Macerich Co. Q1 2008 Earnings Call Transcript

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 |  About: Macerich Co. (MAC)
by: SA Transcripts

Macerich Co. (NYSE:MAC)

Q1 FY08 Earnings Call

May 8, 2008, 1:30 PM ET

Executives

Suzanne Karpick - VP of IR

Thomas E. O'Hern - EVP, CFO and Treasurer

Arthur M. Coppola - President and CEO

Tony Grossi - EVP and COO

Analysts

Lou Taylor - Deutsche Bank

Paul Morgan - Friedman, Billings, Ramsey & Co.

David Toti - Lehman Brothers

Christine Mcelroy - Banc of America Securities

Jonathan Habermann - Goldman Sachs

Ambika Goel - Citigroup

Michael Mueller - JP Morgan

Richard Moore - RBC Capital Markets

Michael Bilerman - Citigroup

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Macerich Company First Quarter 2008 Earnings Conference Call. Today's conference is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue-up for questions. I would like to remind everyone that this conference is being recorded and I would now like to turn the conference over to Suzanne Karpick, Vice President of Investor Relations. Please go ahead.

Suzanne Karpick - Vice President of Investor Relations

Thank you everyone for joining us today on our first quarter 2008 earnings call. If you don't have a copy of our earnings release you may access it at the company's website www.macerich.com. During the course of this call, management will be making forward-looking statements which are subject to uncertainties and risks associated with our business and industry. For a more detailed description of these risks, please refer to the company's press release and SEC filings. Management will also be discussing certain non-GAAP financial measures as defined by SEC 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 supplemental 8-K filings for the quarter which is posted in the investing section of the company's website.

Joining me today are Art Coppola, President and CEO; Tom O'Hern, Executive VP and CFO; and Tony Grossi, Executive VP and COO. With that, I would like to turn the call over to Tom.

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Thank you Suzanne. We will be discussing the first quarter results, recent capital transactions, status of our developments and redevelopments, upcoming opportunities and our outlook for the balance of 2008. Focusing on the operating metrics, generally they remain strong in the second, in the quarter, with continued high occupancy levels, strong releasing spreads but with some softening in retail sales during the quarter.

Total mall sales per square foot for the past 12 months came in at 468 that was up 3% from the same statistics a year ago and down slightly from the year end number of 471. Total same center tenant sales for the period were down 1.1% and looking at that by a region, Southern California was down 2.1; Northern California down 1%; the Eastern region was up 4.2%; Central region up 1.5% and Arizona down 5.4%.

Occupancy levels have remained high with quarter end occupancy at 92.7% that compared to 92.8% a year ago, on a same center basis occupancy was at 92.5%, down from 93.0% a year ago. Leasing activity continue to be robust in terms of both volumes and spreads, we signed leases for mall shops 336,000 square feet, new rent came in at 44.71 per square foot, positive releasing spread of 24.3%, that's on a cash basis, excluding any straight line of rent impact which would have increased that spread.

Average rent per square foot in the portfolio was up almost 5.6%, to 40.36, compared to 38.22 at 3/31/07. The FFO for the quarter was up 13%, compared to the first quarter of last year. That put FFO diluted per share at $1.09 for the quarter, compared to $0.96 for the quarter end March 31st of '07. That was a $0.01 less than the mid point of our guidance and a couple of pennies less than Street consensus. We are not reducing guidance and we are reaffirming that guidance as previously issued at $5 to $5.15 for the year as we expect to pick up the first quarter shortfall in the second quarter.

Earnings per share for the period was $1.30 for the quarter, compared to $0.04 for the quarter ended March 31st of 2007. Included net income and therefore impacting EPS, but not FFO was a $99 million non-cash on the disposition of Rochester assets, which I will get into in more detail in a moment.

Impacting the quarter was same center NOI growth excluding termination revenue of 3% as compared to the first quarter of '07. This was up from the 2.42% for the entire year 2007 and slightly less than our guidance range of 3.5% to 4% for the year, but we still remain comfortable with that assumption for the balance of the year. Lease termination revenue including JVs at Colorado was $2.4 million that was down about $1 million from the first quarter of last year.

The expense recovery rate including joint ventures was 94%, down slightly from 96% in the first quarter of '07. CPI rent increases were $1.7 million higher than in the first quarter of '07. Straight lining of rents for the quarter came in at $2.1 million, compared to $1.6 million in the first quarter of last year. SFAS 141 income was $4.6 million for the quarter, up from $4 million in the first quarter of last year and gain on sale of undepreciated assets during the quarter was $2 million and that compared to $900,000 in the first quarter of last year.

Focusing now on the Rochester redemption, as noted in our press release this morning, effective January 1st, 2008 the former owner of the Wilmorite portfolio exercised its right to exchange $3.4 million preferred units in exchange for the company's interest in Eastview Mall, Greece Ridge Center, Pittsford Plaza and Marketplace Mall. These Rochester assets were transferred with per annum mortgage debt of approximately $218 million. The average sales per square foot of that group of assets was $360 per square foot, about $110 per foot less than our Macerich average and there was a non-cash gain of $99 million reported in the first quarter.

And looking at this redemption and consulting with our accounting firm, the original accounting treatment that was used when we entered into this transaction in 2005 was revaluated. The accounting is a combination of very complicated obscure accounting rules for business combinations and accounting for redeemable security.

In hindsight, it was determined that the minority interest accounting combined with accounting for redeemable securities should have been used rather than purchase price accounting. The net result is a gain on the redemption of $99 million. It will also require us to restate 2005 for a non-cash change to the initial purchase accounting. The initial adjustment of 2005 will be reversed in its entirety at 1/1/08, the date of redemption.

Although it will require that we file an amended 2007 10-K to reflect the change in accounting treatment, none of these changes will impact FFO, cash flow for net operating income. The only other net impact other than the $99 million gain in the first quarter of '08 will be slightly less depreciation in 2005, 2006 and 2007, which will increase net income in those years by amounts ranging from $2 million to $5 million per year.

Focusing now on the balance sheet. At year end, we had a total of $7.6 billion of debt outstanding, including joint ventures of pro rata, about $347 million of that debt matures this year. Our average interest rate is 5.62% and our average rate on fixed rate debt is 5.95% with an average remaining maturity of 4.5 years.

Our debt-to-market cap at quarter end was 55% and the interest coverage ratio was 2.0 times for the quarter. As you can see from the detailed debt schedule that we included in the supplement this morning, we have a very manageable maturity schedule. We have some of our top assets with low leverage loans expiring this year, such as Fresno Fashion Fair, Broadway Plaza and Westside Pavilion.

We've been very active in the debt markets lately and here's the status of our '08 maturities. On May 6th, we've put a new $100 million floating rate loan on the mall at Victory Valley that property was unencumbered at the time of the financing, the initial interest rate is 4.33% and it's a 5-year facility.

On March 14th, we closed $100 million construction loan on Cactus Power Center at Prasada and Surprise, Arizona. That loan floats at LIBOR plus 135 and has a three-year term extendable to five. On May 15th, we expect to close an $82 million construction loan on the market of Estrella Falls that loan is a three-year term and has an initial interest rate of approximately 4.3%.

We've also received $150 million loan commitment from one of our relationship banks for the currently unencumbered SanTan Village regional mall. This is a five-year loan and it is expected to fund in June. We've also reached agreement on a $170 million financing on a 7-year term at a fixed rate of 6.76% on Fresno Fashion Fair. That new loan of our $170 million will pay off the existing $63 million mortgage, and is expected to close in July.

At Westside Pavilion, we've got $91 million loan that matures in July. We have an agreement on a fully underwritten financing for a three-year loan extendable to 5 for 175 million. Loan closing is expected to be June 1st on that transaction. And in addition we have negotiated $300 million combination construction loan; a mini firm loan on the Oaks Mall that's a super regional mall that's undergoing an expansion in an addition with Nordstrom and that loan is expected to close by June 30th.

For the above transactions that we discussed are expected to generate in excess of 500 million of excess proceeds. These proceeds will be used to pay down our line of credit. Today the line stands at approximately $1.25 billion and by the end of July when we've completed these transactions, I expect the line to be down under $800 million. The total line is 1.5 billion, so that would be this with a substantial amount of capacity.

In 2009, we also have a very manageable maturity schedule it's about $700 million that generally includes low loan to value mortgages on high sales per foot centers such as Queen Center, Washington Square, Carmel Plaza and the Village at Corte Madera.

This morning we reaffirmed that we are comfortable with our previous range of FFO guidance of $5 to $5.15 per share for the year. As a mid point that reflects nearly a 10% increase versus 2007, and as I mentioned earlier we are very comfortable with the $0.01 shortfall in the first quarter will be picked up in the second quarter.

At this point I would like to turn over to Art to discuss strength of our business, our pipeline and other events impacting our business.

Arthur M. Coppola - President and Chief Executive Officer

Thank you Tom. And welcome to our call. Our first quarter started off with a bang with the acquisition of North Bridge Center in Chicago. We talked about that in the last call. So I am not going in to the detail on that but it's a great center. We are already seeing strong leasing demand on some of the releasing that we planned at the center again this is the center anchored by Nordstrom, the second highest Nordstrom volume center. Nordstrom store in the U.S. gives us probably 5 of the top 10 Nordstrom stores in the U.S. by sales volume are in our portfolio now. And it is a center which is $839 per square foot adds to those premium centers that we have that exceed over $700 a square foot.

As Tom went through, we had a great quarter in terms of fundamentals in spite of an obvious tough economic times and in spite of the fact that from my view point that we are in a recession.

Our first quarter leasing spreads at 24% remember compared to 28% in 2007, 19% in '06, 20% in 2005, and between 20 and 25% in 2002 through 2004. So this remains a very consistent trend. Our leasing for the year is virtually complete. We are already working on 2009 releasing. Our occupancy levels remain very solid during the quarter; this is consistent with our history over the 17 years that we've been reporting occupancy levels and is really a function of the quality of the real estate that we have highly productive centers in locations with extremely high barriers to entry.

Our redevelopments are coming on terrifically. The Oaks is scheduled to open with the major enclosed malls redevelopment opening up and being completely re-merchandised by fall of this year and then portions of the open-air center opening up later on in this year and then into the first quarter of next year.

Early pre-leasing at Santa Monica Place is extremely exciting. Everything is coming along terrific there. Our rents are coming in at the levels that we anticipated and in spite of the fact that some of the luxury retailers are thinking positive some of their expansion plans, we're getting extremely strong interest from that level in the center and interestingly enough, we're getting extremely strong interest from restaurants at this center in spite of the fact that in general the cost of board restaurants are scaling back in some of their expansion plans in United States.

Our other major redevelopment Scottsdale Fashion Square remains on schedule and on target and the leasing there is remains terrific. Our new developments remain on track and on target. Some of you may have noticed that we are continuing to refine our 8-K disclosure. As you remember our first 8-K that we filed showing our development pipeline was for Q4 of last year, and what we noticed in looking at it is that many of the open-air centers that we're building in order to provide better disclosure to the need to recognize the fact that they open up in phases and in particular that would relate to the Estrella Falls, the regional center for example.

On the other hand, some of you also noticed that on a couple of our power centers we have also phased them and delayed some of the openings or at least recognized that they will be opening up in phases and that's really just in recognition of the fact that the Power Center business in general is probably the area of our business which is again really just a complimentary business to our regional mall business. But across the board these are the types of retailers, the big box retailers that are beginning to cut back on their expansion plans. So we're just trying to be prudent in terms of recognizing those openings, that none of those changes and refinements to the 8-K are material just trying to give you better disclosures as time goes on.

I would like to talk about some broader issues with you. Just want to talk to you about logical concerns that REIT investors should have for any real estate company, concerns about liquidity.

Secondly, I want to talk to you about concerns that you have and have shown for owners of retail real estate, and in particular regional mall landlords and how we are managing our way through the recession and through the weakening consumer demand. And finally I want to address my current thinking on our Arizona portfolio, which again is something that Arizona in particular, particularly with the home builders has obviously had weaknesses that I want to address the impact of the economy there in Arizona on our portfolio.

First of all in terms of looking at concerns that you should have for any real estate companies. The biggest concern that I think anybody has today in the real estate world relates to liquidity. Liquidity is obviously the biggest issue that most capital driven companies are facing today and I won't go back and repeat what Tom went through, but you can see that we are at a very high level of activity in terms of doing property specific non-recourse, moderate loan to value, types of fixed rate mortgages and through that we're raising very significant excess refinancing proceeds that are going to... that are being used to repay our unsecured debt, our line of credit and to bolster our dry powder and to put us in an even better position from a balance sheet perspective going forward.

2009 looks equally promising in terms of the maturities that we have and in terms of the opportunity to generate significant refinancing proceeds there. At times like this when you do have a liquidity crunch, it does cause one though to recognize once again the precious commodity of capital. And in the market like this, we are taking a look at our shadow development pipeline and really beginning to prioritize that development pipeline to only begin to move forward and again these are projects that we haven't even talked to you about through great extent, but only beginning to move forward are most projects that meet a very high standard of return and quality and NAV offers the creation opportunity. So that's another thing that we do in terms of managing our company at times of liquidity crunches.

Secondly, concerns that you've expressed towards all retail landlords. We talked to you in the past about the fact that if you have high barrier to entry, highly productive regional malls that we have a long history of surviving through either recessionary or even discretionary times and that remains the case today. We're already well over 90% pre-leased for 2008, beginning to work on our releasing for 2009. We're continuing to maintain very high historical occupancy levels which is consistent with our history over the past 17 years that we've been reporting our occupancy levels to you.

Our occupancies are fueled to a great extent by our long-term credit leases that we enjoy with tenants with leases averaging 10 years. We also have a certain flow to our growth in terms of our leases with the CPI causes that we went in to putting into effect over five or six years ago, I believe that we probably have more leases with our top line tied to the CPI than most other regional mall companies and we believe that it will bode us extremely well and even in times of flat retail sales and in times of recessionary consumer demand.

At times like this, when we're dealing with a weak consumer environment and recessionary environment, we focus even harder on our profit margins. And so there is a tremendous amount of focus that we've got today on initiatives to... on our sustainability initiatives, on energy savings initiatives, on taking a look at real estate tax controls and savings that we can attain there and on business development and specialty leasing and we see great opportunities to continue to operate our centers at even better operating margins than we have in the past.

At times like this in the recessionary environment it's prudent to exercise caution and prudent on your development pipeline and I think that particularly on some of the power centers that are further out there, at Prasada, for example, we are doing that. It's also prudent to invest your capital in great markets with extremely high barrier to entries, where the tenants really at, where these are must have locations, location like the Oaks, Santa Monica Place, Scottsdale Fashion Square.

Another thing that might seem a little bit on congress to you that we do in times like this in terms of managing portfolio is that we really began to focus on recapturing space from unproductive tenants. At times like this where we have tenants stay in the center that's doing $700 a square foot, you will have a spattering of 10% or 15% of your tenant only doing $300 or $400 per foot, another 20% or 30% doing $1,000 per foot, all averaging $700 a foot.

In a weak time like this it's an opportunistic time for us to go back through our portfolio, and to look at recapturing unproductive space, and then releasing that for the tenants that should be there. So, actually times like this give us an opportunity to really get back space that otherwise we may not have an opportunity to get back. So, that's another thing that we do in an environment like this.

In terms of looking at our Arizona portfolio, I wanted to talk to that issue also. We enjoy a very dominant portfolio there. We enjoy a portfolio that over the past five years have seen a sales increase from 380 to $7 a square foot to well over $540 a square foot. One other thing that's very unique about our portfolio in Phoenix and Arizona in particular is the diversity of the portfolio. Portfolio ranges from super regional centers like Scottsdale Fashion Square were and Chandler Mall to more neighborhood oriented centers like Fiesta Mall, and Desert Sky to open-air centers like Kierland Commons, to luxury lifestyle centers like La Encantada in Tucson. But we're serving multiple segments of the marketplace and that gives us a tremendous amount of diversity and opportunity to go ahead and to do extremely well even in this environment.

Tom mentioned that our sales were off a little bit in Arizona in the first quarter and a significant part of that is due the fact that we delivered a brand new regional mall in Gilbert in the Southeast Valley in the fall of last year and that did have an impact on Superstition Springs and Fiesta, to a lesser degree on Chandler. The impact was not that significant and roughly single-digit impact which shows us that the market was ready for Gilbert SanTan and that the other centers will easily survive that and that is the case.

Looking at our Arizona portfolio, also its important to think about it in terms of its placement in the balance of our company. Our Arizona portfolio comprises roughly little bit less than 20% of our net operating income for the entire company. Again I mentioned that the high productivity level is roughly over $550 a square foot. Its an extremely powerful driver for us and we anticipate that it will continue to be so in the future. But as you look at the balance of our portfolio and you look at the rest of our concentration, an almost equal amount of net operating income comes from nearly our New York City area portfolio which is doing extremely well for us.

A little bit lesser amount that is coming from Southern California, from Central California, from New Washington D.C. sub marketplace, from Northern California. When you add up all of our top high dense metropolitan areas, where we have centers with extremely high barriers to entry, our portfolio was little bit over 80% of our net operating income is sitting in these major metropolitan areas where again we have extremely highly productive centers and very high barriers to entry.

But with that I would like to open it up to Q&A and again welcome you to the call.

Question And Answer

Operator

Thank you. [Operator Instructions]. We'll go first to Lou Taylor with Deutsche Bank.

Lou Taylor - Deutsche Bank

Thanks. Good morning guys.

Arthur M. Coppola - President and Chief Executive Officer

Hi Lou.

Lou Taylor - Deutsche Bank

Tom, can you talk a little bit about the Wilmorite gain in terms of was there any economic gain there from the transaction?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

No, Lewis. It's purely an accounting gain and results from some very complex accounting rules. But its non-cash, non-economic.

Lou Taylor - Deutsche Bank

Okay. And I know there was a little bit in terms of share price differential between what it was in January 1 or what was in April of '05, did that influence your share count or anything along those lines?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

No, no change is share count.

Lou Taylor - Deutsche Bank

All right and then next question just pertains to kind of the financing discussions you've had, I know you've got life companies, you got new relationship banks. Are there any other newer sources coming into the discussion whether it be future CMBS lending or is it really just the two main sources right now. Is it broadening out at all?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Well, we haven't seen it broaden out yet Lou, it stands a reason that it probably will. It doesn't appear to have much CMBS activity but in this point I think there may have been one deal that got done, but we've seen a pretty strong appetite from our bank groups and in the life companies we've been able to line-up attractive financings. So we haven't really had to seek alternative sources, but I think there are probably some starting to surface.

Lou Taylor - Deutsche Bank

Okay. Then last question with regard to the kind of items that slipped from Q1 that you expect to receive... I am sorry, slipped from Q1 to Q2. What were those items, lease term fees, land sales, what were...

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Well, all of those... when we go into the year those two areas are really just a guess in terms of timing and they tend to flow unpredictably through the year, but we looked at our assumptions for both way and sales and lease termination payments and we're comfortable with those. We expect to see some pick up in 2Q that we didn't get in the first quarter.

Lou Taylor - Deutsche Bank

Great. Thank you.

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Excellent.

Arthur M. Coppola - President and Chief Executive Officer

Thanks Lou.

Operator

We'll go next to Paul Morgan with FBR.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Good morning.

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Hey Paul.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Where are you at now in terms of the percentage of your rents that are on CPI leases?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

We're at about 55% now, Paul and virtually every lease that gets signed these days has that feature in there.

Paul Morgan - Friedman, Billings, Ramsey & Co.

So how do you kind of done the math to see where... what the contribution of the CPI bumps is to your same store NOI?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Well I think these reset January 1st of every year and I think on average the CPI rates that was used was at about a 2.4% rate. So if you apply that to roughly half the portfolio, that's 1.2% or so of that 3.5%. And obviously we're looking forward to getting our whole portfolio on CPI, so we get the full benefit of that.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Okay, great. Could you comment on the plans for the Mervyn's portfolio in light of reports the about Mervyn's financing issues?

Arthur M. Coppola - President and Chief Executive Officer

Sure. We're receiving significant demand in interest from third party owners of centers where we now own in Mervyn's building. If you remember the Mervyn's transaction was purely... was a real estate price transaction. It does show a nice return for us, but the price at which we allocated to the portfolio and to the individual assets were prices that not to wish anybody ill will, but prices that we would be extremely happy to take over the real estate and in fact that if you just look at our portfolio alone, if we were able to recapture all 11 stores from Mervyn's, the profit that we could make from that alone would have paid through the entire acquisition of all 40 stores. So, it's very much is a real estate deal that enjoys a good return in the meantime.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Are you making any efforts to proactively recapture some of the face now or is it basically just kind of the... you got the lease for the duration and see what happens?

Arthur M. Coppola - President and Chief Executive Officer

No. We did recapture one space and that was in Mesa, Colorado. But the stores that we brought are all stores that Mervyn's is showing up four wall profit on, but they are doing a good business in. And they are not interested in getting in even that. So, we should try and which is certainly... it was in our game plan. But these are all stores that Mervyn's is happy with and considers to be long term keepers for Mervyn's.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Okay. Now I have a question on the sales and any implications per percentage rents. I mean I know you don't have great visibility. It is going to be depending on sales. But the year-over-year number was down a 1 million. How should we think about kind of a full year percentage rent if the comps kind of persist like we're seeing in the first quarter?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

In terms of percentage rent, Paul. That was an expected rotation from percentage rent into minimum rent which happens when leases roll and it also happens in certain cases, the new developments where tenants go from percentage rental and they starting to pay minimum rent. So far we haven't seen anything that's changed our view and our guidance for the year. We still think we're going to be in that 3.5% to 4% same center growth. And it is hard to draw any conclusions from changes in percentage rent. Because, quite often it really is a function of rotating from percentage into base much more so than in the actual sales activity. We've got less than 6% or 7% of our tenants that actually pay percentage rent. So, we're not real sensitive to quarter-to- quarter fluctuations there.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Okay, thanks.

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Thanks Paul.

Operator

We are going to David Toti with Lehman Brothers.

David Toti - Lehman Brothers

Hi everybody. Just a couple of questions with regard to your pipeline. Have you changed any of your yield assumptions or timing assumptions around some of the projects, I know it's not visible on the schedule but just wondering what your perception is there?

Arthur M. Coppola - President and Chief Executive Officer

Theyield assumption everything is still online and on target in terms of the deals where we're actually are doing re-leasing and then on the timing assumptions they really reflected in just comparing the current 8-K versus the previous 8-K and to a great extent it's really just better and clearly disclosure that you have credence and recognition to the fact that on an open-air center in particular the open-air regional that we open. They tend to open in phases as compared to all at once.

David Toti - Lehman Brothers

Okay and then any change in to the temperature of the pre-leasing environment?

Arthur M. Coppola - President and Chief Executive Officer

Our pre leasing environment on mall pre-releasing remains extremely strong because of the product that we are offering to people. I think in general if you take a look at pre-leasing today the big box anchored center its weaker than it was six months ago clearly and we're to great extent taking that in to consideration and being prudent in terms of the openings that we're looking at in particular at Prasada.

David Toti - Lehman Brothers

Okay and then just relative to potential pull back on you shadow development pipeline. Does that impact any of the prior numbers that you have put out relative to investment spending over the next three years?

Arthur M. Coppola - President and Chief Executive Officer

No because none of those members that... we've never talked to you about any of those numbers to-date, so these are really the opportunities that we're working on that would really have a begun to talk about in terms of quantifying with you at this point. It's really just... I bring that up in the context of recognizing that in a capital constrained environment how do you manage your company in an environment like that and one other thing that we do is an environment like that we really go back and rescrutinize everything that's in our pipeline for the very high standard and high bar in terms of performance for the development to get capital allocations to it and its really just a prioritization that we do in times like this to recognize the preciousness of the commodity or capital.

David Toti - Lehman Brothers

Great. Thank you very much.

Arthur M. Coppola - President and Chief Executive Officer

Thank you.

Operator

We go next to Christy Mcelroy with Banc of America.

Christine Mcelroy - Banc of America Securities

Hey good afternoon. Tom, other than the key one shortfall to be made up in Q2 have your quarterly guidance assumptions changed for the back half of the year. I think you previously talked about 24% in Q3 and 32% in Q4?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

No those haven't changed. As we have mentioned we've got a lot of seasonality that comes through in the fourth quarter that's really a bulk of the percentage recognized that's also where we get a disproportionate share of our temporary tenant revenue activity comes in that fourth quarter somewhere we still expecting that this year.

Christine Mcelroy - Banc of America Securities

Okay. And then just a follow up on the pre-leasing question. What percentage pre-leased as your ground of development pipeline currently and then with regard to Art I think you touched on the malls but then with regards to the power centers have you found a incrementally tougher to lease up this space given some of the pull backs and expansion plans and start closings among the big box retailers?

Arthur M. Coppola - President and Chief Executive Officer

Yes on the power centers there is clearly been some pull back and I think that's you know that's great extent what I mentioned before that is the reason for being a little prudent. We can decide when we want to deliver those power centers and so to... on some of them we will face them and some of them we will move them back a little bit in particular Prasada.

On the mall pre-leasing the only one that they ground up opportunity that we are in the pre leasing process of right now, is the Estrella Falls and that is at a very high level of pre-leasing activity and doing extremely well. We've given ourselves plenty of time in terms of the opening of the center, but we anticipate that that center will easily be well over 90%, leased at opening without any question. We've got virtually every retailer that joined us at SanTan and Gilbert wants to have a store with the Estrella Falls in Goodyear. So I am very confident on that. That is center that at one point we were going to open up in 2009 and just to give ourselves a little bit more cushion to make sure that in this environment that we could open up very high percentage of our retail is all at once. We moved this to 2010 and it could be as pre-leased as we would choose it to be at this point in time but it's in very good shape that way.

Christine Mcelroy - Banc of America Securities

Okay, so you are kind of holding back on some of the commitments there hoping that the environment improves over the next year or two?

Arthur M. Coppola - President and Chief Executive Officer

No, we are not holding back, we're leasing that in the ordinary course of business and it's coming along very well.

Christine Mcelroy - Banc of America Securities

Then what kind yields are you projecting in your power center development project, specifically?

Arthur M. Coppola - President and Chief Executive Officer

Generally on the power centers, we anticipate yields of 9% to 11% on cost.

Christine Mcelroy - Banc of America Securities

Thank you very much.

Arthur M. Coppola - President and Chief Executive Officer

Thank you.

Operator

We go next to Jay Habermann with Goldman Sachs.

Jonathan Habermann - Goldman Sachs

Hey, good morning, here with Tom Boban [ph] as well.

Arthur M. Coppola - President and Chief Executive Officer

Hey Jay.

Jonathan Habermann - Goldman Sachs

How are you?

Arthur M. Coppola - President and Chief Executive Officer

Good.

Jonathan Habermann - Goldman Sachs

Question on, Art you mentioned same store occupancy, I think down 50 basis points year-over-year, any surprises in there, I guess by geography or is that pretty much what we've been reading about in the papers?

Tony Grossi - Executive Vice President and Chief Operating Officer

Tony here Jay. No there is no consequence to that occupancy ties any retail fall out, if you really want to look at our bankruptcy picture, we've got about 150,000 square feet of storage in formal bankruptcy, its not 80 stores with us. We've dealt with over 60% of that right now and a big part of it is Disney wasn't really an economic driven bankruptcy, and our store closing, we have a great handle on that as part of pour normal course of business, we are not surprised or alarmed that what's been reported to us in the media and the voluntary closures, really its minimal and the largest impact being pack, sign and demo stores and we had a virtually no impact to Talbot's men's or baby, it nearly has one store with them, so that activity is very manageable. So I can't say that the direct tie to that 50 basis points differential in our occupancy.

Jonathan Habermann - Goldman Sachs

And you mentioned the comfort with a sort of 3.5% to 4% NOI growth this year is that really a function of just the 90% leasing you've done year-to-date of these expiries?

Tony Grossi - Executive Vice President and Chief Operating Officer

Yeah it's largely driven by that, I mean we've got pretty good visibility into deals that are in the process right now and it's a function of what we've got rolling obviously very good releasing spreads and that was evidenced by the deals that were signed in the first quarter and we expect that to continue through the year.

Jonathan Habermann - Goldman Sachs

Okay and just following on that are you also mentioned sort of recapturing space in some of your top malls. Can you just give us some examples there and is this really pushing out weaker retailers are they month to month or you haven't actually go in sort of proactively buy them out.

Arthur M. Coppola - President and Chief Executive Officer

Generally you don't have to buy them out but I wanted... its something that may sound incongruence to most people that why would a landlord in a recessionary environment seek to get an early termination of a lease, while the reason you do it is because in times like this if you have an unproductive tenant, I mean just... so, I mean if you got a tenant within $700 square foot center and tenants doing $300 a square foot then one or two things have to happen.

The tenant has to get smaller or get out. Now, in better times, the tenant maybe able to limp along and survive an environment like that. But in tougher times it could be an opportunity where we can work together with the tenants. Many times we just entered into an option agreement with them as opposed to a buy-out where we say look, we know times are tough for you, give us with the option to early terminate your lease and when we find a replacement centre to replace you, we'll let you off of your lease. And a lot of tenants are happy to do that for us, so it's really just something that I wanted to bring up that... it relates to the subject of how do you manage your business during a recession and during a recession there are opportunities that may not otherwise occur to people and that's a big opportunity.

Jonathan Habermann - Goldman Sachs

Okay. And for Tom that 2.5 million run rate in lease term fees, is that a good number for the rest of the year or do you expect that to pick-up in Q2?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

I think our assumptions for the year, I don't have it in front of me, Jay is 10 million for the year.

Jonathan Habermann - Goldman Sachs

And I think Tom has one question.

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

It will pick-up.

Jonathan Habermann - Goldman Sachs

Hey guys just a quick question on the acquisitions front, one of your competitors recently put an asset on the market in the Stanford Connecticut area, just curious what your thoughts are with regard to that particular asset and if its something you would consider performing due-diligence on in the future?

Arthur M. Coppola - President and Chief Executive Officer

Well, we don't really comment on acquisitions until they're complete. So I really... I don't have a comment on that.

Jonathan Habermann - Goldman Sachs

Okay and thanks a lot guys.

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Arthur M. Coppola - President and Chief Executive Officer

Thank you.

Operator

We'll go next to Michael Bilerman with Citi.

Ambika Goel - Citigroup

Hi this is Ambika Goel with Michael. You mentioned that some of the luxury tenants are slowing down their expansion plans, how does that impact your redevelopment program?

Arthur M. Coppola - President and Chief Executive Officer

Tony, do you want to go that?

Tony Grossi - Executive Vice President and Chief Operating Officer

Hi, this Tony. The level of quality that we had in terms of our redevelopment of Santa Monica Place or Scottsdale fashion that's anchored by a Barney's. The luxury retailers today is globally minded. They don't have a choice necessarily of cities but they have choice amongst countries. So, our quality that we're introducing in Scottsdale and Santa Monica Place ranks really up there in terms of the global quality. These are truly global locations and they attract the attention of that luxury player that typically in any year they really open between three and five locations. They are very, very choosy and we're quite happy with their level of interest in both those sites.

Arthur M. Coppola - President and Chief Executive Officer

And I really brought that up in the context frankly of the fact that you may not have really seen it so much yet but over the next six months you're going to begin to see anecdotal evidence from the luxury retailers, that is consistent with all retailers where they're beginning to see cut back a little bit on their expansion plans. But I bring that up in the context that even though that's going to hit... that noise is going to hit the press, it's not impacting the leasing that we're doing at our luxury centers.

Ambika Goel - Citigroup

Okay, great. And then on the occupancy, on comp occupancy. In the fourth quarter, you had mentioned that you got back a fair amount of space at Biltmore and that bankruptcies remain low so far. So I guess could we assume that occupancy, comp occupancy would start to be trending in a positive year-over-year or should we assume like the same negative comp throughout the year?

Arthur M. Coppola - President and Chief Executive Officer

You're referencing Biltmore only, Ambika?

Ambika Goel - Citigroup

Just, asset similar to Biltmore where you took back space.

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Yes, well in Biltmore we're remerchandising and we walk in together with a lot of folks around this call and you saw the work that we're putting forward there and so, work in progress and there is a lot of deals opening up later this fall in that site. As it relates to bankruptcies, I spoke about the 150,000 square feet, half of it has been dealt with... some of that will come at us in Q3 and Q4. As we work through some of these negotiations, as some of the smaller ones, some of the smaller bankruptcies really today are still trying to figure out what they want to do. But it's not going to be significant.

Ambika Goel - Citigroup

So, then on comp occupancy, what do you expect? Down 50 basis points year-over-year?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

It's too tough to tell because we... I'm not sure how these smaller bankruptcies are going to through.

Arthur M. Coppola - President and Chief Executive Officer

And there are so many small Items that can affect occupancy. Until you see 2 or 3 or 400 basis point movement, to me there has not been that much change and we've never seen that kind of a movement in our occupancy levels. We've reported occupancy levels over a 17-year period and if occupancies change 50 to 100 bases plus or minus per year, that would be a lot. 93% give or take, 94% occupancy levels, that's kind of like in a macroeconomic environment, that's kind of like full employment, given the frictional vacancies and slippages on occupancies that you have from time to time. So, that's a very-very solid, solid number that we've been able to put up in great times and recessionary times.

Ambika Goel - Citigroup

Okay, great. Thank you.

Arthur M. Coppola - President and Chief Executive Officer

Thank you.

Operator

We'll go next to Michael Mueller with JP Morgan.

Michael Mueller - JP Morgan

Hi. I know the power centers aren't that big part of the business but going back there for a second. I'm curious, how close was demand, was it close enough to the point where if you wanted to move forward with the centers, you could or there was just too wide of the gap and so, the only choice was to push them off?

Arthur M. Coppola - President and Chief Executive Officer

We are not really pushing them off. We are really phasing them more than anything and so, I don't want to overstate that but I do want to recognize that if there was a weakness in... if there is a weakness in demand for new space in the retail world today it is in the big box arena, can't deny that, it is true. The big box development that we do is as you know it's always a precursor to a mall. And so, the fact that we may... that we would decide to only open up virtually 100% occupied levels and then phase the future development is really just an exercise of judgment and prudence and not any broader statement than that. And certainly I wouldn't use the word pull back or anything like that. It's really just building to the demand.

Michael Mueller - JP Morgan

Okay.And then similarly looking up at the Oaks where a portion of that was pushed off. Was it push off or is that just the disclosure of the phasing?

Arthur M. Coppola - President and Chief Executive Officer

That was just improving disclosure. We found again the 8-K pipeline report has been a long time coming. Our first one was three months ago and we found that the protocol we were using was that we were basically using the grand opening date even though it may have been phased some of the openings and we'd began to look at it, oh, wait a minute for the analytical community in order for them to better model their numbers, they really need to see when the dollars are coming into place and so, in particular on the open air centers like Estrella Falls and/or The Oaks expansion. It's not at all a typical for that to open it up in phases. So we are just trying to give you better visibility and transparency into the pipeline, so that you can do your financial models.

Michael Mueller - JP Morgan

Got you and last question. Looking at the 2010 components, it's about 270 million, is there a room for that number to grow or is that a pretty good number for this point?

Arthur M. Coppola - President and Chief Executive Officer

That number could grow.

Michael Mueller - JP Morgan

Okay.

Arthur M. Coppola - President and Chief Executive Officer

Yes.

Michael Mueller - JP Morgan

Okay. Thank you.

Arthur M. Coppola - President and Chief Executive Officer

Absolutely, absolutely. Thank you.

Operator

We'll go next to Rich Moore with RBC Capital Markets.

Richard Moore - RBC Capital Markets

Hello, guys. Curious for your thoughts on your equity needs are for the next 18 months, let's say and how you might go about meeting those, I mean would it be primarily dispositions or are you thinking about joint ventures or the public markets. I mean, how do you view that?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Rich, I don't think we've got any equity need. As I walk through the various financings that we're in midst of, we will get our line of credit down below 800 million or so which gives us quite a bit of capacity and in most of these projects that we're talking about we're seeing decent yields 9%, 10%, 11%. Obviously they are going to be valued at a much lower cap rate when they are done for this kind of built in equity there. So I see no need to do anything on the equity front. We are having no real difficulty financing our ground up development as evidence by a couple of the recent project loans that we've put on the power centers, so I see no need for that any time soon.

Richard Moore - RBC Capital Markets

Okay. Have you guys had any discussions or a thought about potentially joint venturing some of your existing assets or is that not really of too much interest to you?

Arthur M. Coppola - President and Chief Executive Officer

Well there has been huge amount of interest from our... both our existing partner base which we enjoy great partners with people like the Alaska Permanent Fund and Cadillac Fairview and Northwestern Mutual, people like that and other Walton Street. But we've got great current partner base that would love to do more with us but generally we've really been doing partnership deals really more on new acquisitions as opposed to... of an existing asset but to the extent that we would want to bring partners into existing assets, there is a huge amount of pin up demand both from our existing partner base and from other people that would like to be partners with us.

Richard Moore - RBC Capital Markets

Okay, very good, thank you, and then what day did Tom did North Bridge close. Was that January 10?

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

I believe that's right Rich.

Richard Moore - RBC Capital Markets

Okay, good. Alright, thanks guys.

Thomas E. O'Hern - Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

A follow-up question, Michael Bilerman with Citi.

Michael Bilerman - Citigroup

I just wanted to come back to the Mervyn's stores, for the 31 sites you are holding, sort of held for sale that are not in your centers, I think you'd spoke previously last call about $250 million of value that you describe to those, where are those rents if Mervyn's was not a tenant?

Arthur M. Coppola - President and Chief Executive Officer

Well, in some cases, from my view point if the buildings were to be re-leased as is, we were confident when we looked at it, the demands that we are attributed to the Mervyn's building could it be replaced with another tenant if the building was to be released as is or demised. The really big opportunity is in the regional malls where Mervyn's has locations, we are most likely in our case for example, and I know in many, many of the other regional malls in which we now own Mervyn's stores. The landlord would undoubtedly use the opportunity of getting Mervyn's back to recapture FAR. So they wouldn't be trying to lease out a big box, a big box type of rents, that be cutting up that FAR into smaller pieces and instead of running it out $8 or $10 a foot renting it out even though they would be rebuilding. So that's the really big opportunity in the regional mall location is the recapture of FAR.

Michael Bilerman - Citigroup

And are you actively marketing any of these sites today in terms of just having met with brokers and --

Arthur M. Coppola - President and Chief Executive Officer

We are in the process of actively marketing about a dozen of them in the next month or so. We've also had active conversations with several of the counterparty owners of centers of which we now own Mervyn's and several of them have shown a significant amount of interest.

Michael Bilerman - Citigroup

And you have this is not a master lease situation you have individual leases on each site?

Arthur M. Coppola - President and Chief Executive Officer

Yeah, individual leases on each type but we have the full faith in credit Mervyn's overall.

Michael Bilerman - Citigroup

Okay thank you.

Arthur M. Coppola - President and Chief Executive Officer

Okay thank you

Operator

And having no further questions, I'd like to turn the conference over to Art Coppola for any additional or closing comments.

Arthur M. Coppola - President and Chief Executive Officer

Okay well, again we appreciate your being with us. We feel we are in very, very good position here in terms of our balance sheet. We think that's extremely important it today's environment we feel that we're in very good position in terms of the way we're managing the company. Through this recession we've got a lot of experience in doing it, I feel very good about not only our redevelopment pipeline the new development pipeline as well as opportunities that we have planed for the future that are not even in our current 8-K pipeline.

We are going to be prudent and we're going to be balanced and we're going to use judgment in terms of how we allocate capital to new developments that are not currently underway, but all of the developments that are listed in our 8-K right now that are all solid on track on target and that we're very bullish and optimistic about that.

So look forward to seeing many of you in the next couple of weeks either at the shopping center show or at NAREIT in New York. So again thank you very much for joining us and look forward to talking to you again soon.

Operator

This does conclude today's conference, thank you for your participation. You may now disconnect.

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