Macerich Co (MAC) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Macerich Company second quarter 2005 earnings results conference call.

Today's call 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 would now like to turn the conference over to Georgeann Palffy of the Financial Relations Board.

Please go ahead.

Thank you all for joining us for this afternoon's second quarter 2005 conference call.

If you did not receive a copy of this morning's press release, you may access it online at 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 the business and industry.

For a more detailed description of the risks, refer to the Company's press release and the SEC filings.

Management will discuss 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 for the quarter, which is posted on the Company's home page, under the section entitled Investing.

I would now like to introduce the members of management with us, today.

Mr. Art Coppola, President and Chief Executive Officer; and Tom O'Hern, Chief Financial Officer.

I'll turn the call over to Tom for his opening remarks.

Please go ahead, sir.

Thanks, Georganne.

Welcome, everyone.

Today we'll be discussing the second quarter results, recent events, and our outlook for the rest of 2005.

The operating metrics were again very strong for the quarter.

We had very good improvement in tenant sales year-over-year, continued high occupancy levels, good releases spread, significant redevelopment activity, and a very strong quarter for FFO, with growth of 13%.

Total same center tenant sales increased 6% compared to the second quarter of last year.

Looking at that by region, Southern California continues to be strong, up 7%, Northern California and the Pacific Northwest were up 5.5%.

The intermountain region was up 8.1%, eastern region 1.6%, central region 5.4%, and Arizona, again very strong, up 12.4%.

Comp tenant sales, that's same tenant, same space, compared to a year ago, was up 4.6%.

Total mall sales per square foot for the rolling 12 months ended June 30th, 2005, were at $403 per square foot, up from $375 at 6-30-04.

Occupancy levels again remain very high, with quarter-end occupancy at 92.3%.

On a same center basis, we're at 92.1% compared to 92.3% a year ago.

Good volume on leasing activity.

We had 335,000 square feet of leases signed during the quarter for specialty tenants.

That's inline mall space.

Average new starting ramp was $34.68 a foot, and that was a positive spread of 13.5%, compared to the average expiration of $30.54 for the year.

The results of operations now for the second quarter, FFO per share diluted came in at $1.00 And that was a 13% increase compared to the $0.89 for the quarter ended June 30th, 2004.

EPS diluted was $0.11 for the quarter.

That was down compared to $0.29 for the quarter ended June 30th, 2004.

Major reason for that drop was the increased depreciation and amortization expense of about $15 million, related to the acquisition of the Wilmorite portfolio.

The strong growth in FFO per share for the quarter were driven by a number of things.

We had CPI increases that were $828,000 higher than the second quarter of '04.

Same center NOI was up 2.2%, compared to the second quarter of '04.

We're up 2.75% on a same center basis year-to-date, which is about in the middle of our assumption range of 2.5 to 3%, and we remain very comfortable with that assumption.

We had lease termination revenue of $2.1 million for the quarter, and that was virtually flat with the $2 million we recognized in the second quarter of 2004.

Specialty tenant leasing kiosks, carts, temporary tenants were up 31% to $9.4 million.

Interest rates during the quarter were up to 5.8% on average, that compared to 5.5% at 12-31-04.

The average maturity of that debt is 4.1 years.

Many people have asked what the breakdown is on fixed rate.

The fixed rate debt only, the average life is 5.1 years, and the average interest rate is 6.6%.

G&A increased in the quarter to 3.9%, compared to $2.3 million -- excuse me, it increased to $3.9 million, up from $2.3 million in the second quarter of last year.

Virtually that entire increase resulted from marketing -- to market the director phantom stock plan.

Our Board of Directors -- Independent Directors take the vast majority of their compensation in the form of matrix phantom stock, and as required under Generally Accepted Accounting Principles, this stock must be mark-to-market every quarter.

Obviously, the second quarter was extremely volatile with the share price going up $14.00 between March 31st and June 30th.

That resulted in about a $0.02 a share negative earnings hit.

In terms of '05 guidance, we reaffirmed our previously issued FFO guidance.

That was in this morning's press release.

The FFO per share remains $4.30 to $4.40.

Also keep in mind, in your quarterly allocations of that estimate, that we do have quite a bit of seasonality in the fourth quarter, with about 50% of our annual specialty leasing historically coming in the fourth quarter.

For example, last year, $14 million of specialty leasing came in the fourth quarter, that compared to an average of $5 million in each of the prior three quarters.

In addition, over 50% of our percentage rent historically comes in in the fourth quarter.

So also something to keep in mind, in addition to the normal seasonality is, we'll have an additional impact in the fourth quarter as a result of the completion of the $130 million expansion at Tyson Corner, which Art will speak of in a few minutes, but we own 50% of that, and the impact will be felt in the fourth quarter.

So in looking at the quarterly estimates on first call, there seems to be very wide range, and I think perhaps some of you may not have factored in that seasonality in the fourth quarter, so it might be worthwhile to take a look at that soon.

We do expect to give 2006 guidance on our third quarter earnings call.

We will not be doing that today.

Looking now at the balance sheet at June 30th, we had $6.6 billion of debt, including our pro rata share of debt from consolidated entities of $1.5 billion.

Our floating rate debt to total market cap was 21% to quarter end.

Our floating rate debt was 38% of our total debt.

Debt to market cap was 55% at the end of the quarter.

In terms of financing activity during the quarter, concurrent with the Wilmorite transaction, we priced our existing $250 million term note.

We worked with our bank group and were able to drop that interest rate to LIBOR plus 150, for a very significant savings.

Market timing was great, and we got excellent pricing, not only on the acquisition debt, but also on the repricing of that term loan.

The market is also very strong for property specific financing, during the quarter, we refinanced Lakewood Mall.

We paid off the former mortgage of $127 million with a $250 million fixed rate ten-year financing at 5.41%.

The excess proceeds of our pro rata share were used to pay down floating rate debt.

In addition, we do have a number of other large under leveraged assets with near-term maturities, where we would expect to be going to the market and take advantage of this attractive permanent financing market.

At this point, I would like to turn it over to Art to discuss other major events up impacting our business.

Thank you, Tom.

As you can see from all of our operating metrics, our Business is in very great shape.

Sales are strong throughout the Company.

Leasing interest is extremely strong.

The ICFC attendance was the highest ever this year.

Given the fact that we have such little supply of new space coming online, and the fact that our centers continue to get better, the leasing demand within our portfolio and across the industry, has been tremendous.

Major topics that I want to talk about today is that, first of all, a quick look back on our Westcor acquisition, given that this is the third anniversary, last week, of that acquisition.

We'll talk a little bit about the Wilmorite acquisition and what we now see happening there.

Get into our development pipeline, the size of it, and where it's headed.

And then, most importantly, talk about the impact on Macerich and the industry on the merger of Federated and May Company that has now been approved by both boards, and appears to be headed towards consummation over the next three or four months.

Again, as I mentioned on Westcor, we have just finished the three-year anniversary of that merger with the company, and the results have just been outstanding.

Tom talked about year-to-date results on sales at our centers in Westcor and in Phoenix in particular.

And virtually across the board, we're looking at double-digit increases in the Phoenix marketplace.

The Phoenix marketplace today has got more tourist interest and visits, which drives a lot of the sales at centers like Biltmore and Scottsdale Fashion, than it had even before 9-11.

So it is an extremely vibrant market that has actually caused us to accelerate and move up our development plans.

In looking at particular centers in the Phoenix marketplace, when we bought Westcor, for example, Arrowhead Town Center was doing around $390 a foot.

It's now over $500 a foot -- around $523.

Scottsdale Fashion Fair, three years ago, was at around $500 a foot.

Today it's well over $600 a foot, and headed towards $700 quickly.

Chandler Mall was at $380 a foot when we bought it.

It had just opened.

Now it's well in excess of $500 a square foot.

And we've added some very strong assets to our grouping there in the marketplace.

We've added Biltmore Fashion, which is currently doing in excess of $620 a square foot.

We bought an interest in Carolyn Town Center, doing in excess of $660 a foot.

And Fiesta Mall, a center that's doing a solid $370 a foot.

So from just an operating viewpoint, as evidenced by sales, the Westcor portfolio has performed extremely well.

When we bought Westcor, there were two developments that were about to get into the ground.

We have executed on both the Power Center in Scottsdale 101, as well as our upscale Lifestyle Center and La Cantada in Tucson.

Both of them came on-line, on time, on budget, at levels of costs that were less than anticipated, and revenues that were more than anticipated.

So we're thrilled about them.

We'll take a little bit later about our development pipeline, but as we talk about Westcor, for example, I mentioned we have accelerated our development plans on two of the three major sites that we had under option.

So we now are moving forward with the regional mall development in Gilbert, which we call San Tan Village, and we are moving forward with our regional mall development in Goodyear, which we call Estrella Falls.

In addition to that, we have several other new sites under option, and so we see that platform as being something terrific for us, going forward.

We consummated the Wilmorite transaction during the quarter.

All of the terms of the transaction were as described when the deal was announced.

We -- the transition has been great, the people at Wilmorite have been great to work with.

Obviously, the star performer in that portfolio is Tysons Corner.

We are going to be completing and opening the 400,000 square foot expansion of Tysons Corner -- September 29th of this year will be the grand opening.

We anticipate that it will be well in excess of 90% occupied upon the opening itself.

The total cost of that development is approximately $130 million.

We anticipate just under a 12% return on that cost.

Again, I'll remind you we own half of that deal.

Part of the seasonality in this year's FFO, in particular as it relates to Wilmorite, as we pointed out before, is that we funded that acquisition of Wilmorite -- the vast majority of that expansion, at acquisition, and of course we'll be seeing none of the income until the fourth quarter.

So that's something that leads a lot to the seasonality that we'll be looking at.

When we bought Wilmorite, of course, we didn't have any idea that May Company and Federated would merge, and as a consequence of that, the Wilmorite transaction is something that we think is going to be even better for us than we anticipated.

And we'll be talking about Federated and the May Company merger later, but one of the properties that they have announced that they tend to dispose of is the Filing store at Danbury, in Danbury Connecticut.

And we have long identified that as being an opportunity either add a Nordstroms, or a Lifestyle Component, or both to that property.

And clearly the merger of Federated and May Company will accelerate that opportunity.

At Tysons Corner itself, we are working closely with -- we engaged John Anderson, the former President of Wilmorite, to consult with us to complete the entitlements that we are working on at Tysons Corner.

We anticipate having the entitlements to add $3 million square feet of mixed use office, residential, hotel, to the perimeter of the site by the end of this year.

And, again, a by-product of the Federated/May Company merger is that we now believe that approval of the project from the department stores will be forthcoming, very soon, thereafter, when we get the entitlement.

Since now we only really have to deal with Federated, since they will control Bloomingdales, the [Hex] store and Lord & Taylor and Nordstrom.

And Nordstroms has already blessed the expansion, and Federated previously embraced it.

And we anticipate this as being a fabulous opportunity to add value, and to create one of the most powerful mixed-use developments in the country.

As a shopping center itself, Tysons is in the top five shopping centers in the U.S. today.

When we complete this expansion -- sales at Tysons, we anticipate, will be in excess of $700 million in total.

And we expect this is a center that can be a $1 billion center in terms of total sales that can be generated.

Looking at the development pipeline, and projects that are in process.

We are moving along with well with our LIfestyle expansion of Fresno Fashion Fair.

That will be completed, the vast majority, at the end of this year and early into spring of next year.

Our enclosed mall expansion at Washington Square will be completed this year.

Leasing is going great.

During the quarter, we were able to consummate the acquisition of the Mervin's store from Mervins.

Just under 100,000 square feet that we were able to acquire at a cost of about $1.7 million to buy that lease back.

We see great opportunities for remerchandising there.

So that particular property we see great future for, as we complete our current expansion, and then now have the opportunity to move on to another expansion, having acquired Mervins.

Our 29th Street project in Boulder remains on target, on time.

We anticipate that that project will be pretty much completed by the end of next year.

That does not include a residential component that we intend to add to the project, which will only enhance the returns and and the profitability of the project.

But again, we've announced in the past, we see incremental costs of $130 million there.

Nothing that we see has changed our opinion on that, with incremental returns on those dollars of around 11% with all of that being completed by year-end 2006.

It's uncertain as to whether or not Foleys, which will be acquired by Federated will continue to decide they want to operate there, and should they decide not to, then that even opens up another 10 to 20 acres at the site for further redevelopment.

The growth of the Phoenix marketplace has accelerated our plans for regional centers, both in Gilbert and in Goodyear.

The retailers have come to us and with the strong demand that we have, we're breaking ground shortly on our 1.2 million square foot regional center called San Tan Village in Gilbert.

We anticipate the vast majority of that will be open by the end of 2007.

We're currently looking at adding a residential component to that project, also.

We have not announced the exact dollar expenditure for that project yet, or the returns.

But clearly we anticipate a range of expenditure of $200 to $250 million, depending on size and scope of the project, and going in returns of 10 to 11%.

Anchors that have been announced include Dillards, Robinsons-May, Harkins Theater.

It will be an open-air center.

Robinson's-May is committed to the project, and in early discussions with Macy's, we would fully anticipate that Federated would just want to take the position that Robinson's-May had in the development plans.

At Goodyear we have moved up our development schedule due to tenant demand and due to population growth.

We see that again as about a $1.2 million --

Everyone please stand by while we reestablish the speaker's line. [OPERATOR INSTRUCTIONS] And Mr. O'Hern, you're back online.

Operator, are we back online -- with the participants?

Yes.

Okay.

Sometimes I have a disconnect, but never one quite like that, so I apologize to you all.

I'm not sure exactly -- well, I know when we got cut off, so I'm not sure exactly what happened with the rest.

We had previously gone through the three-year discussion of the results of Westcor, we discussed the Wilmorite transaction, and we were into the pipeline discussion.

We had just discussed the regional center that will open in 2007 in Gilbert called San Tan Village.

We discussed the fact that we are moving forward with Estrella Falls, a regional center about 1.2 million square feet that will open up in Goodyear in 2008.

And as a consequence of the merger of Federated and May Company, we would anticipate that our remerchandising and expansions and redevelopments of The Oaks and Santa Monica Place will be accelerated and could easily take place and be consummated in the timeframe of 2007 and 2008.

And of course, as I mentioned, we also have the mixed-use development opportunity that we're looking at Tysons Corner.

Which we have not identified exactly how we will tap into that, but we are highly confident that we will have a firm entitlement to add over 3 million square foot of vertical space to that project by the end of this year, into the early part of next year.

When you add that all up, our pipeline looks -- the hard pipeline kind of shapes up to 2005 completions between Fresno, Washington Square and Tysons, in the $150 million neighborhood. 2006, the pipeline, if you add up 29th Street and some other minor additions that we'll be doing, clearly, in the $200 million neighborhood.

You look at 2007, just the mall alone at Gilbert, you're looking at 200 to 250 million. 2008, just the mall alone at Gilbert, you're looking at $200 to $250 million.

In 2008, the mall alone at Goodyear, another $200 to $250 million.

Then when you layer in The Oaks, Santa Monica Place, it's easy to see that our pipeline is very strong with dollar potential opportunities to invest between $200 and $500 million per year, starting next year, for at least the next three to five years.

So also given the fact that we maintain our discipline, in terms of return on investment on getting double digit returns on those, and that that has, in fact, been our history, and that those are our benchmarks -- we're extremely excited about those opportunities.

Again, probably the most important thing that happened during the quarter was the Federated and the May Company announcement, and then the approval of that deal by their various shareholders. they're waiting for FTC approval.

We look forward to the consummation of that.

This is going to be an extremely powerful event for Macerich and for Southern California retail.

At the end of the merger, Macerich will own roughly 60 department stores that will be under the flagship of Federated, operated under their various names of either Macy's, Bloomingdales, Lord & Taylor.

Those particular stores will generate close to 10% of the total sales volume of the combined Federated/May Company post-merger company, so we clearly have a seat at the table with Federated.

We have enjoyed an excellent relationship with Federated over the years, and been one of their largest developer landlords, in terms of them adding stores in the last four or five years.

Looking back to history, as you look back, just to 1995, 1996, when Federated bought Carter Holly Hill, which was predominately located here in California, very much an underperforming store in 1995, we predicted early on that that was going to change the landscape of California retail, and it did.

And in fact, we ourselves, pursued some acquisitions of some shopping malls that had Carter Holly Hills stores in them, because we knew that once Macy's Federated got involved, that the opportunities to work with them and to expand the centers, and to get better anchor traffic volumes, and therefore better sales at a tenant level, was a real opportunity.

Anecdotally, just looking at some of the centers from 1996 to today, in terms of what's happened to their sales per foot;

Macy's took over our Carter Holly Hills store at Broadway Plaza, sales during that period have gone from $400 a foot in the mall to over $715 a foot.

In Marin County, Macy's took over a Carter Holly Hills store there, called Emporium, sales there have come up from $240 a foot to $260 a foot.

At Fresno Fashion Fair, it was a major impact as Federated took over the Carter Holly Hills store there, and sales at that point in time in '96 at the mall, were $289 foot, and today they exceed $500 a foot.

At Modesto, same situation;

Macy's took over an old Carter Holly Hills store, made a deal with Gottchalks to swap some locations.

We renovated the center, sales have gone from $279 to $461 during that same period.

At Ventura Mall at Pacific View, it enabled us to take a center that was anchored by Penny and Broadway, and to attract May Company and Sears to build new stores.

Macy's reflagged the Broadway store and we ended up building a new two level mall there, and took our sales up to over $400 a square foot.

It's a real powerhouse.

At Cerritos Mall, Macy's bought the Carter Holly Hills store there.

Sales a at the time of that acquisition of the mall were $286 a foot.

Today they're approaching $500 a foot.

At Stonewood, Macy's bought the Broadway store there and actually sold that one to Sears, who -- it's one of the best Sears in the trade area.

Sales at that center went from $280 to $409 a foot.

At Corda Madera, Macy's took over an old Emporium store there.

Sales went from $445 a foot to today, they are well over $600 a foot.

At Inland Center, same story, sales have gone from $280 a foot to $490 a foot.

And at Santa Monica Place, Macy's took over the old Broadway store there.

Sales did improve between '96 and 2002, they have slipped some since then, as we've to gone about our remerchandising plan, but we anticipate now that with the merger of Federated and May Company and the opportunity to recapture the Robinson store, that that's going to be a great opportunity for us.

Coming forward to today, within our portfolio, as I mentioned, we have over 60 boxes that are going to be owned by Federated.

There are 10 locations in our portfolio that they have announced that they will be disposing of stores.

There are 93 malls in the U.S. where both May Company and Federated have traditional department stores, and Federated has announced that they are going to dispose of 68 boxes within those malls. 10 of those boxes are in our centers.

It's a fabulous opportunity for us.

The difference we have here, even compared to the time when Federated bought Carter Holly Hill, is that these 10 centers are real powerhouses.

They do average sales of around $470 a square foot.

And this is going to free up the opportunity to accelerate our development and our expansion at the Oaks, at Santa Monica Place.

And again, to open up other expansion opportunities at centers like Cerritos, at Lakewood, at Pacific View, in Phoenix we go -- we'll have opportunities at Fiesta, Paradise Valley, and then at Danbury Fair, further opportunities to move forward with the expansion there.

So I apologize for the operator error there, but we're extremely excited about where we are with our Business.

We're extremely excited about what's happened over the last three years with Westcor.

As we get our arms around Wilmorite, things look terrific.

And this May Company and Federated merger we are very excited about it getting consummated, because we think it's going to be a watershed event and really open up some fabulous opportunities for us.

With that, we would like to open it up for questions-and-answers.

Thank you. [OPERATOR INSTRUCTIONS] We'll go to Michael Bilerman, Smith Barney.

Hi.

Good afternoon.

Jon Litt is on the phone with me, as well.

Tom, I was wondering if you could spend a moment on the balance sheet.

You've talked about having the ability to repay some mortgages and generate some excess proceeds.

Can you give us some parameters as to the timing and the size that you're looking at?

Well, these are really transactions probably over the -- possible transactions over the next 12 months.

Los Cerritos has an '06 maturity, Valley View, as well as the IBM portfolio, so there are, in that case, 12 assets, all underleveraged.

It's obviously a very good financing market today with -- spreads are very attractive, and there seems to be fair bit of capacity.

So to the extent we can finance some of those early, as we did in the case of Lakewood, where we the opportunity to prepay that six months early with no penalty.

Or if we had the chance to do some defeasance without a big penalty, we're certainly going to pursue all of those.

So just those I that named before you get into any unencumbered assets could generate on the neighborhood of 300 to 350 of additional capital.

Which, in all likelihood, would be used to pay down shorter term floating rate debt.

And you talked about the IBM portfolio.

Your current thinking then, would be to refinance that with Simon?

Or potentially let the mortgage go and sell those assets?

Or go through the process of splitting them up?

Well, obviously, that's a joint decision between ourselves and our partner.

Yes.

And, Michael -- David and I met and had dinner -- David Simon -- on that just a couple of weeks ago.

And, look, we are three choices.

One, we can keep the partnership alive and then just jointly refinance the various properties and take out a lot of refinances proceeds, probably, on a minimum, probably $400 million of refinancing proceeds, $200 million each.

That's one possibility.

We could divide the portfolio, and they could take half of the assets, we could take half of the assets.

End result of that could also result in refinancing proceeds to us, well in excess of $200 million on our side of the table.

And then a further possibility would be a disposition of some or all of the assets, which would obviously generate excess proceeds in excess of just a mere refinance.

So, many opportunities available to us in that portfolio.

And the fact that the blanket mortgage, which had been put on there prior to the time that we bought the portfolio -- had been put on there well before we bought it, is coming up for maturity.

Now it gives us and Simon the opportunity to unleash the cash and the value that we've created in that portfolio.

And then, Tom, in terms of -- and that's helpful.

In terms of -- maybe the floating rate exposure.

You had talked previously about potentially swapping out some of that exposure, taking your 38% down to a 30% level.

Could you give us an update as to where your current thinking is, there?

That was just one possibility we were looking at.

Frankly, we prefer to refinance on these property-specific mortgages, and use that excess liquidity to pay down the floaters.

And so you intend to maybe stay at this 38% level probably through the end of the year, until you can get access to some of these assets?

Well it would be the extent we have liquidity events, that liquidity will be used to pay down the floating rate debt, so.

It will gradually move down over the course of the next 12 months.

And with a lot of these mortgages, like Valley View for example, comes due next year -- we're getting to the point to where the prepayment penalty is small enough that we could go ahead and trigger a refinancing of an asset like that today, and take out $100 million of excess proceeds today.

Likewise, we could do the same thing now within the IBM portfolio.

The defeasance penalties are getting to be small enough.

So it's not out of question that we would trigger some these refinances even before the mortgages natural maturities, which the ones that I just both mentioned are both generally in the late spring of next year maturity.

So it's clearly our commitment to bring our debt levels, as well as our floating rate debt levels, down to levels below what they were pre-Wilmorite, over the course of the next 12 months, and it could happen sooner, rather than later.

And in terms of capital raising, you still have Crossroads.

Has that gone to contract, or you're still evaluating the potential there?

We're still talking to buyers right now, and we had one buyer fall out on the deal.

But -- so really, right now, we're evaluating the decision as to whether or not to sell it or just finance it.

It's an unencumbered asset, and we could easily generate $70 million, give or take, of proceeds, by just putting a mortgage on it.

Which, that's also an alternative if we don't get the price that we want.

All right.

Jon has a question, as well.

Yes, I just wanted to follow up on the Federated/May situation.

I think you mentioned seven locations out of the 10, you were running through them.

Is there -- do you think that all of these goring to represent opportunities?

Or do you think some might be a little more challenging to redevelop or replace?

We have -- we have multiple replacement and/or reconfiguration concepts for each and every location.

Each and every one of them we see as an opportunity.

The one that doesn't have a clear and simple anchor replacement or even lifestyle reconfiguration would be Inland Center.

But, that could be a center that we have such a small middle doing over $500 a square foot -- where one of the alternatives there would be to abandon the upper level of that -- of the store that's going to close and just redemise the lower level in the mall shops, and take the excess FAR and spread it ought amongst the site.

But at places like Lakewood, clearly a great expansion redevelopment opportunity as we get back to the Macy's store.

Cerritos we have had long had ambitious plans there to expand Nordstrom's, and to add GLA.

It's going to open up the opportunity for that.

Santa Monica Place -- fabulous opportunity.

Historically, what we've had is -- we've had two department stores both underperforming, and in order to remerchandise that center, we were going to have to deal with each of them.

And now we only have to deal with one of them, and getting back the Robinson's-May store just opens up the redevelopment opportunities at Santa Monica Place to levels that we had never dreamed of.

Frankly, we -- under the deal that we had with Robinsons and Macy's, even if we scraped the center and rebuilt it, we were going to have to have a home for each of them.

And there was no assurance that both of them were going to take their sales levels from what today are very sub-par to exciting levels.

Now, with recapturing the Robinson's-May building, to the extent that we're able to do that, the opportunity to replace that with a much more than upscale anchor is clearly available to us.

The opportunity to pursue and use that GLA as part of our mixed-use concepts, whether we add a residential office to that project, are accelerated.

The Oaks is a fabulous example.

In order for The Oaks expansion to happen, and for us to add Nordstrom's to that center and add the expansion wing, we had to wait for May Company to expand their West store and to get it open before they would give us back the store, which would be redemised, and then would would build Nordstrom's.

That was pushing the opening of The Oaks expansion, because we had to wait for May Company to get all under one roof, all the way out to 2009.

Now it's quite possible that that whole expansion could be done by 2007.

How many of the stores do you own, and there are any operating covenants in any of those locations?

All of the stores that are being -- of the 10 that are going to disposed of, are owned by -- will be owned by Federerated. we have operating covenants on the Macy's store that they want to dispose of at Lakewood.

We have operating -- two operating covenants at Pacific View, one with Rob-May, and one with Macy's.

We've got -- they did announce a disposition of Scottsdale Fashion Square, but they have an operating covenant with the Robinson's-May store to operate its as a Robinson's-May, and with the Macy's stores, which makes for an interesting situation.

And how do you think you're going to go about figuring out how much you are going to pay them -- I'm assume there is going to have to be a payment, they're not just going to shut them down and give them to you -- to get these back.

And is there a chance that somebody else gets them back?

That somebody else buys them?

Yes.

I can't imagine anybody else being able to pay for one of these locations what we could afford to pay for one of the locations.

Now, for example, at The Oaks, we already had a deal with Robinson's-May, which Federated will honor, to buy the East store, which was going to be the place where we were going to add Nordstrom's.

So the only thing that happens there is that property gets accelerated in timing, but the deal has already been made in terms of what we would pay to recapture that store.

At Santa Monica place, there's a long list of people that would want to try and use that -- that would want to try and get in there.

But it's a 131,000 square foot Robinson's-May building in a very strange three-level configuration, and somebody might come in and say, if and you would you let me go ahead and change the configuration, I'll pay a kazillion dollars to get in there.

Of course wee not going to play with 'if you and would you' with somebody who wants to try to change that configuration.

I guess some of the other situations, not this particular, but other store closings -- sort of the general rule of thumb was you -- you would pay to regain control, basically dollar for dollar to what the sales are per foot of that store.

So it was do be $250 a foot, you would pay $250 a foot to regain control.

Is that a way for us to be thinking about how the sort of the expense that might be involved, on your part, to regain control of these 10 locations?

No, no.

And that -- I know exactly what you're talking about, John.

And, look, Federated knew when they bought May Company that they were going to have to dispose of 60 to 70 to 80 stores, and that they were going to lose $2 billion worth of business.

That's how much business is being done in the 68 stores that they are going to have to dispose of.

I can assure you, they don't have any contemplation that they're going to get $2 billion from whomever for those 68 stores.

Some of these stores we'll just work with Federated to for them to sell the store to another department store.

And so it could just be a cooperation move, where it involves no dollar figure.

When Federated bought Carter Holly Hill, there was no exchange of dollars between us, but there were many changes made to the center, as we allowed Federated to take maybe an imperfect configuration of a Broadway store, allowed them to change that, and then they allowed us to do certain things in the way of expanding it.

So look, given our overall relationship, given the reality and the layout of these stores.

I mean, Lakewood, for example, Lakewood -- they say they want to dispose of the Macy's store, and they want to occupy the Robinson's-May store.

Well, they have a covenant at the Macy's store that they want to sell to operate thats as a Macy's.

So we do have things to talk about to each other.

We expect to pay fair value for the stores, to the extent that -- that they have a real offer from a real anchor that we would maybe prefer to do something else with one of those stores.

We would match that type of an offer, but certainly not dollar for dollar, at all, in terms of what people would pay.

I guess final question and we'll yield to the floor -- what kind of -- if you have to put dollars out to get these spaces back in redevelopment, is there some minimum return that you would want to get on that, like a 10% minimum return?

Is that the way you're thinking about it?

I clearly would envision that the returns that we will see on money that we will expend, as part of the process of getting back these stores, will be some of the highest returns we will generate on any activity that we have anywhere in the Company.

So when I say we're going to go build $250 to $500 million of pipeline stuff per year over the next five years, at 10% to 11% returns, I see returns well in excess of that here.

Great.

Thank you.

And most importantly, John, I see things happening sooner rather than later, in terms of the expansions and developments.

Like I said, The Oaks could be moved up two years.

The Santa Monica Place could be accelerated.

That type of thing.

We'll go next to Ross Nussbaum, Banc of America Securities.

Hi, guys.

Here with Christine McElroy.

A couple of questions.

Art, first on prior quarters, you had talked potentially about a joint venture.

Did I miss that?

Is that now completely off the table?

A joint venture?

With Wilmorite, on selling a stake in that portfolio.

Yes, in February, basically, before we had closed on Wilmorite, and before we know about the May Company /Federated merger -- we did say, when we were asked, how are you ultimately going to finance Wilmorite?

We said, look, one of the options is that we have both existing partners, as well as new partners have come us to and said that they would love to come in and be a fifty-fifty partner with us at Wilmorite.

And come in at a full entity level.

And we said, you know what?

That's one alternative, but we have to evaluate Wilmorite.

We have to evaluate, what do we see in the way of growth opportunities at Wilmorite versus the rest of our portfolio.

And what are our other financing alternatives.

By our May call, we indicated that the probability of doing an entity-level deal at Wilmorite would have diminished dramatically.

And as it sits today, given all of the moving pieces, given now the fact that we know, for example, that we're going to get the Filings store back at Danbury, so that means we're looking at a major expansion redevelopment there.

There could be implications at Tysons Corner, depending on what Federated ultimately decides to do with Lord & Taylor.

And as we look at it, and as we really have gotten our arms around the numbers, we've come to the conclusion that the timing on doing an entity-level deal at Wilmorite is just not appropriate.

There's way too much value to be created in the near-term.

There is -- as we look at the NOI topline growth that we see being generated by Wilmorite, it's in excess of our historical topline growth in our Company, as well as our projected topline growth from our remaining assets.

Which is not unusual, because that's what we look for when we -- when we -- one of our main criterion, when we buy something.

So clearly, I do not see an entity-level Wilmorite joint venture in the cards anytime in the near future.

That doesn't mean that there will not be joint ventures done maybe on selected assets within Wilmorite, and on selected assets outside of Wilmorite.

But clearly not a full fifty-fifty joint venture at Wilmorite and at entity-level, anytime in the near future.

Because there's just way too much value creation, as well as immediate NOI growth, as well as changing circumstances with the May Company/Federated merger.

And we just have too many other financing alternatives that Tom referred to, for example, to bring our debt levels back down, as well as our floating rate back down.

So, yes, definitely that's off the table, at this point in time.

Okay.

Sounds good.

Tom, I've got two questions for you.

One is on Tysons.

Have you been capitalizing the interest with respect to that expansion portion that's opening up in Q4?

There is a portion of interest that is being capitalized on that, Russ.

Is it the full 75 million shares, or something less than that?

Our share of the total deal is 65 million.

The total amount that we funded at closing of our share of the 65 million was probably around 50ish or so.

Okay, so.

It's on that amount?

It's based on a pro Rata share of the amount that been expended.

Got it.

Now the other question I have is, in the press release, you laid out your LIBOR guidance for the end of the year of 3.75%.

And with one month LIBOR sitting here at 3.55%, and three month at 3.75%, it just seemed a little aggressive to me with four FMOC meetings to go, that you would have that LIBOR assumption in there.

We didn't change that, Ross.

That was in there before, and it's holding fairly true.

We've got, at this point, five months left in the year, so if we were wrong -- and we, I believe bumped that to 3.75% starting in the beginning of the fourth quarter.

So I think we're comfortable through the end of the year, Ross, it just remains to be seen what we factor into our assumptions when we give '06 guidance.

Got it.

Thanks, guys

We'll go next to Alexander Goldfarb, Lehman Brothers.

Yes, good morning.

First, going back to your -- I think you said the portfolio sales per square were were about $403 per square foot.

Does that include Wilmorite?

Or does that exclude?

That includes Wilmorite.

That includes it.

Great.

And what was the contribution of Queen center in the quarter.

He's pulling that number right now.

Do you mean from an FFO viewpoint?

Or a sales per foot viewpoint?

No, from an FFO.

I think, back to the Q4 call, and you guys had mentioned that it was little lower ramp up than anticipated because of some defaults with some of the tenants.

And basically, with that asset, what I think would be fully up and running, I'm just sort of curious, given the returns you outlined, what the FFO contribution has been in the quarter?

Yes, one thing we have to remember, a significant amount of Queens was open in -- was -- actually it was open the entire second quarter of last year.

The Penny expansion was open the entire quarter of last year, so what opened up in November of this year -- so that would be comp to comp.

So that contribution came in in the second quarter of last year.

And then what happened in November of this year is we redemised the Penny building, so that would be the non-comp accretion that came in from Queens during the quarter of this year.

Yes, Queens has been consolidated, at this point, with the existing center.

And obviously to come up with an FFO number, you would have to allocate some corporate debt that was used for the difference between the construction loan and the $275.

But, at this point in time, the project is completed, and the entire impact of the $275 million expansion has been felt during the quarter.

And a rough guess, and don't hold me to it, is that it -- again, since the Penny expansion wing was open in the second quarter of '04, and also open in '05 -- so that's comp to comp.

What wasn't open in the second quarter of '04 were the small store tenants that are in the redemised Penny building in the old mall.

My guess is, is that overall, that contribution is probably a $0.01, $0.015, $0.02 maybe, during the quarter.

Okay.

The next question is, your average base rents across the portfolio.

What do you think the current in place rents are?

The average in place --

Across in the entire Macerich portfolio.

It's $34.83

Okay.

My question, then, to follow that, is looking at your new leases over the past several years, they seem to all be in the $35 range.

I think there was one $40 one that was few years ago, but they seem to have sort of stagnated.

Just curious, given the performance that the different regions have had -- certainly the West Coast and Arizona -- would have expected, I guess, more of rents to creep up.

I'm just wondering if you guys can just share a little bit how we should think about that.

Well, I can assure you that, on a granular basis, they have not stagnated.

I'm in the loop on each and every lease that gets signed in this company.

So it's very hard to look at any one quarter, frankly.

Right.

And that's why I was looking at the whole -- the past number of years.

And the other thing that has happened is, that we've got a wide range of assets in our portfolio.

We have assets that generate rents at places like Tysons and Queens that approach -- Queens over $100 a foot.

Of course, none of those are in any of our lease signings, because that was a new project.

But then you also have some of the sub-tier markets like Oklahoma Cit,y where your rents are closer to $15 a foot.

On a granular basis, I can tell you that, from a leasing viewpoint, we have never had as much landlord leverage as we have today.

And, again, it's tough to really measure it on a quarter by quarter basis.

Tom, do you want to add to that?

Yes, think if you look at historically, we have ended up with about 8.5% of tenant sales being equivalent to their minimum rent, and that has held steady over the last five years or so.

So to the extent the average sales per foot in the portfolio is going up, then the underlying rents are goring to go up.

And quarter after quarter after quarter we have been reporting double-digit increases in the positive releasing spread, so that continues.

And that shows up in the same center growth, and it's a little hard to look at one quarter's leasing activity and draw a conclusion, it's just not a big enough sample size.

But if you'll look at all of the data we have had increases, very steady increases over the last five years

And we see that continuing.

Frankly, we see that ramping, in terms of just absolute dollars of rents that we achieve.

Now, of course, you've got to compare it to what was the rent on the lease that was expiring, which, that's a different story.

But just on a granular basis -- and a space by space basis, we've never been in as strong of a position, and tenants are -- look, when they are in an environment where, for the last two or three years they've enjoyed strong same store sales increases, they're able and they're willing to pay more rent.

There is always a lag, and it works both ways.

But clearly on a leasing front, we see the simple rolling over of leases at higher rents as being a very strong factor in terms of driving our internal growth, going forward, for quite the foreseeable future.

And in particular, for example, at Wilmorite, as we thought about, do we bring in an entity-level partner or not?

Just looking at what we know that we can rent that space at in those existing centers, we see top line growth of 7, 8%, so -- And that's just based upon the strength of the centers, and the comparison of the expiring to what we project we're going to be able to get from new leases.

Okay.

And just my final thing, and it's the follow-up again.

Going back to the $34 in place rents, if the deals that are being done are sort of in the $35, $36, $37 -- it doesn't sound like you'll get the high double-digit type increases that you have been getting.

Is that a fair statement, or are there some major rolls coming up that will drive that?

I think, again, you're looking at one quarter, and the average was $35.

That was like, $34.90, something like that, so round that to $35.

And if you look at the expiration table in the 10-K, you will see that the expirations, on average -- and again, that's why you can't use one quarter of leasing activity.

Because in this particular quarter, we had quite a few leases at Crossroads, Oklahoma, and some of the centers in the Midwest where the average sales per foot are lower.

But the average is in '05, '06, '07 are in the $29 to $30 range on expectations.

And we've been signing in the $35 to $37 range on average the last couple of quarters.

So that's still a present decent double-digit return approaching 20%, and we see that continuing.

One thing we have done this year is we've made a big push towards fixed CAM.

It has been an industry-wide move, and as part of that, you're giving away the comfort of a triple net lease, and basically quoting a fixed CAM number.

So typically we have built in a little margin there for error.

And instead of quoting the exact costs we incurred per foot last year, we put $1.00 or $2.00 of additional costs in in there.

So to some extent, that's going to have a bearing on the amount of minimum rent you get.

There's probably not a one-per-one shift.

We may see a little bit of that going on as we make this move to fixed CAM.

Nonetheless, that will still benefit our gross margin, either way.

Wether you call it CAM recovery or whether you call it minimum rent, we should still see the impact as a gradually improving gross margin.

Okay.

Thank you.

Thanks.

We'll go next to Paul Morgan, FBR.

Good morning.

The Rob-May at Santa Monica Place, is getting that back the real catalyst that you need to do something there?

Or is still a big headache in terms of working with the city?

The opportunity to get the Robinson's-May building back could easily give us a whole new merchandising and expansion plan vis-a-vis the city.

Going back two years ago, we looked at Rob-May in the eye, and we looked at Macy's in the eye, and we said, boys, anytime either one of you want to leave, we're ready to sit down with you and write you a check for you to go, because your performance here at Santa Monica Place stinks.

The good news is that Macy's recognizes that -- that they need to concentrate just on the one store, which they're going to, and they're going to free up that other store.

We will be the one that will end up with that store.

And it frees up the timing on when we can do an expansion, as well as the form of an expansion.

It could be instead of working with, what I call the Grand Scheme, that you may or may not have seen in the local papers, of essentially tearing the whole center down and then rebuilding it.

We could simply go in there and do something different.

We could replace Robinson's-May with a fashion anchor, somebody like a Nordstrom's, for example.

Maybe open -- go to an open-air environment.

And if we were to do that, we may not add the mixed-use component, or a much lower or a lesser among of mixed-use component.

And there is a long list of luxury and very high-end tenants that would want to be in Santa Monica Place, in that environment, or in the Grand Scheme.

The good news is that we now, all of a sudden, have 130,000 feet that we formally had to reserve or preserve for Rob-May, that can now go to some other use.

Whether it be more of a fashion-oriented department store or a mixed-use.

So it clearly will change the merchandising plan.

It clearly will change the conceptual plan that has been discussed with the community.

And it clearly will accelerate the entire project, getting to the point where we want it to be.

So do you think it's going to be like The Oaks, in terms of timing -- accelerating as early as '07?

I don't know if it's that fast.

I think -- at The Oaks, we clearly we looking at probably an '09 completion, just because May Company was running into problems when they looked at expanding their building.

They ran into headaches with earthquake codes and with the city, and things like that.

So that's pretty clear on -- I mean, there's even one scenario where we could have Nordstrom's open for business next year at The Oaks.

So that's really clear, that that accelerates that plan from maybe an '09 completion to an '07 completion.

With Santa Monica, if you're familiar with the community here, and the local press and the city council here -- I think whether it accelerates and changes the Santa Monica situation is, it probably moves it forward from Never, Neverland to reality, and reality should be in the next couple of years.

Okay.

At Tysons, with the 3 million square feet, you say -- you mentioned a lot of progress in terms of the entitlement.

In terms of moving forward past that point, how much of the -- what you would do would be contingent upon waiting until the metro goes through?

And how much could you do on your own?

This entitlement, interestingly enough, is already embedded in the master plan that is adopted for this portion of northern Virginia.

All we're doing right now is -- the site was already entitled for -- up to 6 million feet.

You just had to go through the process of showing the county where the 6 million feet was going to be located.

And that's what we're doing right now.

And that's what we anticipate will be completed by the end of this year.

When the metro link comes through, at that point in time, we believe that the site will have a further potential entitlement of another 5 million square feet, so that if you could find the space to put it, the project could go up to 11 million square feet.

So the 3 million feet has got nothing to do with metro link, whether it comes or doesn't come.

Okay.

We could -- once we have that entitlement, we could be in the ground next year, if we wanted to be.

With or without the metro.

Obviously that's a huge project for you.

You mentioned -- how are you handling it from a -- you mentioned that you're leaving the Wilmorite person in charge of that.

Is there someone from Macerich who is solely tasked with the Tysons project?

I didn't mean to say in charge of, what I meant to say -- consult.

And -- yes, the people that are fully in charge of that project are people like myself, or Chief Operating Officer, and some other very senior people.

Because, very clearly, may be the most fabulous opportunity that we've got to create a world class project, anywhere.

Okay, last question.

Asset sales.

You've got Crossroads -- are there any asset sales in your guidance for the rest of the year?

No.

Not even Crossroads?

No.

Okay, thanks.

Thank you.

We'll go next to Robert Belzer with Prudential Equity Group.

Hi, yes.

A few questions today.

The first one is a bit of a follow-up on the leasing environment.

You had -- the leasing spreads in the first quarter were 17% and the current quarter they came down to 13%, both are below your averages.

Is this thing driven by signing leases in lower productive malls?

Or perhaps, fixing the fixed CAM into the leases?

Well I think we addressed that, you may not have heard it, about three questions ago.

But the answer is, you can't look at things quarter-by-quarter.

At the end of the day, Tom pointed out, that the average rents on expiring leases over the next 36 months in our portfolio are around $30 a square foot.

And the average rents that we have been achieving, kind of day in-day out over the last three or four years, are between $35 and $40 a square foot.

So we fully anticipate that double-digit increases on releasing spreads for us will continue well into the foreseeable future.

With the foreseeable future at this point being three years.

And that's driven by the fact that we're sitting on a couple of years of very strong sales growth within our portfolio, as well as the highest appetite that I've seen in a long time from retailers to expand a new store concepts and to just get additional GLAs.

I wouldn't read anything into quarter-by-quarter leasing spreads.

So we can expect this metric to go back to the 20, 25% level?

As you look at -- over the past five years, on average, we have had double-digit leasing spreads, compared to our expiring rents, for a period of the last five years.

They'd been more in the mid-teens, I think.

And something in the mid-teens is probably what we're looking at -- so 15, 16, 17%

Okay.

Then just a follow-up on what you may be looking at, in terms of selling JV interest.

Is there any particular amount you may be reviewing as a potential JV sales?

And then, again, the same question for potential dispositions.

I mean, as far as joint ventures -- we could joint venture, literally, several billion dollars worth of our assets if we were to choose to do so.

Given the appetite for institutional investors to co-invest with us.

Doing a 50% entity-level Wilmorite joint venture is a slam dunk if we wanted to do it, but we decided that that's not appropriate at this point in time.

We're just going to evaluate all of our options.

And in deciding as to whether or not to pursue a joint venture, for example, of any one asset, we have to come to the conclusion as to whether or not we're giving up more potential NOI upside to our joint venture partner than is being generated in the balance of the Company.

And if we come to that conclusion, then it would not be prudent for us to raise capital in that manner.

It would be more prudent for us to raise capital, potentially, through the disposition of an asset like an Oklahoma City; where we see sub-par NOI growth, compared to the rest of our portfolio.

Okay.

Just to follow-up on that.

Is it fair to say that you don't have a material amount in active discussion?

Or could you have something of a significant amount that you're currently in active discussion on?

We are being actively pursued on all fronts by joint venture partners that want to do more business with us.

I don't see a significant joint venture being announced in the next three to six months.

Okay.

Then, moving on.

I have a question regarding how you may be looking at developing the residential components at 29th Street and also, San Tan.

What kind of options are you looking at?

Most likely, at 29th Street, would be to sell the residential land to a residential developer and just them go ahead and develop it.

At San Tan, we're looking at potentially a different approach to it.

But most, probably selling the entitlement to a residential developer.

At 29th Street, we've actually carved off four or five acres of land that could just be simply cordened off from the center.

And a residential developer could build on it.

At San Tan, as we are building out our thinking for the mixed-use component here, we're looking at the possibility of adding some parking structures.

Upon which, residential could then go and build multi-unit residential on top of them.

Okay.

And then, just one final question on the Federated/May stores.

Can you indicate the number of stores that, on the disposition list, are leased, ground leased and owned?

And also, the number that have operating agreements?

We've done that already on this call.

But I can quickly just say that nine of the 10 stores are owned by Federated.

One is on a ground lease.

And there are operating covenants that we refer to -- six different operating covenants.

Okay, great.

That's it for me, thanks.

We'll go next to Greg Andrews, Green Street Advisors.

Hi, it's been a long call.

I'll try to keep this short.

On Tysons, the enticements for 3 million square feet.

Does that break down by various property types?

And is there a residential piece, as well as office?

Yes, the residential piece is 46%, the office piece is around 50%, the balance is hotel.

And that, by the way, is movable.

Our predecessor, when they went in, actually, the master plan originally had the residential component at a lower number.

And as we have been going through the entitlement process, the Fairfax County people came back to us and said that they would to see us increase the residential component.

Which, from our viewpoint, was just fine with us.

Right.

And you mentioned the potential for those sales to go up, but it doesn't sound like adding retail is part of this.

So, were you referring mostly to just organic growth in the sales at the mall?

As opposed to adding more retail space?

We've got 400,000 square feet of retail space that's coming online, that's doing no business today, on October 1st.

So we anticipate a lot of productivity to come from that.

Well, that was in your $700 million, I think.

From what you said.

Well, we don't know exactly what they're going to do in business.

But clearly, we see this as a center -- our goal on this center is to have this center become a center that can generate $1 billion dollars of volume.

Day one, I think, after the 400,000 feet are done, you probably are looking at around $600, $700 million.

But then ,we anticipate that this is a center -- there is a tremendous amount of space in the center, and this is what we do best.

In a center that's doing $650 a foot, you've got tenants that are doing $1200 a foot, and you've got tenants that are doing $300 a foot.

So once we complete this expansion, the next task for us is to the $300 a foot guys, and replace them the $1200 a foot guys.

That's what we did with Queens, for example.

When we bought that in 1996 and we took the sales -- it cleans up dramatically, even before we started our expansion.

Clearly we see this as being one of highest sales volume centers in the U.S., going forward, in terms of the total dollars to be generated.

Okay.

And then you mentioned the buyback of Mervyn's at Washington Square -- are there other Mervyn's where you're in discussions, or potentially buy those locations, as well?

Yes.

Okay.

Great, thanks.

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

Hi, just a few quick things.

Tom, do you have run rates for straight line rent and debt premium amortization?

The debt premium amortization, Mike, will be in the 10-Q, which will be out in the next day or two.

Straight line rents -- this quarter is a pretty good run rate.

Okay.

And that was $0.05 for the quarter.

Okay.

And then, also you mentioned, for your portfolio, how much specialty leasing revenues were in the past year.

Do you have sense -- can you give us a rough range for what it is for Wilmorite?

That's an area where we think we can improve fairly significantly.

There are -- they haven't been quite as aggressive on the front as we have.

We've been coming in pre-Wilmorite, at about $8 million a quarter.

And I think, initially, Wilmorite might take us up another $500 or $600, but we think there is an opportunity to increase that fairly dramatically.

So a lot of that is in our court.

Okay.

So that was $8 --

We talked about the gross when we walked through the acquisition, Mike.

An element of that growth is us coming in and putting our specialty leasing program in place.

Okay.

The other thing, also, is operating synergies.

We found that as we bid out the insurance, post-announcement on the deal, and pre -- and around the closing of the deal, we ended up saving almost $3 million in insurance that went straight to the bottomline.

Okay.

And just last question.

And expectations for land sales in the balance of the year?

Well, we haven't factored anything into the guidance, Mike.

We have deals out there, particularly in Arizona, that we pursue.

And the thing about those is, you never know whether they're going to close or not.

So we typically don't factor them in.

For example, in the second quarter, we had no land sales.

In the second quarter of last year, I think we had $0.01 a share of gain attributed to that.

And we've got deals out there, but it's almost impossible to predict when they're going to close.

So, we haven't factored those into our guidance, at all.

Okay.

That's it for me, thanks.

Thanks.

We'll got next to [Nim Marjanovick] with [INAUDIBLE].

Guys, good morning.

Judging by your comments on fixed CAM, you guys seem to quoting spreads on the minimum rents only, which ignore the impact of the one to two seller bumps to recover income.

What will your spreads by on total rents?

They'll be higher, correct?

They would be higher, by definition, right.

You mean in terms of as a percentage of sales, Nim?

As a percentage of total expiring rents to total new rents.

Yes, we're quoting minimum rent to the expiring minimum rent.

But you're taking -- you're putting $1.00 to $2.00 in recovering income, so that means there is less to go into new minimum rents, correct?

Theoretically, yes.

A tenant looks at their total occupancy cost and that's what they pay.

And so, as a result, you could arbitrarily allocate some of that to minimum rent when you're quoting a spread.

But we don't try to do that.

Okay.

So I guess, in general, just your spreads are in their historic 20 to 25% range, if we look at total rent spread?

I think that's fair.

That's a fair comment if you -- if you try to factor in the impact of these fixed CAM deals that we're signing today.

Sure.

Could you guys refresh my memory on the CAP rate on the Wilmorite transaction?

Sure, it was -- the unlevered, blended CAP rate was 6%.

Which we said that we felt would be 6.75% in the -- on a run rate, once the Tysons expansion came online.

Right now, we are in the driest of all dry periods in that deal, because we've got money sitting out there in the Tysons expansion -- the 400,000 foot expansion that opens October 1.

It's generating no income.

And we did have some post-closing operating expenses that were a little bit unusual, in the second quarter, that will go away over time.

I see.

So I was just curious -- so it an inplace CAP rate?

The inplace CAP rate on income inplace was 6%, as of the closing.

Actually, I think -- it turned out to be a little bit better than that, because of some of the immediate savings on insurance that I referred to.

And then when we announced the deal, we said that in the second year of operation, we saw that going up to around 6.75%

So, as you can see, we're looking at topline growth from year one to year two in that portfolio of 11 to 12%.

Which also goes to the decisions as to whether or not you bring a partner in or don't bring a partner in.

And helped us make the decision, given the signigicant topline growth that we see over the five to six years in the whole Wilmorite entity, that, at this time, to do a entity-level joint venture wouldn't be prudent.

But those are the returns that we announced and those are the returns that we're saying.

And just one last question.

Can you update us on a cost on Fresno and Washington Square, the redevelopment there?

Yes.

The Fresno cost will be around $24 or $25 million.

Washington Square is around $50 million.

But at Washington Square we have a partner, so our half of that is $25.

Gentlemen, thanks very much.

We'll go to Lou Taylor, Deutsche Banc.

Yes, thanks, just one question.

Hi, Lou.

Hi guys.

Tom or Art, can you talk about, as you look at your development pipeline over the next three to four years.

Do you have the balance sheet to do everything that you want to do off that balance sheet?

Or whether that's bringing in partners on select assets or other assets that have very low secured debt levels.

Do you have the balance sheet to do what you want to do?

Lou, no question.

You can -- for example, you can look at the transaction we're doing at 29th Street.

Granted we already own the land there, or a portion thereof.

But typically, we're building these things out at a 12% return on cost.

So, if we're out of pocket anything, it's usually just the land.

And there's a cadre of construction lenders that are more than willing to finance the entire amount of the development, based on the returns we've historically seen.

Because by the time we're done, they're easily financed out of their construction loan at a typical 60 to 65% loan to value permament mortgage.

SO there's no shortage of capacity to do that.

And virtually every project that we mentioned that is in the pipeline could be financed at a project level.

So, 29th Street could easily be financed with the construction loan.

The Tysons expansion, we've already funded that.

The Washington Square expansion, our half of the $25 million was more than funded through the same partnership -- refinanced another asset to do that.

The two malls, the Gilbert and Goodyear, the vast majority of those expenditures could easily by covered by construction loans.

The Oaks has got has a very small mortgage on it, today, compared to it's value.

And virtually all of that expansion could be done just by putting -- by refinancing that floating rate debt.

Virtually everything in the pipeline that we've discussed here, could be self financed at a property specific level.

Cause, Lou, if you think about -- if we're hitting returns of 12% and when these things are completed, their values -- use the six CAP, seven CAP, whatever you want to pick.

You're looking at a loan to value at completion, even if we haven't paid for the land, even if the land is part of what's financed is in the 55, 60, 65% range.

Okay.

Tom, just as you look out, what do you think your debt to capitalization will be.

Based on -- pick whatever base you want, either book or [INAUDIBLE] et cetera.

What do you expect it to average over the next three, four years?

Well, we've historically been between 50 and -- Measuring CAP rates just so we can measure book value doesn't make much sense, Lou, cause there are a lot of assets in there, historically.

But a contribution -- and we've historically been between 50 and 60%.

I'd see us operating between 55 and 60% in the next three years.

We're at 60% right now, so to the extent we have some liquidy events, we'd knock that down.

But, we're comfortable where the levels are.

To the extent that we do have liquidity, we would probably reduce those levels.

I think you'll see a little more of a push from moving from some of this moving to six.

And pushing the term out a little bit as we do property-specific financing.

Great, thank you.

Thanks, Lou.

We'll go next to [Ralph Blok], Focus Financial.

Hi, guys.

Hi, Ralph.

How are you progressing on your '06 lease expirations?

We're doing -- we're like a lot of -- some other people.

Where frankly, they'll say, here it is, it's August of '05 and a mall is done with '06 and working on '07.

Which kind of makes me wonder what their 50 leasing people are doing.

We don't tend to lease two, three years out in advance.

We're clearly working on deals that are '06 expirations, but we're a little bit more patient, frankly, on that than maybe some others are.

We don't believe in doing all of our leasing 18 months to two years committed in advance, because sometimes that takes away your flexibility.

But, look, just going back to a comment I made earlier.

From strictly a space-by-space basis, we have never had the amount of interest from retailers across the board in our portfolio as we have today.

And their appetite is stronger today than anytime that I've seen -- at least the last 10 years.

Okay, fair enough.

Have you noticed any increased divergence in comp tenant sales growth between the malls in the high household areas versus the medium or lower?

Clearly, absolutely -- no question about it.

Geographically, as Tom mentioned, Phoenix is on fire, period.

But if you take centers that are located in the higher demographic regions like The Oaks, for example, we haven't even touched The Oaks, in terms of our expansion, or the addition of Nordstrom's to The Oaks.

And when we bought it, three years ago, it was doing in the high $300s a foot.

Today it's over $500 a square foot.

So there's no question that centers that enjoy better demographics, like Broadway Plaza, up in Walnut Creek, that their sales are going up much faster than centers that are in lower income demographic communities.

Would that encourage you to look more closely at selling some the of the lesser income properties, perhaps Oklahoma City or something like that?

You should sit on the disposition committee, cause you'd be singing to the choir.

Okay, and one last question.

In your discussions with Federated, have you been able to glean some of their plans for boasting the productivity of some of their stores where they're also closing a May-related store?

Yes.

And you don't have to look too far.

You can listen to Terry Lundgren's remarks, cause he's spoken to people.

Clearly, that is their goal, that is their intent.

I think it's very achievable.

They've got a track record of achieving that that I've observed, and they've acquired different chains.

In particular, as they acquired Carter Holly Hill, the productivity of the department stores, in general, that they acquired in that group when they bought that in 1996, are up significantly.

Certainly, the centers that they came into, where productivity is up significantly.

So what they've told us is that the centers where they're disposing of anchor stores, they're hopeful that the replacement retailer, or retailers, are complimentary to the point that more traffic, more sales are generated at the mall.

And therefore, they themselves generate more traffic and more sales.

I think, clearly, that's in the cards.

I mentioned that there are 10 center where we own, where they are going to dispose of boxes.

I am going to be very interested to report to you all, say three or four years from now, and say, okay, here were the 10 centers that they disposed of an anchor.

Here is what happened at those 10 centers, this is what they were doing in business in 2005 and this is what they're doing here in 2008.

And I think it's going to be along the lines of the example I gave on Carter Holly Hill, where when you have an anchor like that come and really dedicate themselves to a market.

That they do better and the center does better.

Federated has a good history of working with developers to make the neighborhood, in this sense the neighborhood being the shopping mall, better around them, so that they do better.

Okay.

Thank you.

Thank you.

We have a follow-up question;

Michael Bilerman, Smith Barney.

Sorry that it's the afternoon for you guys, at this point.

Just on the unconsolidated JVs.

How much NOI from Tysons is included in there?

And any other assets that may have acquired at Wilmorite that have another partner?

We really don't break out the NOIs by property.

That was the only addition -- you had two months worth of that in the NOI.

Which, you can see our pro Rata share in the financial highlights section, I think on page four or five, would break out the pro Rata share.

But the bulk of the increase you see there in the NOI is related to Tysons, Michael.

There are a couple of assets -- minority interest you bought out in -- you took minority positions, I think early in the --

Yes, there was a little bit of Kierland in there, and a couple other things.

But we don't, as a practice or policy, break down NOI specifically by property.

Okay.

And then, is there a loan on Tysons that we should know about?

There is a [StanBF] loan on Tysons that exists --

You'll have the details of that when we file the 10-Q.

But Tysons has a mortgage in our pro Rata share that is -- hang on a second. $170 million, at 5.22.

It's a way underleverd property, which is consistent with the philosophy of our partner, the Alaska Permament Fund, who does not want to have a lot of leverage on their investments in the U.S.

Because they want to have a lot higher allocation of equity to the U.S.

And they are one of the many institutions that have come to us and said, can we co-invest with you at other locations?

And Tom, do you have -- I know you said it'd be in the Q. But do you have maybe a magnitude of the debt premium amortization that may have been included in Q2 in the consolidate and unconsolidated?

Just from thinking about this from a run rate perspective?

Are you talking specifically about Wilmorite or everything else?

I mean the -- Wilmorite and everything else, if it's possible to break it out.

Everything else will be in the Q, I don't have that at my fingertips.

The piece that is applicable to Wilmorite is about $0.02 a share.

$0.02?

And that is --?

Thanks for taking more questions.

Sure.

No problem.

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

All right, again, we apologize for the technical difficulties during the call.

But we are at a moment where we are very, very excited about where we're headed.

Again, coming off of a great leasing environment that we exhibited at ICFC a couple of months ago.

This -- the acquisition of Wilmorite is a hugely positive event.

Our new developments that are in the ground in Phoenix are obviously much faster, in terms of when they're going to get built, than what we estimated three years ago.

And we are most excited about the opportunity to work with Federated on these 10 locations that they're going to be disposing of in highly productive malls that we own.

And that are going to free up the opportunities for us to expand, remerchandise and bring in some very exciting new retail concepts.

And as I mentioned before, returns, in our opinion, that will exceed the normal returns that we see on normal developments.

So, thank you for participating.

And we look forward to talking with you again.

This does conclude today's conference.

Thank you for your participation.