Morgan

You said by the time the second series of JVs is done, the next two in this string, you’ll have raised 450. Is that including the non-core assets and Queens or is that just with Queens in there?

Tom O'Hern

It would be $450 million of joint venture equity and Queens is $150 million so that would imply that there’s roughly another $300 million of equity to come from joint ventures on deals that are basically in process right now.

Michael Mueller – JP Morgan

Okay and then just thinking internally, how do you guys think about where and what drives the decision about where to draw the line in terms of round one of JVs, potentially a round two? Is it more right hand side of the balance sheet driven or is it maybe something where you look at your pro rata ownership of the NOI, assets and say we’re comfortable selling down to here. I mean, how do you thing about that internally?

Art Coppola

Well, I hope I understand your question. I’ll try and answer it. The way I think about it is that it’s basically a very simple decision for us as we sit down and look at it and we know that the private real estate markets are valuing our real estate at closer to what we believe they’re worth or at what we believe they’re worth, than the public real estate markets.

The public securities market and it makes it a simple decision to raise equity. Look, it’s a simple decision to de-lever the company so we know we’re doing that and it’s a simple decision to de-lever the company by raising money from assets as opposed to from common stock. We just happen to have the luxury of having assets that are in the highest possible demand from investors around the world.

So it makes it I don’t want to say it’s simple but it’s simple. It’s really black and white and the only question right now is how much more asset equity we’re going to raise over what period of time and then once we have finished that sequencing of that round of asset equity, if we find that the asset equity market and the common equity markets tend to move more closely in terms of their valuations, then the common equity market is something that we can more closely consider.

One point that I do want to make is that joint ventures are a positive. They’re not a negative. We never enter into a joint venture that we do not believe that we are not going to receive more benefits from the relationship in the future than the closing of the transaction. These are not financial transactions, even though they have financial impacts.

So every joint venture that we have ever done, we believe that more will come from the relationship than that simple transaction and the proof of the matter is that that has been the case. So if you follow that logic, I would feel comfortable if every one of our properties was in a joint venture if I believed, which I do when we enter into them and our history has shown that to be the case that one plus one equals three each time that we enter into a joint venture.

That has been the case. It’s in our DNA. It’s what makes Macerich different than any other real estate company out there and that’s why we’ve been so confident, that we could do these joint ventures and that’s why we feel so good about what we’ve done. In particular, the partners that we’ve selected for the first round of phasing we just couldn’t be happier with the partners.

Again, going back to Queens, we had as many unsolicited indications of interest as you could imagine, but we preselected Cadillac as being our number one choice and for a lots of good reasons and we’re thrilled about the opportunity to have done that deal with them. We’re just seeing more of that coming in the future. So doing joint ventures is not a choice of last resort. It is a choice of first resort for Macerich. That’s an important distinction for people to realize.


Your next question comes from Ian Weissman - ISI Group.

Ian Weissman - ISI Group

You guys lost a little over 200 basis points of occupancy year-over-year. Yet the stocks don’t seem to be discounting or accounting for this consumer led recession. Do you think that we are nearing the bottom of the cycle at this point or no?

Art Coppola

The only way that I have the ability to measure the consumer recession personally is our monthly sales reports from tenants. I see 12, 15,000 sales reports per month from tenants. I don’t study each and every one of the tenant sales each month, but I see them each and every month. That’s a very good barometer and pulse. So when you’re taking the pulse of the consumer every month through multiple retailing venues, both in terms of geographic location and retailer type, you get a sense for where the consumer is.

Again as I indicated, our sales declines have pretty much stabilized in that 8% to 10% neighborhood. So we had basically the consumer got very spooked in September, October of last year. It resulted in a very rough fourth quarter of last year with double digit sales decreases.

Sales remain off year-to-date compared to last year in that high single digit neighborhood. They’re not dropping further from where they were in the fourth quarter. So things don’t seem to be worse and that of course for me, the person who has the best feel for the consumer is our retailers and they’re the best judge of what’s happening with the consumer.

They make that judgment by making decisions on whether or not to take down new stores from us and they’ve been voting with their pocketbook as they’ve been doing new deals with us at good leasing spreads for the company. So they do have some very guarded optimism and outlook for the future. Again, they make long term decisions as we do so.

Ian Weissman - ISI Group

So would you say though the differences today versus maybe six months ago in your conversations with retailers who were looking to retrench are actually reversing course and looking to take on new space?

Art Coppola

I don’t think I’d go that far. I’d say that the retrenching is probably behind us. Now it’s just kind of okay, I’m open to the conversation of looking forward and some of them are stepping up and signing leases. I don’t want to say that they’re actively expanding. Again I guess that’s just not true yet.

Ian Weissman - ISI Group

Have rent relief requests abated or they’re still requesting them?

Art Coppola

They’ve been basically about the same. I’d say actually, they’ve abated because the first round of rent relieves, it’s kind of check the box for any business. I’ve got 22 vendors, I don’t care what business you’re in. The Chief Operating Officer says to whomever, you’ve got to go cut costs at all these places. Macerich is a vendor. So yes, probably all of our retailers in one way or another asked for some form of relief and 99% of them ended up with no relief whatsoever.

Ian Weissman - ISI Group

Finally, you talked about a lot of the vacancy that you are hit with, as related to the big box. What has sort of been the demand for big box today relative to sort of inline stores?

Art Coppola

It’s probably the toughest retail market to lease into today. For us, given that we’re not a power center developer. We don’t specialize in the 30,000 square foot category, killer type of retailers even though we have good relations there, but it’s tough right now. Those people have a lot of square footage to pick from.

Anybody that would say they don’t has blinders on, but we’re making progress and the biggest bulk of the square footage that we have to deal with are the Mervyn’s boxes outside of the Macerich malls. I’m personally, along with the other senior executives, I’m in meeting every week, with a team of a dozen folks working on thinking through the remerchandising of those spaces and we’re making good progress.

Ian Weissman - ISI Group

Finally, if you had to segment the big boxes versus the inline stores how much would you say rents are down on the big box versus the inline, for the space you’re trying to market?

Art Coppola

On the inline spaces, you know what we reported our leasing spreads to be positive versus the expiring leases. So, you know where those numbers are. On the big boxes, I guess the best way that I can answer that for you is to take a look at the new big box rents versus the types of rents those types of tenants paid, say two years ago. I’d say they’re 10%, 15% down from where they were two years ago, in that ballpark, maybe 20%. They’re down, they’re not up.


Your next question comes from Quentin Velleley - Citi.

Quentin Velleley - Citi

Good morning everyone I’m here with Michael Bilerman. Just going back I guess to the equity raising question. We can understand you sort of selling assets or forming joint ventures given that the implied value, below what’s implied in the share price. I’m just wondering, what’s the risk that after doing those joint ventures that markets being volatile have corrected and the share price is lower again, I’m just wondering how you’re sort of thinking about that?

Art Coppola

I think there’s a definite risk that share price of any company in Corporate America is going to be lower in the future than it is today and that’s not specific to Macerich. Our business strategy is not dependent upon selling new stock, period, case closed. We can manage all of our maturities that we have on our balance sheet without selling any additional stock.

Now, if you take a look at our stock dividend, some people could say, well that’s a stock sale and that’s, look, is it an apple or is it an orange, if it’s six of one, half a dozen of another. So, you could call that a stock sale. I don’t think most of our investors don’t see it as a sale and we could continue and we will continue to retain cash, but through the reduction of our dividend, as well as the payment of our dividend and the way the stock dividend.

If we were to extend the period of time that we did our stock dividends, we do our stock dividends from beyond this current year into another one or two years beyond this, which we can do. Then we clearly can manage all of the maturities that we have to deal with over the next three or four years through a combination of joint ventures and stock dividends, retention of cash and that requires no common equity whatsoever.

Again, I’ve acknowledged that as part of a total comprehensive common equity plan de-leveraging plan, that common equity has a place. So, I’m not excluding it, but I’m not price driven either. What we are is we are logic driven and logic says when you can raise capital from the private markets at far more attractive rates than the public markets, that’s what you do.

Michael Bilerman – Citi

This is Michael Bilerman speaking, is there a risk, you looked at the stock dividend which has been mandated for this year, potentially for next year it gets extended, but that’s not a definite. That changes your thinking a little bit without having the ability to do a stock dividend in 2010 or at least I think you had talked about doing it for three years.

Tom O’Hern

First of all, we could cut our dividends further, if we wanted to, probably, but more importantly, before the current revenue ruling that allows 90%, but that allows you to do at 90% stock dividend came out, basically all the case law and the rulings will go supported something close to an 80% stock dividend. So we’re not dependent upon the revenue ruling that this year’s 90% stock dividend is dependent upon.

So before this year, you could have done an 80% dividend and most people all tax people believe that no matter what happens you could continue to do at least 80% dividends going forward.

Michael Bilerman - Citi

I think you go back to last call, I think you were very detailed in terms of how you thought about your capital plan and you were very clear in terms of the equity and very clear that it was the last piece of the puzzle and that you were going to sequence it.

Just relative to those and that budget that you had thought about, it sounds like you are more inclined to do more joint ventures. I think you said you’ll sell everything, sell every asset to joint venture than doing common equity anywhere different from where the stock is trading on an implied cap rate basis.

Tom O’Hern

At this point in time, it’s a very simple decision that the right thing for our shareholders is to continue on our raising of cash from joint ventures. Again, I want to emphasize, we’ve got our eye completely on the ball on finishing up the joint ventures that are well under way right now that will close in the next 30 to 60 days and we are considering what exactly is going to be involved in round two. It’s something we feel very comfortable with and from a sequencing viewpoint, I remain committed that we need to control those items that we can control.

Most people don’t think that we can control doing joint ventures, going back six, eight months ago. We knew we could, because we know the market. It’s in our DNA and we’re going to work on those things that we can control. We can’t control our stock price. The only thing we can control is we can remove negatives that hangover our stock price and we have and we will do that, both through the way that we’ve done our property financings.

We’ve reduced our dividend, gone to a stock dividend, raising asset equity. We can control those things. We can control our leasing, occupancy levels, things like that. The stock price will take care of itself, once we removed the negatives and made progress and we see some parity between the two, then. Common equity could be part of the final piece of the equation, but it’s a simple decision today and it remains the last piece.

Michael Bilerman - Citi

Can you just go through and I think you talked about joint ventures that you’ve done in the past and where one plus one is three. Can you talk a little bit about some of the tangible benefits that have come out from those joint ventures that you don’t think would have been able to be done if you had owned the asset 100%, just trying to get more clarity as to the benefits of historical joint ventures and the ones to come, other than just being a financial play.

Art Coppola

Sure. I mentioned northwestern mutual life insurance company, so that should potentially be obvious. The correlation there, we’re partners together today on a joint venture. They’re a big OP is the unit holder investor. Before we went public, we were joint venture partners on eight deals. The public information on the company probably discloses the fact that they are a large lender to Macerich and in the last year or two’s environment.

We’re one of their very much preferred borrowers and I think that that’s definitely related to the fact that we have a long standing partnership relationship even though it’s only per son uprising in the form of one joint venture today. We still think of each other as business partners, alliance people and we do business together in numerous ways in that context. We’ve managed real estate for them up for a fee basis in the past bought real estate from them in the past.

Ontario Teachers which owns Cadillac Fairview has been a great resource for the company. They’ve been a big investor in Macerich. When we first started our relationship with them in 1998, they’ve started the relationship by picking a partner in the U.S. retail marketplace, they picked Macerich. We tried to do some deals together, where we got outbid by some other buyers and then they decided that they wanted to formalize the relationship and they made $150 million preferred equity investment in Macerich in midpoint of 1998.

We then did a joint venture together to buy properties from Safeco Insurance Company, the Winmar Portfolio. Then they were our partner later on as we equities the company in late 1999. In an environment that was post Russia default not completely dissimilar to today, not as severe as today, but they were there for us in tough times then and they’re there for us during tough times today.

Calpers through Miller Capital Advisors, I mean we started out with one deal with them, that’s now grown into four joint ventures, very comfortable, tight relationship. They don’t do business with just anybody and we see them as a partner going forward. Alaska Permanent Fund was our partner at Tyson’s Corner, when we bought that. As time went on, they had an inside track on North Bridge and brought us into that deal and we bought that deal together, which we’re happy about.

Going back to Cadillac, we meet with each other quarterly. During those meetings, we share a tremendous amount of operating core information with each other. We’ve shared IT system information back and forth with each other. Again, they’re the premier shopping center owner in Canada. We send tenants north of the border. They send tenants south of the border. There’s lot of different ways that we see these joint ventures are of value to us beyond the financial side of the transaction.

Quentin Velleley - Citi

Just switching back to the development pipeline; just wondering if there’s been any changes in the stabilized expectations on any of your projects?

Art Coppola

There have not been changes in the expectations on our projects on the three that are in process. You kind of broke up on the question, but if that answers your question, there have not been any changes on yield or costs on the three projects that are underway.

Quentin Velleley - Citi

Can you just remind me, what Santa Monica place was?

Art Coppola

On a yield on new cost basis?

Quentin Velleley - Citi

Yes, a stabilized yield on total project cost.

Art Coppola

Yes, I’ve always indicated that would have a new yield return of roughly 9% to 10% on total project cost and we still are tracking on a stabilized basis to be in that neighborhood.


Your next question comes from Alexander Goldfarb - Sandler O’Neill.

Alexander Goldfarb - Sandler O’Neill

Just want to go to the sales front. As the tenant sales are declining it sounds like flattened out. At this point assuming, how much more could sales decline? Where the tenants may start to push back as you negotiate the releasing of their spaces?

Art Coppola

Sales basically would need to go below the tenant’s expectations for them to cutback on their new store commitments. That’s what happened in the fourth quarter of last year. Sales were way below the retailer’s expectations and that’s what spooked them. That’s what caused them to retrench and of course we all know the environment that we were in the fourth quarter of last year, it spooked the entire world in every business. Sales now are tracking along levels that are within their expectations.

Again, I would encourage folks that are confused or interested in the subject to listen to some retailer conference calls. You have the opportunity to do that and you’re going to hear them say, that they are managing their business for sales to be down on a comp basis while maintaining their margins. So it all comes down to, are they doing the business that they expect to do.

If they expect to be off 10%, and in fact they’re off 10%, then they’re making the profit that they planned for and it’s all about meeting their plans. At this point in time, over the last six months, they’ve been meeting their plan. I have every reason to believe that they are realistic in their plan going forward and that they’re going to continue to meet their plan going forward. That’s why they’ve cautiously put their toe back into the water and begun to make new commitments.

Alexander Goldfarb - Sandler O’Neill

Then on the line of credit, can you draw all the way up to the limit, to the $1.5 billion, or is there some sort of step limit ahead of that?

Art Coppola

Tom, you want to go ahead and address that?

Tom O’Hern

Yes, there’s no limit on that, Alex.

Alexander Goldfarb - Sandler O’Neill

Then in Walnut Creek, there seems to be a lot of noise coming out of there, looks like one of your competitors sponsored an initiative. Would you view, what’s going on at Walnut Creek as sort of typical, whenever you’re trying to do a new development or is this beyond the sort of typical noise that we’d normally hear?

Art Coppola

I’d have to say it’s not typical at all and I can speak from personal experience that Macerich personally, that Macerich personally, Macerich has never ever gotten involved in spending Macerich’s shareholders money to fight another development when the retailers have made the decision to go to another development.

We believe that once the free market and the retailers have made their decision, that using a legal process and using shareholders money, worse of all to go ahead and to fight a development, that’s a waste of our shareholders money and we have never done that and I don’t ever anticipate doing that.

So, I view the activity that’s going on as being certainly very a typical from my viewpoint. I’ve never seen anything like it never been exposed to anything like it and personally, I think it’s a total waste of the other company’s shareholders money and a total waste of our money when the free market has decided where it wants to be.

The department stores have decided where they want to be and they told the other developer that even if he is legally able to stop this development from going forward, there is no way that those department stores are going to go to the development that he wanted to build, that the retailers didn’t want to go to. I think it’s totally atypical and I appreciate you asking the question.


Thank you. Unfortunately we have no time for further questions from the queue at this time. Please turn the conference back over to Mr. Coppola for any additional or closing remarks.

Art Coppola

Well I want to thank you all for being on the call and again look forward to seeing you the day before NAREIT, November 10, I believe Jean is that the date and we will look forward to seeing you there and reporting on our progress to you over the very near future. So, thank you very much and see you soon. Bye.


Thank you again, ladies and gentlemen. That concludes today’s conference.

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 All other use is prohibited.


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