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Executives

Jean Wood - VP, IR

Tom O'Hern - SEVP, CFO and Treasurer

Art Coppola - Chairman and CEO

Randy Brant - EVP, Real Estate

Analysts

Craig Smith - Bank of America/Merrill Lynch

Rich Moore - RBC Capital Markets

Michael Bilerman - Citi

Christy McElroy - UBS

Ian Wiseman - ISI Group

Paul Morgan - Morgan Stanley

Tayo Okusanya - Jefferies & Company

Jay Habermann - Goldman Sachs

Michael Mueller - JPMorgan

Vincent Chao - Deutsche Bank

David Wigginton - Macquarie

Alexander Goldfarb - Sandler O'Neill

Ben Yang - Keefe, Bruyette & Woods

Cedric Lachance - Green Street Advisors

Macerich Co (MAC) Q2 2010 Earnings Call August 9, 2010 1:30 PM ET

Operator

Good afternoon ladies and gentlemen thank you for standing by and welcome to the Macerich Company’s second quarter 2010 earnings conference call. One note that today’s call is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer-session and instructions will be provided at that time for you to queue up for your questions.

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

Jean Wood

Hi, thank you everyone for joining us today on our second quarter 2010 earnings call. During the course of this call management will be making forward-looking statements which are subject to uncertainties and risks associated with our business and industry. For a more detailed description of these risks please refer to the company's press release and SEC filings.

As this call will be web cast for some time to come, we believe it is important to note that the passage of time can render information stale and you should not rely on the continued accuracy of this material. During this call we will discuss non-GAAP financial measures as defined by the SEC’s Regulation G. The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the press release and in the supplemental 8-K filings for the quarter which are posted in the investors section of the company’s website at www.macerich.com.

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

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

Tom O'Hern

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Art Coppola

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

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

And we had to make that decision in November of 2008 if we were going to open in August of 2010. And it was a tough decision, there was a lot of money it was $275 million, and there was a perception in the market place that the company had liquidity issues given the debt that was coming due in the following year from our mortgage debt view point, and also given the term notes that were coming, just the uncertainty in the whole marketplace.

But we sat down and we made the tough decision that in spite of the fact that luxury retail was plummeting fast, and we had plans for luxury retail share market place, that Santa Monica Place was such a unique location, probably in our view the single best piece of real estate to build upon that we have ever come across in the United States, that we had to go forward. It was a tough decision we made it, and today I am thrilled that we made it.

As you know, we also then in February, March and April of 2009 made some tough decisions on the capital front. And on our last call and throughout we been have outlining what those steps forward, what we did and how we executed culminating in our April 14 equity offerings. And that's resulted in us having a tremendously strong balance sheet today. Lots of optionality to take care of opportunities, lots of cash on the balance sheet the lowest debt, the market cap and best coverage ratio that we’ve ever had.

Santa Monica Place opened on Friday, three days ago. It feels like it was a month ago. It’s just been incredible, the typical shopper reaction is “Oh my gosh, this is the Disney land of retail”. Myself and Randy share, we stand as much time as we could with shop owners and retailers as we try to find our way through literally, roughly, probably 100,000 people at least per day on Friday, Saturday and Sunday in that shopping center. And they were all just overjoyed, we have many anecdotals from various retailers. But it's hard to extrapolate from 3 days.

But just for example, the food court, we have a tenant in food court and a kiosk did more business in one day than any of our full-line restaurants. This is kind of testimony to the food court and all of our food line restaurants couldn’t be more elated, most of them and they are all chef driven, six of them, most of them wish that they could, but the ones that only took one location wished that they’d taken two.

The restaurant interest that we are getting from all over the country is just unbelievable. From an apparel and a retail viewpoint, and from Bloomingdale’s viewpoint, they are all just thrilled.

Virtually across the board you had retailers saying that store might change, double, triple my plan and all of them were saying you’ve created meaning Macerich a new destination in Los Angeles a must see place. If an international Tourist, or a tourist that's going to come to LA sometimes they think maybe they have to go see Disneyland or they have to go see Universal City. Well, Santa Monica Place and the Third Street Promenade along with the peer up here [Dennis Ford Walk] and we are in the epicenter of all of that.

It is now a must see destination. It is without question, the most exciting retail venue that I personally have ever been to in the United States, and I have been to almost every one of them. It’s clearly going to be the most productive in terms of sales per square foot shopping mall that we own.

I have previously indicated to you that I felt that sales should reach $1000 a foot on maturity. I could be pretty low on that number, we’ll just have to see we can’t extrapolate three days, but we feel very, very comfortable.

Santa Monica Place is unique in so many respects, and that’s why we pulled the trigger. We built Santa Monica Place basically off of cash-on-hand, cash-flow, using our line of credit, but now when we payoff the mortgage on Santa Monica Place in the next month or so and we finish construction, we are going to own that asset free and clear. And it’s nice to have an asset that is worth, some analysts have estimated and I would say they are conservative, $3 a share, $4 a share maybe it’s not even rolling through our numbers right now in terms of share NAV.

It firsts the market in so many different ways. It is the first Nordstrom view they are west of the four or five, it’s a service west of LA and Nordstrom has been doing business in LA now for over 30 years and it’s their favorite market, Southern California. They’ve been dying for a location like this for years and in our conversations with the family and the chief executives of Nordstrom, they just can't wait for their August 27 opening.

It's the first time that Macy’s has ever exited a market in favor of its sister company Bloomingdale. Now when they merge with many companies they put some excess boxes and added Bloomingdale with places like South Coast Plaza Fashion, Fashion Valley and places like that but they've never left a market with Macy’s and put in a Bloomingdale is what I can think of.

I believe it’s the first incentive to open with a Bloomingdale and Nordstrom as the anchor. It is the first Bloomy SoHo concept, it's called Bloomy SoCal so cool I think Michael (inaudible) calls it. It’s an incredible store. You have to see it, it’s just unbelievable. It’s SoHo but in a modern building design they have 18 foot ceiling height and the layout and the merchandize it’s just fabulous.

Its the first time that we have ever dedicated an entire floor to food, combination of the six chef driven restaurants, the food court dining hall which as I mentioned, one food court tenant alone did more than any one of our 8000 square foot restaurants, some of them are that big in one day. That’s testimony to what food court might do, it might be the most successful, it could easily be and probably will be the most successful food court we own and it could easily be in the top ten floor in the United States.

It was a big desk putting food up on that third level and today I think most people believe that it’s the most attractive element of what we did. We’ve been having ongoing entertainment. We've taken the street performance that currently are on the promenade and because we have private property in that public property but there's street promenade we've pick what our performers are. We've partnered with KCRW which is the local public radio station and they've brought in the duty of sunsets spent on Friday night, anyway all of this is available in the social media. I believe that it's available on our website through various links or it will be. The numerous, the media coverage has been unbelievable. And it's going to be unbelievable and the interest thing is that we have really only just begun, I mention the third level.

On the third level we still have another sit-down restaurant ready to open, we still have two or three, two tenants that haven't opened. We have the whole market which is really if you think about the current market building in San Francisco and or Chelsea market places, that interestingly enough, the community is getting more excited about that than anything.

We held that off the market on purpose and we’re not opening it until November 15 because we knew that once people came to the property and saw the traffic and realized what they had in the way they view, the demand for a new concept of market of the nature of the current market building in a regional shopping center, the demand will then become overwhelming and interestingly enough a lot of demand now is coming from our restaurant owners. The chef driven restaurant owners who have great access to food resources that nobody else has access to and that's why the restaurants are so good. They all want to come in now and open up a unit or two in there. And then the thing that we haven't really been talking about that now we are beginning to evolve our thinking, is that as part of the conversion of Macy’s, the Bloomingdale, that used to be 150,000 per building, and Bloomingdale has shrunk it down to a 100,000 feet to a level.

But we've retained the third level up on the dinning deck for ourselves and its been shelved out and its 50,000 feet, but we feel, we are going to wait and see what are the great ideas. We’ve already got a half a dozen great ideas, but we are going to wait for the optimum ideas. So, it's hard to avoid the press if you read anything and look into anything in the national media or the local media, radio or TV. This is clearly the shopping center of a decade if I look back five years. There's nothing been built like it in the US periods.

If I look forward five year I can't imagine, there's nothing on the drawing board that's out there. For us it’s a generational opportunity, it’s a generational development and again we've really only just begun. We still have Nordstrom to come to come and open August 27, the community can't wait for that. We’ve got the market open and then the real, and then we will have the fine tuning to open, we have logistics that we still have to work through.

The first couple of days of the opening of this center three or four miles away from us east on the freeway, on the Santa Monica freeway, I mean on the powers that be, that run the freeway systems would be running electronic reader boards saying City of Santa Monica parking is full period, kind of like don't even bother coming and there's thousands and thousands of parking structure, a parking stall besides the ones that we own, we have a typical floor ratio ourselves but when you add in all the other garages up and down the promenade you probably have a 12.0 ratio, everything is full.

So we have logistics to work out, nobody has ever experienced the kind of the peculiar, pedestrian traffic that we've got here three or four years from now. We are going to have the light rail goes only from downtown Los Angeles and it terminates, adding owner to the Bloomingdale about a couple of years from now, the City of Santa Monica is going to be open up an eight acre public park immediately to the south of the 10 Freeway which is going to be a place to come for families. They are going to build a pedestrian bridge they hope over the Santa Monica Freeway to connect it exactly into Santa Monica Place.

But again remember Santa Monica Place is at the epicenter a proven attraction to the Third Street Promenade that has already being doing $1000 a foot at its peak. We were 250,000 to 300,000 feet a couple of years ago the Santa Monica Pier which is a huge tourist attraction. The Zenith Beach and Santa Monica Beach, the Santa Monica Civic Center and now we are at the epicenter of it all. We can't wait to have those of you that are going to join us for our October 5 Investor Day.

And this really shouldn’t come as any surprise to any of you because as you know Macerich’s expertise and our core competency is taking existing retail properties and rethinking them re-imaging them and recreating them and we have done that time and time again. This is just the best form that we have ever done but if you think back in recent history look at what we did at Queens, look at what we did at Tysons Corner right as we bought it, we added a 200,000 foot expansion as we got rid of penny and as we added an entertainment wing and a theatre wing and that was tremendously successful. We took a set of venture and virtually tore down everything but the anchors and rebuilt a one level mall to a two level mall tremendously successful because we doubled it in size when we were able to get back a couple of stores and separated as part of the merger.

Scottsdale Fashion Square, we expanded it again and again. Northgate, a complete redo that we've done and the list goes on and on and that's in our DNA. So where we fit today on the development front, the redevelopment front is that we have no shovels in the ground other than finishing up Santa Monica Place. But we've got lots of thoughts for the future of Santa Monica Place. We’ve really only scratched the surface of Santa Monica Place. Our experience in great, great centers is that you have 30% or 40% of your retailers just do unbelievable business and another 30% or 40% do really good business and then another 20% or 30% for whatever reason, they just miss the market and you have the opportunity in a situation like that to recycle those spaces and the one thing I can tell you and we've got leasing meeting later on this afternoon is that we are regarded to put out any retailer later that's sitting on a lease that they haven't executed but if its not executed in the next 48 hours the lease is retracted, the market rents at various places in the center are being doubled. And that’s just reflective of the fact that what we knew was going to be true, was true beyond anybody’s expectations. And again we've only just begun, Nordstrom hasn't even opened yet, the marketplace hasn't even opened yet.

And so as we look at our pipeline going forward we are carefully analyzing different projects, some of them are going to be major, some are going to be minor. We have announced that we are recycling the filings building at Stanberry and making up to $25 million to $30 million investment there and we are going to see like a 14% to 15% return on that investment. We are looking at a number of different opportunities within our portfolio. We've had developers come to us and cities come to us already and say we want what you did at Santa Monica and of course, you have cities that are equally as difficult as Santa Monica as a reputation being, coming to us and saying what if you are able to embrace the community of Santa Monica and to deliver a project like that there then we want you to come and talk to us. So, our future is very bright, we don’t need to go out and buy centers from others and that’s going to be limited source of opportunity I think going forward.

Our embedded growth is in the retail that we own and fortunately, 15 years ago when we went public we decided to buy properties as we expanded from a base of only 10 properties, basically the basic premise was to buy properties in high barrier to entry markets and to buy good properties or great properties that we can make greater and that’s where we sit today we are carefully, analyzing where the next opportunities are, raising the bar again at Santa Monica Place because again we have only just began and the good news is that the due to your support and our equity offering in April, we have the balance sheet and we have the cash-on-hand to take advantage of those opportunities. So, if you sense a little ebullience and optimism you are not misreading me.

I would like to open it up for Q&A.

Question-and-Answer Session

Operator

(Operators Instructions) We will go first to Craig Smith of Bank of America/Merrill Lynch.

Craig Smith - Bank of America/Merrill Lynch

I just want to thank you guys; you threw a heck of a party in Santa Monica on Friday. I felt like I was in a resort more than shopping center. But thanks a lot for that and my question is I don’t know if you have done any research on this or have an opinion. But what areas surrounding the Santa Monica place will you be drawing at, at greater pace when you were when the old enclosed mall was open?

Has the trade area grown and what areas might be delivering stronger sale?

Art Coppola

Let me take a step at that and Randy may want to jump in. The area that we are drawing from now that we didn’t use to draw from is 20 feet away from us. It the Third Street Promenade. When it was an enclosed mall we weren’t drawing from the Third Street Promenade at all expect for a one thing and one thing only and that was our food court. And that was the first thing that embedded the Broadway Deli and Broadway The Street and that was what you walked into. And the food court was always successful, I think we have people counters in that food court, we were running 16 million people a year through that food court.

And that was as we are closing the center down even we were running back a huge number. But we were never getting business you never seen people move from the promenade into the enclosed mall when you stood on top of the enclosed mall. Today when you stand on the third level of the open air having torn the roof off that’s all you see is people coming from the promenade into the shopping center.

Now by the way I have always maintained that the promenade itself is an anchor to Santa Monica Place. When you got 250 - 300,000 people doing 800 or $1000 a foot right next door to you, that’s an anchorage as much as Nordstrom and Bloomingdale's is an anchor, this is much as the amusement Santa Monica peer is an anchorage. So that is the first place right there. Then along with that the tourists. Santa Monica Place without question and I am talking about this is kind of from the retailers based upon who they are already selling to and who have got a pull from the market. They firmly believe that Santa Monica Place itself in conjunction with the promenade that Santa Monica Place will become a true destination for anybody visiting Los Angeles, not just the shopping destination a destination period. It goes way beyond as you know having been here the shopping experience, it's an experience itself. It’s a people experience, it’s an entertainment experience, it’s a view experience, it’s a dinning experience, it’s all of the above.

We originally looked at our market and to be safe, we said look, we should be able to draw from Malibu through the palace say through Brentwood through Santa Monica, through Venice, Marina del Ray, may be drop down into Manhattan Beach. And we really felt we could do that and of course the income levels that are serviced there are unbelievable. The consumers still having a tough time in the US, but not the consumer I just mentioned.

Anybody that lives within 2 miles of the Pacific Ocean and from Malibu to Marina del Ray generally just doing pretty fine. So we counted on that but I think what we are going to see is that its going to become a regional draw for a long distance I mean I never counted on Beverly Hills, we already have immediate people that live in Beverly Hills and I can’t wait to go out to the beach this weekend and well by the way go to new Santa Monica Place. I think we’re going to be, we have a merchant whose base is in West Hollywood, who says, I don’t think there is any question that my West Hollywood shopper is going to come here.

We never counted on that. And Randy do you want to jump in terms of trade areas that we might get that we have not anticipated. We were pretty conservative in the beginning, but I think the reach to establish what is going to be one of the three or four places that is I a must see place to see. I’m not sure I counted on that.

Randy Brant

I think, one of the things that we are going to experience is a deeper presentation and to the more mature customer Third Street Promenade except for Fred Segal which is just off Third Street Promenade had very little appeal to anyone but juniors. With our tenant mix we’ll be bringing in the more mature and more well to do customers from Malibu and I think all the way to Manhattan Beach and most of beach to beach cities?

Art Coppola

Yeah, Randy and I were at the Bloomingdale Charity event Wednesday night a few five nights ago and they limited it to 200 people and there was a high dollar ticket item but they at their private shopping day on Thursday and then on Friday I mean, they’ve got their highest consuming credit card customers for all of Bloomingdales coming to the store and of course you have Nordstrom you didn’t even open yet and we know that Nordstrom is going to do something at this store even though it’s not a huge store but it’s a big size store which were 135,000. Said that it's big enough, it’s adequate. They are going to do something really special and we have huge aspirations I know they have huge aspirations, so you know and people like Hugo Boss, I was talking to the manager of Hugo Boss yesterday, he said, we are doing really good but he said, so far people just so overwhelmed by the place that they are just in awe of the beauty of it, but they almost stopped walking into the stores yet. So, it’s our typical, quite a few high end customers that we have personal shoppers for that will turn into the store once every two months and spend a lot of money. But they are not going to come out on a weekend when they know there is a 100,000 people that only cant find parking place they are going to find a way to sneak in, but even yesterday there were quite a few celebrities that were noticed and I guess in terms of trade area, the word is, it’s going to be a destination for Southern California. So anybody who comes to Southern California is going to have to come to Santa Monica Place if they want to get the full experience. It’s hard to say that about a shopping center, I’ve never been into a sale and I don’t know another shop. It’s very few of them that you can say that about.

Craig Smith - Bank of America/Merrill Lynch

Thanks a lot and congratulations on your new mall.

Art Coppola

Shopping center, retail, not a mall. I keep telling my wife and kids we tore the roof off, quit calling it a mall.

Operator

And we will move on to RBC Capital Markets, Rich Moore.

Rich Moore - RBC Capital Markets

With 97% of that mall leased and Cerritos 100% leased, it sounds like even going beyond the Santa Monica, there is something good going on for retailers. I mean, should we read the recent leasing successes as retailer demand starting to really comeback?

Art Coppola

Let me jump in and Randy may go further speak on the points that I can't. We monitor big earnings reports in earnings calls transcripts. I don’t want my leasing teams wasting their time listening for an hour and a half following you can read the transcript in 20 minutes, but they have to read the transcript of every one of their accounts, and we are in an account based system.

All of our top retailers are making a lot of money, because going back to February of last year they redid their business model, and that was a secular change. And they redid their business model to make money on less sales. And now they are very confident in their profit margin, so they are really willing to pay a little higher than a higher cost of occupancy, because they know what difference does it make if I'm paying 16% occupancy versus 15%, when I'm really confident on my profit margin on the other 84% of my sales. If they are not sure what the profit margin is going to be on the bulk of the sales, they don’t want to pay a 10% as a cost of our occupancy.

So, I think you have seen it with us, you have seen with the other big comparable names to us. I think you have seen volumes pick up. I know with us you saw in the quarter leasing volumes pick up. And I am not calling it robust, but the retailers are making money, they’re talking, they are clearly coming to the realization that the supply of rate centers is limited, and we are blessed to have well over 80% of our EBITDA, and now that number has just gone up because we’ve manufactured a Triple-A flat piece of EBITDA from Santa Monica Place by getting that open for business.

They know that when they do business with us they are going to get prove them winners. And they know that there is a limited supply of those. So you are in a good position there, just in terms of the retailers attitudes, Randy, you want to add some color to it.

Randy Brant

Well you touched upon it. The retailers did change their business model. They have lots of cash.

Every percent of increased sales, a large percentage is going back into their pocket and they want to expand. You know you said you wouldn't call it robust, I would certainly call it robust in our Top 25, 30- shopping centers, it’s very robust. And the retailers want to make deals.

Art Coppola

On the committed side, we said 92% of leases 97% committed. I also mentioned earlier in the call that the 5% between the leased and committed if those guys aren't signed by Wednesday or Thursday of this week, we are back to 92% committed and leased as far as I am concerned, because those guys have just lost their leases.

Rich Moore - RBC Capital Markets

And then you had kind of mentioned that redevelopments have once again come under the horizon. Would you see any ground up development at this point? I mean you had talked a little bit at ICSC about maybe outlet centers that kind of thing but is there a regional mall ground up development or lifestyle centers any thing like that?

Art Coppola

Well, we are clearly going to have two major ground up developments Phoenix, Scottsdale marketplace in the next 10 years. I can't predict when they are going to open, if you made me dial it in, I would say somewhere between four and seven years is when they will open, and may be one of them will open three or four years from now, and one will open five or six or seven years from now.

We got to wait until the Phoenix marketplace really begins to come back. And that’s when you are really begin to get the rents. I mean it would be silly to build something and lease it into a headwind on a piece of property that irreplaceable piece of property, and the two sides, one in particular the North Scottsdale site we have, two of them they are irreplaceable. As Scottsdale Road is 101, and it will be silly to build something before it is time.

So those are the two ground ups. We are being approached by other folks. But it is mainly in the re-development arena. And again, I want to go back to the re-development. I mentioned some of the examples of the bigger re-developments between walls and the oaks doubling in size, and now Santa Monica Place.

We’ve been doing that for a living to 35 years. And it was only two years ago that we basically said okay, other than these four we're putting everything on hold. Now that we have completed Santa Monica Place, we've got our balance sheet in order, we've got cash on hand, we've got the talent here, and we are sitting on a huge winner, retailers love winners. And there is isn’t a retailer at Santa Monica Place that isn't saying, "my gosh your people were the best people I’ve ever worked it to get my store open in a difficult environment in terms of getting certain approvals for certain agencies that have to deal with state agencies, costal commission, all kinds of people."

City of Santa Monica actually at the end of the day was tremendously cooperative, at the end of the day. But, that’s our D&A is re-development and so, it's timely now to really re-visit that. And that’s where the big value creation is on, because you've got a proven commodity. We knew the day that we broke ground on Santa Monica Place it was going to do a $1,000 a foot, because the promenade was doing a $1000 a foot, and there was no reason to believe that in a properly conceived extension of the promenade shouldn’t do as well.

Now, I will admit that putting all of those good restaurants, and all of that food on the third level that was a risk. But we believed in it, Randy and his team they went out and got six major ships open terrific concepts, and the architectural designs Craig seen it, and when you all see it October 5, I think you will love it. And the best design that we have is rearranged for the Pacific Ocean that would be about 200 yards away, and the beautiful sky would be open above if I turn the roof up.

Rich Moore - RBC Capital Markets

Okay good, thank you. And then if I could real quick, I know you’re not going spend $600 million, the rest of your cash, on redevelopments. Do you have any plans for the $600 million that you have on the balance sheet?

Art Coppola

Yes we are going to treat it as really precious long term equity capital. We are not going to feel compelled to spread investment. It is painful to be earning less than a half of 1% on it and in the meantime, my friend [Melton Cooper] said to me one day in the toughest of times 18 months ago he says you can never be too thin, you can never be to rich and you never have too much equity or too much powder on your balance sheet, he’s right. Who knows where the economy is going. We can always use it to further un-encumber the balance sheet, and then take un-encumbered assets as mortgage of some due, and then take those un-encumbered great assets and that could be your dry powder for when the next big opportunity comes through.

So we are accessing every thing. I think once we go through a complete reevaluation over the next 30 days of the reality of our redevelopment pipeline, and the possibility even though I said don’t expect any acquisitions, and the possibility of maybe something happening in that arena, then we will evaluate whether or not it makes some sense to maybe use some of that capital just pay down some of the debt, including debentures, including mortgage debt, things like that.

Rich Moore - RBC Capital Markets

Okay good thanks. And Tom when is the queue coming out?

Tom O'Hern

Today, Rich.

Operator

Next we'll hear from Michael Bilerman with Citi.

Michael Bilerman - Citi

Maybe Tom sticking with you, can you sort of walkthrough I think you said you've reiterated the guidance 260 to 280, with $1.22 year-to-date sort of leads a pretty wide range for the back half of the year, can you highlight where your comfort level is within that range? I know there is a lot of seasonality heading into the fourth quarter, but an average of how do you sort of get from Point-A this past quarter’s result, up the Point-B which would be the implied second half or so?

Tom O'Hern

Well, I think for starters Michael, you’ve got the impact in Santa Monica coming online, so we’ve get $7 million or so of NOI coming in from that asset just for this year. We had a variety of things happening, we had some swaps burn off in April that were pretty expensive. And so we are going to pick up some benefit there as it relates to interest expense.

Our re-financings are rolling through, this is going to really provide a pretty significant benefit. We’ve got some loans at coupons of 7% and even 8% that have been refinanced and we haven’t got the benefit of that, yet. So that'll flow through the second half.

And then obviously, we’ve got a lot of seasonality, we’ve recognized virtually no percentage written until the fourth quarter, and that as a result of the accounting rules, where you can’t recognize that until you have exceeded the annual breakpoint.

So we typically always had a lot of seasonality, and this year will be no different. Plus we will have the positive impact to the refinancings with lower coupons as well as Santa Monica opening. So I think if you…

Art Coppola

And no body gauged been growing into itself this year. We also had some further gain, Cerritos has had some gains moving into the year. So there is redevelopment that still we're lagging through this year and are coming online gradually through this year, especially Northgate.

Tom O'Hern

So Michael if you took the midpoint of the guidance at 270 and subtracted out the FFO year-to date through June which was about 22 and the balance I’d say would be split 47% or so in the third quarter and the balance 53% in the fourth quarter.

Michael Bilerman - Citi

So could it be like at around $0.70 to high seventies in the fourth quarter and I guess its just that ramp going from 57 reported to next quarter up to 70 on a 140 million share base that's a pretty big dollar increase and I know Santa Monica comes on but I also thought that you were going to stop capitalizing interest. So then it would be that in a while it would drop to the bottom line? It wouldn’t be as big as of an impact, right?

Tom O'Hern

We are picking up a lot of that, you are going to pick up percentage rents, especially leasing the bulk of special leasing that was during the fourth quarter and historically we've also had the bulk of our lease termination revenues come into third and fourth quarter and that's a guess, it’s a bit of a guess, I mean last year with 18 million of lease termination revenue that came through in the third and fourth quarter that’s not in the first two quarters. So, historically that’s been somewhat seasonal as well. So that obviously we are comfortable with it Michael and we wouldn’t reaffirm guidance at that level.

Michael Bilerman - Citi

Right but I just want to make sure that in general restaurant would be very specific with the street in terms of what sequential and in terms of the ranges and moving up $18 million, just want to make sure that we understand the breakdown of what’s driving that sequential increase in FFO ahead with lease submission have probably been very light year-to-date at $33 million.

Tom O'Hern

That matches where we were last year almost exactly.

Michael Bilerman - Citi

And do you expect a bigger second half as well?

Tom O'Hern

It’s hard to say, I mean historically that’s what we have always seen, I mean we've made, that's part of the reason we have wide ranges because certain things such as lease termination revenue unless are less subject to prediction and other things.

Michael Bilerman - Citi

And then I just wanted a clarification, you talked about the average base rents in the portfolio and you gave the detail in the stop, both the consolidated and the unconsolidated were up relative to year end but they actually sell a little bit modestly from the first quarter and I know you mentioned the leasing spreads were positive so I was just trying to figure out what would have caused the average portfolio base rents do decline sequentially on the trailing 12 months if the lease spreads were positive?

Tom O'Hern

Well, lease spreads were positive on average, on wholly owned assets they dropped slightly and joint ventures they were up fairly significantly and I'll have to get back to your question on average rent, if the question was, how come average rent dropped between now and year end, I actually think it was up slightly.

Michael Bilerman - Citi

It was relative to year end, it actually sequentially from the data in 3Q

Tom O'Hern

I'll have to get back to you on that Mike, I don't have it right now.

Operator

Christy McElroy from UBS has our next question

Christy McElroy - UBS

Hey good morning, congratulations on Santa Monica looking forward to seeing it. Just with regard to following up on Michael’s question, with regards to your capitalized interest, I think it was $8.8 million in the quarter. Can you break out how much of that will start to get expensed now the Santa Monica and most traders are coming online Q3, Q4 and then just for the rest of it what other projects are your capitalizing interest on currently?

Tom O'Hern

Well Santa Monica is obviously the biggest one and we’ve got roughly 80% of the tenants are open right now so some of that will continue Christy, then we’ve got a variety of other projects including Danbury and other locations where we’ve bought department store buildings. There's quite a few locations and we can't go through everything here and we typically haven’t done that but the bulk of it has been Santa Monica of the total.

Christy McElroy - UBS

So roughly call it 60% to 70% of it will start to get expensed?

Tom O'Hern

Well of the Santa Monica piece, I would say of the $8 million, that would probably be reduced by $4 million.

Christy McElroy - UBS

By $4 million, okay. And then just following up on Danbury, I could be wrong but it seems you started to do some more work there, can you confirm that its big (Dicks) from Forever 21 taking the outside lean space and then do you have a replacement center already lined up for the old Forever 21 phase.

Randy Brant

The answer to all three, this is Randy is yes.

Christy McElroy - UBS

Okay. Who is taking the old Forever 21 please?

Randy Brant

I don’t have it in term, but I know it's committed. And the lese back is not signed.

Christy McElroy - UBS

And then given that you are sort of out there looking at potential acquisitions, can you provide some color as to what you are seeing sort of in terms of opportunities and pricing and just wondering if you looked at it pro-bridge and (inaudible).

Randy Brant

Yeah, we have passed from pro-bridge in December, three or four months before it came to the market because it's owned by our partner Northwestern Mutual. And the reason we passed on it is not because its not very solid asset, it is a very solid asset, but we just couldn’t get our arms around owning that as our only asset in Hawaii and that’s why we passed on and we also have a member of our Board of Directors who used to be the Chief Investment Officer at Northwestern Mutual and sometimes you can know too much about an asset. But I think it will be a fine acquisition for whomever might buy, it just didn't make sense for us and we are very stingy about how we are going to approach our opportunities and I would definitely not model any acquisitions of any kind into our numbers anytime in the near future.

Christy McElroy - UBS

Okay, but then just in terms of what else you are sort of seeing out there, is it just sort of nothing.

Randy Brant

Nothing.

Operator

We will go on to Ian Wiseman with ISI Group.

Ian Wiseman - ISI Group

Yes, good afternoon. A question on Valley View Center, I know, I read recently in the Dallas press that you guys handed the keys back on the property. I was just wondering if you could just walk us through that and tell us maybe what the NOI on the property was given that you had about $7 million of debt service?

Randy Brant

Yeah, I'd be happy to go through that with you Ian. Valley View is in Dallas, at the center we have a $125 million CMBS loan that matures in 2011, subsequent to the time we bought that center there's been a huge growth in the amount of retail space and the Dallas market has gone from seven regional malls to ten region malls from nine million square feet to 13 million square feet.

In the overbuilding that trade area pretty significantly and adversely affected Valley View Mall, that combined with the consolidation of the department store business that really left us with two vacant anchors and a pretty low occupancy rate. So we made a really difficult decision recently and that was to turn the asset back to the special servicer. We've seen the NOI decline to its current level which is $5 million and that's on a $125 million loan and although the loan still remains on our books today, we expect to have title transferred and the debt released before year end. Its currently in the hands of a receiver and they are moving to make that transfer.

Operator

And Paul Morgan from Morgan Stanley has our next question.

Paul Morgan - Morgan Stanley

On redevelopment that you talked about, I mean is there any additional detail you kind of, kind of what centers, I mean for example what types and there's a big project that for example Tysons is a big project that you have spent a lot of time planning and you know whether the metros under construction whether it would be something there or any other areas where you could seek kind of large scale investments in the copies over the next say two or three years.

Art Coppola

Sure this is Art, I would be happy to amplify on that. Again, we are carefully taking a look at that over the next 30 days. Now one of those big opportunities is the 50,000 square feet of space that's sitting on top of the Bloomingdales building at Santa Monica Place but we have, really nobody knows about it. When I told a couple of retailers about it the other day, they said you've still got the 2000 feet there and we said yeah, it’s the third level of the old Macy’s building and it went up from one to this dinning bed and could be 50,000 foot bigger.

So that’s going to be one area of focus and that's going to turn out as a huge winner. We talked about Danbury, huge, nice little (inaudible) of the of the five wings’ buildings and we are looking at some other things there. Broadway Sparta, we are under construction in the markets right now and that construction by itself is the addition of newer markets which is great and Nordstrom has taken one of their top five stores in the world and expanding it. But we are also working with Macy's to work out some plans for them to redo their store. We are talking about the possibility of adding a Bloomingdales to that center. We’re looking at the possibilities of an expansion of that center because when you've got line ups like a new name in, one of top three Nordstrom anywhere. Macy’s and then some great current specialty shops and you’ve got some inefficient parking structures, you’ve got an opportunity to completely revisit that.

Probably Plaza could be our next Santa Monica Place, not in terms of it's entertainment value per se because its more of a buttoned down collar environment than Santa Monica is but it could be huge.

Pacific View, we have been searching for the right combination up in Ventura to expand an area north of the enclosed mall area and we’ve got roughly what is it about at about a 100,000 feet of space that we are either demoing and redoing Randy who did we just make deals with Trader Joe’s and BevNO I think and anyway [couple of staples] so that type of thing we are doing Nordstrom, Cerrito's we relocated Nordstrom to the old main company building.

Now we have a wing of shop space and the old Nordstrom building so in total it must be 180,000 feet of space to rethink and redo at Cerritos big opportunity, Tysons Corner, we’ve got to be just perfected a re-approval of the proper with the county Fairfax County with respect to the residential, the office and hotels component of Tysons Corner, and based upon some agreements that we reached with the county and some rethinking on the design, we now have green lighted the project to move forward with architects of brokers on the residential component and on the office component and my anticipation would be that project probably would make sense to deliver around the time with the rail land at Tysons Corner which will be around the end of 2013, 2014.

The talking's are about a very significant project, you are talking about a $400 million or $500 million project there. And based upon the returns that I’m seeing, they are very acceptable residential returns in the compared to other residential rental return and the office returns look to be acceptable, I know that price and Northern Virginia, Fairfax county has got vacancy in the B class of office space but that’s also most of the office space they have.

We intend to build a world class office tower and only build it when it's pre-leased so that’s an opportunity that’s out there. We are working our final details for Nordstrom to expand their store at Corte Madera and that’s a fabulous market for the center that does well over $500 a square foot and we could easily be looking at a 30 to 40,000 foot expansion there.

We’ve got some final work and expansion to be done at places like the Oaks. We are looking at redoing the outside retail at FlatIron’s Crossing in the Boulder Turnpike area and there are number of these projects. Panorama city, we are looking at a complete redo, we are looking at a future expansion of Queen's center. We are looking at adding an expansion to build more Fashion Square. We are working on a pre-release with the credit tenant to do an office tower there actually sometime for delivery four years from now but it would be pre-leased mainly to one user.

We’ve got 15 acres of land to the North of Scottsdale Fashion Square that we are in the process of getting entitlements on. A lot of our work is going to be in the entitlement arena but I mean these are all real projects and they are at locations that are great locations. And again that’s where we make our big money, is taking great real estates and making it even better. So Washington Square up in the Portland market place we have that whole free standing area of building pads to the North of Sears to be re-done. Southam we are looking at adding an additional anchor that could be very exciting up in Sandy, Salt Lake City area and well its point, we’re in the running to be considered to be master developer of Willets Point next to Shea stadium is burning up the city of New York City and be able to finalize the eminent domain proceedings that we are going to have to do which they seem to have afforded to do.

And then we’ve been approached by a couple of owners frankly of some great shopping centers recently where we’ve seen what you’ve done in different places and now we’ve seen in Santa Monica Place and we want you to do that in our city. And we have one major city at the grand opening on Friday. So we want you to come and completely redo our downtown.

So I think there is a pipeline that would be very good and very robust, looking at the rearview mirror to see that. That’s what we do and looking through the front windshield it's easy for us to see, that’s where the big opportunity is for us not acquisitions, its redevelopment and then ultimately a couple of developments but its redevelopment. It’s taking good assets and making them great or taking great assets and making them greater that’s what we specialized in more than anybody in the business for 35 years and right now, we’re coming and off of the best form we've ever been.

Paul Morgan - Morgan Stanley

That’s great is it too early for you to kind of have a feel for dollar volumes of investments say in 11 and 12 that you might have from.

Art Coppola

Yeah now it’s too early. Trust me; I would love to give you real exact numbers and returns I would've loved to give them to you yesterday. But it's too early to give you those numbers but clearly, throughout some exemplary numbers on Danbury like throughout on Tyson that I felt that we were going to achieve above market development returns both on the office component and the residential component when we deliver that $400 to $500 million expansion, we do have a partner but that’s just 50% of that roughly 2014 or so whatever the market is right.

But we’ll give you those numbers as they develop. The number is going to be very major some of them you know Ventura the expansion up in Ventura was a $15%-$20 dollar expansion but you know the 15-20% return on it also so some of its fine tuned in, but some of it is very significant, so what we see a lot of opportunities and we are now ready to go ahead and dust off the old pipeline but also embrace the new one.

Paul Morgan - Morgan Stanley

My other question is just on leasing and you could comment on maybe where we are seeing some of the pickup in the occupancy. Is it new concepts from larger store formats, many anchors type things and maybe some color on kind of A's versus the B's?

Randy Brant

It's been a combination of all of the things. We’ve had a lot of our activity from H&M as they move west, we’ve been able to secure a number of deals and there is a lot of interesting deals that are not yet executed. New concepts like Charming Charlie's is expanding and the accessory concept, All Saints. And a lot of the core retailers are beginning to expand again, so it’s really been a mixed bag.

Paul Morgan - Morgan Stanley

Any differentiation we keep hearing a lot about I guess between the twin A's and the B's?

Art Coppola

Well, look the retailers always want the A's, but we had some good occupancy gains in activity in the B's, don’t you think Randy?

Randy Brant

Absolutely, the A's and B's have been very, very strong. Fortunately we have only got 4%, 5% may be of our EBITDA comes from C's.

Operator

We will move on to Tayo Okusanya with Jefferies & Company.

Tayo Okusanya - Jefferies & Company

Can’t wait to see it on the fifth we will definitely be there. In regards to the quarter, wonderful but little bit more on the cost side. And just operating expenses, G&A come in meaningfully since first quarter. I’m just curious in regards to the back half of 2010 how sustainable that will be especially on the G&A side?

Tom O’Hern

The question was on G&A was higher in the quarter and is it going to be higher going forward.

Tayo Okusanya - Jefferies & Company

G&A was lower in the quarter. And operating expenses too were much lower than I was expecting, you still seem to be doing a very good job of cost containment.

Tom O’Hern

In the G&A you kind to have to look at the full year together, because some of that is timing difference on certain re G&A costs like audit fees, annual report, production of things like that but year-to-date we are at about $11 million that compares to $10 million through last year, and I’d say on an annual basis quarter-by-quarter we are going to run between $5 million and $6 million a quarter on average. And that’s probably a good run rate. One of the reasons you see a drop in operating expenses, part of its cost containment but part of it is also is that we had a total of four major assets that moved from being wholly owned last year to being joint ventures. So they no longer shop on a shopping center operating expense line, they are included in equity and income of unconsolidated joint ventures.

Operator

And next you will hear from Jay Habermann with Goldman Sachs.

Jay Habermann - Goldman Sachs

Art could you touch on asset sales and what you are thinking about? I know in the last few calls you've talked about your top 50 assets and 80% of NOI, but are you thinking about, with all the capital on the side lines perhaps selling some of those lower tier assets and becoming a bit more self funding so using those proceeds to fund future re development or even pay down some of the converts coming to?

Art Coppola

I think have been consistent in our projections of what we would like to achieve. We are in a rare position with in access of 80% now, as we bring Santa Monica Place online, clean and clear, especially that adds another couple of points of our income coming from A assets. And we want to get that to over 90% of our income coming from A assets and that’s going to come from a combination of manufacturing the income, either through releasing spreads, occupancy gains, expansions redevelopment, this also going to come from eliminations and dispositions.

Valley View unfortunately was our first situation where we have had to take an asset and give it back to it's CMBS lender. But, it is the equivalent of selling an asset that is in a serious decline at a four cap rate. So, from an NAV view point it's pretty attractive.

In late 2006 debt markets drive buyers of Cs and Bs. If buyers can borrow lots of money at low interest rates and leverage up with less debt, then your market for Bs and Cs gets much deeper.

Now, so that's one thing that might occur. And that’s what we had in the end of '06. We took advantage of it, and we sold I think $600 million of Bs and Cs, and really as they've turned, out mostly Cs.

Would I do that again? Would I do it today? Absolutely, and to some degree I think some of the larger institutional investors are going to find themselves realizing that there just a very few As available and they are going to be willing to invest in the Bs.

Never really seen it happened yet per second, but if it does happen, are we going to be willing to participate in that, even though we are going to suffer short-term earnings dilution? I mean if you are selling an asset at $11 million ten multiple even B or C and your company trading at a higher multiple it's going to be short-term diluted. But it’s the right thing to do for an NAV viewpoint. And that’s what we do is create value.

So, yes we would love to do it. I do believe that the market is going to evolve through that, and if it does we will not hesitate.

J. Haberman - Goldman Sachs & Co.

And I guess just on Santa Monica Place with the plans to payoff the existing mortgage, do you plan on eventually putting on I guess debt on that asset and with that potentially the source for a joint venture?

Art Coppola

Neither one, no debt no partner anytime soon, because this is an asset you don’t finance and you don’t sell a piece of an asset until it's relatively stabilized. We are only scratching the surface at Santa Monica Place. There is so much growth to come in terms of the some of the things that I’ve mentioned, but also like I said when you had a great asset, you actually have turnover, because you get people they started to paying high rents $150 a foot, and they are only doing $600 a foot which is pretty good in most places. They are not making any money.

And then you got 30% to 40% of your tenants doing let's say $2000 a foot, and you got a line up of people that know they could $2000 a foot want to take that place from the guys that are doing $500 or $600 a foot. So there is way too much growth at Santa Monica Place to come with the opening of Nordstrom markets 27, with the opening of the market place November 15, we've got 50,000 pieces we've held in reserve with the rollovers and the business development sponsorship income, way too much upside in the next couple of years to even think about financing it in anyway today.

Might that change? Sure, would every lender in the world love to have that loan? Yes. Would every partner in the world love to own a piece of that center? Yes. Because you don’t do that until you've got a little more stabilized, and I mean that from a growth view point not from a downside view.

J. Haberman - Goldman Sachs & Co.

And then lastly for Tom, just on the floating rate debt, that matures over the next year or so. Is your anticipation to turn most of that out? And just give us a sense of where you see floating rate as a percentage of total debt moving in the near term?

Tom O'Hern

Well, we’ve historically seen that between 15% and 20% in our portfolio. Obviously, that’s stuffed the future of pre paid and some of the fixed rates that have penalties involved. I can see overtime that pretty much settling out at 15% to 20%.

Operator

And from JPMorgan, Michael Mueller.

Michael Mueller - JPMorgan

I know you think there is a lot more growth that come from Santa Monica down the road, but before we can get the initial underwriting performance you talked about, I think penciled out at about a 9%, 9.5% return, when do you hit that stabilized run rate? Is it the first part of 2011? Is it by year end ’10?

Art Coppola

I would say it's probably the end of the first quarter of ’11 my guess. And by the way I’ve noticed lately that some people are including capitalized interest in their return on costs and some people are not. We include capitalized interest. If you took it out, then that return is more like 10%, but in any event, given that we are going to be so patiently, you heard me say that we are 92% leased, and then 97% committed.

And you heard me say earlier, anybody that has a lease out for signature but hasn’t signed it, if its not signed by the end of this week that lease is going to get retracted. And we are going to be so patient, like I said, market rents in some parts of the center have just doubled, as far as I’m concerned. And stabilization I don’t know, but its clearly going to hit that number by the end of the first quarter of next year, but that again is really only scratching the surface, there's so much yet to come.

Michael Mueller - JPMorgan

Got it okay, Tom

Art Coppola

And this is the one center; excuse me, where you are actually going to have percentage rents that would never end our numbers, because we just don’t project percentage rents. But these kinds of volumes you actually are going to see percentage rents, and they are going to be really meaningful.

Michael Mueller - JPMorgan

Okay, Tom going back to the leased term, how much was embedded guidance in your 260-280?

Tom O'Hern

We used historical average or less four years of $16 million.

Michael Mueller - JPMorgan

Okay.

Tom O'Hern

And again just for reference we had $22 million last year.

Michael Mueller - JPMorgan

And then last question just going back to the topic of acquisitions, and I know it seems like the focus is more on the redevelopments at this point, just think for we had gone back to the last first quarter conference call, commentary around there, it seemed to be a little more bullish about acquisitions whether it was buying out partner interest or just something that may popup from pure third parties, just curious as to what would cause the thinking to at least from where we are sitting seemingly change a little bit over the past three or four months to the point where, it seems like that's on the backburner?

Art Coppola

Well two things, we had a number of partners that were interested in monetizing their interest towards the middle part of last year to the end of last year, and even into the first quarter of this year. And they have observed two things happen.

One, the retail marketplace sales have improved. People’s view on retail have improved. The scarcity value of regional malls has come back because people realize that general growth is not going to be liquidated and broken up into pieces. And going back to 18 months ago, there was a whole camp of investors out there that were of the belief that we were going to have 200 centers hit the market all of once, and it was going to flood the marketplace and raise cap rates and lower values. That didn’t happen.

The other thing that didn’t happen is that the company remained independent. Had, a certain company that was trying to buy that company, bought that company, undoubtedly they probably would have ended up maybe selling off some assets and we could have maybe been somebody that they might have wanted to have talked to, as part of maybe meeting NOI trust issues, who knows.

So, each of those things that happened, and I would also say that I guess the main thing is that the people that we are thinking about maybe selling have realized that what they are sitting on is in their view that if they come to the belief that it’s more valuable than what they thought it was. It is just, at this point I just, I have to be very agnostic and I would rather surprise you on the upside. But I probably shouldn’t minimize the fact that I think a lot of people believed there more was than a 50% probability that Simon Inn was going to be successful and (inaudible) and I think a lot people believe that if we bought them that the lot of assets would have to be spread off to satisfy certain anti-trust issues and I think we believe that maybe we would have been buyer of some of those assets. And that wasn’t a small water number.

Michael Mueller - JPMorgan

Okay. And actually last question Tom, what is the normal working cash balance where you would see yourself just carrying because you have about $600 million on hand right now?

Tom O’Hern

Yeah, normally we’d probably have in $50 million to $70 million on the consolidated balance sheet and then a $50 million to $60 million on the JV’s.

Operator

And Vincent Chao from Deutsche Bank at the next question.

Vincent Chao - Deutsche Bank

Hi everyone, just a couple of clean-up questions, just I’m thinking about the line of credit is now coming due in April of ’11, what are you going to think in terms of size based on what your seeing as opportunities today and given the fact that you have a fair amount of cash already on the balance sheet?

Tom O’Hern

Those are conversations we are going to have in the coming weeks with our bank group. The capacity now is still available at $1.5 billion, so we could see us downsizing and obviously we got cash on the balance sheet today. So if we were to make the decision today I would have to say it would be a billion possibly last, that we’ll see, we don’t need to make that decision right away and we have got a great bank group and a lot of support from them and they are eager to recast and move forward and so that’s the conversation we’re going to have over the next three to four months. We will give you a better guidance on the next call.

Vincent Chao - Deutsche Bank

And then just one value center until that gets transferred. Are you guys subject to a higher rate in interim period?

Tom O’Hern

No there is no…

Vincent Chao - Deutsche Bank

No default rate on that?

Tom O’Hern

Not at this time.

Vincent Chao - Deutsche Bank

Okay, and just one last question, just in terms of overall it sounds like tenant conversations are going pretty well, but just as you think about sort of the recent Microsoft Office and some of the regional sales have been a little bit lighter more recently, has that changed the conversation at all may be not necessary top 20 or so centers, but just a you know as look at the overall portfolio, has there anything that’s happened in the last couple of weeks changed?

Tom O’Hern

No, first of all July sales, we’re have to (inaudible) especially with some of the luxury guys need them to double-digit and our senses are pretty good but tenants are not making decisions based upon a weekend of sales, they are making $1 million decisions when they take the space and with centers like we have, they know that when a space opens up it’s the generational opportunity, so those sales from the last month don’t mean anything. Look, the fact that we were able to lease Santa Monica place in the worst possible leasing environment that I can ever remember in terms of leasing to a sector that get harder than anybody which was luxurious in 2009 with testimony to the fact that tenants realize that these are scare commodities and they don’t let one month, they don’t let one year sale effective thinking especially because they are making money, sales have never been more irrelevant than they are today.

Vincent Chao - Deutsche Bank

I just actually one last question, just on the Santa Monica what are the remaining capital needs you guys have there, if any?

Tom O’Hern

What are the what?

Vincent Chao - Deutsche Bank

What are the capital needs you have on Santa Monica at this point?

Art Coppola

Well, our needs, we just opportunities to be identified to be identified and as we identify them like that 50,000 piece that we are holding back. We go and do it in terms of cash that finished Tom that you had already given that number up.

Tom O’Hern

Yeah, at the end of June it was $70 million but a lot of that will have been spent in July and August, so my guess at this point is once we rolled all those construction costs through, there’s probably 25 remaining for final build outs and some spaces and things like that.

Art Coppola

And then the real question is what do we do with the 50,000 square feet of space sitting on the dinning deck which is the most desirable level for people to be on because of the entertainment value. We are sitting on 50,000 feet up there. We are going to decide, that I’m sure we are going to get interest from folks that we had never even dreamed of before.

Operator

And we will take your question from David Wigginton with Macquarie.

David Wigginton - Macquarie

Just (inaudible) a lot I’d say about redevelopment, just wondering if you can maybe give us an update on Northgate and the Oaks with respect to how much and left on those and maybe when you have approximate completion date and what the estimate yields are?

Art Coppola

Well, Northgate I believe that when we started out on that construction, we said that we should see a 9% return on the incremental money that was being spent there. I mean and we are on target with that and we are still opening up kind of and ran into Northgate or are they all so we have to how open are we virtually they are all open. So we are well over 90% open there. As of today we are pretty much opened and at the old adding a restaurant or two there. Does that answer your question?

David Wigginton - Macquarie

Yes, how much of those are in there the second quarter numbers at this point and how much are we de-factoring in to the remainder of the year?

Art Coppola

The Oaks was pretty much what would have been in a second quarter numbers, but Northgate there were still several tenants opening up in the middle of the year and, Tom maybe you can give some color on that, but my guess is that was probably $2 million or $3 million of income that was not in place the first six months that will be in place the second six months down the…

Tom O’Hern

That’s about right Art. We’ll probably see pick up of about $2 million to $3 million versus the first half of the year for Northgate?

David Wigginton - Macquarie

Is that an annual number or is that just the actual number that's going to be coming in the second half of the year?

Tom O’Hern

Yeah, actual amount.

David Wigginton - Macquarie

And then with respect to your management business the operating expenses, I reckon it’s a lumpy number and it fluctuates, but I mean is there a way we should be thinking about that mall not going forward?

Tom O’Hern

In terms of the shopping center expenses?

David Wigginton - Macquarie

No, your actual management business, the operating expenses.

Tom O’Hern

The reason the management business looks different than last year on the revenue side, expense side is because we have got four new joint ventures for ultimate the assets that we had 100% under the past we are not impacting on management company revenues into there they are. So, if you check the second quarter and us that that as a run rate that would be clearly indicative of what you'll see going forward.

David Wigginton - Macquarie

And then just my last question with respect to the same-store and wide growth, I recognize the majority of it was a result of occupancy increases, by what percentage of it can be attributed to these favorable bad debts comparison.

Tom O’Hern

You can tell by going back to one of the schedules on the press release this morning. We reconcile to same center growth and the same center NOI for the quarter was a $146 million and the decrease in bad debt expense for the quarter was approximately $2 million. So, $2 million on a base of $146 million is about 1.3%

Operator

And next from Sandler O'Neill, Alexander Goldfarb.

Alexander Goldfarb - Sandler O'Neill

As photos in the LA times are impressive with the crowd. Valley View in your numbers, is there anything in there for either impairment or debt gain on that asset either for the year and then also is there anything in your guidance for that?

Tom O’Hern

[Notable]

Alexander Goldfarb - Sandler O'Neill

Okay. And then as far as Art on the redevelopment, that’s pretty consistent. What are your thoughts on the outlet side, obviously (inaudible) spoke about that on their call. They are really trying to get some bogs down to launching theirs. What do you think about outlet versus your talents in redevelopment? Do you think there’s a chance to do both or you think just the opportunity set on redevelopment is much more that there could possibly be on the outlet side

Art Coppola

Maybe to a shortfall but I’ve chosen to guide this company with a very tight focus and so we've chosen to stay in the continental Unites States, we have chosen to do what we do best and we found no limit to opportunities to deploy our talent. We don’t want to be the biggest; we just want to be the best. And you know to jump into the outlet business could be interesting, may be I could imagine why retailers would love to see the more players enter that business. You know there is one location that we own, where I can see us doing something that would be in that arena but I don’t see us jumping into that system now.

Alexander Goldfarb - Sandler O'Neill

Okay. And then as far as all the people who are coming to you to have a dual redevelopment in their area, I am assuming that for the most part you would look to own assets or have an interest in them, rather then just do it on a fee basis, is that correct?

Art Coppola

Yes, the only times we do third party fee business is that we believe that we are going to (inaudible) in-depth with an ownership position period and over the one, there’s a couple but they have just reached there, they are very fresh conversations. We would definitely be making, we would have either a venture investment or we would essentially have a 100% ownership. But in the early days but, and that’s not in our pipeline but its fresh conversation as of Saturday morning.

Alexander Goldfarb - Sandler O'Neill

Okay and just on a final question, on the disclosure front when do you think that we’ll see their the redevelopment table come back, and then also perhaps it will be helpful in the opening on the press release just to get the overall portfolio releasing spreads, that would be useful.

Tom O'Hern

Yes, Alexander the stat we did give was the overall stat.

Alexander Goldfarb - Sandler O'Neill

Right now, I am saying that having that in the press release would be helpful.

Tom O'Hern

It was in the comments section for the press release, the 4.6% I believe. That’s combined number and then in terms of the pipeline page, I guess maybe we have a volume that we warrant that we'd re-consider it.

Operator

And Ben Yang from Keefe, Bruyette & Woods.

Ben Yang - Keefe, Bruyette & Woods

I recall you downscale the luxury focus of Santa Monica from what you had originally planned. And now that the center appears to a big success, is there an opportunity for you get some space back in a few years. And I guess more than the natural turnover that you had previously mentioned? Basically I am curious of any early tenants did any type of short term deals that give you some type of kick out options?

Art Coppola

Well we have kick outs on a number of leases from a performance view point in a center like that. We clearly were forced than we’ve set up before to cut back on the square footage that we devoted to luxury because of the luxury environment in early 2009 when we were leasing up the center. On the other hand I also have to say though, that we do live in a community where one of the early questions that people had is, am I going to able to afford shop there to. So finding the right mix of price points both for the tourist and the local population as well as the wealthy population is a fine balance. And it’s like a restaurant, it takes a while to get to your menu perfect, even after you are open so the good news is that the quality problem we have all kinds of luxury retailers that said no, either because they just didn’t have the finances to do it or they just were skeptical, are beating our doors down now and we are merchants of every category jumping all over. So over the weekend and this morning all over our leasing people saying, I can’t believe I didn’t do this. Is there anyway I can do that?

Look we are in a position of total strength, we are on (inaudible) and the good news for us is that, vendors like vendors, and the lot of the retailers that are there and now want to talk to us about certain other locations where they can do comparable stores with us and we think this will spread throughout, it will become infectious throughout our portfolio. So we're going to find the right mix and we got a great mix today when we blocked this center, you will see it, you will feel it.

We probably might rule that the Chairman of Bloomingdales called me right after his opening he said, there is one thing I wish would have done is put more kids into my store because I forgot how many mom and kids and strollers are here and we had more strollers and more moms and kids in that center over the weekend, it was just unbelievable and these are people that you don’t see on the Third Street Promenade because on the promenade they didn’t necessarily feel safe.

That’s the advantage that they are having a private property owner in the common area of Santa Monica Place that we have is, that our security is very high and anyway, the right mix is something we'll fine soon overtime. The good news is we have a long list of retailers, restaurants and users from every category that are wanting to get into that center today.

Ben Yang - Keefe, Bruyette & Woods

And then on the sales potential for Santa Monica you mentioned the 1,000 per square foot, I am just curious what impact that food and restaurants have on that number given that you have more space allocated to full food than a typical mall

Art Coppola

Average the restaurants will do at least that number, the third level will do at least that number and maybe more.

Ben Yang - Keefe, Bruyette & Woods

So it’s not food that necessarily bumping up or boosting that number that you are expecting, it's just the overall mix that you had mentioned earlier?

Art Coppola

It’s definitely not food and by the way we have no Apple Stores in Santa Monica.

Ben Yang - Keefe, Bruyette & Woods

And congratulations by the way. Are you still living working in that area and think that’s great add to the community (inaudible).

Art Coppola

Have you seen it?

Ben Yang - Keefe, Bruyette & Woods

I have not yet, but I’ll be there in October.

Art Coppola

Wait till you see, you're not going to believe this.

Operator

And we’ll take our final question from Cedric Lachance with Green Street Advisors.

Cedric Lachance - Green Street Advisors

Just going back to the management company revenue and expense line items. When I look at the three months results, the management company revenues grew by about $2.8 million, the expenses grew about by $5.6 million. So I am just curious if you whether or not the addition of for joint ventures there is something that’s unprofitable and asset management perspective or are there other expenses that are also included in management company operating expense line item?

Tom O'Hern

Yes, there is also expenses related due assets that we own 100%, so if you look back historically the expense have always been almost twice the revenues for the management company that’s because we don’t charge ourselves a fee on only on assets.

Cedric Lachance - Green Street Advisors

But if the difference is partially related to the joint venture, why would it grow at the same base here?

Tom O'Hern

Well, when you do a joint venture it's going to be more labor intensive than if you own at a 100%. It’s not exactly proportional so there are additional costs versus a year ago and to some extent there are some lumpy costs in there depending on what happened a year before, what happened this year, some of the straight line through the year, some of its seasonal and some of it just fluctuates quarter-to-quarter.

Cedric Lachance - Green Street Advisors

Okay, so you mentioned some of your expenses are related to 100% owned entities. What percentage of the expenses would be related to those entity or property?

Tom O'Hern

I don’t know at the top of my head, but if you're trying to see it and the management company’s breakeven, take the revenues the total revenue kind of 5%. Because that’s the kind of management fee you would charge, such as ticket consolidated revenues or at least minimum rent percentage rent recovery at 5% So if they charge themselves a 5% fee to manage those management company revenue would be higher by that amount and then you see it’s basically a breakeven business for us.

Operator

And gentlemen, I’ll turn the conference back over to you for any additional or closing comments.

Art Coppola

Thank you very much for joining us. We look forward to seeing you, you can join us on October 5, and again can’t wait for you to see our newest, latest and greatest creation. Thank you very much.

Operator

Ladies and gentlemen that does conclude today’s conference. We thank you for your participation.

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Source: Macerich Co Q2 2010 Earnings Call Transcript
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