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General Growth Properties, Inc. (NYSE:GGP)

Q2 FY08 Earnings Call

July 31, 2008, 9:00 AM ET

Executives

Tim Goebel - Director of IR

John Bucksbaum - Chairman and CEO

Robert A. Michaels - President and COO

Bernard Freibaum - EVP and CFO

Analysts

Jeffrey Spector - UBS

Craig Schmidt - Merrill Lynch

Christine McElroy - Banc of America Securities

Paul Morgan - Friedman, Billings, Ramsey & Co.

Louis Taylor - Deutsche Bank

Mike Mueller - JP Morgan

Jay Habermann - Goldman Sachs

Thomas Baldwin - Goldman Sachs

David Fick - Stifel Nicolaus

Ben Yang - Green Street Advisors

Steve Sakwa - Merrill Lynch

Jeff Donnelly - Wachovia Securities

Michael Bilerman - Citigroup

Operator

Good day everyone and welcome to today's General Growth Properties second quarter earnings conference call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to Tim Goebel, Director of Investor Relations. Please go ahead, sir.

Tim Goebel - Director of Investor Relations

Thank you, Glen. Please note that this conference call and webcast will contain forward-looking statements, including guidance for 2008 core FFO. Actual results may differ materially from the future operations suggested by these forward-looking statements due to various risks and uncertainties. Please consult documents General Growth Properties, Inc. has filed with the SEC, specifically the most recent forms, 10-K and 10-Q for a detailed discussion of these risks and uncertainties. The company disclaims any obligation to update any forward-looking statements. GGP has furnished its quarterly supplemental information to the SEC in an 8-K filed yesterday, as well as posted it to our website ggp.com. During Q&A, we respectfully request that you limit yourselves to two questions or one with a follow up.

With that I will turn the call over to John Bucksbaum, our Chief Executive Officer.

John Bucksbaum - Chairman and Chief Executive Officer

Thank you, Tim. Good morning. Thank you for joining us. Also with us this morning are Bob Michaels and Bernie Freibaum. During the second quarter, we produced core funds from operations of $0.72 per fully diluted share. Core FFO for the quarter decreased $0.01 versus second quarter 2007. It comes as no surprise that we are in a difficult business environment and this includes almost all industries, not just real estate and GGP. What is most important is how we, GGP, remain successful and work our way through this period.

Over the last 55 years, the Bucksbaum family has led GGP and all of its predecessor companies by always having a plan to guide our company. Whether it is to build them all, redevelop a project, lease the center, or finance the property our plan is always to do what is right. We have implemented many different plans during different cycles and this is no different. During our history, we have completed 100% of our developments and repaid 100% of our loans. Tens of billions of dollars of construction loans, acquisition loans, and mortgages that have always been repaid in full and on time, every penny borrowed has been repaid. You will not find many real estate companies anywhere near our size that can make the same clay.

Yes, credit markets are different today and nobody at GGP will suggest that it's business as usual in those markets. For those of you who have been tracking our progress, you have seen that we have refinanced every mortgage that has come due in 2008 and we have multiple plans and options available to us to take care of our remaining 2008 and 2009 maturities. For those who have questioned or doubted our abilities, you should understand that everyone in this company is focused on the execution of core operating properties, development, redevelopment, and financing in the most efficient, realistic and profitable manner.

One of the right decisions as we move forward is to temporarily delay some of our development projects. It's important to note that we are not canceling these projects. We are simply moving back the opening dates. Financing, of course, plays an important role in these decisions, but of equal importance is the consumer environment. Now it's not the best time to be opening new projects and we'd have the full support and encouragement of our major retailers to delay these project openings. The retailers want to do what is right just as we do. Despite the weak consumer environment, we did have a very strong quarter of leasing. Signed leases totaled approximately 2.1 million square feet, just off our all-time second quarter record of last year, and well above the 1.6 million square feet signed in the first quarter of '08. We also opened 401 stores during the quarter versus 319 in the first quarter.

Retailers continue to expand and open and are not backing out of agreed upon deals. Another good indicator that retailers are continuing to look for productive locations is evidenced by the 204 portfolio review meetings we held throughout the quarter, an increase of over 65% versus the first quarter. The quarter was highlighted by a new record occupancy of 93.2% versus the previous second quarter high of 92.9% in 2007. This is a powerful endorsement of the long-term strength of our retail real estate and the retailer relationships we have built over the last 55 years.

Comparable NOI gain for the quarter in our consolidated properties was 2.6%, while unconsolidated properties increased by approximately 7.9%, resulting in an overall portfolio gain of 3.4%. Year-to-date we have a strong 4.5% comparable NOI increase. Last quarter I spoke to you about historical periods of slowing retail sales that have not necessarily translated into a marked increase in mall store closings. Most small retailers remain in better financial shape with stronger balance sheets than retailers in years past. The data I have studied regarding store closings shows that retailers today are far more efficient unless susceptible to economic downturns than in years past. Their resilience could well be one of our most valuable assets. While we read about a great many store closings, the numbers are actually down nationally for the first half of '08 versus the same period a year ago. And of the approximate 72,000 store closings, only approximately 5% of those are shopping center related. We did see a slight increase in closings due to bankruptcies during the quarter, but they remain a fraction of 1% of our total square footage. It's important to note that the majority of these closings had good locations and strong properties, making re-leasing a very viable alternative for this space. It appears the survey by Marcus & Millichap that reported retail vacancy is expected to increase by only 50 basis points on a national average in 2008 is holding true. This is a powerful endorsement of the strength of mall real estate.

Total sales per square foot remained constant with last year at $459 and comparable sales increased eight-tenths of 1%. Indicative of the strength within our portfolio is the performance of our 50 most productive United States centers. These properties generated average sales per square foot of approximately $648. Not only do these 50 centers produced tremendous sales per square foot, but they also represent approximately 50% of our total mall NOI. This is one more example of the quality of our portfolio and quality will be more important than ever as we move forward in 2008 and 2009. There is no question the world we operate in has changed dramatically from last year. The credit markets we have known are either not available or have changed considerably. The strong employment environment we have enjoyed during the last three years is weakening.

Consumer confidence is down albeit it did tick up in the last report, but sales have softened. Is this reason to set up the alarms and abandon ship? Of course not. But it is reason to draw upon our experience and our approach to business, which allows us to continue to grow and operate as a consistent, stable and profitable company. This continues to be who we are. You will find in an environment of increasing difficulty the company with the best properties, the best talent, and the best plan will be the most successful. We expect a lot from ourselves and I know you expect a lot from us as well. Despite the challenges facing us and our business partners, we still expect to produce approximately 15% per share of core FFO growth in 2008.

I'm convinced that we will successfully manage the shorter-term challenges we face because of our talent, collective focus, and the passion we have across GGP. Because of this, I remain very enthusiastic about our business. The world we live in today has changed dramatically from a year ago. We have recognized this change and we are adapting to it. This company is blessed with great properties and great people. Certain external challenges do exist, but I promise you that just as we have done in the past, we will meet every challenge.

I'd now like to turn the call over to Bob Michaels to discuss past, present, and future performance in the area of asset management.

Robert A. Michaels - President and Chief Operating Officer

Thank you, John. In the second quarter, our sales were up slightly over the second quarter sales in 2007, and we anticipate a similar pattern for the third quarter with hopefully a more significant pick up in the fourth quarter and holiday season. As John mentioned, our increases in NOI, occupancy and rent spreads are a reflection of the strength of our portfolio of centers. So, much has been focused by the media on the 10% of retailers who are struggling and a little really has been written or discussed about the 90% that continue to do well. If you study the sales performance, the inventory levels and balance sheets of the top-30 retailing companies will make up the majority of the retailers in our centers. This is due to the fact that most of these retailers have multiple concepts.

You will see that overall this group is doing well and has confidence in their abilities to growth their profitability during this slow environment. With our occupancy of 93.2% for permanent long-term leases and our overall occupancy in the high 90s, if you consider the temporary tenant leases of less than 12 months, the retailers are looking to 2009, 2010 and even 2011 in order to secure the appropriate location and to properly size their stores for the future. Their interest remains strong. The soft areas continue to be home furnishing and women's accessories, while the junior apparel business is doing well. Our leasing activity remained strong with our 2008 leasing complete and the majority of our 2009 renewals also completed. We are already working on renewals for 2010 and beyond.

Last week I spent time in a number of our Las Vegas centers, including Fashion Show, Palazzo, and the Grand Canal Shoppes. Sales of these three centers average well over $1,100 per square foot. To say there is a disconnect between the media and main street on the malls would be an understatement, as all three centers were busy, people were shopping and dining, and a lot of new retailers were getting ready to open from the back-to-school and holiday season. In our business, we will always have some retailers who are not successful, but that is exactly why the regional mall is the best retail venue, because we can anticipate these problems well in advance and move quickly to secure lease termination settlements and bring in the newest and best retailers to our centers.

Much has been written recently about the influx of European, Japanese, Canadian, and South American retailers to the U.S. H&M with 156 U.S. stores made the comment [inaudible] Wall Street Journal that the U.S. is its largest expansion market. Other foreign retailers expanding rapidly in the U.S. includes Zara and Mango from Spain, Top Shop and Karen Millen from the UK, Lululemon from Canada, WhoAU from South Korea, Geox from Italy, and Uniqlo and Spiral Girl from Japan. Many others are also expanding and the regional mall is their venue of choice, mainly because they are assured the type of co-tenancy that will make their stores successful.

The back-to-school shopping season has already begun. ICSC is predicting that households will make fewer trips, but spend more and that the average spend will increase to $400 from $360 in 2007. Value will be the name of the game and we believe the malls for this one-stop shopping will be the venue of choice during this period of high gas prices. One positive aspect of the slow economy is that fewer new projects will be built over the next three or four years, which will increase the demand for space in our existing centers. We are already seeing this in our portfolio review meetings. In addition to delays we have announced on some of the new and redevelopment projects, we'll materially increase the level of occupancy and the returns upon their openings.

The luxury segment of our business remains strong, as is evidenced by the various sales reports that these retailers have released over the last three weeks. The challenges that we have experienced in the first two quarters of 2008 will continue throughout the year. But having anticipated many of the already announced store closings, well in advance we have taken advantage of the opportunity to complete our settlements and re-lease the space with generally higher rents.

I would now like to turn the call over to Bernie Freibaum.

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Thank you, Bob. Similar to our actual experience in prior economic slowdowns, our operating income is still growing, but at a reduced rate. In general, specialty retailers have never been better operationally and financially positioned to withstand a challenging consumer environment. While trailing 12-month total sales per square foot of $459 were flat compared to last year and comparable sales per square foot were up only a modest 80 basis points, there was typically little short-term correlation between current sales productivity and current operating income. Through the first half of 2008, our total portfolio comparable net operating income increased by 4.5%. This actual significant income growth is in sharp contrast of the dire suggestions made by the financial press that consumers have completely stopped all discretionary spending. While market expectations were for a further decline, this week's announcement that consumer confidence improved in the latest survey was another indicator that shoppers are likely to continue to purchase discretionary items.

Retailers are currently much more experienced and knowledgeable about running their stores over the longer term, which will inevitably include periods of strong, soft and occasionally declining sales. While it is only anecdotal and by no means an inference that we are not in a very challenging mall sales environment, it is nevertheless worthwhile to repeat that our permanently leased occupancy actually increased this quarter by 30 basis points from 92.9% at June 30, 2007 to 93.2% at June 30, 2008. In addition, the sum of average new rents and recoverable common area costs in the first half of the year compared to expiring rents continue to track double-digit percentage increases, which is another good indicator of the growth embedded in our portfolio.

Our actual core FFO of $0.72 per share this quarter was $0.01 below the estimate we gave you three months ago of flat core FFO. In this challenging environment, it is much more difficult to accurately and precisely estimate future core FFO and the timing of future capital transactions that impact funds from operations. That said, we currently anticipate that full-year 2008 core FFO will be approximately $3.42 per share. Of the remaining $1.94 of core FFO per share that we currently estimate for the second half of 2008, we estimate that Q3 2008 core FFO per share will be $0.77 and that Q4 2008 core FFO per share will be $1.17. Although it is lower than our previous guidance, $3.42 of 2008 core FFO per share represents a 15% increase over actual 2007 core FFO per share of $2.97. Even though our overall property and operating income continues to grow, we are experiencing minor pockets of pullbacks.

We also now anticipate somewhat lower seasonal income in the fourth quarter, in line with retailers' reduced expectations. In addition, we also now expect to lose some net operating income in the second half of 2008 due to some recent bankruptcies, including the recent filing by Mervyn's. We currently have five leases with Mervyn's, four of them are in buildings that we bought back from them and leased back to them with the option to terminate because we expect to redevelop those buildings. All of them are in high-quality malls and if necessary in the short term, we will be able to re-merchandise their space.

Sales per square foot at those five malls average approximately $525 per square foot. For those of you that compare and contrast REIT FFO multiples, I'd also like to point out three things that should be considered when you look at general growth FFO multiple versus that of other REITs. First, our core FFO does not include any amounts from our master planned community assets. The impact of that business and the long-term value that it creates is not best measured in the near term by its contribution to funds from operations. Through the first half of 2008, cumulative master planned communities net operating income of $14.1 million was approximately $0.01 per share short of covering the first half of 2008 provision for income taxes of $17.9 million. We are currently still in the throes of the worst U.S. housing market downturn in many decades. We are confident however that in the long term our land in Summerlin and Houston will produce very substantial cash flow and earnings in excess of the income taxes related to that profit that we will actually have to pay. In the somewhat related vein, our funds from operations rarely include profits from selling outparcel land. We have a strong preference to lease outparcels in order to create a recurring and increasing income strength.

Second, unlike some other REITs, our FFO does not include any profits from asset sales or transaction fees or promotes related thereto. Merchant building, which is often uneven due to changing economic cycles, is not part of our business model. Finally, our estimated 15% growth in full-year core FFO per share will occur even after you take into account the fact that our year-to-date FFO from non-cash items has decreased by almost 50%. During the first half of 2008, our net non-cash FFO from consolidated and unconsolidated properties totaled approximately $26.3 million. That amount represents approximately $23 million or $0.07 less FFO per share than our net non-cash FFO of approximately $49.4 million during the first half of 2007.

Now I would like to lay out for you our current plans for the near, intermediate, and long term for capital. We continue to move in the general direction we described in the road map that we provided at the beginning of the year. To start, I would like to announce that we have reduced our overall need for development capital in the next few years by over $500 million. After discussions with key retailers, we have decided to defer the opening of a number of new and redevelopment projects to enhance the likelihood that the projects will open in a more favorable general economic environment. We currently intend to see construction financing for the larger new development and redevelopment projects in mid-2009 and anticipate that such loans would provide all or substantially all of the future funds to be expended from July of 2009 through the completion of all the projects.

While we can't be certain that such construction financing will infect the available in one year, we believe that these projects will be highly desirable financing candidates, as we anticipate that on average over 50% of the project cost will already have been expended and that the majority of the space will be pre-leased as of that time. Historically, more than 50% equity and more than 50% pre-lease, our criteria that would satisfy even the most stringent construction loan underwriting. Just as we previously projected and anticipated, we closed a $1.7 billion secured loan on July 11th, 2008 in order to generate cash proceeds from mortgaging unencumbered malls and to refinance certain 2008 mortgage maturities. The loan was structured to fund in multiple tranches, as existing mortgages on seven of the 24 assets that will ultimately secure the loan do not mature until later this year. Another $75 million tranche of the loan is scheduled to fund next week, which will bring the cumulative amount funded to $1.21 billion. Probable participant for the remaining $540 million of the loan have been identified and they are currently completing their confirmatory due diligence and/or their approval process. We currently anticipate that all the remaining tranches will fund within the next 60 days to 90 days. The total $1.7 billion credit facility represents an aggregate loan to combine property values at 65%. The individual property values were determined by independent appraisals of the 24 assets and separately confirmed by the lead banks, including options to extend the total available term is five years. The interest rate flow to 225 basis points over LIBOR, but we have already swapped approximately $1.1 billion of the loan to a fixed annual rate of approximately 5.7%. Given the concerns that most banks currently have about making loans secured only by real estate, we also provided a recourse guarantee of up to 25% of the loan.

Varying amounts of upfront fees are paid depending upon the amount of each lender's participation. We currently have five additional wholly owned malls and one joint venture mall that will mature in the fourth quarter of this year that still need to be refinanced. We anticipate closing a one-off replacement loan for the existing joint venture mortgage that will mature on November 10th, 2008.

We currently expect that the new loan will be for a much higher amount than the maturing loan, as we believe that the expiring loan represents only approximately 25% of the value of the property. Excess loans proceeds will be distributed to the partners and our ownership share is 35%. We currently anticipate that four of the aforementioned five wholly owned malls, including Fashion Show mall, will be part of a much larger pool of properties that will include many other malls with loans that mature in the first or second quarter of 2009. We are currently planning to sell only investment grade rated bonds to numerous fixed-income investors. It is incorrect to extrapolate that these bonds would sell for spreads that are similar to those that are currently available on resales of existing investment grade CMBS notes.

Existing CMBS notes of various vintages represent portions of loans on many assets of different qualities and risk profiles. The unrelated loans were made to different borrowers and much less rigorous underwriting standards were utilized in the past. In addition for reasons unrelated to the quality of the loans, many holders of existing CMBS funds are currently being forced to liquidate their positions at deeply depressed prices. We will offer new bonds secured by conservatively leveraged high-quality malls with stable and predictable cash flow. The malls are all owned and operated by General Growth and will be cross-collateralized to provide further downside protection for the bondholders.

Our discussions with a number of institutional fixed-income investors that are potential buyers of the bonds lead us to believe that there will be considerable interest on the part of very large debt players. There have been virtually no new freshly underwritten investment grade rated secured mortgage-backed bonds made available to the fixed-income investor market for quite sometime. We currently anticipate offering these bonds for sales in mid-October or about two and one-half months from now. The actual number of malls that are part of the pool with loans that mature in 2009 will depend upon the amount of demand that we have for the bonds in October. That said, we currently anticipate that we will probably sell at least $1 billion of bonds in mid-October. As I previously said, Fashion Show mall will anchor the pool. It is one of only a handful of malls in the entire United States with current sales in excess of $1,100 per square foot, so it should generate a lot of debt investor interest. If there is additional demand at that time, we have enough malls that could be prepaid at par, such that we could sell as much as $2 billion of secured mortgage-backed bonds in mid-October.

As it just recently debuted with some stores yet to open, the shops at Palazzo are still not close to reaching their full cash flow potential. The Palazzo stores are contiguous to the Grand Canal Shoppes, which have current sales productivity of almost $1,200 per square foot. We currently anticipate refinancing both properties at the same time in early 2009. We could either do a one-off club deal for a single mortgage secured by both the Grand Canal Shoppes and the Shoppes at Palazzo, or we could use both properties to anchor a second pool of cross-collateralized malls, for which we would offer freshly underwritten and newly rated secured mortgage bonds in the first quarter of 2009.

As we demonstrated with our recent $1.75 billion secured loan, despite the current limited availability of individually underwritten single property CMBS loans, there are in fact other sources of reasonably priced secured loans for high-quality malls with stable cash flow and moderate loan to values. When the $1.75 billion staged loan is fully funded, it will have generated approximately $500 million in new cash proceeds and $375 million of proceeds to refinance a bridge loan that was originally not secured with mortgages.

Although we used a number of our previously unencumbered assets for the $1.75 billion secured loan, we still have approximately $1.75 billion worth of additional unencumbered operating assets. These operating properties include malls, office buildings, and strip centers. Including our share of projects and unconsolidated joint ventures, we also have over $1.5 billion of development in progress as of June 30, 2008, and thousands of acres of master planned community land, the vast majority of which are also unencumbered. Over the next 24 months, we currently anticipate that we will generate at least $1 billion of cash from mortgaging and/or selling non-core assets that are included in this $1.75 billion collection of currently unencumbered operating assets.

Now, I would like to address capital plans for the intermediate term. Given the current constrained general availability of commercial mortgage financing, I'm reluctant to precisely predict the amount of excess mortgage proceeds that we can generate over the next two years, as we replace our mortgage loans that will mature in 2009 and 2010. That said, our share of existing mortgage loans that will mature in 2009 is approximately $2.5 billion. Using what I believe is a conservative average cap rate of 6.75%, the assets encumbered by those mortgages would be valued at approximately $6.2 billion. Accordingly, the existing mortgages maturing in 2009 represent approximately 40% of the average value of those assets. If, on average, we were to refinance all of the expiring 2009 mortgages at a 55% average loan to value level, we would generate approximately $900 million of excess proceeds in 2009. For hypothetical purposes only, if the weighted average constant on the new mortgage loans, including amortization, was 7%, the initial total debt service coverage would be approximately 1.75 times. For a mortgage investor, that represents very high and secure coverage for a mall with stable cash flow.

In 2010, our share of existing mortgage loans that will mature is approximately $4.4 billion. At the same conservative average cap rate of 6.75%, those assets would be valued at approximately $9.1 billion. Accordingly, the mortgages maturing in 2010 represent approximately 48% of the average value of those assets. If we were to refinance all of the expiring 2010 mortgages at a 55% average loan to value level, it would generate approximately $600 million of excess proceeds in 2010. Again for hypothetical purposes only, if the weighted average constant on the new mortgage loans, including amortization, was a higher 7.5%, the initial total debt service coverage would be approximately 1.65 times.

Now the last July $750 million unsecured bridge loan has been fully refinanced. Our next significant maturity of non-mortgage debt comes in March and April of 2009. At that time, an aggregate amount of $595 million of Rouse Company bonds will be due. During the nine-month period from August 1st, 2008 through April 30, 2009, we currently anticipate raising at least $750 million from the various types of non-debt capital that we described in our road map. To refresh your recollection, these items include proceeds from the sale of non-core assets, primarily office buildings; preferred equity on individual under-leverage malls with existing low leverage mortgages that don't mature for a number of years; and proceeds from entering into new joint ventures for malls that are currently wholly owned.

During the next nine months, market conditions will determine the actual timing, dollar amounts, and the mix of non-debt capital that we will raise from each of the aforementioned or other possible sources. If general economic conditions improve, we can envision raising substantially more than $750 million. However, regardless of market conditions, we believe we can achieve our minimum objective. If we have completed a second major secured mortgage-backed bond financing prior to the maturity of the Rouse bonds, excess proceeds from that transaction would also be available to repay those bonds.

After the Rouse bonds that are due in 2009, our next major and significant non-mortgage debt maturity will not occur until February of 2011, when our current unsecured term loan and revolving credit facility will be due. We certainly do not expect the current tight credit conditions to continue for 31 more months, but we are nevertheless formulating contingency plans today that we would execute in the future, if it subsequently appears that we would have any difficulty replacing that credit facility in 2011. As just one example, in early 2010, we will have 100% of the economics from all the unsold land that will remain in Summerlin at that time. In two years' time, we believe that the demand for that land will be much greater than it is today. As the land will be completely unencumbered, we will be free to finance it or to bring in a joint venture partner to raise cash to pay down the credit facility in February of 2011. There are numerous other things we could do in addition to raising cash from Summerlin land, but it is premature to discuss those possibilities at this time.

Finally, I would like to address the long term. There are, in fact, some people who project that the current economic conditions and the severely constrained and limited supply of commercial mortgage financing will never improve. Our initial inclination is not to attempt to console inconsolable people. However, even for those that forecast permanent gloom and doom, summarizing the points we previously made might make them feel a little bit better.

The main reason that we will be able to get through the upcoming period of time that it will take to heal the damaged financial markets is that the substantial majority of our debt maturities are existing mortgages on high-quality malls with stable and predictable cash flow. The average expiring loan to value levels are low even when you use the lower leverage standards for loans that can be still be obtained in the current difficult environment.

In addition, among numerous other possibilities, the most probable potential sources of excess cash that I previously identified include at least $1 billion from mortgaging and/or selling currently unencumbered operating assets over the next 24 months; construction loans beginning in July of 2009 to fund all anticipated development costs to be incurred to complete all development projects; $1.5 billion of potential excess mortgage refinancing proceeds in 2009 and 2010, if expiring mortgages are refinanced on average with new 55% loan to value replacement mortgages; at least $750 million of non-debt capital over the next nine months, if necessary a considerable of additional non-debt capital could be raised over the balance of 2009 and 2010; utilizing Summerlin land in 2010 and 2011 to generate significant amounts of cash from new loans and/or new joint venture proceeds. If necessary all of these things and other possible items in the aggregate can be reasonably expected to generate at least $6.4 billion of proceeds over the next five and one-half years. That amount represents 100% of the unsecured bank and bond debts that will mature between December of 2008 and November of 2013. The most important fact of all is that we don't have any huge balloon debt maturities that will present an insurmountable challenge to refinance. Given the myriad sources of obtainable cash that we have outlined today, it is very clear to us that the most effective and the most shareholder-friendly strategy is to raise manageable and bite-size chunks of cash from the multitude of possible sources that we described today.

Rather than seek a massive near-term capital transaction, the right plan is to gradually and not too immediately reduce our leverage. No large-scale distressed asset sales or large chunks of extremely expensive capital are necessary. Our course is navigable, our goals are realistic, and our plan is achievable.

At this time, we'd be happy to answer any questions that you might have.

Question and Answer

Operator

Thank you. [Operator Instructions]. We'll go first to Jeff Spector with UBS.

Jeffrey Spector - UBS

Good morning. Can you provide more detail on the downward guidance revision? You expect lower NOI, can you discuss that further, please?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Yes, in this soft environment, we want to be very cautious. And it's difficult to predict today some of the variable items that are part of our NOI. Some of those include overage rent. We have a fair amount of overage rent from restaurants, for example, in some cases their business is down a little bit. There is a considerable amount of seasonal holiday season income that's not the subject of long-term leases, that is somewhat variable relative to the conditions that will exist at that time. So, in this environment, yes, it's difficult to see the future, we wanted to be more cautious and perhaps reduce our expectations to cover the possibility that this variable income will be less than we had previously anticipated.

Jeffrey Spector - UBS

And then what are your expectations now for your same-center NOI target of 5% '08 and '09?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

We had an objective going back a few years of averaging at least 5% over 2007, 2008 and 2009. We exceeded it slightly in 2007. For the first six months of 2008, we were at 4.5%. And at this point, we are reluctant to estimate with any precision what year-to-date comp NOI will be at the end of '08 and especially for 2009. We don't think that NOI is going to be drastically reduced, it will continue to grow. But we think it's more appropriate not to give guidance on that, and I'd also tell you that it was never necessarily our guidance, it was more explaining what we thought we could achieve and it was an objective, and at the risk of saying that we don't know what 2009 holds, it's not entirely out of the question that we couldn't have an improvement in 2009, that could actually produce three years '07, '08 and '09 of average 5% growth.

Jeffrey Spector - UBS

Thank you.

Operator

And we'll go next to Craig Schmidt with Merrill Lynch.

Craig Schmidt - Merrill Lynch

Thank you. I just wondered, there seems to be a widespread between the same-store NOI of the unconsolidated versus the consolidated. What do you primarily attribute that to?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Some of that, in fact perhaps a big portion of it is attributable to very large joint venture properties that we acquired as part of the Rouse Company portfolio. As we told you four years ago when we bought it, there would be a lot of opportunities to improve those properties, but it would take time through remerchandising. And as we look at those numbers, the number of comp NOI improvement in any quarter shouldn't be looked at in and of itself is an indicator of what a more smooth full-year number will be, because there are always timing differences from one quarter to the next, but we did notice that a lot of the very large joint venture centers from Rouse, very high-quality centers were producing some very large comp NOI increases and we can attribute that to the remerchandising that we told you about that we completed in the last couple of years, and now it's bearing the fruit that we predicted that it would.

Craig Schmidt - Merrill Lynch

And I guess the follow-up was for Bob is, have you seen less willingness on the side of retailers to pay wider spreads for rents and do you see that coming in, going forward?

Robert A. Michaels - President and Chief Operating Officer

Well, I would say the retailers are cautious obviously and I think that we haven't really seen a pullback in rents. What you've seen more than anything, Craig, is the pullback in maybe opening dates and I think that's the biggest thing that we're seeing, and that's one of the reasons why we've elected to delay a couple of these projects. In talking to the retailers, they say well, we would rather open a particular, especially a new project in 2010, then in the middle of 2009. So, that's where we are seeing the pushback more than anything in the openings, but in the rents I would say we're pretty consistent of where we have been over the last 12 months or 24 months with the spreads.

Craig Schmidt - Merrill Lynch

Thanks.

Operator

We'll go next to Christy McElroy with Banc of America.

Christine McElroy - Banc of America Securities

Hey, good morning guys. Just following-up on Jeff's question, the comment about overage rents. How much could we potentially see that decline year-over-year in the second half? And then how much of the NOI reduction is related to Mervyn's? Are you expecting a full liquidation or kind of one-off store closings?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

With respect to the second part, our five leases are we believe stores that are all doing well. And based on what we've read and some conversations with Mervyn's, they have their own position in financing and fully expect to continue to operate although they'll close some stores. So, we're not sure that we'll lose any, but we might. And the same goals with respect to overage rent. We don't give guidance for individual line items. We are not sure that there will be a big drop in it, we don't expect a big drop in it, but there could be a minor drop related primarily to restaurants and jewelry stores that could experience some lower volume during the holiday season and reduce that number.

Christine McElroy - Banc of America Securities

And then I was wondering if you could provide some further color on Echelon specifically? What were the primary reasons for the delay with the kind of Las Vegas fundamentals and the leasing interest you're saying, or was it more related to project financing? And then what are you expecting in terms of an estimated completion timing at this point? I think previously you had said Q3 of 2010, am I right? Should we assume it's being delayed 18 months or is it possible that it could get pushed out further?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

No, I mean, first of all, we are in current discussions with the Boyd about the timing of the High Street portion of the larger Echelon project. We're only involved in the shops portion, and we are having discussions with Boyd about the timing of that element of the project. In general, it's no different than the many other projects. In the case of the others, we talked to the retailers, we're discussing new deals with retailers and many of them are cautious about making commitments and we believe that all of these projects that we've deferred will be much more effectively leased in terms of dollars and tenant mix and are much more likely to open during a strong economic environment, which is what retailers would like. So, it's just a function of looking at the need to lease these up and understanding that the retailers, although there are all interested in our projects, are not being particularly aggressive these days with making longer-term commitments. So, we believe it's not in our interest to press them to make these longer-term commitments.

Christine McElroy - Banc of America Securities

So, the timing on High Street has basically stopped for discussion at this point?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

We are discussing the timing of the High Street component with the Boyd Company, the developer of the larger project.

Christine McElroy - Banc of America Securities

Thank you.

Operator

And we'll go next to Paul Morgan with FBR.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Good morning. On the seasonal leasing, maybe just Bob or somebody comment on how much visibility you already have for fourth quarter leasing of carts and kiosks tenants and whether... so you think you already know what it's going to being and it's down a certain amount or a lot of it maybe still done in the third quarter?

Robert A. Michaels - President and Chief Operating Officer

Well, a lot of it is done in the third quarter. And the problem with this kind of leasing is, these are what I refer to as local retailers, entrepreneurs, mom and pops, if you will, and even though we have a pretty good idea as to where we are, it's much easier for these people to not follow through on their commitments. And so we are just being super-cautious here and we are seeing a little pullback from some of them and I think that it's just very, very important that we look at this business and say, it's been so good for so long, but it may not be quite as good. And that's one of the reasons why we are cautious on it. This is one area where it's easy for the retailer to give us some more commitment, but then not follow through on and in these times, I think that's the thing that we are concerned about.

Paul Morgan - Friedman, Billings, Ramsey & Co.

But you think by next quarter you will have a lot more clarity?

Robert A. Michaels - President and Chief Operating Officer

Oh, yes, yes.

Paul Morgan - Friedman, Billings, Ramsey & Co.

The November-December stuff?

Robert A. Michaels - President and Chief Operating Officer

Sure, we will. And I think that as you get into later in the third quarter, we'll certainly have a lot more clarity and... but again I think that... I just think it's prudent to be cautious in this area right now.

Paul Morgan - Friedman, Billings, Ramsey & Co.

On the... follow up on the development pushbacks. I mean how are you weighing the redevelopment and expansions versus on one hand, you have less ground up projects competing, so you may have opportunities to expand your existing centers with retailers who might have otherwise gone in the new project. But on the other hand you have less overall demand and your own capital considerations. I mean what do you think most of the change in your development spend seems to be on the ground up projects at least from last quarter to this one. What do you think is going to happen over the next couple of years with your redevelopment?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

The major redevelopments and expansions where we are adding GLA are also good candidates for deferring because even though there is less current demand from retailers, I think on balance, all the potential projects in those trade areas that were possible have for the most part been cancelled. So, when you look at the significant reduction in the new supply, you balance that against the soft current demand from retailers to commit to something opening well into the future. I think we won't lose anything at all by deferring these expansion projects at centers that are already doing very well, and we'll just make it more likely that when they commence and when they open later that they will be that much more successful.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Okay. Thanks.

Operator

And we'll go next to Lou Taylor with Deutsche Bank.

Louis Taylor - Deutsche Bank

Hi, thanks. Good morning, guys. Bernie, can you give a little update, if any, on the status of any joint venture discussions?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

We are still having just very top-level joint venture discussions with a few very, very large people... a group of people, institutional investor types that have expressed an interest. And we're not pressing at this point, just like we've decided not to press the retailers to make longer-term commitments in the midst of what is obviously a soft economic environment with remaining financial market instability and uncertainty. It is in a very good time to press hard to make a good joint venture deal and to us, it's very important not just to raise the cash, but to find the right strategic partner that will be a good fit for us for other things going forward. And I think that what I would guess at this point is that any non-debt capital that comes from joint ventures rather than from the other sources that we identified is probably more likely to come in early 2009 than sometime in the balance of this year. And it's just a function of the timing of a capital transaction. We think it's likely that people will be more comfortable and pricing will be better if you go out six to nine months from now for any type of a major joint venture transaction.

John Bucksbaum - Chairman and Chief Executive Officer

It's also important... just to add to what Bernie is saying is that, it's not just about the money and we look for partners who make sense for us either because they own other shopping centers and there might be opportunities of things that we can do going forward and the fact that historically we've always tended to essentially be 50/50 with all of our partners, which is again quite unusual. So, it's important that the partner be a real partner and it's not just a source of capital and one that oftentimes people really don't care that much about because it's about the promote, it's about the fees. We live with these partners and we're equal to them or shoulder-to-shoulder. So, you want to make sure that it's the right person.

Louis Taylor - Deutsche Bank

Okay. Thank you.

Operator

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

Mike Mueller - JP Morgan

Yes. Hi. Following up on that last question, when you are talking to these potential JV partners, what can you tell us about what their expectations are in terms of yields and cap rates and just making general statements about today's environment versus a year or two ago? Have their expectations increased dramatically, say, for the higher-quality malls or are they still fairly low?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

As I've said, we have been having very high-level discussions more about concepts than about cap rates. What I can continue to confirm is that, there is still considerable interest in co-ownership with General Growth of high-quality malls, a very significant interest. The things that we're discussing with some of the larger potential partners are other things... other things, for example, in the international area that they might be interested in. Some of them have expressed some interest and possibly being joint venture partners with us in the future on the Summerlin land when we have that option in 2010. So, as John said, we've got a lot of strategic objectives in connection with any what I'd call major joint venture. It's conceivable we might do a few one-off joint ventures, but I think it's much less likely that that will be the case as compared to one or two larger joint ventures.

And you can look in the marketplace today there are not a lot of transactions of any kind happening. There are very few, if any, high-quality malls trading joint ventures, new joint ventures on high-quality malls. So, there is a lack of transactions out there and I think that's consistent with what we thought would happen in terms of... the highest-quality malls are owned by either REITs or institutions that don't have any need to do transactions currently when the market conditions are not necessarily that favorable. So, we are not discussing detailed cap rates at this point, but having said that we don't believe that cap rates have declined much. You can't prove that because, as I said, there have not been any, that we are aware of, very high-quality malls trade in quite sometime.

Yet the business strategy for them going forward, the fact that there are so few in the country and the barriers to entry for new ones and the fact that it's the only property type where the people that pay us money are paying us for the right to make a profit in this space and we do business with them across the whole country. So, there is a correlation from one property to the next and having a very large high-quality portfolio puts you on a much better position to get a disproportionate share of the retailer stores and all that business.

So, the thesis for co-ownership of high-quality regional malls with an operator like General Growth remains to be very good. To push for a transaction today when we don't need one would be doing something when the environment is not optimal and our plan, in general, is I hope you heard us articulate earlier is to do things incrementally as the market improves in the various segments that are important to us, in particular the financing segment.

John Bucksbaum - Chairman and Chief Executive Officer

The desirability for Class A malls remains very high, as Bernie said. It's not a commodity, it's always been highly sought-after by the institutions and there is a tremendous amount of equity that is waiting to be invested, but you need to do it in the right circumstance or the right format.

Mike Mueller - JP Morgan

Okay. Thanks.

Operator

We'll go next to Jay Habermann with Goldman Sachs.

Jay Habermann - Goldman Sachs

Hey, good morning. Here with Tom and Johan from my team as well. Bernie, with regard to the road map you've laid out for the capital plan, can you give us a sense of the average debt term, perhaps a year out? You stand today with an average debt maturity of about four years, and I'm just curious what sort of terms you're seeking for this upcoming pool of loan that you are looking at with Fashion Show?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

That's a great question and gives me an opportunity to tell you that. This next financing that we are doing and there has been significant amount of confusion about it that I've read in various comments by analysts and others, $1.5 billion to $3 billion, it's just like existing CMBS. It's really nothing like existing CMBS. If you want to make an analogy, it's almost exactly what we did in 1997 before the individual separate property underwritten CMBS market was fully developed. We put together 13 malls, one to the rating agencies, got bonds rated, various tranches through investment grade and sold them to investors. There are billions and billions of dollars of fixed-income investors that typically buy corporate bonds. These are not investors that are specifically mortgage investors, they are just long-term fixed income investors. And they are very happy as they told us and I don't have any reason to doubt them to buy bonds that just happen to be secured by mortgages. The Treasury Secretary in the last week has put something out encouraging U.S. financial institutions to adopt the covered bond strategy that is primarily for residential mortgages, but that is I think a $3 trillion market in Europe and it's never caught on here. And the only technical issue that has to be dealt with before that market grows is that, if a financial institution issues bonds that are covered by mortgages that they've issued, that they still have on their books, there are some technical issues for example, if there is a bankruptcy who stands in front of who, we will be doing a form of covered bonds, but directly. And there isn't any complicated bankruptcy issue. These assets directly secure these bonds. So, to compare what we are trying to do in 2.5 months with huge fixed-income investors that typically don't buy mortgage bonds to a broken CMBS market saying that certain tranches traded 1,000 basis points over the Treasury. These are pools of assets that were put together in 2002 or '03, different underwriting standards, no cross-collateralization, some properties very likely to go into default in the pool, etcetera. So, we are after this huge market of fixed-income investors, not CMBS mortgage investors.

Jay Habermann - Goldman Sachs

Right. But I guess in terms of term...?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Yes. I was about to get there. I'm sorry to give you the longer prelude. Our preference... our strong preference is for much longer-term mortgages, seven years, ten years. However, that will take a backseat if necessary to what the fixed-income investors want. As we are working with the bankers and the rating agencies deciding how big these pools are and which assets are in them and when we do them, we will be at the same time having discussions with these larger fixed-income investors enquiring them what maturity they would like to see, what types of assets they would like to see. So, the important objective, the most important objective is to get proceeds at a reasonable price that they are interested in. Having said that, I don't believe that they will be interested in shorter-term maturities. I think that they will, in fact, be interested in five, seven and 10-year maturities. And our... one of our goals for the longer term is well, which I didn't articulate is to extend our weighted average maturity from the current four plus years, which was never our target. For years, we've been targeting five years and the circumstances of the financial markets have been the primary reason why our weighted average maturity has been reduced, but it's down to four, we wanted it to be at five and our longer-term objective is to get it back up to something like seven. So, we would love to sell long-term bonds in October, seven to 10 years, that's what we'll do if that's what the investors want, but if they should want shorter term, I think that the importance of getting the capital at a reasonable price, given that these are all very high-quality malls and we wouldn't be concerned too much about subsequent refinance risk when those mortgages come due. The point again is that we'll provide these fixed-income investors with what they are requesting as opposed to what we want.

Jay Habermann - Goldman Sachs

Right. And you mentioned obviously more attractive pricing, can you give us a sense of your expectations over the next 6 to 12 months?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Expectations is too strong of a word. We don't have any better idea about where the underlying treasury is going to go or spreads, they are two very important components. Having said that, we are kind of anticipating that all the rates... all the interest rates would be in the 6s, not in the 7s or the 8s, but in the 6s. It's possible that the longer-term treasury rates will increase as the yield curve steepens depending on what happens in the economy and what the Fed does, but it also is much possible in our view that the current much wider spreads might contact as a result. So, what's important to us is the overall... the all-in rate, not necessarily how much of each component is what. But I would say we currently anticipate, I don't want to even go into 2009, but for the deal that we'd like to do in mid-October, we anticipate an all-in rate in the 6s.

Thomas Baldwin - Goldman Sachs

Hey, guys. This is Tom here with Jay. This was a question for Bernie. You've spoken about gradually lowering leverage over time, but in many ways that actually sounds like you are going to be increasing leverage in the near term, including raising loan to value levels on encumbered assets as the mortgages come due and potentially encumbering the Summerlin land longer term. While you've spoken of non-core asset sales and you'll continue to grow the company organically, it doesn't seem like this in and of itself will be sufficient for lower leverage. So, I am just curious what the potential for an equity raise is longer term or if that's not on the table, what your game plan for lowering leverage is longer term?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

An equity raise is not being contemplated, I don't think it's necessary. I can't imagine why we would do that given the other alternatives that we have. It's going to take a long time to change our total capital structure and the mix. There are a lot of variables that are out of our control, including primarily how long it takes for the current broken financial market to mend itself. But over the longer period, we absolutely do expect to reduce overall leverage primarily through asset sales and if you look at the impact of a joint venture, we've used as a hypothetical example on a number of occasions and I'll remind you again, not that we would do this or will, but we repurchased from our partner last July a 50% interest in what we call the Homart I portfolio, which we had purchased 12 years before that. We believe it's worth today the same price or more than we paid for it and we believe that would be valued in that manner at the same price or higher in the future.

If all we did was resell, that 50% interest that we purchased, it would cause a $2.25 billion reduction in our overall $27.5 billion of debt. It would provide $1.25 billion in cash, which we could use to pay down other debt. And because our $27.5 billion includes our pro rata share of debt, half of the $2 billion of existing mortgage debt on that portfolio would go off of our books on to the books of the new partner. So, in the short term, it is possible that we'll be increasing or not decreasing our leverage, I should say. But it's absolutely our plan and our intention through asset sales and joint ventures to reduce both the nominal and the relative leverage over time. And that's something I believe we can achieve, but it just cannot happen overnight.

Thomas Baldwin - Goldman Sachs

Okay, thanks a lot.

Operator

Thank you. We'll go next to David Fick with Stifel Nicolaus.

David Fick - Stifel Nicolaus

Good morning. Bernie, I think a few minutes ago you said that you won't provide same-store NOI guidance for '08 or '09. I'm looking back at the text of your last call and you said we anticipate... continue to anticipate that we will average at least a 5% improvement comparable NOI income for the full two calendar years, '08 and '09. And I'm just wondering that if it eroded this much in just three months from May to today, how should we think about your ability to project these numbers going forward given the trend?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

First of all, it has not eroded that much in our view and as I try to explain, David, that comp NOI is not forecasted FFO per share. We said starting three years ago that it was our objective and we anticipated that we could achieve over that three-year period average comp NOI of 5%. I'm not going to say that we still believe as strongly as we did last quarter that at the end of 2009 we will have achieved it. But I think in this environment and we've never actually forecasted precisely comp NOI, it's an important number year-over-year over the long term, but because of the uncertainty we believe it's appropriate to be conscious not to make predictions when there are so many variables that are out of our control at this point.

Again having said that, our comp NOI is growing, it will continue to grow and it's not fallen out of bed, it's not a disaster. It's just that for the balance of this year, at least until we have more visibility and can feel more comfortable making estimates that we are just simply not inclined to guess what our comp NOI is going to be for the balance of this year or at this point next year.

David Fick - Stifel Nicolaus

And yet you are providing us the full guidance, and I don't see that it's consistent. But my next question is the dividend would normally be increased in the next quarter and obviously given your need to preserve capital at this stage, I am wondering what you are thinking about that routine annual increase?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Just as we always do shortly before the dividend is announced in October, we have a board meeting and we evaluate the current environment and what our view is of the next 12 months, and we'll do that same thing that we've done every year next October. So, at this point, there isn't anything I can say beyond that we'll continue to do what we've always done.

David Fick - Stifel Nicolaus

Thank you.

Operator

And we'll go next to Ben Yang with Green Street Advisors.

Ben Yang - Green Street Advisors

Hi, good morning. Question for Bernie regarding the $1.75 billion secured loan. You talked earlier in the call about your goal for longer term and in light of this comment, can you talk about your decision to go with the three-year term for this particular loan versus something longer?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Yes, absolutely. It's exactly the same as the discussion that or what I've just said about the objective for the bond deal. As we looked at the capital markets last March and April, we believe that there was an opportunity with our unencumbered assets to do a bank transaction with primarily what I refer to as commercial banks. A standard commercial bank transaction is not a 10-year loan, it's not a seven-year loan. It's actually not even a firm five-year loan. The standard for a commercial bank transaction currently is a three-year initial term and you are able to get two one-year expansion options, which we have. So, rather than try to do something that we want to do, it's much more appropriate to do something that's doable. And because we could obtain reasonably priced mortgage debt through this type of transaction, we were willing to accept the three-year initial term with two one-year extensions. So, it really is a five-year term rather than a three-year term, but we would have preferred a 10-year term, but at this point in time, that wasn't available from the commercial bank market. I do believe, as I said earlier, that seven and 10-year terms will be available from the institutional fixed-income investors, because that's typically what they do as longer-term deals. Commercial banks don't typically make long-term fixed-rate loans. So, we did what was available rather than what we would have preferred to do. I wish we could have done 10 years, but as I said it's our clear preference going forward as we do mortgages to do longer-term mortgages and over time to get our weighted average debt maturity up from where it is to hopefully as much as about seven-year weighted average.

Ben Yang - Green Street Advisors

And then what about your decision to fix the interest rate probably in the first two years of the loan?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

That is connected to our view, it's a guess at this point, but our view is that within 24 months, getting into the third year of this term, we will be able to do individual replacement loans on many of the 24 properties that are part of the pool. The loan was specifically structured, so that we could remove individual asset... each asset has a release price and the best way to refinance this large facility is not to do a $1.75 billion loan in five years on all of it, but rather to pull assets out individually over time, so that we can be more likely to extend our weighted average maturity and not face large single debt maturities like this would be. So, it is a bit of a guess, but our view is that three years from now the market for individual loans will be substantially better and that's why we did it for two years. If we can do it earlier, we will do it and we will transfer the swap to our bank line of credit. So, we have other variable debt that we can transfer the swap to, but the two-year decision was completely related to our view that it'll take about two years for the market to be really robust again. But we hope it happen sooner and if it does, even though we have a swap to the extent we pay part of that loan down in less than two years, we'll be able to transfer the unused portion of the swap to our credit facility.

Ben Yang - Green Street Advisors

And then for the remaining tranches, are the terms going to be the same as what you discussed for the initial draw regarding the three-year term, the interest rate and the amount of recourse that you are providing?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Yes, that's our anticipation. The terms of the loan have been established and additional participants will have the same terms as the people that came in before that.

Ben Yang - Green Street Advisors

And then just finally, can you tell us what the upfront fees you paid to the lead banks to get this funding done?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

The upfront fees were anywhere from 50 basis points to 1.5... 150 basis points depending on the size of the commitments.

Ben Yang - Green Street Advisors

And are these incorporated into the 5.6, 5.7 fixed rate...?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

No, they are not. So and then the reason we didn't do it yet is because we don't have the full deal closed. When the full $1.75 billion is funded and you amortize the fees that we will actually have paid, my guess is that the weighted average rate, including amortization will be in the low 6s.

Ben Yang - Green Street Advisors

Great, thank you.

Operator

We'll go next to Steve Sakwa with Merrill Lynch.

Steve Sakwa - Merrill Lynch

Thanks. I think this question maybe for Bob. Can you just talk a little bit about the development projects? It's hard to I guess tell from the disclosure here what kind of percentage lease you are on these and what kind of slippage you may see in development yields given the tougher environment. I guess what kind of pushback or discussions are you having with the retailers and we have seen, I guess, a pushback and slowdown in a number of new stores and projects taking place. So, I'm just wondering how your expectations for yield have trended on these and what is your expectation at this point?

Robert A. Michaels - President and Chief Operating Officer

The new developments, I think , I would say that on Summerlin for example in Las Vegas, it... if we had stuck to our original opening date, would have been my expectation I think we would have opened that center probably around 70%, maybe 75%. I think by delaying it, the 12 months that we are delaying it in discussion with all of our retailers and people, people who haven't even committed to the project yet that this project will open 90% to 92%, 93%. And I think also and probably equally as important, I think the rents will be higher and I think that as we've had these discussions with the retailers that almost universally they have said we would prefer to open this in 2010 versus 2009. So, that's really what we took our cue from. This project will be a great project anchored by Nordstrom, Macy's, Dillard's, Crate & Barrel, all those deals are totally firm. We are well over 50% in our leasing and I just think that by giving us this extra time it will open extremely strong. Same comment would apply to Elk Grove and Sacramento, and I think that just giving the extra time, I think, is a prudent thing to do and the right thing to do not only for us, but for the retailers. So, that's kind of an overall look and I think that as... I mean we are continuing to lease these projects. We are continuing push forward on all of the projects that we delayed and whether there are new developments or redevelopments and the end result is that you will just have much, much stronger openings.

Steve Sakwa - Merrill Lynch

Well, I guess what I'm really focusing on Bob on page 40. You list out projects that have planned openings as basically early as 4Q '08 and some go to the second quarter of 10. So, those are, I guess, projects that are definitely happening, you are spending money, you may or may not be leased on those. And I guess my question really is focusing on this close to $1 billion of capital. How has your return expectation changed on these since you can't really delay these at this point?

Robert A. Michaels - President and Chief Operating Officer

Well, I do what you are saying, Steve. I mean really not at all. I mean these projects for the most part are leased. I would... Mondawmin is open, Montclair, the Nordstrom and mall renovation is underway. Saint Louis Galleria, the Nordstrom construction is underway in addition to the mall shop. Towson Town Center is totally underway, it will open this fall, great line up of tenants. Crate & Barrel, we've... I mean we are fully leased on those projects and there is really no change in the expectations that we have on any of those and Water Tower Place in Chicago, American Girl will open their flagship store there in October. We've done a lot of re-leasing there and new leasing. And so as far as the definitive projects page that you're referring to, I see really no change at all.

Steve Sakwa - Merrill Lynch

So, something like Saint Louis Galleria, which looks like it has an opening that's effectively two years from now?

Robert A. Michaels - President and Chief Operating Officer

Right.

Steve Sakwa - Merrill Lynch

I realize it says, you are saying all that small shop space is 100% leased with...

Robert A. Michaels - President and Chief Operating Officer

There is very little... yes, there is very little additional mall shop space here being added, there are some re-configurations being done. But really Nordstorm slips into the Lord & Taylor space and that's the major redevelopment on Saint Louis Galleria. There are two spaces leading into the mall corridor from the Nordstorm store, those are both fully leased and... but very, very little re... new space being developed there.

Steve Sakwa - Merrill Lynch

Okay. Thanks a lot.

Operator

We'll go next to Jeff Donnelly with Wachovia Securities.

Jeff Donnelly - Wachovia Securities

Good morning guys. Bernie, we get a lot of questions around this, I hope you might be able to clarify, specifically concerning the settlement with the [inaudible] on the Summerlin land. Could you... maybe review the folks what the timing and mechanics are in the dilation and settlement and maybe what flexibility you have there --?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Thank you for asking. I think I have explained as clearly as I can on numerous occasions over the last few years that that event is not at debt maturity. There will be no cash paid in early 2010, it is simply a valuation process. When the transaction was done 15 years ago, we obviously were not involved at that time, but the people that did the transaction anticipated that most of the land would have been sold over that 15-year period. As it turned out, most of the land has not been sold. So, the remaining land as of December 31, 2009 will be valued. The Hughes' heirs will appoint an appraiser, we'll appoint an appraiser and there will be a third appraiser. One of the appraisals will be knocked out, whichever one is furthest away from the other two and the other two appraisals will be averaged. It's a forum of baseball arbitration, if you will, except that instead of taking one or the other, the one being the least egregious, the remaining two will be average.

Our obligation and we don't expect to modify it in any way, is to deliver shares of General Growth stock to the Hughes' heirs in an amount... the number of shares will be a function of the appraised value of half the land and our share price at that time. So, no cash is due or is required. In our mind that creates an opportunity for us. It gives us an option to do anything that we want relative to the issuance of those shares. If things are extremely good in the overall environment in our company, I would say probably the most aggressive thing we would do would be prior to the share issuance in 2010, we would be buying back enough shares so that when we issued the total shares in February of 2010, we would be issuing repurchased shares.

The source of the cash for that repurchase could come from any number of places. It's two years from now. So, I don't want to predict where it would come from, but as I've said in the past and I can repeat again today, one possible source is just financing the land that now becomes 100% in our control. Another option is to do a joint venture where we bring in a partner for half of the land or more, or some variation on that and use that cash to buy back the shares or another possibility, which I am now predicting is simply just to issue the shares because it's a good thing to do at that point given everything that's going on in the company, and then utilize the capital that could come from a joint venture or a financing for other purposes, unrelated to purchasing the shares back.

So, the settlement of the Summerlin land in 2010 is actually a positive thing and people still seem to be confusing it with a big debt maturity that's coming that we will have a difficult time refinancing. It's not a debt maturity. We're not obliged to pay any cash and as I just said, it gives us the option to consider any way that we want to realize that investment or stay in it, sell it, joint venture it as we've said. So, I think there has been a lot of misunderstanding, I've tried to give the same explanation many times, hopefully people will understand that it is not a debt maturity, it's not a bad thing, it's actually a good thing.

Jeff Donnelly - Wachovia Securities

Thanks. And I'll ask just one other question. I guess maybe as a follow-up to David Fick's earlier question on the dividend. I know it might sound preposterous given that your dividend is covered, but what ability do you have to actually maybe reduce your common dividend as a means of retaining additional capital, and is that a course of action that's potentially on the table?

Robert A. Michaels - President and Chief Operating Officer

Okay. I know that everybody listens to remarks very carefully and I don't want to mix words here. There is no need to consider reducing our dividend. We've outlined so many different places that we can get cash, there are so many things we would do before we cut our dividend. We are not like a bank that has written down billions of dollars of its balance sheet and it's paying out a dividend that could be used to help restore its balance sheet. Our balance sheet is not broken, it's just simply... it's got more leverage on it than some other companies, but prior to a year ago, it was viewed by almost everybody as not aggressive leverage. So, we have no losses to cover, we don't need to restore capital like a bank does. There is no... I can't imagine any scenario where we would need to cut our dividend. That said, it's a Board decision. As I said, every October we revisit the circumstances, but one minor joint venture on one of our best assets would create 10 times the capital, the cash capital as a reduction in our dividend.

Jeff Donnelly - Wachovia Securities

That's helpful. Thank you.

Operator

We'll go next to Michael Bilerman with Citi.

Michael Bilerman - Citigroup

Good morning. Bernie, can you just talk about the $1.75 billion of the unencumbered assets and just give a little bit more color on that pool in terms of what comprises it? And also if any of the facilities and your debt facilities having covenants on the amount of unencumbered assets that you need to keep?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

The last part you see, the shorter answer, none of our debt facilities have any unencumbered asset covenants whatsoever. The first part of your question is that most of the assets are office buildings in Summerlin and elsewhere that were part of the Rouse transaction. There are quite a few strip centers that were part of the JP Realty transaction. JP Realty had bonds that had an unencumbered asset pool requirement connected with it. So, that's why we still have a significant amount of unencumbered assets there. The final JP Realty bond that had that covenant was repaid last March, so that restriction no longer exists. There are still some malls, smaller malls, no huge malls, but some of our newer malls are part of that pool and it will be easy to finance six to 12 months from now as they get forward or more mature. So, a big part of that pool will be office buildings that are unencumbered that we would hope to sell in the next 24 months, which will generate obviously that much more cash because there isn't any existing leverage. But it's a whole mix of operating assets as I've described, quite a bit of office buildings that we got in connection with the Rouse assets that we bought four years ago.

Michael Bilerman - Citigroup

And just in dollar terms, it's like $1 billion of office or would be greater than that?

Bernard Freibaum - Executive Vice President and Chief Financial Officer

I don't have that exact number. I would say at least half of it is office buildings.

Michael Bilerman - Citigroup

And just a question for Bob. You talked about the 240 port folio review meetings that you had in the quarter, and also having those discussions about pulling back on the developments and the retailers being comfortable with it. Can you talk a little bit about the discussions you are having on the '08 renewals and 2009 expirations and sort of the tone that you are hearing from retailers? And combined with that, maybe talk a little bit about the leasing spreads in the quarter, which were about 13%, a little bit lighter than where you have been, I'm sure mix plays with it, but maybe you can just talk a little bit about the ability to push around?

Robert A. Michaels - President and Chief Operating Officer

First of all, I mean, the leasing is quite... it's a matter of timing. And these are numbers that vary every quarter and it really all depends on the centers that are involved or the rollovers that are occurring and it... I wouldn't put too much faith in one quarter to the next quarter, what those numbers are. Some quarters they are very large, some quarters not quite as large, but it all depends on the centers that are rolling. I would tell you that, as I've said in my opening remarks that all of our 2008 deals are virtually done, they're put to bed. Most of our 2009 renewals, and these renewals that come up on January 31, 2009, the majority... the vast majority of those are completed. We are working on 2010, working on 2011. And as I go through the list of retailers and when I started the day, I said a lot of focus is on the 10% of the retailers that are struggling and that doing well which I understand from the media. But, I mean, you can go through a list of probably 50 retailers who are expanding, they are growing, they are doing well, they have multiple concepts and those are really the retailers that we're talking about. Probably the top 30 retailers make up 80% to 85% of our mall shop space because they have multiple concepts. We're not seeing pushback on those... kind of renewals and I think that it will continue. I think they're working further out, they are properly sizing their stores. We are doing a lot of renewals in 2010 where a retailer might want additional space. Some of the foreign retailers that I've mentioned coming into the country have a certain requirements for their spaces. We are moving people around. So, it's really business as usual. It's not something that has slowed down, John mentioned the number of portfolio reviews. On any given day, we have probably one to two, sometimes three retailers in here in our portfolio renewal meetings, and again we are working further out and... but, the centers are fully leased, to have to... in order to get the space. So, I would say for the most part its business as usual. 2008 is done, 2009 is mostly done on the renewals, and we are working on 2010 and '11.

John Bucksbaum - Chairman and Chief Executive Officer

[inaudible] I'll mention the renewals that is done... it's based on the productivity that the retailers are doing and that productivity is during the past lease term. And so, if you had years of flat sales going forward, you would see more pushback and have greater concerns that next time around in terms of lease renewal and such, but given all of the gain that's been made by these retailers over the last 7 to 10 years, it leaves you a lot of room.

Bernard Freibaum - Executive Vice President and Chief Financial Officer

Just one thing to the augment to what Bob said about the rent spreads, the spreads are not same store in every quarter that there is a huge amount of variability, that is why Bob said don't look at this in any individual quarter. Over the long term, rent spreads are important, but to be very precise, we signed hundreds of leases last quarter for spaces that won't... leases that won't commence until 2009. And we are... all we can do is tell you what the average expiring rent is in 2008 across our whole portfolio. So, some of the numbers for the leases that we did in this quarter, many of them actually are for leases that will commence in 2009, not the same spaces that are maturing now. We did a lot of those leases last year. So, because it is in actual store for store, just trying to give you an indication of what the newer rents are compared to the expiring rents to focus on each quarter, where the Holy Grail is paying far much attention to something that is just from quarter to quarter an interesting indicator and not something very critical.

Michael Bilerman - Citigroup

Right. If I can just have one another, just on Vegas with Summerlin and Nashland [ph] being moved out and I think Bernie you talked about the lots are not meeting yet the expectations.

Bernard Freibaum - Executive Vice President and Chief Financial Officer

No, I didn't say it didn't meet the expectations at all, in fact it's exceeding expectations. It's simply not fully mature and stabilized and from a cash flow point of view. That's the critical point. It's open today, but there is... there are many leased spaces that haven't commenced operating yet.

Michael Bilerman - Citigroup

From a financing standpoint, it's not ready to be financed.

Bernard Freibaum - Executive Vice President and Chief Financial Officer

I mean it's not the best candidate for a 10-year loan today. Let me be as precise as I can because if I had to do... if I had to guess for you, I would say the NOI increase from what exists today over the next five years, it could increase on average 15% or 20 % a year.

Michael Bilerman - Citigroup

Right. The operations at Fashion Show... I'm just trying to get a sense of, obviously there is... there is some hesitation for retailers in your discussions, it's not move forward some projects, it's just how overall Fashion Show and Grand Canal is doing in this sort of environment?

John Bucksbaum - Chairman and Chief Executive Officer

Well, I mean Fashion Show and Grand Canal are doing fabulous. Fashion Show sales are up over $1,100 this quarter, Grand Canal Shoppes is running over $1,200 this quarter. A lot of the business in Las Vegas if you are there has moved what I call north. And I mean it's with the opening of the Wynn and the bridge to the Fashion Show and the Palazzo from the Wynn, traffic has increased tremendously at both Fashion Show and now also at Palazzo. Wynn is opening Encore here in December, that will give it an another boost. A lot of the businesses is moving to that end of the strip. Fashion Show is... when we purchased Fashion Show, it was doing about $600 a square foot and today it's over $1,100 a square foot. We continue to grow the rents in all of those assets, those two assets Grand Canal and Fashion Show in my opinion are about as good as we guess.

Michael Bilerman - Citigroup

That's helpful, thank you.

Operator

And due to time constraints that does conclude our question-and-answer session. I'd like to turn the conference back to our speakers for any closing remarks.

John Bucksbaum - Chairman and Chief Executive Officer

Well, thanks everybody for joining us, and we'll look forward to seeing some of you in the early fall and for those of you others, we'll talk to you on the next call. Thank you.

Operator

Thank you everyone. That does conclude today's conference. You may now disconnect.

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Source: General Growth Properties, Inc. Q2 2008 Earnings Call
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