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The Macerich Company (NYSE:MAC)

Q3 2010 Earnings Conference Call

November 4, 2010 1:30 PM ET

Executives

Jean Wood – VP, IR

Tom O’Hern – Senior EVP, CFO and Treasurer

Art Coppola – Chairman and CEO

Randy Brant – EVP, Real Estate

Analysts

Craig Smith – Bank of America/Merrill Lynch

Cedric Lachance – Green Street Advisors

Rich Moore – RBC Capital Markets

Manny (ph) – Citigroup

Michael Mueller – JPMorgan

Tayo Okusanya – Jefferies & Company

Ben Yang – Keefe, Bruyette & Woods

Alexander Goldfarb – Sandler O’Neill

Operator

Good afternoon ladies and gentlemen. Thank for standing by and welcome to Macerich Company Q3 2010 Earnings Conference Call. (Operator Instructions).

I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead ma’am.

Jean Wood

Hi, thank you everyone for joining us today on our Q3 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 filing. 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 certain non-GAAP financial measures as defined by the SEC’s regulation G. The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the press release and the supplemental 8-K filings for the quarter, which are posted in the investor’s section of the company’s website at www.macerich.com.

Joining us today are Art Coppola, CEO and Chairman of the Board of directors; Ed Coppola, President; Randy Brant, Executive Vice President Real Estate; and Tom O’Hern, Senior Executive Vice President and Chief Financial Officer.

With that I would like to turn the call over to Tom.

Tom O’Hern

Thanks Jean. Today we’re going to be discussing Q3 results, our recent capital activity and our outlook for the balance of the year.

During the quarter, operating metrics were strong, occupancy levels improved, retail sales increased and same-center NOI was positive for the third quarter in a row. The releasing spreads were also positive again this quarter.

We signed leases for about 305,000 square feet, that was 225 deals and we had a positive releasing spread of 15.7% on average. The occupancy level increased 160 basis points compared to a year ago. We’re at 92.6% at quarter end compared to 91% at the end of Q3 last year. The occupancy cost as a percentage of sales continue to trend down at 13.7% for the trailing 12 months ended September 30th. That compared to 14.2% at year-end.

FFO for the quarter came in at $.66; that was slightly ahead of consensus, which was $0.64. Part of the metrics impacting that FFO number was same-center NOI being up 2.6%. That positive comparison to last year was largely driven by occupancy gains, terms of lease termination revenue, that was down significantly; that was at $3.5 million for the quarter compared to $11 million during Q3 of last year. If you recall during Q3 of last year, we had some significant lease termination payments from Ruehl They closed five or six stores at some of our better malls and had a big termination payment.

The expense recovery rate including JVs was 93%, a significant improvement from a year ago when it was 90.4%. This improvement is due to having 70% of our leases now on fixed (inaudible) as well as some significant cost reduction measures we took in the end of 2009 that we’re getting the full year benefit for this year.

Looking at the balance sheet, we’ve continued to have a significant amount of financing activity. In September we closed on a new loan on Danbury fair. It was a $250 million dollar loan fixed at 5.5% for ten years. That paid off the old loan that had a coupon 7.51% and a principal amount of $160 million.

Earlier this week we closed on a $114 million dollar refinancing of Stonewood Center, that’s a joint venture property. The new rate was 4.6% for seven year financing and that paid off the old loan, which was $71 million at 7.41%.

And most recently we’ve agreed to a $232 million dollar loan on Freehold Raceway Mall. It’s a seven year fixed rate deal with a coupon of 4.15%. That compared to the old loan, which had an actual pay rate of 7% although the GAAP interest rate was lower than that at about 4.7%.

So you can see as we progressed from the end of Q2, the financing environment continued to improve both in terms of rate as well as capacity. Several of the financings we’ve done were on 2011 maturities. When you factor in the financings as well as excluding loans with extension, we have about $466 million of loans maturing in 2011. The average interest rate on the remaining 2011 fixed rate maturities is about 7% so we should see some significant interest savings there.

In addition we have a $400 million dollar swap that expires in April of 2011. Based on today’s (inaudible) rate, the expiration of that swap will effectively reduce the interest rate by 4.8% on $400 million of floating rate debt that that swap has been applied to. Just looking, not even at a full year savings, but just at the 2011 savings that will be almost $13 million in interest savings there.

So, again, between the refinancing, paying off some higher coupon debt and the swap (inaudible) we expect to see some significant interest rate savings next year.

We continue to de-leverage the balance sheet subsequent to the equity offering that we had in April. We’ve unencumbered several assets including in Q3 when we paid off a $50 million dollar loan on Panorama Mall and on October 1st when we paid of a $76 million dollar loan on Santa Monica Place, that at a 7.8% interest rate those two assets are now unencumbered. In addition, since April we’ve spent $76 million on the completion of Santa Monica Place.

At quarter end we have $486 million dollars of cash on the balance sheet. We plan to maintain our discipline and use that cash for capital projects for further de-leveraging or redevelopments that make sense.

Today our debt to market CAP net of cash is 45%. The average interest rate is 5.7% and the floating rate debt is approximately 9% of total market CAP.

In this morning’s press release we revised FFO guidance; we reduced our range to 260 to 270. The primary reason for the tightening of the top end of the range was as we look forward to the balance of the year, tenant health has improved significantly, there’s a significant demand for space and we see fewer requests for rent relief and early terminations. As a result we’re cutting our 2010 expectation for lease termination revenue. In the last four years we’ve averaged $17 million. We had a range of lease termination revenues in our guidance with a mid-point at around $17 million and we realized today, looking forward, that that is not going to be recognized this year. We currently have recognized about $6.6 million and we cut our expectation for the year to $7 million. So that’s the primary reason for the change in guidance.

And at this point I’d like to turn it over to Art.

Art Coppola

Thanks Tom. Along the lines of the operating metrics is the other thing that I’d like to point out is that sales are improving. Sales for the quarter were up a little over 5.8% and notably within the portfolio, the Arizona region in particular in Q3 was up roughly 7.3%, giving us year to date increase in sales in Arizona at 6%.

Northern California remains strong. The eastern region remains strong. The central region remains stable. In addition to that, Southern California began to break a trend and was up 6.3% for the quarter. So that’s all positive.

When we look at the operating metrics and the business and we look at the fact that sales are improving, leasing is definitely feeling better with more permanent deals and better spreads and good concepts and our retailers feeling good about their profit margin. And when you add to that all of the positive events that we have going on within the portfolio, and within our retailers, as we look forward to our development and our redevelopment pipeline, we’ve given particular thought to what all of this means to us in terms of the dollars that we would want to allocate to our development and our redevelopment pipeline.

And we talked about this anecdotally on the last call and we mentioned Tyson’s Corner and we mentioned Broadway Plaza and we mentioned the possibility of one or two deals in Phoenix. We mentioned several deals that were in process such as Danbury, Pacific View. But we didn’t really give you a specific dollar amount of what we thought that pipeline was going to be. And we said we were in the middle of thinking that through.

We’ve thought that through and we have very clear visibility that over the next five years we will profitably reinvest in redevelopments or developments within our portfolio between $750 million and $1 billion dollars. And that’s spread over roughly four or five relatively major projects. Tyson’s Corner is clearly the one that we have the most visibility into.

We talked about the dollar figures that are involved in that at the last call but we would have, as we see it now, roughly it’s a 550,000 foot office building and roughly a 500,000 square foot residential building. We have the opportunity to do a hotel, which we would do on a ground lease of some sort if and when we were to find the right operator. And obviously that business is picking up.

We’re feeling very good about the integration that this (inaudible) into Tyson’s Corner. The market feels like it’s improving significantly there. We’ve hired a broker, engaged architects and are talking to fee developers about handling the development of that. And that particular project we see just under $400 million of incremental development costs with returns on those incremental costs of roughly 9%.

If we look at the broader project and we were to include all of our sunk costs to date, which is roughly $20 million to $25 million, we also allocated a hypothetical land value to that and add in capitalized interest etcetera. The total project cost approximately $420 million and the overall returns on that total historical plus new cost is a little over 8%. The return on the new money alone is a little over 9% and recall that we own 50% of that asset.

Other big projects that we see happening over the next five years, and I would also say to you that on delivery, we really see this being delivered over the three to five year horizon. Tyson’s in particular seems to feel like it’s going to be at early 2014 delivery.

But another big activity that we see on that is that we do feel like there is going to be clear visibility for at least one development in the Scottsville-Phoenix Marketplace to be delivered in the next five years; give or take within that range. We said on the last call that we felt that we had two projects that would be delivered between four and seven years. So as we think about a time frame of three to five years, I’d say there’s relative certainty that there will be at least one there.

Looking at a couple of potential acquisition type joint venture activities where we would buy an existing asset and/or joint venture an existing asset with somebody else, a private owner. That could happen in the next five years. It could be major. And of course I mentioned a couple of other major projects that we’re looking at where we have anchor addition that should trigger some tenant recycling such as Broadway Plaza.

So we have very clear visibility that we’ll be profitably investing $750 million to $1 billion dollars over a handful of projects over the next three to five years. We’re very optimistic about other opportunities that we’re thinking about in terms of entitlement that we’re going to be working on that are not even in that pipeline of opportunity. And the returns that we feel we can generate on those projects will vary between roughly 8% to 10%. If you made me pick a number, it’s probably going to be in the 9% to 10% return on costs.

So with that we’d like to open up for questions and thank you for joining us today and we obviously look forward to seeing you in a couple weeks at Macerich.

So operator, if you could open up the questions, I’d appreciate it.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions.) And our first question comes from Craig Smith of Bank of America/Merrill Lynch.

Art Coppola

Good morning Craig.

Craig Smith – Bank of America/Merrill Lynch

Hey, good afternoon. Unfortunately you answered a lot of my questions at the end there. I guess in terms of this $750 million to $1 billion investment, would that be about three quarters redevelopment and one quarter ground up development?

Art Coppola

I would say that’s right. Although, you know, as we slide up the range, it could be more 50/50.

Craig Smith – Bank of America/Merrill Lynch

Okay. And would you be thinking of anything ground up outside of Phoenix?

Art Coppola

We’re looking at a couple of opportunities that we think might have some legs, but that’s not in our pipeline of thinking in terms of having clarity in the $750 million to $1 billion dollars. But there’s a couple of opportunities in some markets that we’re looking at; primarily western oriented as well as one on the eastern seaboard which is consistent with where our strengths are. So there’s a maybe there but it’s clearly not in our pipeline. But we’re always actively looking at everything.

Craig Smith – Bank of America/Merrill Lynch

Great. Well thanks a bit with the greater detail on the pipeline.

Art Coppola

Thanks Craig.

Operator

Our next question is from Cedric Lachance with Green Street Advisors.

Art Coppola

Good morning Cedric.

Cedric Lachance – Green Street Advisors

Morning. When we look at California and we look at what’s happening with the state budget, what’s happening in general with the economy in California and we think about the plans you may have for capital allocation over time. Where do you see the state going over the next few years and how does that influence where you’d rather invest your money?

Art Coppola

I have very positive views on the state of California. I think that if you take a look at the last 35 years that I’ve been doing business here, there’s absolutely no correlation between the budget of surplus or deficit of California and the profitability of our shopping malls. If anything, there’s actually a positive correlation between budget deficits and profitability for us because the worst shape that the state is in, the more approvals we get to do redevelopments of existing assets in communities that are otherwise difficult to do business in.

This is clearly the melting pot of the world; Los Angeles, that’s not going to change. That’s not a bad thing, that’s a good thing. Startup businesses, if you take a pulse of it and it doesn’t show up in the numbers yet, in the southern California region is definitely picking up. We have pockets that are still difficult if you look at Riverside County for example. And pieces of the Central Valley, there’s still issues out there. The Bay Area is on fire in terms of activity. If you take a look at what’s happening in Silicon Valley right now, it’s absolutely on fire.

I love this market, look, as Randy Newman says, “We love LA.” And we love the West Coast, we make a lot of money out here, we’re going to continue to make a lot of money out here. And, you know, as I see us allocating our capital I would not hesitate to devote 100% of our future capital in this state, it’s such a diverse state and it’s such a large state given that it’s the eighth largest economy in the world, you know.

I just participated with Mike Milken at the State of California State of the State conference ten days ago and spent the day with a lot of CEOs in California. And it doesn’t show up in the numbers yet, but this state is going to rebound again, it does. Look, it’s one of the entrepreneurial capitals of the universe, of the world, forget universe, of the world. And you know, I feel very comfortable here, I’ve been up and down and all around here for 35 years and it’s a great state to do business in.

And by the way, it’s 90 degrees today.

Cedric Lachance – Green Street Advisors

I’m looking at the ocean from my window so I’m…

Art Coppola

So what’s to argue with?

Cedric Lachance – Green Street Advisors

From that perspective there’s not much to argue. It’s very interesting; your comments are helpful. In terms of balance, you’re just thinking about the unsecured debt maturity in 2012, what’s your appetite for unsecured debt financing versus secured debt and where do you think you might be getting the best pricing over time if you chose one avenue over the other?

Art Coppola

Well I mean part of what we will do over the next six months is recast our line of credit so there will be a certain amount of unsecured capacity there in related pricing which continues to improve month by month.

In terms of the converts that come up in 2012, we’ve got an open mind as to what we may do there. I know the pricing on converts has gotten down to record levels in the recent weeks, so it’s obviously something that we would keep an eye on but we haven’t made any decisions at this point yet. All I can tell you is there are some very attractive alternatives out there and they seem to be getting better with each quarter.

Cedric Lachance – Green Street Advisors

In terms of financing on the secured front maturities you have next year, any indication on pricing at this point. How spreads are moving in the last few weeks?

Art Coppola

Well it’s gotten to be a real borrowers market, obviously if you look at the progression through the quarter for us, the last deal that we announced the fact that we got a 4.15% rate, that was a function of there being a flaw in the deal at 4.15% the spread was- it was about a 50% LTV deal. The spread was 185 over the treasuries, which would have yielded a natural rate of about 3.8. So it’s an extremely attractive environment now for doing long term fixed rate deals and you know we’re taking advantage of it wherever we can.

Cedric Lachance – Green Street Advisors

Okay, thank you.

Operator

Next from RBC Capital Markets we have Rich Moore.

Art Coppola

Good morning Rich.

Rich Moore – RBC Capital Markets

Hello guys. Good morning. I just wanted to tell you by the way we’re up to almost 50 degrees in Cleveland so it’s looking pretty good here too. I want to thank you too, by the way, for putting the balance sheet in the supplemental, that’s very helpful.

The first question I have for you guys, was there anything special in operating expenses? Was there bad debt or something unique in the quarter?

Art Coppola

No.

Rich Moore – RBC Capital Markets

Didn’t it seem to go higher, Tom, I guess than I was used to?

Tom O’Hern

Well Rich if you’re looking at sequentially, you have to keep in mind that utilities always go up in Q3 because we get hit with the summer billing rates on electric. So that was the biggest move. Utilities were up significantly compared to Q2. Bad debt expense is actually down, Rich, compared to a year ago; down about $700,000 on the bad debt expense. But the biggest upward move at least sequentially versus Q2 was utilities.

Rich Moore – RBC Capital Markets

Okay. So do we…

Tom O’Hern

And that’s normal.

Rich Moore – RBC Capital Markets

So for Q4, Tom, we kind of go back to more of a Q2 pen level, does that sound right?

Tom O’Hern

That’s about right.

Rich Moore – RBC Capital Markets

Okay, good, thanks. And then in this environment, are you guys, and thank you for the color on the redevelopments as well, but are you stepping up any thoughts on disposing of assets? I mean does that make any more sense than it did, say six months ago?

Art Coppola

Same as it has been for some time. We, you know, we are very interested in pruning the bottom section of our portfolio. It’s not easy to find buyers for that grouping. If it happens, great. It’s not in any of our guidance numbers but it certainly fits within our long-term goal of growing the percentage of income that we have from A assets and reducing the percentage of income that we have from C assets.

So we’re always looking at opportunities to do that but when you get to the lower core tile of your assets, it’s not the type of thing that you just market to market and put it on the market and send them out the door. You really need to find the right fit with the right buyer, but if we look at history, generally the thing that has driven good pricing on B and C assets is cheap debt and high leverage. And we’re moving in that direction. So, you know, it may happen.

Rich Moore – RBC Capital Markets

Okay, very good. Thanks guys.

Operator

Our next question comes from Quentin Velleley with Citi.

Art Coppola

Good morning Quentin.

Manny – Citigroup

Hey guys, it’s Manny [ph] here with Quentin. Just look at your leasing, what proportion of the leasing that you guys did was short term in nature?

Art Coppola

It’s consistent with what it has been historically. There really hasn’t been any change in terms of the percentages.

Manny – Citigroup

Could you just remind us what that is.

Tom O’Hern

Yeah, looking at the quarter it’s slightly better than it was a year ago. I think 30% of the deals are three years or less and the balance is over three years. And if you go back into the middle of 2000- early 2009, we were trending closer to 40% in that range.

Manny – Citigroup

Great. And then looking at your occupancy, I guess you guys are about 100 basis points off of your peak and a two part question; do you think it’s achievable kind of to reach that peak and when. And was there some kind of ceiling almost that you thought that you hit then that you can exceed that and does that change now?

Tom O’Hern

Yeah, if you go- there were a couple periods in time where we were almost at 94% occupancy, which in our opinion is full occupancy. That was the end of 2002 and the end of 2007. But if you look over time, we normally operated in a fairly tight occupancy range on the lowest side 91% and the high side 94%. And you know I’ll defer to Randy in terms of leasing demand and the quality of leasing we see today and how soon we may get up towards that 94%.

Randy Brant

Well leasing continues to get better every month, every quarter, and the volume of deals has increased dramatically. Year to date we’ve done 857 deals totaling 1.3 million square feet so I would think that we could hit 94% in probably 18 months or so.

Manny – Citigroup

And then while I have you on the line, Randy, how much occupancy would temporary tenants add?

Art Coppola

Well within those numbers, just because temporary tenants is really a matter of definition, we’re at pretty much the historical average which is around 500 basis points of a total occupancy is in the shorter term types of leases of roughly a year or so. So roughly 5% of the 92% or so is in that category. Is that about right Tom?

Tom O’Hern

That’s right. And just to clarify, if the term is less than six months, we don’t count it in occupancy anywhere. It’s not considered occupied space. Greater than, as Art said, greater than six months, you know, up to a year is less than 500 basis points typically. It’s in the 4% to 5% range.

Art Coppola

But more importantly, you know, in terms of opportunity and this is something that we’re constantly challenging ourselves and our leasing people on is that let’s not get comfortable with 93% occupancy if we have 5% of the space not paying us full fair market rent. And that is what tends to happen with those shorter-term deals as you’re only committing to a year or two years, you don’t tend to get the bigger rents. And so that is a big opportunity is that even as we get to 93% or 94% which historically is almost deemed to be full occupancy in a regional mall in the same way that 4% unemployment or 96% employment is full employment in the overall economy. The opportunity there is not to go from 94% occupancy to 100%, but it’s to take that 500 basis points, give or take income that you’ve got in there that’s not at 45 a foot of triple net revs and convert those guys that are at less than those types of rent to the higher rents. And that’s a big opportunity if the economy strengthens, as property strengthens and as retailers strengthen. It’s kind of the hidden little secret under the numbers.

Manny – Citigroup

Great. Thank you guys.

Art Coppola

Actually it’s a kernel of opportunity.

Operator

(Operator Instructions) And our next question comes from JP Morgan, Michael Mueller.

Michael Mueller – JPMorgan

Yeah, hi, good afternoon. First of all, on a leasing spreads 15.7% I just want to confirm that that’s a Q3 number and not a full year number and that’s a cash number and not a GAAP number.

Tom O’Hern

Mike, it is a cash number and as we’ve cautioned before not to use one quarter’s worth of statistics on that, you really need a full year sample size.

Michael Mueller – JPMorgan

Sure.

Tom O’Hern

For the full year, you know, it was 4.5% trailing 12 months. So I think we disclosed both but the 15.7% was just one quarter.

Michael Mueller – JPMorgan

Okay, and what’s the expectation as you start to think about 2011 and look at the lease roll there?

Tom O’Hern

Well I mean obviously as Randy mentioned, the leasing demand and activity is improving. It’s pretty hard to predict what spreads are going to be, but one thing we do know is occupancy cost is dropping. Sales are up, which is part of that equation, obviously. Tenant demand is definitely on the rise and deal volume is up and the quality of deals are up so

Art Coppola

We would expect to see positive releasing spreads. I don’t think we’re ready to predict double digits yet, but on an annual basis, but it’s certainly moving in that direction.

Art Coppola

One thing that I would point out along those lines Tom, is that you may remember that when we gave our guidance in February of this year, we predicted- we said, “Look, for the year we’re predicting flat leasing spreads,” and in fact our leasing spreads have turned positive. Now that doesn’t show up in our numbers yet but those will roll into next year. So that’s positive.

Michael Mueller – JPMorgan

Okay, and just thinking about the cash for a second, the cash balance of about $500 million dollars, just giving your commentary on the call it sounds like you consider refinancing to convert just giving how the interest rate environment has been. The development spend looks like it ratchets up, not necessarily maybe in 2011 but a couple of years out it really starts to pick up. So how do you view looking at the cash balance over the next year or two? Do you plan on- are we just going to see you run with higher cash levels up in this range? Is there, outside of acquisitions, some other use? Because it doesn’t necessarily seem like you would go and pay down mortgages if you’re getting pretty good rates on them today.

Tom O’Hern

Well it depends. You can look at the ‘11 maturity schedule for example, Mike, and there’s two loans in particular which jump out, (Capitalo) which has a coupon of 7.13% and (RamRock) which has a coupon of 7.45% and together that’s $100 million dollars, I mean we may decide at a point in time to un-encumber those and you’ve always got the capacity to go back and put debt on those in the future, but to put debt money to work at roughly 7% is certainly a possibility that we’d keep open next year.

Art Coppola

And I’d like to expand that comment because this is a question that has legitimately been asked by several people about what are you going to do with the cash. Let’s do recall that it’s really only been six months since we did our equity rate and we have said consistently that we view this cash as a very precious commodity. We’ve taken roughly $200 million of our cash balances over the last six months and either retired existing mortgages, created unencumbered assets that are really dry powder for the future, which is a great cash management technique. Or we plowed that money into the finalization of the development of Santa Monica Place.

I would say that over the next six months, the majority of that cash will get deployed through either some redevelopment activity or paying off debt or we may get surprised and have some opportunities to invest into something externally even though on the last call I said there’s nothing on the acquisition horizon. And I’ll reiterate today that there’s nothing on the acquisition horizon, but we may get pleasantly surprised over the next six months. If I had to predict what will happen over the next six months, the vast majority of that cash will get deployed even if it’s just retiring some existing debt which creates dry powder and is really a cash management technique if you think about it.

So we’re going to weight it very carefully, you know, it obviously, there’s huge opportunities to, as we put that money to work even if it’s just paying off debt, to create a spread investment over our most nominal to zero cash return that you get on having that in the bank. But that’s long-term equity opportunity venture capital that we see and it requires long-term equity types of returns for us to pull the trigger on it. We may use some of that money to, again, pay down debt as a cash management technique and have dry powder for the future.

Hopefully that answers yours as well as some others questions.

Michael Mueller – JPMorgan

Yeah it does. Got it. And then one last question in case I missed it. Did you quantify that Shadow redevelopment pipeline outside of the $750 million to $1 billion dollar reference. You’re looking at a number of other projects did you put a number to that?

Art Coppola

That’s imbedded within that range.

Michael Mueller – JPMorgan

Okay, okay.

Art Coppola

There’s a couple of opportunities we’re looking at that are external, that if I had to bet, one of them would probably happen with the next five years. Maybe more.

Tom O’Hern

The one thing that I have that frankly is pleasant news but, you know, look, the company hasn’t changed but as we all know development but more importantly redevelopment is in our DNA and Santa Monica Place in particular has caught the attention of so many cities and even other owners of other shopping centers across the United States in terms of what you can do if you are courageous and long-visioned in your thinking on great real estate. That if you’re willing to take the bold and the tough step in that case closing down a very successful regional mall. The value that can be created can be quite substantial. And we have other cities around the United States as well as within our region that are approaching us saying, “Look, we’d love to have you do Santa Monica Place in our city.”

Now obviously we can’t do that in terms of replicating the tenant mix at Santa Monica Place but what we can do is we can take the fundamental success from Santa Monica Place is that we delivered a project that meets the demographic exactly. And so all we have to do is to take that knowledge in that business plant of understanding the trade area and then meeting the trade area with whatever tenant mix is appropriate for that area. And it will open up opportunities across the country and I do actually think that it will be a platform and a pivot point in terms of future redevelopment opportunities that could be obtained for the company externally.

Michael Mueller – JPMorgan

Okay, great. Thank you.

Operator

Next we have Tayo Okusanya with Jefferies & Company.

Tayo Okusanya – Jefferies & Company

Hi, yes, good afternoon. Just a quick referral back to the quarter leasing spreads of the 15.7%. Is there any way we could get a break out of what piece of that relates to all the JV assets versus the piece (inaudible) consolidated assets?

Art Coppola

Tayo, I think that is in the supplement. I think we break out the split. The 15.7 is a blended number but the split is in there, I believe on page eight of the supplement.

Tayo Okusanya – Jefferies & Company

I must have missed that. Okay. Okay, thank you very much.

Art Coppola

Thank you.

Operator

Next we have Ben Yang with Keefe, Bruyette & Woods.

Ben Yang – Keefe, Bruyette & Woods

Hi good morning guys. I have a question on Tyson’s Corner. I recall that when you originally provided details on your plans there several years ago that it was a four phase build out that was going to take place over say a 10 to 15 year time horizon. Based on some of the details that you’ve provided earlier, is that $400 million specifically for phase one of the project?

Art Coppola

It is only phase one. Exactly phase one. Yes.

Ben Yang – Keefe, Bruyette & Woods

And then have your plans for the latter stages changed at all in terms of scope or timing? Do you think it’s going to maybe now be a 20-year expansion for that center?

Art Coppola

You know, it’s not anywhere in our pipeline of opportunity. A lot of things would have to happen for phases two, three and four to trigger. Let’s see how phase one goes. We’re really feeling very confident about the returns we can deliver. We’re feeling very confident about the symbiosis of the introduction of the office in the residential and maybe the hotel to the retail component. But we’re going to have to see how that plays out before we consider going forward. Phase one could be the only phase that we do.

On the other hand it could be such a roaring success and as time progresses and the metro rail is there and we have the reality of rail and the transportation hub and the hot lanes on the beltway and everything else, that we do go ahead and accelerate phases two, three and four. It’s a great entitlement to be sitting on but the only thing anybody should put into their thinking cap is phase one. The phase one is real and we are actually breaking ground on it next year in terms of spending multi million dollars in terms of ring road realignments and everything else to prepare the building pad for the complete build out which would start work late next year, early 2004.

Ben Yang – Keefe, Bruyette & Woods

And what is the status of that metro rail extension at Tyson’s Corner?

Art Coppola

It’s presumably going to land in the neighborhood late 2013 to be completed or a little bit earlier than that and they’ll do tests for about a year. But the full usage and such, of I think Q3 or Q4 of 2013 if they proceed on the plan that they are talking about which is outside of our control.

Ben Yang – Keefe, Bruyette & Woods

Okay, and just a final question regarding the $10 million less the lease termination fees for the year. Can you just maybe give us some detail on which retailers are- or maybe even which segments of retail are doing better than you had previously expected?

Art Coppola

The house wares is doing great. Most of the junior fashions are performing extremely well. Luxury is fantastic, both the inline and the department stores Nordstrom, which I consider semi luxury and Neiman are all performing very well.

Ben Yang – Keefe, Bruyette & Woods

Do you have any idea what next year is going to look like? Is it going to kind of pick back up to the historical level that you mentioned earlier?

Art Coppola

On terminations?

Ben Yang – Keefe, Bruyette & Woods

Yeah, on the lease terminations.

Tom O’Hern

That’s always a big guess. Over the last four years excluding 2010, we’ve averaged $17 million. The lowest has been $12.4 million; the highest has been $22 million. It’s going into a year you have some visibility but it’s very difficult to predict. That’s part of the reason we have a wide guidance range is because that’s an uncertain category, probably the most uncertain we have as we forecast.

If I had to take a guess, I’d look at the average and say that over the last five years at the turn of 2010 we’re averaging $14 million. So history is probably the best thing to point to. But at this point I don’t think we have knowledge of a lot of terminations that are going to come rolling through in the next three to six months.

Art Coppola

As Tom I think mentioned in the press release or his early remarks, the fact that that termination income is going to be down here could be seen as positive sign that business failures are at a low level, and that’s probably true. And as Tom mentioned, termination income is uncertain in dollar amount but certain that it’s going to occur in our sector. It has been occurring for 35 years in our sector in our space. It’s going to continue to occur and one of the reasons it occurs is that we have very high credit from the retailers that we do business with and from our tenant base. So if they have a business concept that ends up failing, they’re big boys and you sit down with them and you have a conversation and you work with them for them to exit.

So it’s certain that it’s going to happen every year, it’s uncertain to the amount.

Ben Yang – Keefe, Bruyette & Woods

Sure, I was just wondering if maybe at this point you’ve kind of called out some of the weaker credits and then going forward maybe that historical number is going to be too high, but it just sounds like it’s too early to say.

Art Coppola

Sometimes it’s not a weak credit, sometimes it’s a brand expansion that doesn’t work. That was clearly the case with Ruehl last year. I think we got $6 million or $7 million in termination payments from Ruehl. Abercrombie was a fine credit, they just had a brand that wasn’t working. They expanded and the Ruehl concept didn’t go that well so that’s why they pulled back.

Ben Yang – Keefe, Bruyette & Woods

Great, thanks guys.

Operator

Next we have Alexander Goldfarb with Sandler O’Neill.

Alexander Goldfarb – Sandler O’Neill

Good morning. Just going back and maybe I missed it in all the back and forth commentary on that six to twelve month bucket, that 5% of tenants; can you just give a sense of what, you said that those rents aren’t the same as full term rents. So just sort of curious what the difference in the economics to you is. And then just in a bigger picture, how much of that 5% is realistic to think that you could lease those spaces to long-term tenants versus sort of structural short term because tenants are always coming and going. So you’re always going to have some kind of short-term lease in the portfolio.

Art Coppola

That’s a good question. I would say as the business improves and things get healthy. 40% of that less than full market rent income could be converted to full market. And you’re right, there always is going to be an incubation activity, there’s the reality of some of the spaces are not as good as others. as you move to the ten yard line in a weaker economy, those tend to have less than long term leases. So roughly 2% of the 5% in a healthy economy and the strong properties could be converted to full market rent. Even though the headline of the number of occupancy doesn’t change. Does that answer your question?

Alexander Goldfarb – Sandler O’Neill

Yes. And then what is the difference in the rents between the full fair tenants and those six to twelve month tenants. Is it they’re paying half the rent.

Art Coppola

Yeah, it’s about half, it’s about double, you’d about double the real rent.

Alexander Goldfarb – Sandler O’Neill

Okay. And then separate question is you had spoken about investments, maybe some joint ventures. Westfield had their big announcement and one of the articles indicated they may be selling some stakes in the US. Is it realistic to think of Mall (inaudible) co investing with each other or is it better to think about that they’re probably targeting institutional capital that wants just a purely pass over all?

Art Coppola

I can’t speak to the Westfield announcement. But look, we have a history of investing with mall REITs. We had a historical great partnership with (inaudible) property group over the years and we’re even partners with General Growth on a couple properties. So you know we’ve done that. We frankly have probably done more of that then anybody. But I wouldn’t predict that as being any level of activity that’s going to occur. You know, there’s no real reason for that to happen going forward very often.

But the joint ventures that I referred to in my comments is one or two specific opportunities that (inaudible) on where if private owner comes up and says, “Look, I got a great property and you guys have a great organization. Let’s join forces to take this to the next level.” And those would be kind of the gleam that I have in my eye in terms of opportunities that shouldn’t be in our pipeline but I see it happening in the next five years.

Alexander Goldfarb – Sandler O’Neill

Okay, so it’s more that rather than maybe something with like a Westfield.

Art Coppola

I wouldn’t preclude anything with anybody. We have a wonderful relationship with those folks at Westfield and the Lowy family and would welcome the opportunity to do business with them just as we have a wonderful relationship with the Simon Property Group and others.

Alexander Goldfarb – Sandler O’Neill

Okay, thanks a lot.

Operator

(Operator Instructions) And that does conclude the question and answer session. At this time I’d like to turn the conference over to Art Coppola for closing comments.

Art Coppola

Okay, thank you all and we look forward to see you at (inaudible) in a week and a half. Thank you very much. Bye.

Operator

And that does conclude today’s conference, we appreciate your participation.

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