Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Macerich Company (NYSE:MAC)

Q4 2010 Earnings Conference Call

February 8, 2011 01:30 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

Michael Mueller – JP Morgan

Rich Moore – RBC Capital Markets

Quentin Velleley – Citi

Craig Smith – Bank of America/Merrill Lynch

Paul Morgan – Morgan Stanley

Cedric Lachance – Green Street Advisors

Alexander Goldfarb – Sandler O’Neill

Samir Parikh – International Strategy and Investments

Tayo Okusanya – Jefferies & Company

Ben Yang – Keefe, Bruyette & Woods

Todd Thomas – KeyBanc Capital Markets

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Macerich Company Fourth Quarter 2010 Earnings Conference Call. Today’s call is being recorded. At this time all participants are in a listen-only mode. Following the presentation we’ll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded.

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

Jean Wood

Hi. Thank you everyone for joining us today on our fourth 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 filing. As this call will be web cast for some time to come, we believe that 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 VP Real Estate; and Tom O’Hern, Senior Executive VP and Chief Financial Officer.

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

Tom O’Hern

Thank you, Jean. Today we’re going to be discussing the fourth quarter results, our recent capital activity and our outlook for 2011.

During the quarter, our fundamentals continued to improve significantly, occupancy levels were up, retail sales had a very sold increase for the quarter and same-center NOI was positive for the fourth quarter in a row. The releasing spreads were also positive again this quarter.

Looking at leasing, we did 238 deals in the quarter that’s 295,000 square feet. The average new rent was $42.74 and the average releasing spreads versus the expiring rent was a positive 13.7%. Mall occupancy was 180 basis points higher than a year ago, yearend was 93.1% compared to 91.3% at the end of 2009. The average rent per foot in the portfolio was up to 42.50 a foot that compared to 41.98 at year-end 2009. Occupancy cost as a percentage of sales was down significantly for the year at 13.5% compared to 14.2% for 2009.

Looking at FFO, FFO diluted per share for the quarter was $0.77 and that was 2.66 for the year, that was $0.01 ahead of our – the midpoint of our guidance range. Same-center NOI for the fourth quarter was up 1.82% and for the year same-center NOI growth was 2.04%. That positive comparison is largely driven by occupancy gains, CPI increases and positive releasing spreads. We had a significant drop in straight lining of rents, in the quarter they were down 1.9 million compared to the fourth quarter of last year and SFAS 141 income also dropped to 2.4 million compared to 3.3 million in the fourth quarter of ‘09.

Lease termination revenue also dropped significantly during the quarter at 2.9 million compared to 7.5 million during the fourth quarter of 2009.

The expense recovery rate during the quarter improved to 92.3% and that compared to 91.5% in the fourth quarter of last year, that improvement was driven primarily by the positive impact of moving to fixed CAM versus triple net about 70% of our portfolio today is on fixed CAM.

We saw a significant decrease in bad debt expense, it was 1.5 million for the quarter that was down 2 million compared to the fourth quarter of last year. And this is another sign of renewed tenant health.

Looking now at the balance sheet, we closed a significant financing on December 30 at 232 million loan on Freehold Raceway, that was a seven-year fixed rate deal with an NOL rate of 4.15, that paid off the former loan which had interest rate of 7%, although a slightly lower GAAP rate of 4.7%. The pay rate was the 7% pay rate.

We also negotiated the pay off early, the $50 million loan on Chesterfield Towne Center that was paid off in early February. The loan had an interest rate of 9.1% and it had a 2024 loan maturity. It also had a participation fee too, that would have allowed the lender 35% of any sale proceeds in excess that loan amount if the asset were sold prior to the 2024 loan maturity day. There was a $9 million fee that was paid to the lender as a result of terminating this debt early. And that $9 million charge will flow through the first quarter results for 2011.

At year end, we had 445 million of unrestricted cash on the balance sheet. Our current intention is to use some of that cash to pay off some high coupon debt that matures in 2011, that includes Capitola Mall which is 33 million at 7.1%, Pacific View Mall which is 84 million at 7.2%, Little Rock Mall, 41 million at 7.6%. And as I just mentioned, the pay off at Chesterfield. So there is a debt of over 200 million that we either have or planned to pay off during 2011, that will provide us once this pay offs have happened when Unencumbered Asset Pool that throws off over 92 million of NOI, so that’s a significant source of liquidity should we needed at some point in the future.

Today our debt-to-market capitalization is 44.7%, our average interest rate 5.65% and our un-hedged floating rate debt is only 7.6% of our total market capitalization. Our interest coverage ratio during the fourth quarter was 2.33.

In this morning’s release, we gave initial FFO per share guidance for the year of 2.78 to 2.94. That guidance is based on same-center NOI with the range of 1.5% to 2.5%. And it also reflects the debt payoffs I just mentioned a few moments ago including the fee we paid on Chesterfield.

In terms of tenant sales, tenant sales for the year per foot came in at $435 that was up 6.6% compared to 2009. Total tenant sales were also up, 5% for the quarter. And looking at the total sales improvement by region, our biggest improvement was in Arizona which was up 6.7% for the quarter, 6.2% for the year. Central region was up 5.5%, the Eastern region up 2.8%, Northern California combined with the Pacific Northwest was up 4.9% and Southern California was up 5.3% for the quarter.

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

Art Coppola

Thank you, Tom. This time of year with the year-end it’s normal for us to reflect back upon the returns that we’ve been able to generate for our shareholders. And certainly 2010 was an outstanding year in terms of our total shareholder return and coming on top of 2009 where we were ranked in the top 5% tile in total shareholder return. Certainly over the last couple of years the total shareholder return has been very good. If I look back over the last 10 years, the total shareholder return that we’ve been able to generate is in the top 20th percentile. So while we’ve had our rocky moments in late 2008, we, on over all basis if you take a look at over the life of our company as a public company and more particularly, over the last 10 years, over the last two years and over the last one year, we’ve had outstanding returns.

And coming off of two years of really very significant out-paced market returns, it could be normal for some folks to sit back and say, well it’s going to be hard to replicate that but at this point in time, I’m very bullish on how I see our future for this upcoming year.

When I look at the people and the properties that we own and the dry powder that we have and the passion that we have for our business, I have every reason to be extremely bullish on my view going forward. From a people view point, we have a very well organized and seasoned management team that’s been together for a long time. It’s a tried and proven market-tested, tough-time tested team that’s been able to produce great results year-in and year-out.

For our properties and portfolio view point, we’re the great size on a relative basis, we’re big enough to matter and small enough to make a difference. I’m very pleased with the performance of our properties and the concentration that we’ve been able to develop in great urban markets like New York and Washington D.C. and L.A. and San Francisco and then of course the great presence that we have in Arizona, which is now beginning to lead the way in terms of recovery, in terms of our sales and rent and even NOI production.

We’ve got the dry powder to drive the future growth of our company. We took a look recently for our board of directors over what our balance sheet looks like for the next five years. In particular, we’re taking note of how we had utilized the proceeds from our large acuity offering last April. And if you look back on what we really did with that equity offering and with the guidance that Tom just gave you, we essentially took a little over $200 million approximately 200 million last year and finished off the completion of Santa Monica Place and an unencumbered it to create a huge unencumbered asset force.

And the balance of the capital that we’ve utilized primarily has really been a cash management exercise to-date where we’ve been creating a larger and large unencumbered pool of assets by paying off some debt opportunistically Tom mentioned, the payoff of the Chesterfield debt. And then our plan for 2011 is to pay off debt on certain assets, as they come due, to as they create a very large unencumbered pool, a pool that will be well and excessive $1.5 billion, which puts us into a position that we’ve really never been in before with low, modestly low debt-to-total market cap ratios, good liquidity, nothing outstanding at our line of credit and a lot of dry powder through this unencumbered pool which puts us into a very good position as we look at all of the development activity, the re-development activity, the possible acquisition activity and every single loan that we have come due, coming due over the next five years. We are in a very good position to maintain those kind of ratios and to maintain that kind of powder over the foreseeable future, so I’m very pleased with that.

More importantly, we’ve got a real passion for our business, that I think was to a great extent driven by the grand opening that we celebrated with Santa Monica Place four months ago. At that opening we – a lot of the retailers said, it’s nice to have something to celebrate. And that’s really reinvigorated our entire company and that’s given us a new passion for the way that we see our business.

We look at our properties and we say, where the next Santa Monica Place, where else can we create something like this and I’ll be talking about that later, but we do see opportunities, either in the large scale format through a major redevelopment or simply by repositioning a property that better suit the trade area in which we are located.

I want to talk briefly about the three growth platforms that I see for us going forward here. In the near-term on the operating side, I see strong opportunities for us. Over the mid to long term, when the – in the redevelopment front, there are excellent opportunities that we got specific about out last earnings call. And then finally, on the external growth and acquisition view point, we are beginning to see some opportunities and to take some advantage of some opportunities there that I will talk about in a minute.

On the operating side, when you look at the sales that our tenants are generating, the outlook for leasing, the occupancies we have, the properties that we have, all of the trends are pointing in the right direction. And while we have not been able to as of yet, put up what I would consider to be day-by-day robust strong leasing spreads, although the leasing spreads that we achieved in 2010 were significantly higher than what we had given guidance for early in ‘10. Early in ‘10 we’ve said we would be flat on our leasing spreads in 2010 and I believe that the actual spreads for the year are up around 6.8%.

But as I look at the future, there is going to be, I think, a significant opportunity for us to begin to drive leasing growth. And that’s not a function of occupancy cost as a percentage of sales. Frankly, I kind of wish that we all would forget that statistic, because it’s not that relevant when you take into effect the law of large numbers. What’s relevant is the operating margins of retailers on each and every space that we are leasing.

And there is a tug-of-war that’s out there today, between the landlord and the tenant. But I will tell that today the tug-of-war is clearly in the favor of the landlord. Where the tenants create of the impression for all of you two years that the tug-of-war was in favor of the tenants, and that they were getting major rent relief, and they probably were in the lifestyle centers, that shouldn’t have been built in 2005, ‘06, ‘07 and ‘08. They weren’t getting that rent relief in the regional malls that were owned by strong, established operators. They get some short-term leases where they didn’t pay a lot of rent increases.

But now that we are seeing sales rebound in 2011 to levels that they were at in 2008. And we see the fact the – from our viewpoint of the supply viewpoint, there just isn’t any supply of great new regional centers coming on line. And the alternatives for, other growth alternatives such as the lifestyle centers, some of the mall-based tenants were pursuing in 2008, ‘07, and ‘06 have gone away and they realized that the regional mall is the place to be. That tug-o-war, I will tell you, is going to come, is going to land in the favor over the near-term of the next two, three, four or five years in favor of the landlords unless something unanticipated happens again.

And with that I am convinced that there will be moments of pain for the landlords and the tenants. There will be times that we will actually have occupancy cost slippages at individual properties. So don’t pay too much attention to that number, we are not going to sit there and preach to you, that each 100 basis point increase in occupancy levels to generate x dollars in FFO, or each on a 100 basis points in cost of occupancy as a percentage of sales generates the other. But I will tell you all of the fundamentals are pointed in the right direction and with that I’m bullish on the leasing side.

From a development and a redevelopment viewpoint, which is our second major leg of growth here, we even have more clarity as we began to think this through day-by-day. We have a lot of reasons to be very optimistic about the development and the redevelopment pipeline. The redevelopment pipeline remains as strong as we have been talking about and specifically outlined for you in the last earnings call. Tysons is marching along extremely well with the office market in DC rebounding, the apartment market rebounding, and even hotel players coming to us now.

We are beginning – we are in the process over the next couple of years of finishing our Santa Monica Place, that still at work in progress, it’s doing great, but there are still new, exciting anchors that we are going to be bringing to the property in the form of marketing anchors or in the form of our new marketplace that opens May 20, which is going to open the third level and it’s going to further enhance Santa Monica Place as a destination.

And I mentioned earlier that we are out there looking for the next Santa Monica Place throughout the United States and we have got one of them identified that we own today and we have one of the identify that we don’t own today, and I’m convinced that we are going to be able to convert each of those into exciting dramatic redevelopments.

On the development side, I can tell you that today that after carefully reviewing our prospects on the ground of development side. Well, I feel very confident in getting a little bit more specific, that was a hedge confident getting a little bit more specific. All right, so I feel very confident in telling you that I believe that we will in fact be developing in that Arizona marketplace because the time will be right for us to do it. My strong suspicion is that by the end of this year we will pull the trigger on our good year development and that new regional mall will open up in 2014. If I look at the development landscape, I also alluded to you in previous call that while we have monitored the outlet space in particular the premium outlet space that we could anticipate taking some land that we own today and converting, and developing that out to be a premium outlet center, with all of the attention that has been paid to the Phoenix and Scottsville marketplace recently in outlet arena.

We’ve carefully looked at the sites and the developments that are being planned in that marketplace and the impact that would have on our existing portfolio. And I have come to the conclusions that Scottsville-Phoenix Marketplace maybe the single most underserved premium outlet metropolitan area in the United States.

We’ve come to the conclusion that we should have a say in where that outlet center gets built and while we’re not here to renounce today where or when it’s going to be built, I’m very confident that we’re going to be a part of that process and that we will very profitably participate in the outlet, in the location and timing in the Phoenix marketplace both to minimize its impact on our existing portfolio, but also to participate in the profit opportunities that are available there.

I alluded to the fact, that the third lager broke that I am now ready to talk about is in the external acquisition arena. Some of the mainstream blurbs or blogs about the fact that we recently showed up at an auction on Friday, February 4, I believe in New York in the Queens Marketplace. And we did in fact, we were in fact the successful bidder on a 4,000 square foot retail project in Queens in Glendale known as Atlas Park.

This is a project together with the partner, we brought for roughly 54 where we put our deposit down and we’ll be closing later this month for $54 million. We’re buying at a roughly $130 dollar a square foot. Project today is losing money due to lack of occupancy and due to operating expense, but it’s got one of the best theaters in the entire regal chain. But, we are very confidence that our management, and given our relations in the community there that we’re going to be able to recycle that property, re-brand that property, re-flag that property and make a lot of money out of it. We’ve taken a look at the retail landscape from an acquisition viewpoint that have obviously come to the conclusion of the opportunity to buying no brand or class A premium regional malls is pretty much not existent today, it’s just not out there.

On the other hand, the opportunity to buy class A retail regional real estate that’s located in major metropolitan markets where we have a significant presence, and have a history of making a lot of money like New York City, Washington DC, Los Angeles, The Bay Area. Those opportunities they’re out there and Atlas Park is one of them. And we have kind of re-thought the way that we’re looking at the future there and are defying our growth opportunities to include class A regional retail real estate that doesn’t fit the mall of being anchored by Macy’s and Nordstrom, Neiman and Bloomindales etcetera, that doesn’t fit the malls are being a property and an asset group that we can make a lot of money of it. I have every reason to believe that having blog outlets at roughly $130 dollar a square foot of GLA, there is no reason to believe that we shouldn’t be able to generate $30, $40 dollar a square foot and ramps or more as we lease that up.

So, I think the opportunity there to make money is very significant, it’s a little bit one off, in terms of the fact that it’s not anchored by the traditional department stores that we normally have in our core portfolio. But, it’s right down in the middle, in terms of the fact that its class A regional retail real estate that we know how to make money off of because we know the tenants, we know the communities and we can see the opportunities.

So, I’m very bullish for all of those reasons about where we stand today and with that, with invite you to participate in the Q&A.

Question-And-Answer Session

Operator

All right, thank you very much. (Operator Instructions) And we will take our first question from Michael Mueller with JP Morgan.

Michael Mueller – JP Morgan

Yeah, hi. Couple of questions, first of all going to 2011 guidance, I just wanted to confirm that the outlets acquisition is in there?

Art Coppola

Not really because we put our guidance numbers together really, really before that and at this point in time, it’s probably a breakeven deal, we’re only putting in 26 or 27 million of cash. So even if we had pumped it through the numbers it would be less than a penny of share plus or minus. So yeah, it’s factored in, but I’ll tell you that the auction was, I think February 4th and the closing is uneven for another month or so.

Michael Mueller – JP Morgan

Got it. Okay. And, also sticking with guidance again Tom can you talk little bit about what’s in 2011 for at least term land sell gains and also maybe just touch on income tax benefit?

Tom O’Hern

Yeah Mike, in terms of lease termination revenue that’s the part of the reason we have arranged, I mean, if you look at last five years we’ve gone from a low of 6 million to a high of 22 million. And so, that’s kind of encompassed by the range I think the midpoint of what we are thinking is 12 million, but it could move either way, and that’s all within the range. In terms of land sales, we have not factored in any land sales into the guidance number as of now. And just as a frame of reference if you look at, land sales in the last few years, in ‘08 it was 5.6 million, in ‘09 it was 5.1 million, and 2010 it was 1.4 million. And we have not factored any of that in for this year.

Michael Mueller – JP Morgan

Okay. And then, what about, can you give us little more color on the income tax benefit?

Tom O’Hern

That’s the function of NOL usage and it depends on what else is going on, I think if for the year you put in a $5 million number that would probably cover it.

Michael Mueller – JP Morgan

Okay, great. And then last question, looking at the same store NOL guidance up 1.5 to 2.5 for, good chunk of the year this year. Your occupancy has been up over 100, 180 basis points. You are looking for occupancy for next year, your spreads have been double digit the last couple of quarters. Can you walk us through the map to get to that 1.5% to 2.5% growth next year?

Tom O’Hern

Sure Mike. We’ve had a lot of occupancy gain already this year. And we factored in, when we factored all of leasing activity, I think we are on average going to be up 50 basis points in our guidance versus this year. But, keep in mind at this point at 93.1% we are not too far of the heights of 2006, 2007, although, I’ll tell you the quality of that occupancy can go up because included in that is some short term leasing that we did in 2008, 2009 and as those leases role we’ll take those as the long term that way doesn’t move the occupancy number but it improves the quality of the occupancy. In terms of releasing spreads, we’re going to average high single digits and again that’s looking forward, and that’s an estimate. And we certainly hope to do better than that, that’s what in the guidance.

Michael Mueller – JP Morgan

Okay. Great. Thank you.

Tom O’Hern

Thanks Mike. And I, actually Mike, I have a follow on answer on outlets just to clarify that auction actually was January 28th, I got my days confused. It was January 28th and we normally wouldn’t talk about something like that but given the public nature of the auction process and given that Art Coppola was spotted as the mysterious and better in the court house, we did have to comment on that, but it was January 28th was the auction I think, the closing is February 28th. And I also want to clarify the numbers, it’s pretty much a break even or little bit of loss this year, but that’s really of huge NAV play for us. I don’t see that it as being accretive or diluted to speak up the first year or two, but I think from an NAV view point we are going to make a lot of money over the next 3 to 5 years. Next question?

Operator

All right. Thank you very much. Moving on, we’ll now take a question from Rich Moore with RBC Capital Markets:

Rich Moore – RBC Capital Markets

Hello. Good morning, Guys.

Art Coppola

Hi Rich.

Rich Moore – RBC Capital Markets

The Chesterfield Towne Center is the plan going forward to (inaudible), is that what we should take away from this?

Art Coppola

No, no I think Tom was, hi, this is Art. Rich.

Rich Moore – RBC Capital Markets

Hi.

Art Coppola

Tom was really pointing out, I think that, when you look at the premium that we paid on the debt, part of the premium was really defusing an old kicker, it was an old kicker that was built into a mortgage that was done 20 some years ago. And had we sold it, the kicker actually would have been in the nature of the premium that we paid, it is of the quality type that we would consider pruning at the right price going forward, but we had actually done a great job of recycling Chesterfield as we have had a couple of anchors that had been recycled and have been able to maintain and even increase the income in a market that is extremely in Richmond, Virginia way over retail and so at this point in time no, it’s not there is no correct plan to sell but it’s the quality type that we would consider selling going forward.

Rich Moore – RBC Capital Markets

Okay. What was the reason for the timing on that asset in particular doing this transaction?

Tom O’Hern

Paying off the debt?

Rich Moore – RBC Capital Markets

Yeah, paying off the debt?

Art Coppola

The reason was that after 16.5 years of trying to pay off the debt, we finally were able to do it, I ate kickers in mortgages because there is no capital credit built in for CapEx that’s there to increase the NOI, it was of one of those old mortgages from the mid-80s that certain insurance companies were doing and the alignment of interest between the lender and the owner it’s completely misaligned because the lender doesn’t participate in the CapEx but they do participate in the increase in NOI and NAV. So, it’s just something that only one we had in our portfolio, we don’t want to pay it off literally to support that property two years ago.

Rich Moore – RBC Capital Markets

Okay, good thank you. I got you. Yeah, good, thank you. And then, when you guys think about Dillards, and you know that Dillards is obviously been seeking to monetize their real estate and yet it doesn’t sound that they can really start to read, is this something that you would go to them you think and perhaps talk to them about purchasing some of the Dillards that they may own in your portfolio, some of the stores they may own?

Art Coppola

Well we’re always interested in owning our anchored stores and land parcels and all of our shopping malls though we think that’s a good way to do business but the answer to that question would be no.

Rich Moore – RBC Capital Markets

Okay, all right, good, thank you. And then given that this is sort of time of year when retailers, I guess, start to thinking about whether they’re going to make it or not or whether it’s a good time to shut down some stores, is there anybody in the portfolio, any retailers in the portfolio that concern you guys at this point?

Art Coppola

This is the obvious one that’s been in the news for a hundred years, that bookstore.

Rich Moore – RBC Capital Markets

Okay. Nothing else you say to those guys?

Art Coppola

No. I mean it’s one off but now we’re, Tom had mentioned about that our bad debt in the fourth quarter was very modest; our bad debt prognosis for ‘11 is very modest, ultimate electronics looks to be an issue, we’ve got a couple of stores with them so that could be an issue and we believe we have a good opportunity to recycle that. But the retailer help that you’ve heard on other calls and in particular in the regional malls, it’s just as strong as it has ever been in my being in this business, and that’s 36 years.

Rich Moore – RBC Capital Markets

Okay great. Thank you, guys.

Art Coppola

Thank you.

Operator

All right, thank you very much. We’ll now move on to Quentin Velleley with Citi.

Quentin Velleley – Citi

Hi there. Going back to garden, in terms of the – and you ran through the 200 million of mortgages that you’re going to pay down which obviously might be difference, but then I think you’ve got to fixed swap burning of 8% of West side Devine (ph) almost 7% of Victor Valley. What are you building in there in terms of refinancing or extending?

Art Coppola

Quen, these swaps burn off in April and it’s a derivative, it’s not specifically tied to the mortgage, you have to attach it to the mortgage for accounting purposes so that will burn off and you know, we’ll have a lower interest rates on those two properties by about 400 basis points when those burn off in mid-April.

Quentin Velleley – Citi

Okay. And then, in terms of Mervin and I think there were about 12 vacant Mervin boxes left which hadn’t yet dealt with, just one ring, how many you may have leased now and what you’re factoring into gardens for 2011?

Randy Brant

This is Randy Brant. Hi Quen. We have 11 that are currently are not leased, of the 11 only 3 of those are we on the position where we don’t have anything to active, the remaining we have very active negotiations going and expect to close those in the next 3 or 4 months.

Art Coppola

Quen, on those – none of those have been factored into guidance, so to the extent we do a lease deal on one of those Mervins’ spaces that will be upside to the guidance.

Quentin Velleley – Citi

Okay, perfect. Thanks. And then just lastly, and I know you’ve spoken about selling some of your B grade assets in the past, I was just wondering if you’ve made any progress or whether you’ve change how your thinking about that of the moment?

Art Coppola

Okay, well I think, let me start. If that’s a situation that we intend to be opportunistic about or we are very cognize one of the fact, it’s installing something at a Cap rates its above your multiple, it’s theoretically dilutive. But, we’ve been willing to do in the past. It’s not NAV dilutive, it’s simply mathematic dilutive. But it’s a right thing to do. We did it in 2006 and 2007 when people were able to borrow 90%, 95% loan to values and we sold a bunch of stuff that were sea stuff at 7 cap rates. I probably have been pretty vocal over the last year about the fact that we are very willing to prune our portfolio, we’ve shown it in the past. We clearly are again going to be willing to do that in the future. It is our goal to take our premium, our class A NOI from just north of 80% to lower north at 90%. But you don’t control the buying side of the market. And that should – it’s improving. And it may happen but I wouldn’t – if not in any of our numbers. And it’s certainly not something where we can say we own 75 properties that we’re going to prune the bottom 20 of the 75 properties. There is not a market that I know of to go and do that.

Quentin Velleley – Citi

Okay. Thank you.

Art Coppola

Thanks Quen.

Operator

Thank you very much. Now moving on, we’ll take the question from Craig Smith with Bank of America/Merrill Lynch.

Craig Smith – Bank of America/Merrill Lynch

Hi, good afternoon.

Art Coppola

Hi Craig.

Tom O’Hern

Hi Craig.

Craig Smith – Bank of America/Merrill Lynch

Hi. The joint venture NOI that was used to bid on Atlas Park, is that a one-off opportunity or do you think maybe using that JV partnership to pursue other acquisitions?

Art Coppola

Well, it’s with an existing partner who we bought a couple of deals with historically and who I could see us doing more deals with in the future. So, it’s an existing partner. That – it was really just formed as a special opportunity for that particular auction, there’s nothing to read into that. But there is something to read into the fact that the people that we do partnerships with and that we do business with, those are organic relationships that grow overtime. And this is just another example of asking the partner getting involved in a situation. It clearly is one-off but we got involved in it. And that we’re very optimistic about where it’s going to go.

Craig Smith – Bank of America/Merrill Lynch

Cool. And is the good year development, do you – how many I guess – you must be talking to traditional department. So how many traditional departments so as you think would be anchoring that project?

Art Coppola

We’ll announce that when we’re ready to but – it likely would be 3 plus another couple of large format users. But let us go ahead and put some flesh on the bone on that.

Craig Smith – Bank of America/Merrill Lynch

Okay. But I mean, it’s clear that you’re getting some positive feedback for you to be pursing that on taking that?

Art Coppola

We were ready to break ground on good year in 2008. But then, what happened in 2008, this is the market that is the most underserved market in all of Arizona. There is over 600,000 or 700,000 people in our medium trade area that don’t have a quality regional mall to go to. We don’t need any growth just to make sense. We just want that the people that live in our trade areas to feel a little bit wealthier. And they’ll be getting to – they’re quiet in the situations there. It’s a very good sub market but we want the rents to be robust. Like you have, very limited opportunities to grow these regional malls and there is no sense in building one before it’s time. Our sense of it is that the time is going to be right by the end of this year from a pretty leasing view point and everything else good starters will align. But now I feel confident instead of saying in the next 3 to 7 years we’re going to build 1 or 2 malls in Phoenix. We’re pretty much I think focused on the fact that we can tell you it’s going to be good year and it’s going to like 2000 – it’s going to be fall of 2014.

Craig Smith – Bank of America/Merrill Lynch

Thanks, that’s helpful.

Art Coppola

Thank you.

Operator

Thank you. Moving on, we’ll now take a question from Paul Morgan with Morgan Stanley.

Art Coppola

Hey Paul.

Paul Morgan – Morgan Stanley

Hi, good morning. Art, you mentioned towards the end of your comments about looking at non-mall retail. I mean, does that so Atlas Park is obviously an example of that. But I mean, are you thinking Power Centers or neighborhood centers in your core markets?

Art Coppola

No. I’m thinking regional retail that is class A retail. The class A real estate that’s in our core market. So Atlas is 400,000 square feet. I mean in that, there are more small shops. There is almost as many small shops spaces at Atlas as there are Queens Center Mall, that’s unbelievable. And we think there is a great opportunity there to make some money. We are looking at other markets where you have, let’s say a traditional department store and a discount store in a class A location in the Bay area, that is right for redevelopment or looking at something there, we are looking at something in DC marketplace or there is a couple of traditional anchors and there is an opportunity to redevelop it. So, we are clearly not breaking into a subcategory of community or a price change in terms of Power Centers. We are going after the regional retail but it may not have the normal names associated with it as department stores that are in our core portfolio with the properties like Tyson’s and Santa Monica and Broadway Plaza etcetera North Bridge.

Paul Morgan – Morgan Stanley

Great, and some of these opportunities have mixed use components with them in California or elsewhere?

Art Coppola

Absolutely.

Paul Morgan – Morgan Stanley

Are you looking to take sort of the Tyson’s approach there and partner or would any of these, would you ever kind of do a multifamily or anything like that?

Art Coppola

We are not opposed to owning multifamily as part of a retail project, but it’s really an ornament to the retail project not the driving force.

Paul Morgan – Morgan Stanley

Yeah, okay thanks. And last question on the short term leases, have you had much experience yet of rolling over short term deals that you did in ‘08 or ‘09 or that’s mostly going to be something you addressed this year and then if you had some of that kind of what’s the result there, mixed between people just closing their stores or people doing long term deals for a lot higher or long terms deals at flat, I mean, there is any color you have there?

Art Coppola

Well, I will give you the bunny clip version of that –

Paul Morgan – Morgan Stanley

Again with the bunny clip.

Art Coppola

I couldn’t hold that on that as you know. That’s the tug-o-war that’s going on right now, the short term renewals that were given to folks in ‘08 and ‘09, well late ‘08, ‘09 and ‘10 now as you are rolling over, those folks are like to kind of continue do enjoy, not have facing an increase in rent. And now it’s time to have the big conversation of – okay, it’s time to either step up or step out and that’s why I say we will be having conversations, I’m sure with tenants. We are going to be telling to them, look you’re going to pay the rent or we got plenty of other folks that will pay the rent. And with that we could suffer occupancy losses in some of our powerful centers in order to get NAV and rent gains for the long term. So that’s the tug-o-war that’s going on right now. And it’s not going to resolve itself this day, this week, this month, this quarter; it will take a full year to play out. But it’s definitely I like, in the hands of the landlord at this point. And by the way these tenants can afford to pay the rent, when I said that cost of occupancy is the percentage of sales is over stated, over rated metrics, it’s because of the fact that we are very keenly aware of the operating margins that our retailers have, and the rent that we are seeking these are fair rents, very fair rents. And they are really using cost of occupancy as a percentage of sales as a wagon against this to mask the fact of their operating margins and we are seeing through that, it’s a tough conversation but I’m confident it’s going to resolve and play out in a very good operative results for the owners of well-located strong regional retail.

Paul Morgan – Morgan Stanley

Great, thanks.

Art Coppola

Thanks.

Operator

Thank you and moving on we’re going to take questions from Cedric Lachance with Green Street Advisors.

Cedric Lachance – Green Street Advisors

Thank you. Just going back to Atlas Park a little bit, as my understanding, it’s an asset that’s probably too upscale for the market at this point and also it’s probably typically not always perfect from the layout perspective, what kind of CapEx do you think you will have to spend to that asset overtime to change and then see what you desire?

Art Coppola

I can’t tell you what the exact number it’s going to be, I hope it’s a lot because of it’s a lot that means we are going to make even more money than I thought we are going to make because we don’t put money in the properties but that’s without seeing outside returns. We bought the property for roughly $54 million, say our total CapEx budget was another 50% on top of that but it could be more than that, we will just have to play it out. Atlas Park you correctly categorized that as being a little too upscale for the market. It really fits into the profile of the fasted lifestyle center, but it’s in the market where you have got million and a half people within five minutes. That’s pretty good demographic that we made a lot of money in that demographic, by catering to the masses, and even with the classes, and that’s what I see in Atlas Park.

Cedric Lachance – Green Street Advisors

Okay. And how you can make that asset relevant in relationship with Queen Center? Where are the overlaps with tenants and what can you do there that complements actually Queen Center?

Art Coppola

There’s no overlap and it’s a completely different market. The only comment and (inaudible) is the million and a half people.

Cedric Lachance – Green Street Advisors

Okay. And looking at the balance sheet you have to converts coming due in low over year from now. What is the game plan there?

Art Coppola

Cedric, some of that happens before that is the line of credit, which is currently not utilized, we’ve got a billion and a half of line of credit, we have been in active conversations with our investment banks about, moving forward with that. There is pretty strong bank market right now. So, our expectation is we would continue to have that type of capacity which gives obviously us the ladder to deal with the converts, without having to be in a big hurry to deal with the converts. Those converts although they have a gap interest rate 5.5%, the pay rate is only 3 and a quarter. So, they are pretty attractive, they would be expensive to prepay early, probably at a premium. So, as long as we have got the capacity through our line or else, where we’re pretty comfortable and addressing those as we get closer to maturity.

Cedric Lachance – Green Street Advisors

Okay. And in terms of granite run your JV with Simon, I think the debt there has been in some form of the fall for a few months, what do you intend to do or the keys going back to the lenders?

Art Coppola

Our partner really is handling that matter, but I would tell you that it’s, most likely will not be owned by that joint venture a year from there.

Cedric Lachance – Green Street Advisors

Okay. And final question, going back to your outlet comment in the Scottsville area. Is it fair to understand your comments that you believe you have the right side already and that you would be seeking a joint venture partner to develop outlets?

Art Coppola

We know, we have the right real estate and how we pursue the opportunity will be something that we will determine based upon, what’s best for our company or portfolio and the execution.

Cedric Lachance – Green Street Advisors

Okay. In terms of timeframe, when would you think you’ll have decision there?

Art Coppola

I would say that if we do something, that’s – the property will be open in 2013 fall.

Cedric Lachance – Green Street Advisors

Okay. Thank you.

Art Coppola

Thanks.

Operator

All right. Well, thank you very much. And moving on, we’ll now take a question from Alexander Goldfarb from Sandler O’Neill.

Alexander Goldfarb – Sandler O’Neill

Hi. Good morning. Just going to outlet, just your initial pay guard, you think, this will be sort of, you keep the garage or keep the theater as great [ph] builder, you think you can work with the existing layout?

Art Coppola

I think we’ll work with the existing layout, but we’ll see.

Alexander Goldfarb – Sandler O’Neill

Okay. And then as far as –

Art Coppola

You make a very good point in that, look we’re buying this real estate at a $130 a square foot, which includes the garages, when we bought west side in number of years ago, one of the big assets we’re buying with this garage underneath west side too, west of Nordstrom which we opened and we put a state of the art theater on top also, and look add in garage with a lot of parking spaces in a market where you got a million and a half people who drive to your property because there is no subway, that’s a real asset. So we’ll see how it plays out, but I don’t know, I don’t see there is (inaudible) just to fill it up.

Alexander Goldfarb – Sandler O’Neill

And then, my understanding is the original owner still owns the dark boxes next door, I’m sure you’re still a little upset about losing this center, any sense that you may be willing to talk with you guys or is that not even in the realm of profitability?

Art Coppola

I would say everything in the realm, I can’t tell you the outpouring of communication that we received from the community, how robust and positive it was, I suppose, I could have anticipated it, but when people finally figured it out because, you need to look, my brother Eddy was saying that starting wheels is going to be hard prunes and he didn’t exactly show up at the auction with the big names tag on himself. But, when people figured out who it was, the community, the governmental elected officials, community leaders, retailers, I mean, people are coming out of the woodwork contacting us saying, wow, that’s terrific, that’s great, we’d love to get involved, just an incredible amount of positive support on mainstream.

Alexander Goldfarb – Sandler O’Neill

Okay. And then, just the final question is, with Walton Street being in – as part of it. If you think about value creation, the teams like sometimes you want to sort of create the value and then JV it after you created the value. In this case, it looks like you’re going to do it concurrent with your partner. What’s your thought process – what do you think about what type of JV partner to bring in on an NAV creation versus when you have a stabilized asset that’s more long-term growth bring into JV partner then?

Art Coppola

We match up the properties of the partner. And in this case the partner and we looked at the opportunity and we both saw great opportunity, and we decided to go ahead and understand the risk and to do it together. And they’ve been a great partner of ours as all of our partners were great partners. And again, I want to emphasize that all of our partnerships are very organic. None of them are intended to be one-off. They are not disposition, they’re true relationships. And so just that’s another expression of that relationship.

Alexander Goldfarb – Sandler O’Neill

Okay. So, it wasn’t like when you guys showed up first as the auction, both you guys came together and worked on this jointly?

Art Coppola

We clearly had talked about it way before the auction and each of us scratched our heads and said, there is really an opportunity here even though it’s not very obvious what it is, and by the way, it’s not very obvious what it is because if it was somebody – there would have been a ton of people in there buying that property at a lot of money. So it’s not real obvious except for one thing. What’s obvious to me, its great real estate, it’s in a market that we know intimately. And I’m absolutely positive that we’re going to do terrifically well.

Alexander Goldfarb – Sandler O’Neill

Okay.

Art Coppola

How are we’re going to do it? I don’t know. But we’ll let you know when we’ll plan it out. No wonders when I say, I don’t know is because if I – if we told you what one plan would be today, that might minimize the real opportunity which I think is true.

Alexander Goldfarb – Sandler O’Neill

Okay. Thank you.

Art Coppola

Thank you.

Operator

Thank you very much. And moving on, we have a question from Samir Parikh with International Strategy and Investments.

Samir Parikh – International Strategy and Investments

Hi, good afternoon. The question of Valley View, I just wanted to see if I need to make any adjustment I guess in 2011 for that. I wasn’t sure if the operations from that were in your numbers this quarter?

Art Coppola

No, there’s no impact from Valley View, that’s being operated by the servicer. We do expect at some point they will dispose of it in 2011 and at which point it will officially come off our books. We have not factored in the gain from that in our FFO guidance numbers but there will ultimately when that comes off our books there will be a gain because the debt is in excess of our book basis. But it’s not in the numbers.

Samir Parikh – International Strategy and Investments

Okay. Thanks. And then just one last thing, is there anything in Q1 in terms of incremental revenue that maybe hasn’t been realized that will come on from Santa Monica or something else that we should be thinking about?

Art Coppola

Not in Q1.

Samir Parikh – International Strategy and Investments

Okay. All right. Thanks.

Art Coppola

Thank you.

Operator

All right. Thank you. And moving on, and I’ll take a question from Tayo Okusanya with Jefferies & Company.

Tayo Okusanya – Jefferies & Company

Yes. Good afternoon, just another follow-up question on Atlas if you don’t mind. Could you give us a sense of what’s the current occupancy and NOI of that asset and then where you think it would ultimately go once you have put in the action plan?

Tom O’Hern

It was way over 50% vacant. It loses money today and we think we can make a lot of money on it. I threw out some numbers earlier that we bought it at a $130 a foot for 400,000 feet give or take. I don’t think it’s out of the question, we’d get rents of $30, $40, $50 put on that asset over time. We can generate those kind of numbers. The income generation could be massive and the value generation could be terrific. It’s yet to be done, it’s not obvious, otherwise a lot of people would have jumped into this opportunity. But I’m absolutely convinced that three years from now, we’re going to look back and say, wow, what a great acquisition.

Tayo Okusanya – Jefferies & Company

Great. that’s helpful. And then, second question in regards just tenants and the portfolio that are receiving temporary rents or rent breaks. If you could quantify just how much of your portfolio that is and what the potential rents could be if you do get those tenants back to market rents?

Art Coppola

Well, during the period of ‘08, ‘09 we were signing about almost half of our deals were short-term deals. So, that means that today if you look at that, there’s probably 15% of our portfolio is shorter term then what we consider normal. And those tenants will be rolling over the next couple of years. And a lot of those deals if our average rate is $44 dollar a foot, a lot of those deals were signed in the ballpark of $22 to $25 dollar a foot. So there’s some significant upside embedded in those lease expiration that come rolling through in ‘11 and ‘12.

Tayo Okusanya – Jefferies & Company

Okay. I want to turn into – that’s helpful. And then last question, the whole tug-of-war issue between the landlords and the retailers. Just wondering of late and recent negotiations, how much tenants are talking about sourcing costs been an issue and whether they are really kind of trying to use as a negotiation point in the new lease renewals?

Tom O’Hern

All right. There is always something, but I can tell you that it comes down with supply and demand. And when you look at all the factors that are in play, it’s in the landlords’ favor today and that’s fair, it’s not extracting profit from them, it is simply a fair (inaudible) that they should be paying and they’ll come to the realization that it’s fair. Just as it was fair for us to be very empathetic to their needs a couple of years ago by giving them short-term renewals without significant rent increases or even modest rent increases or decreases. Now it’s fair for them to pay some increase in rents as low rents meteor (ph) and they’re sitting and making a lot of money of a real estate that can’t be replicated anywhere.

Tayo Okusanya – Jefferies & Company

Got it. Thank you.

Tom O’Hern

Thanks, Tayo.

Operator

All right. Thank you very much. And moving on and I’ll take a question from Ben Yang with Keefe, Bruyette & Woods

Ben Yang – Keefe, Bruyette & Woods

Yeah, hi. Good morning. Given that you guys brought in a partner on Atlas Park and are basically willing to share in the value creation upside there. Do you intent to pursue this new class-A retail real estate strategy with partners? Is that kind of the stated or the plan goal for you guys?

Art Coppola

It’s possible that it could happen that way. There is no prototype, but I just don’t want you all to be shocked by us getting involved with Atlas because it is part of a comprehensive new mindset that we have that we’re going to look a great markets like LA, San Francisco, New York, Washington DC and others. And if we see opportunities that don’t get the perfect mold of three anchor, Nordstrom, Neiman, Macy’s type or whatever center, that they are either regional retail opportunities, not power centers, not community centers for say, not grocery-anchored drug centers for say, but regional retail centers that we can money of based upon our tenant relationship that we have, and more importantly based upon our reputation and our relationships in the communities. So when we’ve already had folks from the governmental agencies and the zoning areas that govern Atlas Park, reach out to us and talk to us about how we can, how they can help us make that property better.

So, it’s really part of playing off of the power that we have in these markets, and not limiting ourselves to traditional regional mall with traditional department stores.

Ben Yang – Keefe, Bruyette & Woods

I guess I’m trying to understand how you guys decide whether and when to bring in a partner. I mean, obviously there’s an element of de-risking, but why Atlas Park and why the next project or why not the next project, in terms of having a partner versus going solo?

Art Coppola

Each case is going to be determined on the phone. There was risk in Atlas Park, there is risk in Atlas Park. There is no obvious answer and we both decided to go together with our partner and we both feel good about it.

Ben Yang – Keefe, Bruyette & Woods

Okay. And then just final question, I think you commented that you had or there were two other Santa Monica Place type opportunities, one of which was in your portfolio. Can you tell us which one is in your portfolio?

Art Coppola

I’d love to, except for the fact that, in order to perfect the opportunity we have to get entitlements in that community. And we need to get the entitlements and then we can talk about it.

Ben Yang – Keefe, Bruyette & Woods

Okay. Thank you.

Art Coppola

Thanks, Ben.

Operator

All right. And moving on, I’m going to take a question from Todd Thomas with KeyBanc Capital Markets.

Todd Thomas – KeyBanc Capital Markets. Hi. Good morning. I’m on with Jordan Sadler as well. Just back to guidance, can you give us an update on sponsorship opportunities within the portfolio, it looks like other income came in a little bit higher this quarter and I was wondering if should expect the higher run rate in 2011 and how much of an increase in sponsorship might be built into your 2011 forecast?

Art Coppola

It’s relatively flat.

Todd Thomas – KeyBanc Capital Markets

Okay. And then just a quick clarification on the Victor Valley Mall and Westside Pavilion. Do you plan on exercising the extension option there when the swaps burn off or do you plan to refinance those mortgages?

Art Coppola

Well, the swap is totally independent of the underlying debt and the swap will burn up just naturally in April and the underlying debt we have extension options and we’ll evaluate at the time, whether it makes sense to extend the existing (inaudible) to put new debt in place. But that is relatively a low coupon debt once the swap expires.

Todd Thomas – KeyBanc Capital Markets

Okay. And what type of underwriting terms are you seeing in the market today?

Art Coppola

Well, I mean, you saw the financing we did on freehold and we were pushing the leverage much there that was about a 50% LTV transaction, but it’s very attractive pricing and we are seeing quotes at really under 200 basis points over the treasury, it’s a very, very competitive market and borrowers markets, even the rates have gone up a little, but it’s still attractive.

Tom O’Hern

Just augmenting that, I mean looking debt yields on class-A properties going back not that long ago, they were 15% give or take and today that closer to ten.

Todd Thomas – KeyBanc Capital Markets

Okay. All right. Thank you.

Operator

All right. Thank you very much and we have time for one last question, and that final question will come from Quentin Velleley with Citi.

Quentin Velleley – Citi

Hi. Yeah, thanks. Just in terms of the construction in progress, I’m wondering how much or how many Mervyns were included in that balance as of 31, December?

Art Coppola

I think there is only two or three of the Mervyns in there, Quentin. There is a variety of projects in there, but there is only one or two at the Mervyns locations are in.

Quentin Velleley – Citi

And it sounds like about $10 or $15 million Mervyns in there, is it?

Art Coppola

Yes.

Quentin Velleley – Citi

Sorry?

Art Coppola

That’s it at the most. It wouldn’t be anything –

Quentin Velleley – Citi

Okay. And then just lastly in terms of your operating expense price of 2011 guidance, what’s your expectation there?

Tom O’Hern

We’d like think we’re going to operate pretty effectively from a forecasting standpoint. I think we assumed a growth of 3% although I honestly expect us to be better than that certainly on the controllable expenses.

Quentin Velleley – Citi

Okay. Got you. Thank you.

Tom O’Hern

Thanks.

Art Coppola

All right. Thank you all and we appreciate you involvement and look forward to reporting our results for this upcoming year. Thanks again.

Operator

All right. Great. Thank you very much. Again ladies and gentlemen, that does conclude today’s conference.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

Source: The Macerich Company CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts