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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 Schmidt – BofA/Merrill Lynch

Michael Mueller – JPMorgan

Paul Morgan – Morgan Stanley

Christy McElroy – UBS

Rich Moore - RBC Capital Markets

Eric Schmidt – ISI Group

Cedric LaChance – Green Street Advisors

Quentin Velleley – Citi

Todd Thomas – Keybanc capital Market

Nathan Isbee – Stifel Nicolaus

Benjamin Yang - Keefe, Bruyette & Woods

Alexander Goldfarb - Sandler O'Neill & Partners L.P.

Vincent Chao – Deutsche Bank

Macerich Co (MAC) Q2 2011 Earnings Call July 28, 2011 4:00 PM ET

Operator

Good day ladies and gentlemen. Welcome to the Macerich Second Quarter 2011 Earnings Conference Call. As a reminder this presentation is being recorded. At this time all participants are in a listen-only mode. After the prepared remarks we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the call over to your host Mr. Jean Wood. Please go ahead ma’am.

Jean Wood

Good afternoon. Thank you for joining us today on our second quarter 2011 earnings call. During the course of this call, management will be making forward-looking statements, which are subject to uncertainties and risks associated with our business and industry.

For a more detailed description of these risks, please refer to the company's press release and SEC filing. As this call will be webcast for some time to come, we believe it is important to note that the passage of time can render information 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 on 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 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'll be discussing second quarter results, our recent capital and acquisition activity and our outlook for the rest of 2011 including our revised guidance.

During the quarter, our fundamentals continued to improve occupancy levels improved, retail sales had a very sold increase and same-center NOI was positive for the six quarter in a row. The releasing spreads also showed good increases.

We signed leases during the quarter for 247,000 square feet that was 161 deals average new rent was $41.60 a foot. The average releasing versus expiring spreads on the trailing 12 month basis was positive 11.6%.

The occupancy level increased 50 basis points over a year ago. It rose to 92.3% compared to 91.8% a year ago. Average rent in the portfolio stands at $43.74 that is up from $42.31 a year ago.

Occupancy cost as a percentage of the sales on a consolidated basis including JVs at pro-rata was 13.2% for the trailing 12 months. Looking at FFO for the quarter, FFO per diluted share was $0.47 for the quarter compared to $0.57 for the quarter ended June 30, 2010. Negatively impacting FFO during the quarter was a $35.7 million impairment charge on Shoppingtown Mall. Adding that to the FFO it was an adjusted FFO per quarter of $0.72 per share.

The operating metrics are good including same center NOI excluding terminations in (inaudible) 141 being up 2.94% compared to the second quarter of last year. As key components of that 90% of our leases have CPI increases built in. So January 1st of this year must get those CPI increases kicked in and may average 1.3%.

In addition, you’ve got the positive impact of the releasing spreads that we saw through 2010 growing through our same center NOI numbers and that was a pickup of about 0.8% plus you add to that the gain from occupancy pick up of another 0.8% and that covers most of the 2.494 same center NOI increase.

Lease termination revenues including the JVs were at $2.5 million compared to $1.5 million during the quarter ended June 30, 2010. Looking for the balance of year we still expect to see approximately 12 million of lease terminations revenues for the year. Bad debt expense for the quarter was up about $700,000 and $2.1 million net compared to $1.4 million in 2010. However, if you take a look at the full year through June we stand at $3 million for the six months ended June 30, 2011 versus $4.8 million in the six month period a year ago.

Management company expense was down at $21 million compared to $24.4 million in the second quarter of last year however you really need to look at your paid management company expense which stands at $46.7 million compared to $46.6 million a year ago. The second quarter difference was primarily due to timing differences as we noted in our first quarter call, because of right sizing in which there was severance payment that happened in the first quarter of 2011 and conversely we saw the benefit of the reduced headcount affecting our numbers in the second quarter of 2011.

Also during the quarter we had from a joint venture gain on early extinguishment of debt of approximately $7 million that happened on April 1st and we mentioned that on our first quarter call and that offsets the $9 million of loss on early extinguishment of debt we saw from the Chesterfield Town Centre pay off that happened late in the first quarter.

Looking now on the balance sheet we got additional loan pay offs in the quarter including $83 million loan at 7.2% interest rate on Pacific View Mall, and again in July, early July we paid off $40.2 million loan on Rimrock that was at 7.6% interest rate, both assets are now unencumbered. With those pay offs we’ve got 13 unencumbered assets that throw off about $93 million in NOI. So we could very comfortably in today’s market borrow on a non recourse basis $750 million to $800 million on those assets.

On May 11, 2011, we had a $39 million non-recourse loan on Shoppingtown Mall mature and is currently in maturity default. The company is negotiating service – at this time the ultimate resolution is uncertain, however as a result of that maturity default, we’ve recorded a $35.7 million impairment charge on that asset for the quarter ended June 30, 2011.

Today our debt to market cap is 43%, our average interest rate is 5.13% and our interest coverage ratio for the quarters is 2.24 times.

In this morning’s earnings release we also issued new guidance on FFO, and the new range with adjusted FFO which excludes the impairment is 2.84 to 2.92 in the midpoint of 2.88. That’s up from 2.78 to 2.94. The reason we tighten the range is some of the uncertainties like lease termination payments which are uneducated assumption at the beginning of the year become more clear as the year goes on, and also we’ve factored in the accretion from the recently acquired fashion outlets of Niagara Falls which Art will talk about in a minute or two.

Shipping out of tenant sales, mall tenant sales per square foot were 4.58 for the 12 months ended June 30, 2011. That’s up 9% compared to a year ago when the trailing 12 sales per foot was at 4.20. Looking at it by region based on total sales the Arizona region for quarter was up 6.4%, central region was up 5.6%, the eastern region is up 7.6%. Pacific Northwest 5.4% and southern California up 6.5%.

At this point I would like to turn it over to Art.

Art Coppola

Thank you Tom. Welcome to the call. As you can see from the results that we’ve reported we continue to have a very strong year. As Tom has outlined our balance sheet is continuing to improve with its capacity which is enhanced by the recently revised new five year line of credit revolver that we have and we’ve been building up a significant amount of an unencumbered asset pool that would give us fire power to take advantage of the opportunities in the future, certainly one of the opportunities that we recently were able to take advantage of was our acquisition of the fashion outlets of Niagara Falls which I’ll talk about in a few minutes.

In looking at the portfolio itself, leasing continues to be strong. The environment is very good, sales are good, our retailers are making a lot of money. As you look at where our portfolio stands today compared to two years ago, about two years ago in September of 2009 the sales of our tenants had pretty much bottomed out from the significant decline that all retailers starting in September of 2008. And we basically – we feel that by the end of this year we will be back at sales levels that will approximate the sales levels that we were at before we entered into that depression that we entered into in fall of 2008.

As Tom outlined our regional malls averaged $458 a square foot today with strong comp sales increases. If you slice that up into pieces our top 20 malls in our portfolio average $630, $631 per square foot. Dropping down to our top 50 malls in our portfolio those top 50, if those were the only malls we owned average $502 a square foot and then including all of our malls together they average $458 per square foot.

Our top 20 malls which average $631 a foot generate just under half of our total NOI in our company at 46%. Our top 50 malls which average $502 a square foot generated a little over 82% of our NOI. And this is indicative where we stand in our portfolio and I shared these numbers with you because as you remember about a year ago I shared with you the fact that our portfolio currently was generating a little over 80% of its NOI from what we consider to be fortress assets, and that our goal over time is to increase that percentage of NOI that comes from fortress assets or A-quality assets to something well into the mid to high 90s and we intend to do that through accommodation of acquiring powerful centers, expanding existing centers of ours that are already powerful centers and making them even bigger and more powerful.

Developing Class A properties, and then as time goes on disposing of assets or pruning our portfolio. While we’ve not done a significant amount of pruning in the last year, it is still very much in our radar screen and we’re watching carefully what’s happening in the B mall market place and even the C Mall market place and it’s clear to us that capital is taking a look and recognizing that given the scarcity of product on a risk adjusted basis that there are significant rewards to be achieved from investing in the quality malls.

And then when you add to that the fact that the debt markets have improved to the point to where these properties are able to support relatively high loan to value debt levels either through traditional loans or CMBS loans, it creates an environment where I am convinced we will have the opportunity to monetize some of our B and C malls and achieve the long term goals that we announced a little over a year ago which is to tape our portfolio to a point to where something in the mid 90% of our total income is coming from class A fortress high barrier to entry real estate. And that’s our goal, that’s one of the lessons that we learned from the recession – the depression of 2009 is that those type of assets perform the best in downturns. We’ve also learned, when we look at our NOI that our strongest NOI performers over a long history of time are the powerhouse properties that we owned.

We can take a property that is generating insignificant amount of NOI and generate huge increases like Scottsdale Fashion Square, a Tysons Corner, a Washington Square, Cerritos, properties like that. On the other hand we found over time that the B and the C malls that generate lesser amounts of income and are in secondary markets, while they are very safe and secure investments from many different angles we just can’t generate the same double digit growth because you just don’t have the dynamics available to you in the market place and when you do have the dynamics available to you competition can tend to occur in any number of different format.

So, that’s our strategy at a portfolio level. In terms of how we’ve been implementing that strategy as you saw in this quarter we’re able to enhance our ownership Class A high quality, high productive malls in a couple of ways. One, that we were able to increase our ownership that Arrowhead and Superstition Mall, we’re all had in super mall by executing a tray with general growth properties where we traded five Mervyn’s stores plus some cash for a one-third interest that they had owned historically in Arrowhead Mall and Superstition Mall they were a passive investor in those two malls and were the great regional malls that – and Arrowhead in particular is a very, very strong desire and Superstition is probably more of a B type of property from a sales per foot or any other viewpoint. It wasn’t a core investment for them because they had inherited that investment. So it made sense for them to liquefy, made sense for us to increase our ownership. We did it and it's part of our goal and our method of getting to that long term goal that I’ve enunciated.

The other really key event that happened that we announced a couple of days ago is they are consistent with the guidance that we have carefully been giving to you over the course of the last one year, where we started one year ago today and said we are going to carefully look at the outlook business and if you take a look at all of the team leads that we ask you to read – we gave you strong indication to believe that we had decided last quarter that it was definitely an arena that we are going to move into, and that we are going to move into it and we predicted for you that look at the end of five years from now my guess is we will own somewhere between five and ten very strong fashion outlet malls. Because it's a natural progression for us, we have had great reception from retailers and we looked at this and we’re able to capitalize on a relationship to acquire one of the – one of the top tier outlet malls, located in Niagara Falls, we can get into the characteristics of the property, I’m sure on the call, but it's fashion outlets of Niagara Falls, it’s a property that generates over $650 square foot, it's enjoyed dramatic sales increases over the last five years due to a combination of enhanced marketing as well as the relationship of the Canadian and the U.S Dollars, but we also see an opportunity because of the tenant demand that we know that we have today for an increased enhancement to the productivity of the center and an increase in the NOI from the center with significant NOI increases available to us given the fact that our cost of occupancy as a percentage of sales at this center is something in the neighborhood of 7% for the mall tenant and a little bit over 8% to 9% basically for the non-mall tenants that we have here, we think there is a great opportunity at this level of productivity to generate good rep bonds going forward.

We have retained AWE Talisman to stay onboard with us and own the property over the last five years and done the leasing marketing management of it. This is the same group that we retained to join us in the development of the fashion outlets of Scottsdale and they would be working with us here year as we take Niagara on to the next level and we built in earn out incentives into the economics of the transaction where if they’re able to generate significant increases in NOI over the next three years from Niagara Falls they are able to generate out of another 18 million give or take over the $200 million of consideration that we paid after closing itself.

The cap rate on the – if I had to characterize the cap rate on the year now which I know you’ll be interested in asking it probably is in the area 7.5 on the year itself but we see significant increases available here. We’ve elected to align our interest with AWE Talisman. They are a recognized name in the outlet industry, not a big name but a quality name, retailers know well and they trust and we are going to be using them here as well as we’ve got them working with us in Scottsdale.

We announced it in Scottsdale that we were going to develop a fashion outlet center at Scottsdale, a lot of week before ICSC. And that was extremely well received at ICSC. We’re currently in the process of discussing the project with numerous tenants who are taking inventory of the interest. We’ve been developing leasing plan and a sizing parameters based upon the demand that we have, and this is a center as we said in previous calls we have very high hopes for, we think we have a opportunity for a really high performer in the fashion outlet world and we’re very excited about pursing that.

On the development side we see great prospects over the next five years that we made very good progress over the last quarter. As we’ve indicated to you we see about a $1 billion pipeline of development and redevelopment opportunities available on our pro rata share to us in the company over the next five years. The most visible of that right now would be Tyson’s Corner where we are proceeding with our office and residential expansion. The reception we have in the market there, we’ve engaged the Hines (ph) Organization as our key developer on the office and we’re engaging a local, very strong residential developer to lead the way for us on the residential, we’re in the process of picking a flag on the hotel (inaudible) for the hotel and we’re very bullish on that.

And of course the fashion outlets of Scottsdale is in our pipeline which will be something that will definitely occur over that five year period. Beyond that within the pipeline you have a Estrella Falls as well as a couple of other projects that we’re looking at within the expansion arena within our existing portfolio as well as the possibility of one or two projects that we’re looking at where we may buy a project from another entity and taking it to (inaudible) and expand them.

So, we feel very good about where we stand. We are exactly where we want to be and at this point in time we’d like to open it up for your questions. Operator?

Question-and-Answer Session

Operator

Yes sir (Operator Instructions) And we’ll first go to Craig Schmidt with Bank of America/Merrill Lynch.

Craig Schmidt – BofA/Merrill Lynch

I just wanted to focus a little bit on Niagara Falls outlet center. I guess when I look at the size, the occupancy and the productivity I’m coming up with a pretty high cap rate. And I guess there's two things obviously I don’t know. Is the occupancy cost very low on this asset or is the sales per square foot somehow not include all the properties in the 526,000 square feet.

Art Coppola

Well the cap rate I can share with you is, if you were going to use one I would tell you it’s got a seven handle on it, on the initial purchase and I mentioned to you that it's more in the mid seven. And the occupancy cost as a percentage of sales ranges between 7% for mall tenants to 9% for some of our non-mall tenants. But it is a low occupancy cost as a percentage of sales. It’s high sales level. Those are for likely tenants under 10,000 feet. But we see good upside there, but the cap rate on the purchase I would play it flat out as around 7%.

Operator

Thank you. And we will continue on and hear from Michael Mueller with JP Morgan.

Michael Mueller – JPMorgan

Yeah, hi, two questions. One, to get to the 5 to 10 outlet centers over the next five years I mean what do you think the split is going to be between purchasing or developing because it looks like – well, basically you have done (inaudible) so far.

Art Coppola

Yeah. Let’s see how it goes. Let’s see how it goes. I feel very confident in those numbers and one thing that I would add as another category would be an reuse of one of the properties that made switch-ons today. So, one or more of the properties that made switch ons today to be converted to either a partial or even a full outlet center. Let it play out.

Clearly, I think there is – beyond Scottsdale there is another development opportunity that’s imminent in the pipeline, but we need to finalize some conversations related to that and there are in fact couple of other, I would say a little bit longer term development opportunities that we are looking at, as well as some potential acquisition opportunities. But at this point in time, we have announced Niagara Falls, we have announced the fashion outlets of Scottsdale. I have indicated that there is a development opportunity that is imminent that we should be announcing hopefully before the end of the year. And I feel comfortable that at the end of five years we will be in that zip code of 5 to 10 properties. The major message is we are cautiously going to be in the business, very carefully, in really a small way compared to our overall asset base. At most I would guess that the outlet business will be 10% to 15% I don’t know in that region of our asset base. But it's something we should enter into and when it's 10% to 15% over what we have today you are adding, maybe even as many as more than five centers, some of those development through the pipeline over and above what we have in the traditional regional mall area. On our small base that’s real growth.

Michael Mueller – JPMorgan

You mentioned the growing cap rate on this is about 7% on Niagara. I mean for a regional mall and an outlet center hypothetically that have comparable sales, what do you think the cap rate differential should be?

Art Coppola

I am not going to comment on that. You guys know how you treat – I mean you know what the reported cap rates are on the outlet centers that recently traded and there is very few, but there hasn’t been a class A regional mall that’s traded any time recently. We are very happy with the deal that we made. Niagara, we think it is a fair price from both sides, but you know how the street values outlets versus regional malls. Some of the outlet owners at higher multiples than the regional mall owners.

Michael Mueller – JPMorgan

Okay. And last question. Tom comment on about 12 million of lease term, was that for the balance of the year or 12 million for the full year. And then considering that you have only gotten, I think about 4 million so far year-to-date, can you just talk about where you are generally seeing the back half of the year lease term coming from, types of tenants?

Tom O'Hern

Yeah. Mike, the 12 million was our assumption for the full year, and there was a range that was part of the reason we had a wide guidance range, we’ve got a lot more clarity today and you are right year-to-date was about 4.5 million, we’ve got a couple of deals out there that we are working on right now, so we’ve got a little bit of clarity and we are comfortable with the balance to get us to 12 million or come through in the next two quarters.

Michael Mueller – JPMorgan

Okay. Great, thank you.

Operator

We will continue on to Paul Morgan with Morgan Stanley.

Paul Morgan – Morgan Stanley

Hi good afternoon. On the – you mentioned pruning the portfolio and how that’s still a priority and you are watching what everyone else is doing, I mean – you also then broke out kind of top 20, top 50, I mean should we assume that what’s not in the top 50 or a big chunk of that is up for pruning or you quantified the number of assets that you think might qualify, are they sort of geographically dispersed and not in your top markets or how we should think about that?

Art Coppola

Sure, you know there are 20 properties in our top 70 that are not in the top 50, right? So the top 50 do $500 a square foot, there is another 20 properties that are sub $400 foot type centers and sub $300 foot centers.

I would say, you know, over time, as many as half of those or ten or so would be candidates for pruning

Paul Morgan – Morgan Stanley

Okay, great. And then just can you give an update on the …

Art Coppola

I do want to emphasize that from a time table viewpoint that would be pruning only on an opportunistic, in a strategic way for us, we don’t feel compelled to do any of that pruning. But as we look at where we want to be five years from now in terms of the overall quality of our portfolio, the guidance we’ve given is, look, with the size of our company we can get to almost a 100% of our income coming from assets because we don’t own that many assets that need to be pruned and between a combination of pruning and in addition you can get to a place that is a very unique place in the market place and end up with a portfolio that is extremely high barrier to entry that should perform very well in tough times and extremely well – should perform satisfactorily in tough times and extremely well in good times, go ahead and cut shot.

Paul Morgan – Morgan Stanley

I was just thinking on that. So you do where you sort of down envision doing like a Westfield type thing where you try to market the portfolio.

Art Coppola

Let's see how it goes. We need to look at – I think it's going to be instructed to all of us the process that Westfield is going through and I’m agnostic as to what that result would be. I am a big believer that you know the B malls of the world are still very good investments and that there are very good returns to be had there. But as I look at our portfolio management we’ve elected to go a little different route here because we have the opportunity to do it. If we were at the 40% of our income coming from A malls I probably wouldn’t be sitting here saying our goal is that have 95% B-A malls, but will be sitting in the low 80s, it’s in a attainable goal, and we don’t need to get there and I’m not saying industrial does either, because they’ve got a very nice and strong (inaudible).

We don’t need to get there through a mass marketing but who knows, I mean we’ll do whatever is best an attracts the most interest. We’re hearing there is very good interest on those 17 properties. So let's see, we are monitoring it. I think it’s great that they are out in the market because that will give us all some transparency on it.

Paul Morgan – Morgan Stanley

Okay great. And then my other question is from re-development pipeline. Has there been any movement over the past kind three to six months in terms of things moving forward or popping in your conversations ICSC maybe that something over the next 18 months might start that you had another right start or anything like that?

Art Coppola

Well, the major project that we’ve got under a careful – and Randy, help me if I miss something. But the major one that we are looking at right now is Broadway Plaza and Walnut Creek. We think there's an opportunity to add some GLA there. May involve tearing down some of the small store space and then rebuilding in a more densified manner. We’re adding new markets there to an already well anchored location. We think there's great opportunities there. The other center that I would say has got great opportunities is Cerritos Mall. We just recently worked with Nordstrom for them to relocate to a new store from an old store that they had at the mall, and they are doing fabulous. Our expansion tenants that we’ve added are doing terrific. Mall sales and traffic is just on fire and we’ve got the capacity there to recycle a fair amount of square footage. So I’d say those are probably our talk-to candidates that we’re focused on. But we’re looking at every property all the time just in the ordinary course of business.

Operator

Thank you. We’ll take our next question from Christy McElroy with UBS.

Christy McElroy – UBS

Can you give us a early sense for how you plan to refinance the converts maturing next year?

Art Coppola

Christy, we’ve got a variety possibilities as you know the converts fill up in March and today they’re trading at a premium. So there is no real incentive to go early for them. You saw us announce in the line of credit a 1.5 billion, but we’ve also got the ability to expand that to 2 billion and I today as we speak we’ve got maybe 200 or 240 outstanding in the line. So there is not – there is a lot of capacity in that line if we needed to do the line. There is also a very strong market front secured bank notes right now. We’ve got multiple indications from banks that we would be eager to put up five to seven year financing in place for us.

So there is a variety of ways we can do it. As we mentioned before we also have a fairly large unencumbered pool and could do some financing there on some of those assets. So, not at the point of making the making decision but there is a number of buckets of liquidity that we could go to our combine to take the converts out.

Christy McElroy – UBS

And then on Superstition and Arrowhead coming through leader year. Are these assets that you would potentially unencumber or would you refinance them. And if you did reify them how much of an excess proceed do you think you could generate?

Art Coppola

Well, we are going through that decision now. It’s in partnership so we are getting tips from our partners. But just as an indication we are getting proposals now on Arrowhead and Arrowhead has a relatively modest amount of debt, I think less than $17 million and we’ve got proposals coming in at $210 million and $240 million. A very, very attractive pricing. So, there is a lot of capacity, and both of those assets tend to be very under leveraged today.

Christy McElroy – UBS

Okay. And then just following up on an earlier comment. I’m wondering if you could give us a sense for some of the feedback you received from retailers outlet projects in Scottsdale and have you officially begun pre-leasing? And I knew that there was some talk about proximity of the sites, a full price retail and if that’s been an issue at all?

Art Coppola

No, it’s – it has been an issue which the retailers believe that given the different projects that have been announced in the marketplace that the location of the project that we’ve announced and the timing of the project that we’ve been announced, the sponsorship is in their mind in the proximity to existing retail, the right project for a fashion outlet center in the Scottsdale marketplace. The retailers are very strongly supported by that and we’re really right now just taking inventory of all of the demand that we have whether we can size the first space of it, it's traditional, and these outlet centers to build them in phases, the demand has been so strong that we may build the first phase that’s something larger than what would normally be a space of an outlet center which might normally be more in the 350,000 square foot zip code or neighborhood.

But we’re assessing the demand, doing the layouts there right now, and conversations taking interest from tenants. Once we’ve taken interest from all the tenants we’ll select from that group and work with that group and find the right locations for them in partnership with our relationship and re-developer that we’ve got involved there AWE Talisman who is working with us and directly with the tenants, and we are very bullish on that. We think it's going to be a real winner.

Christy McElroy – UBS

Okay. Thank you.

Art Coppola

Thank you.

Operator

And we will continue on to Rich Moore with RBC Capital Markets.

Rich Moore - RBC Capital Markets

Yeah. Hello guys. How are you? First of all thank you for the breakout on the mall stats. I think that’s a good thing to do and certainly appreciate that. On the outlet center, the two outlet centers I guess that you guys are working on, both with Talisman, I guess you bought one from Talisman and you are working on the Scottsdale one with Talisman. Is there a broadening Talisman relationship you think that’s developing here? I mean I have a couple of centers that they own and a couple that they are developing as well.

Art Coppola

We have a lot of respect for them otherwise we wouldn’t have handed the keys to the car to them both at Niagara over the next couple of years or at Scottsdale for the future. So we’ve got a lot of respect for them. Retailers have got a lot respect for that group. We look at them by no means the power house inside that other groups are. But they are quality operation that have produced quality results and developed quality projects and we think they are a perfect partner for us at this point on these projects and potentially others going forward. So I could see it definitely getting broader.

Rich Moore - RBC Capital Markets

Are any of those four are of interest to you guys to debate they currently have operating of those two in Chicago and Miami that they are developing. Was that even on the table or it’s a possibility?

Art Coppola

I would say that at this point in time we definitely see ourselves doing more with them. I’m not sure it wouldn’t involve buying something that they currently own. On the other hand, I could see developing something together with them beyond what we are doing in Scottsdale. We will just have to see how things play out.

Rich Moore - RBC Capital Markets

Okay. Good. Thank you. Then on, Tom, a couple of questions for you. The expense recovery ratio seem to dip this quarter, anything unusual in there?

Tom O'Hern

Rich, we had one settlement of a lawsuit that flow through expense for about $2 million, they were operating of nature. So that flowed through and moving numbers a little bit that was probably the only thing out of the ordinary. And if you compare that versus – that’s probably the biggest differential in terms of recovery rate.

Rich Moore - RBC Capital Markets

Okay. Good. Thanks. And then on the overall debt, I mean there was more floating rate debt this quarter it took a pretty good jump. Does that go back to do you think typical levels of fixed rate versus floating rate?

Actually

Rich, the reason that happened was we had $400 million worth of swaps that burned off and there are a vintage of loans in our portfolio that came about in ’08 and ’09 when we were in a tight credit market that are floating at The Oaks and Westside Pavilion and SanTan and those are natural candidates to go to a long term fixed rate financing when they mature over the next couple of years. So, you will gradually see us move the percentage of floating rate debt versus the total down below 20%, make around 25% as a results of that swap running off.

Rich Moore - RBC Capital Markets

Okay good thank you.

Operator

Thank you. Now we will hear from Schmidt Eric with ISI Group.

Eric Schmidt – ISI Group

Hi, good afternoon guys. My question really was sort of if you guys have done an analysis on looking at the performances divergence in our portfolio, you talked about, someone said 46% of your NOI consumer assets, $631 a foot and then the rest below, have you looked at how same store has trended may be over historically between those two, and what the divergence is and how you expect that going forward?

Art Coppola

I will try and give you an answer and hopefully I am being responsive. We find that the stronger a center is the better comp sales growth we get and the better NOI growth that we get. The more average a center is the more average the growth is and the weaker the center is the weaker the performance is both on sales and NOI, does that answer your question?

Eric Schmidt – ISI Group

Yeah, I was just wondering if you guys have actually looked at it some of the other companies have sort of given us an actual statistic on that, but if not that’s okay.

Art Coppola

Yeah absolutely, yeah. So we could that for you, you know, why don’t we do that maybe on the next call we’ll address that on these categories and we can talk about how sales have grown say in the top 20 over the last year and how same center growth was in the top 20 over the last year or maybe the last five years even that type of thing. And then the top 50 and then – we’d do a little slicing and dicing for you then.

We do it granularly, but let's do it for you in the same groupings that we talked about both sales breakouts and a NOI breakouts, is that fair?

Eric Schmidt – ISI Group

That’s definitely fair, and I guess the just last question. If you can disclose some of the outlet you guys bought, what were the sales per square foot be for the entire center and not just the inline non anchor space.

Art Coppola

It’s about $600 dollars a square foot on average. Because there is some scrip center space to – yeah, that’s about right.

Eric Schmidt – ISI Group

Okay, thanks.

Operator

Thank you. We will now hear from Cedric LaChance with Green Street Advisors.

Cedric LaChance – Green Street Advisors

Tom, I just want to go back to some of the numbers you gave earlier when you gave the breakdown in sales per region. All the numbers were basically between 5.5% and 7.5%, but when you look at the overall sales productivity gain for the last 12 months the number is about 9%. Can you help me bridge the gap between the two?

Tom O'Hern

Yeah. They are two different stats step Cedric. The first stat at 9% was the mall sales per square foot and that’s for tenants that have been open 12 months. When we looked at it regionally we were looking at total tenant sales for the period, and so it's really a different statistic.

Cedric LaChance – Green Street Advisors

Okay. Since you can gear back to development, and, Art, six, nine months ago I think you talked about making progress in regards to potentially announcing a development in the TNX market, mall development in the Goodyear area. Are you still on track to make such an announcement in 2011?

Art Coppola

Yeah. I think that at this point in time as we evaluate the market, the opening of that center looks like 2014-2015 but we are looking at it right now and trying to evaluate it. Now, we own that land. It's entitled, and we are still assessing that.

Cedric LaChance – Green Street Advisors

Okay. Is there anything changing in either direction whether you open or – whether you go ahead with the project or not?

Art Coppola

There is nothing changed about whether we are going to go ahead. We are definitely going ahead. The only question is will it open. So we are still evaluating that. We have about 32-33 month build out from the time that we start the plans, preliminary plans etc. through until finished, and when we have an opening date we will announce it, but I would say it's in our five year pipeline. It is definitely in those numbers.

Cedric LaChance – Green Street Advisors

Okay. And then final question. In regards to leasing, are you seeing any changes in trends in terms of demand for short term leasing from your tenants. In particular, are you able to start moving more and more tenants effectively to a longer term lease to and effectively and hopefully at full market rent?

Art Coppola

I’m going to ask Randy Brant to share with us today, to address the planning.

Randy Brant

Hi guys. No tenants were at shorter term leases. I would say there is a trend more towards longer term leases as the economy is getting better. But definitely not a trend of shorter term. Most of our deals are – the tenants want to lock in 10 years at market rent.

Cedric LaChance – Green Street Advisors

So you are able to convert more – you are able to convert the short term tenant to the longer terms or is it something that from a percentages of leases that’s down on a short term basis is something that’s not changing much over the last 6 to 12 months.

Randy Brant

The leases that came up in the end of ’08 and during ’09 where sales were down. We did short term leases many of those are converting to long term from the leases today.

Cedric LaChance – Green Street Advisors

And what kind of rental uplifts are you able to achieve on those?

Randy Brant

Obviously a very center-to-center, but we feel we’re getting market rent.

Cedric LaChance – Green Street Advisors

Okay. All right. Thank you.

Operator

Thank you. Quentin Velleley with Citi. Your line is now open.

Quentin Velleley – Citi

Just in terms of the handing back with Shoppingtown Mall, any comment that you want to prune sort of the bottom 20 in the portfolio and with (inaudible) malls go I guess the root of being handed back to the lender. Are there any sort of other malls sort of working in that bottom 20 where NOI might be deteriorating and they might be zero or negative equity value in your view that ultimately could be handed back to as well?

Art Coppola

Well, Quentin, unfortunately we don’t have a lot of the situations. And even in the case of shopping tenant we don’t know what the resolutions is going to be on that one. We are negotiating with the servicer and there are a variety of different ways it could go. It is good real estate, and we’re not sure of the outcome there. So, no, we don’t have a lot of those situations and nothings that’s imminent. But obviously we always reserve the right given the non-recourse financing to evaluate as we get close to a maturity.

Quentin Velleley – Citi

Okay. And then I think Michael have one as well.

Michael Bilerman – Citi

It’s just – it's been a been a long day, I just wanted to know how the – you said $18 million, but I guess how does that what threshold did they earn that $18 million and how will that work?

Art Coppola

Michael this is Art Coppola. Basically we’ve identified certain spaces that were very much under market that when this property was in the servicer’s hands there were leases done that were very, very generous to the tenants. And as part of this we identified certain spaces that we identified with them and quantify them and have a realistic outlook as to the rental increase which will occur over the next three years, which gives them the ability to earn up to $18 million additional payout less certain leasing cost that are attributable to those new leases. So, I suspect very strongly that the performance will be high. The demand from tenants here has severely increased and we’re obviously looking at ways to expand our presence in this market and we’ve got lots of different interest from luxury tenants that were not able to get into this center previously. So, it was an arms length negotiation that we sat down and then figured out the earn out.

Michael Bilerman – Citi

But I guess the math behind it obviously 18 on a purchase price to 100 is a lot, and as you are thinking about how the upsided NOI is sort of shared so that let's throw that $18 million at a seven cap, effectively is another like 1.25 million of NOI. Is it then they effectively get paid for that first increase in NOI and then after that you’re sharing all the upside?

Tom O'Hern

There is no sharing of that upside. They get paid a formula up to a certain amount which looks to be much greater than 1.5 million and we capped it at 18 million less leasing expenses and it was really capped at about a 7.5 cap on specific spaces not on the whole center.

Art Coppola

I think actually to add to that a little bit Michael. There was another question earlier today about what cap rates might property of this normally go for. Look in a privately negotiated transaction there's always a difference between the bid and the ask. The seller wanted to get the value paid to them or leases that they knew were way below market, and for leases that we acknowledge were below market. But we also wanted to say, all right, so long as those leases are really rolled over at least the rent that we both anticipate are attainable, we’ll give you a value for those credits, for those leases as they roll over and in fact we’re going to retain you to do the leasing and management and marketing of this center for a period of time. That’s really the different between giving them value by having paid them let's say a purchase price that would’ve been 2.18, less the cap reserve, let's say a few million less 2.14 or 2.13, so it’s the difference essentially between adding by percent or at a 6.5 cap as it is and with no earn out or seven cap with an earn out where they can earn a little bit extra so long as they’re able to produce what we both believe certain spaces are worth. Does that answer your question?

Michael Bilerman – Citi

Yeah, that’s perfect. And so you could have owned the center outright at 6.5 with gross or you are effectively going to own it at a seven and that seven is probably going to be flat as you pay this earn out over time and then after year three, I assume it's a three, it's a three year earn out?

Art Coppola

Yeah. But, again, I want make very clear. We see – the earn out is only related to certain spaces within the center. There are plenty of other spaces that are going to be rolling over. There is plenty of other growth coming from percentage rents. There is opportunities to grow the NOI in our view from cost savings from the economies of scale that we would have, on insurance and things like that. So we see growth from this center beyond the earn out locations within the center that is well in excess of the same center growth that we have in our existing portfolio, which is in the neighborhood of 3%. We see very strong same centered growth coming from the stats, which is a function of the fact that we are buying it with the current cost of occupancy as a percentage of sales in the zip code of 7%, say 8% overall including the non-mall spaces. So there is huge room for growth, and the earn out will after a period of years give them value three years from now on a deferred basis for that growth. I think in fact the reality is, Tom, we are going to end up booking the purchase price at the full level anyway most likely. And, so all of the growth will be attributed to us. What this really is, is that means – it's really – the reverse could have easily been done too, where we paid them 2.18 and they give us back money if the center doesn’t perform at a certain level. So, it does not compress the growth. It really aligns our interest in my view.

Michael Bilerman – Citi

Right now - your money just goes out the door at a later point on the specific performance of the NOI coming in.

Art Coppola

And the one thing I am almost a 100% certain, the money is going to go out the door. We are going to book it as liability.

Michael Bilerman – Citi

And I only have one other question on this asset was, obviously they went through a whole revitalization of the lapidated center. When you reviewed the leases, is there anything that gives you positive and negatives, leases have been negotiated with tenants that either they have causes that things don’t go the way that you see them going?

Art Coppola

We have, Randy, feel free to hop in, but we have a very bullish view on the property. There is huge demand in our view beyond the spaces that we currently have available, and we think it's going to – we think it's a great center today, but we think it's going to be an even stronger center three to five years from now. Randy, do you want to chime in.

Randy Brant

Yeah. I wish some tenants would opt out, we could probably get a lot more run.

Art Coppola

Yeah. This is a center that anybody that ever came to you and said I would like to have relieved or I will leave, you would say hand me the keys.

Michael Bilerman – Citi

Okay, thank you.

Operator

Thank you. And we continue on to Todd Thomas with Keybanc Capital Markets

Todd Thomas – Keybanc capital Market

Hi, good afternoon. Question on Tyson’s corner. Outside of Reston Town Centre, the Northern Virginia office market remains rather soft with good amount of availability, what type of pre-leasing, if any, would you require in order to move forward on that project and what type of rents are you underwriting on the office component?

Art Coppola

We are going to make the decision on – right now we are doing infrastructure work that will allow us to open up the office building and the residential building in spring of 2014. We are going to take – and that work will be done between now and November of this year. This is the utilities work and things of that nature. The pre-marketing of the building is going extremely well. We are already in negotiations with a lead tenant on the office space.

On the residential, we could pre-lease that building to virtually in a short period time to 50% lease in a number of ways after doing our due diligence with local residential developers. So on the office side and that’s really the key question. The market, look it’s a very large CBD Northern Virginia and Fairfax County. This will be the premier building without question, in the entire market both from a quality viewpoint, a location viewpoint and the adjacency to Tyson’s Corner Shopping Center. When you add all of that together we are absolutely convinced we will make the decision. At the end of this year to continue moving forward and to break ground in the spring of next year that would allow 2014 delivery. But we will be making that decision we’ll report further on this to you in our next earnings call, next quarter. right now everything is moving along very well.

Todd Thomas – Keybanc capital Market

Okay you have – you received the full site plan approvals.

Art Coppola

We have approvals for three times the square footage that we are building. We have approvals from Fairfax County to build 4.5 million square feet of residential and office and hotel on this site and we are only adding at this point in time 1.3 millions square feet.

Todd Thomas – Keybanc capital Market

Okay right. And then at Atlas Park, can you give us an update on your plans to re-merchandise that center bringing new retailers and talk about maybe some progress that you started to make there.

Ed Coppola

Yeah, we’ve been – this is Ed, have been in meetings with retailers and again you know we just closed on that centre – a couple of three months ago. We’ve gone in –our operations team have saved tremendous amounts on operating costs and broad end, our experts and obviously we’ve got a huge position there in Queens, with our Queen Center Mall in our East Coast operating group. We are and Brandy’s team our meeting with tenants we have significant interest based upon what we’re going to do with the traffic flow in the design, fixing the design of that center. I was actually in New York City meeting with the planning department of the City of Queens and City of New York this past week, and we were welcomed with a very, very open reception on them wanting to help us fix the situation out there. We feel very confident that we’re going to. We do have tenant demand, we do have interest, we are sourcing that. We’re probably going to add a food and drug component to it to create more day trips and more traffic into the center. Today, restaurants are doing quite well. Theaters are doing well, the top theaters in the chain and it's got a very, very successful health club there. So, Randy if you want to expand on that we’re feeling pretty good about it.

Randy Brant

We’ve had many tenants interested in pursuing it. As Ed said, there is a few physical aspect to the center that needs to be fixed, if you will. And we are evaluating those. But the progress is going very well.

Todd Thomas – Keybanc capital Market

Okay, all right. Great, thank you.

Operator

Thank you. Nathan Isbee with Stifel Nicolaus. Your line is open

Nathan Isbee – Stifel Nicolaus

Hi, good afternoon. Just focusing back on the Niagara Center, I dnot know if I’m reading this right, but there are some numbers out in the web on Talisman’s website that sales were 800 bucks at the peak. Is that correct and if it is what would have caused that drop?

Tom O'Hern

There is no drop, the Talisman website is private developer’s website, and they have their own method of defining sales and it probably relates to the most recent vintage of outlet tenant sales. But, it's certainly not – we have a certain protocol that we as well as the other public mall companies follow. I don’t think there is hardly any private developers that follow that. Probably more of just the pure outlet play tenants in there and the more vintage play tenants are the ones that they put in as opposed to the ones they inherited way back. The numbers we reported are absolutely consistent with verified validated sales reports consistent with the way that we report each and every one of our properties.

Nathan Isbee – Stifel Nicolaus

There was no sales drop off?

Randy Brant

No, no drop off. We track the sales for each tenant since they have been opened, and some are over 10 years. The sales has been going up not down.

Tom O'Hern

And in fact year-to-date sales are up just under 11% and then in May we are up over 15. So this center is tracking quite well.

Nathan Isbee – Stifel Nicolaus

Okay and then.

Art Coppola

I want to tell you that sometimes our leasing people when they are leasing space in a leasing booth in ICSC might say something different, what time I put into 10K. Okay. I will tell you that that probably is true.

Nathan Isbee – Stifel Nicolaus

Got you. Okay.

Tom O'Hern

And so nine sales are up over 41% in the center.

Nathan Isbee – Stifel Nicolaus

Okay. And then do you have any numbers on how much of the center sales are being pulled from Metro Toronto or Canada.

Art Coppola

Yes 82%.

Nathan Isbee – Stifel Nicolaus

Okay. So any thoughts on possible impact the Halton (ph) Hills one of the two that are going to get filled might have assets.

Art Coppola

Yeah, we thought about it. We feel very comfortable with our position for a lot of reasons, and some of those reasons you will be learning about over the next couple of months.

Nathan Isbee – Stifel Nicolaus

Okay. And then Tom, I think you had mentioned bad debt was up. Was that purely a function of borders or was there something else in there?

Tom O'Hern

No, we really didn’t lose much on borders. It was just a few tenants and again year-to-date the numbers are down. So, we wouldn’t have really drawn any conclusions from that. We think the tenant environment continues to get better and we think year-over-year versus last year we are going to be actually down significant in 11 versus 10.

Nathan Isbee – Stifel Nicolaus

All right thanks.

Operator

Thank you gentleman. Benjamin Yang with Keefe, Bruyette & Woods. Your line is open.

Benjamin Yang - Keefe, Bruyette & Woods

Yeah. Hi. Thanks. Just very quickly building on an earlier question. Was there ever any consideration to buying Talisman outright because you guys have shown a willingness to buy a company that was (inaudible) hands on good assets and ground up development capability. So, I mean why not buy this company and take a bigger first step in the outlet sector rather than do these peace meals deals with the same partner?

Art Coppola

Well, we’ve announced the deals that we have announced with them today. And we believe that – look not everything that they own or that they are interested in doing on their own fits our platform from a quality perspective and some of those things that they would like to do in the future do fit our quality platform and some of the things that we would like to do in the future makes sense to bring them into like we did at Scottsdale. So let the hand play out. We are very pleased with our relationship with AWE Talisman. They are class group, well received on main street. We think it's a great combination. We see the opportunity here to do more together and let the hand play out.

Benjamin Yang - Keefe, Bruyette & Woods

And as you build your portfolio to five or ten outlets over the next five years. Where the partner only be Talisman? Do you have some type of exclusivity with these guys that you would only do deals with these guys?

Art Coppola

Let the hand play out.

Benjamin Yang - Keefe, Bruyette & Woods

Okay. Great. Thank you.

Art Coppola

Thank you.

Operator

Thank you. Alex Goldfarb, Sandler O’Neill.

Alexander Goldfarb - Sandler O'Neill & Partners L.P.

Thank you. Good afternoon. Just going to the B&C Malls (ph). As you guys think about pruning your portfolio, how many of those centers are enjoying benchers, I’m just sort of curious how easy it is to sell those centers or how easy it would be for you to sell just your stake in the center as a way of getting towards that mid 90% fortress composition?

Art Coppola

About 13 of them are in joint ventures and two of them are going to be actively marketed with our joint venture partner in the near future in the next three months or so. And about another 10 of them or so are with another joint venture partner. And I think if that joint venture had an opportunity to monetize its investment in that joint venture it would. Let’s say up to 20 you are looking at 13 of them are in joint venture and two of them are going to be marketed in the very near future just on the upper market through a broker and I think the others we will see how it plays out. But there is no mandate again that we do all this. It is again just part of the broad goal of getting to a point to where we have well over 90% of our income coming from high quality fortress, high barrier to entry A rent type of assets, and we have the ability to get there and we are going to do it.

Alexander Goldfarb - Sandler O'Neill & Partners L.P.

Okay. And I could probably guess the answer, but I want to ask you anyway. As you think about selling these assets, you guys always seem more focused on asset quality versus impact earnings and dilutions. So, I am going to assume that if you had an opportunity to sell more of these centers before you had a chance to reinvest the dollars on a current income basis, you would certainly do that, correct?

Art Coppola

Yes. We will, and we have. We’ve got a history of doing that and we totally understand and get it that it's going to be earnings diluted before you do it and that will not – unless you had an immediate redeployment of the capital, which we have had in the past at times, but we are not going to let the redeployment of capital the immediate redeployment get in the way of taking advantage of an opportunistic disposition.

Alexander Goldfarb - Sandler O'Neill & Partners L.P.

Okay. and just the final question for Tom. Tom, in the guidance on the second half of the year, one just sort of the term fee if that’s writable or if that’s more weighted in, in one particular quarter, and then if there is anything else sort of one timish in the guidance.

Tom O'Hern

Now, on the term fees pretty hard to predict exactly what you settle and they write the check. But I put it evenly in both quarters and then there really is nothing else unusual in that guidance.

Alexander Goldfarb - Sandler O'Neill & Partners L.P.

Okay, thank you.

Operator

And we will take our final question from Vincent Chao with Deutsche Bank. And Mr. Chao your line is now open, please check your mute button.

Vincent Chao – Deutsche Bank

Yes, sorry about that. Most of my questions have been answered. But just - could you provide a quarterly re-spread, as you previously have? And is that something you are going not or not planning to provide in the future, in moving more towards the (inaudible).

Tom O'Hern

In terms of the guidance?

Vincent Chao – Deutsche Bank

No, just in terms of previously in the press release or in the script you quote that quarterly spread.

Tom O'Hern

No, as we have said for quite some time one quarter alone does not really give you an indicative sample size and so we think its misleading it can be misleading on the higher side of the low side so we think trailing 12 is far more meaningful number.

Vincent Chao – Deutsche Bank

Okay and can you just tell us what it was last quarter.

Tom O'Hern

Trailing 12 last quarter?

Vincent Chao – Deutsche Bank

Right, right.

Tom O'Hern

9.6.

Vincent Chao – Deutsche Bank

Okay all right. Thank you.

Operator

Thank you. We have no additional question in the queue at this time. I will turn things back over to our speaker for any additional or closing remarks.

Jean Wood

All right. Thank you very much and we look forward to talking to you again soon. Thank you for joining us.

Operator

Thank you. Once again ladies and gentlemen that does conclude today’s presentation. Thank you for your participation and have a great day.

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