Macerich Co (MAC) 2007 Q2 法說會逐字稿

Welcome to the Macerich, second quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Suzanne Karpick, Vice President of Investor Relations.

Please go ahead.

Thank you, everyone, for joining us on our second quarter earnings call.

If you don't have a copy of our our earnings release, you may access it at the company's website at www.macerich.com.

During the course of the call, management will be making forward-looking statements which, are subject to uncertainties and risks associated with our business and industries.

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

Management will discuss certain non-GAAP financial measures as defined by SEC Regulation G.

The reconcile division of each non-GAAP measure to the comparable GAAP measure is included in the press release and the supplemental 8-K filings for the quarter posted on the investment section of the company's web site .

Joining me are Arthur Coppola, President and CEO, Thomas O'Hern, Executive VP and CFO and Tony Grazzi, Executive VP and COO.

With, that I'd like to turn the call over to

Thank you, Suzanne.

Today we're going to discuss second quarter results, recent capital transactions, the status of our developments and redevelopments, upcoming opportunities and our outlook for the balance of 2007.

The operating metrics generally remains strong in the second quarter with continued high occupancy levels and very strong re-leasing spreads.

All store sales per square foot were up to $458 per foot up from $433 a year ago, a 6% increase.

Looking at total same-center tenant sales, for the quarter, they were up 1.2%, however, year-to-date, we're still reflecting a strong numbers at 3.6%.

You remember at quarter, the second quarter of last year was a very strong quarter where tenant sales were up 4.4% and a relatively tough comp quarter.

Looking at it by region, southern California was flat for the quarter up 2.4% year-to-date and Northern California and the Pacific northwest is up 1% and up 2.3% year-to-date.

The Eastern region was up 4% and up 6.7% year-to-date.

Central region for the quarter was up .7% and year-to-date up 2.7%.

Arizona was up .4 for the quarter and up 2.7 for the date.

Looking at occupancy levels, we had a very strong quarter and ended the quarter at 93.2% that compared to our portfolio average of 92.1% a year ago.

On a same center basis, we were up about 40 basis points coming in at 93.2% compared to 92.8% on a comp basis.

Leasing activity was strong looking at shop space under 10,000 square feet, we signed about 343,000 square feet, at positive spreads of 26.2% with new rents being signed at almost $44 a foot, $43.71 be specific.

Average rent per foot in the portfolio is now at $38.44.

FFO diluted for the quarter was up 8% to $1.04, that compared to $0.96 for the quarter ended June 30, 2006, this result exceeded our guidance at midpoint by $0.2 a share and exceeded the consensus estimate by a penny.

EPS diluted was $0.19 for the quarter and compared to $0.36 for the second quarter of '06, keeping in mind we sold a number of non-core assets in the second quarter of last year, recorded a $26 million on asset sales.

During the quarter, we had same center NOI income growth excluding termination revenue of 3.4% compared to the second quarter of '06.

Year-to-date, that bring our same-center NOI growth up to 2.6%.

The termination revenue, including JV's at prorata was 3.2 million, comparing favorably to 2 points, excuse me, 3.2 million compared to $2.3 in the second quarter of last year offsetting that going the other direction was a decrease in SFAS 141 income which dropped to $3.5 million, compared to $3.4 million in the second quarter of '06.

Expense recoveries continue to improve, the rate including JV's is 95% in the second quarter of '07, compared to 93% in the second quarter of '06.

EPI rent increases contributed $1.3 million of our increase compared to the second quarter last year, straight lining of rents were flat a year ago at $3.1 million for the quarter.

We had a significant decrease on gain in land sales which dropped from $3.4 million in the second quarter of last year to a loss of $700,000 during the quarter ended June 30, 2007.

During 2006, we sold 8 centers, the FFO drag this quarter resulting from the sale of those lower-quality assets was about $0.04 a share.

(Inaudible) G & A was up a quarter $1.2 million compared to the second quarter last year.

$1.5million of that difference relates to a non-cash GAAP charge for incentive compensation put in place at the beginning of this year.

Focusing now on the balance sheet, the issuance of the convertible bi-ventures in March continue to strengthen our balance sheet.

We had the benefit in that in our numbers for the full quarter this period.

We now have $6.7 billion of debt including the new bi-ventures, and that includes our pro rata share of debt from consolidated ending of $1.8 billion and floating rate debt at a percentage of our total debt is down significantly down from 20% at year end to 7% at quarter end.

If you factor in the recent refinancing of Scottsdale Fashion Square which closed in July, we placed a $550 million CMVS Loan on that asset.

Seven years fixed rate at 5.66%.

We had excess proceeds of $162 million used to pay down a line of credit and that took our floating rates debt to under 5%.

Our total debt-to-market capitalization was 47% and the interest coverage ratio was a very healthy 2.17 times.

Looking at earnings guidance, we're affirming our prior guidance in a range of which was $4.58 to $4.68 per share, the quarterly split on that FFO guidance for the balance of the year is 25% in the third quarter and the balance in the fourth quarter, our major assumptions remained unchanged, including net operating income growth same center of 2 1/2 to 3 1/2%.

At this point, I would like to turn it over to Art to address your developments, redevelopments trends and other major events impacting our business.

Thank you, Tom.

In looking at our core fundamentals, we had another very strong quarter.

As Tom mentioned, our leasing spreads remain extremely vibrant, which is indicative of the demand our retailers have for new space which again that is our ultimate consumer is our retailers and the demand that they have for the products that we sell, which is space, remains very strong given the product that we have to offer.

Our occupancy levels remain excellent and as you have seen our sales per foot continue to remain strong and to grow.

The fundamentals that we continue to put up have been strong for many, many quarters and years.

They're a function of the fact that we're operating a great business, the regional mall business is unique to any other real estate business.

We're in great markets, we're in the bicoastal markets of Los Angeles, San Francisco, the central valley of California and then the eastern corridor of New York to Washington, D.C.

And within the very high growth markets of Arizona.

We have terrific demographics in each of our markets, we have extremely high barriers of entry in each of our markets, great anchors, so this is really what is driving our growth.

It's the fact that we're located in exactly the right location and we have gotten markets that are extremely high to entry and with very strong growth characteristics.

This particular quarter is one of the most exciting quarters that we have had in recent past.

During this quarter, we open two very exciting new projects.

One in Casa Grande and one in Gilbert.

Casa Grande project that was announced before is a retail center in excess of 1 million square feet and again, it's one of the projects we would call an ALLF in that it has traditional anchor stores, theatres, discount stores, big boxes and that opens in November on time and on budget.

And even more exciting projects is SanTan village that opens in Gilbert, October 25th of this year.

Let's talk about SanTan Village in particular -- SanTan village in particular.

SanTan will open up October of this year.

It will be the most, it will -- will be the newest regional mall to open in the Phoenix Metroplex since Westcor opened Chandler Fashion Center in 200, six years ago.

Gilbert has a lot of characteristics Chandler possessed in terms of demographics and growth and then some.

In 2001, Chandler had 180,000 people when it opened.

Today when we open up our SanTan village in Gilbert, we have a population of 190,000 people.

In 2001 when Chandler opened, it was the fastest-growing city in the U.S.

Today, Gilbert is in the top 5 cities in the United States in terms of growth and in terms of new residents, Gilbert boasts 1,000 new residents per month that are coming into the market.

In terms of the average household income, Chandler today, the average income is over $75,000 a year.

Gilbert's possesses average household income is in excess of $83,000 per year.

So we're extremely excited about our project that is opening in Gilbert.

It represents our philosophy embodied within Phoenix 2020, that we not only open up our properties at the right locations but at the right time.

This is the right time for Gilbert to open and the leasing tells us that it's the right time.

We had the project well over 90% leased, the opening will be very, very strong.

Further contrasting Chandler to Gilbert, we see a different design in SanTan village.

We're building SanTan to be an open air center, that's reflective of today's economics and the evolving and changing world do in the department store environment.

We built it open air partly to differentiate it from our other malls in the region, which include Chandler, Superstition and Fiesta but we also built it open air to have it be a modular facility that can be expanded as new anchors come to the properties.

We anticipate very good opening at this center.

Retailers are very, very excited about it and we would welcome you to join us at the opening on October 25th.

Looking at our broader pipeline, I wanted to review for you some -- a little more clarity in terms of how our pipeline is breaking out between new developments and redevelopment.

Going back two years ago, we signaled to you that as a consequence of the Federated-May Company merger, we anticipated our groundup development and redevelopment program would deliver between $300 and $500 million per year of profitable new activity..

Later on in February of this year, we upped that number to $500 million.

As I look at the pipeline today, during 2007, as we look at the pipeline and define it to be the construction that it's placed into service during the year, in 2007, we will place new development and redevelopments of $330 million in place and open for business N.

In 2008, we will put in place new developments and redevelopments of $490 million in 2008, and in 2009, we will put new developments and redevelopments of approximately $700 million into place.

That breaks out by year in 2007 to approximately $210 million of new developments put into place, about $120 million of redevelopments and expansions put into place in 2007 for a total of $330 million.

The average returns on both our new developments as well as our redevelopments for properties put into service this year will average about 8 1/2% return.

As far as looking at the redevelopment pipeline, we generally see returns between 6 and 10% on average around 8 and on the new development, we see between 9 and 11% in the pipeline on average about 10.

Breaking out our '08 openings, we see $80 some million of new developments opening in '08 and over $400 million of redevelopment opening in '08 and average returns between the two of about 8%.

And in '09, we see new developments opening of approximately $175 million and redevelopments opening up in '09 of about $525 million for a total of approximately $700 million in '09 at weighed average returns between the two of about 9%.

Not included in any of these numbers are the densification projects that we have been discussing with you in terms of adding mixed juice to Tyson's Corner, Biltmore and Scottsville Fashion Square.

As time goes o we will update the numbers for you by year.

We'll use a protocol of giving you the numbers based upon year placed in service for your modeling purposes.

It would be safe to assume September 1st as the date of placing in service the various developments, the average amounts and we're extremely bullish about this pipeline.

We hope that before the next conference call we're in the position to give you a final update on where we are in the complete positioning of the eleven boxes that we acquired with fed rated as part of the merger with May Company and put further clarity to the development and redevelopment of the pipeline.

We're very bullish about where we stand in the repositioning of the ten malls that are affected by that merger, and again, anticipate giving you complete detail on each and every property not only the anchor or the retail replacement for the anchors that we bought, but also the scope, size and the returns that we anticipate in each of those redevelopments.

At this point in time, we would like to open up this up for questions.

(OPERATOR INSTRUCTIONS) We'll go to Christine McElroy, Banc of America Securities.

Hi, good afternoon.

Hi, Christine.

Given that you have been able to push occupancy in your portfolio and still generate pretty solid releasing spreads, can you talk about where new demand is coming from and how much further you think occupancy can rise from here.

Sure, Christine, as we mentioned earlier on, Tony Grassi, our Chief Operating Officer is here on the phone with us.

I'll ask him to address that question for you.

Thank you.

On occupancy, we continue to experience great demand in the markets that Art mentioned earlier in his comments.

We have -- [ Indiscernible ] In those markets, we feel we can push our occupancy and push our rents.

Today, our occupancy costs slightly over 12%.

We have a focus and increasing this, the goal of increasing this and the expectation is that we have continued leasing spreads into the future as we have been experiencing a little of that in the 26% leasing spread for this quarter.

And do you have a sense yet for the potential impact of the Footlocker closings on your portfolio and do you have a sense for mark-to-market on the Footlocker stores?

Foot locker had announced a closing of 250 stores, double what they anticipated.

They reached out to us and indicated about 250, only one store that affects Macerich.

Today with us, Foot;locker occupies 157 stores and they have average rent of $31.63.

If you want to overlay our average rent as Tom had indicated earlier as to our, today average portfolio rent of $38.44, we're only getting the one location back unfortunately, we wish we can get more of the inventory back.

At $38.44 represents to our average a much higher spread.

Okay, and lastly, what was the estimated loan-to-value on the Scottsdale refinancing

The loan to value on that was about 60%.

Investment rate and we saw some very attractive spreads and did not experience a lot of the widening that we read about recently in the trade publications.

I think we were maybe 10 basis points wider than what we would have been had we done that in January.

Okay great.

Thank you.

Thank you.

We'll go next to Paul Morgan, FBR.

Morning.

Hi, Paul.

Hi.

Regarding the sales data that you broke up by region, do you think that any of that deceleration was due to the Easter effect between March and April?

Sure.

Easter was April 8th of this year and the 23rd last year.

Yes, we had an early easter this year and a late one last year.

It's reasonably sharp deceleration from quarter-to-quarter.

How much of it meet have been, you know, just seasonal versus something that is sort of more of a trend?

Clearly I don't see it as a trend but I would say that any time you're dealing with March and April you have to look at them as combined and generally most years and unfortunately March 31st is a quarter year-end.

Yes, late Easter, early Easter , it had an impact

If you look across kind of the various chain segments, is there any, you know, a part from what has been typical to home segment or is there any, you know, other areas where there is sort of notable softness versus the rest of the group?

No.

No, just the home segment?

Yes.

Pretty much.

Okay.

And then regarding the development pipeline, can you go through a little bit of the the pretty substantial pipeline.

I appreciate the detail there but in in terms to your capacity to fund that development with, without asset sales and the way you look at the leverage in that context and maybe also your thought process about buybacks given the size of that pipeline.

Yes, I mean as far as the funding of the pipeline, you know, we have maintained consistently that we're able to finance the pipeline virtually 100% through property specific financing.

On the ground-up development, for example, to do a $220 million new development at SanTan and Gilbert.

The equity component we put into that deal was about $30 million, give or take.

So, because of the fact that we own the land at a lower basis, so we've owned it or we had it under option for substantial period of time.

At several of the centers like the Oaks and others, we were able to do a refinance at a property level and as we have indicated, if you want to look at it just from a macro viewpoint, it's very easy to match up on average to match up $150 million a year of asset dispositions that we have been exceeding that average and I would anticipate that being a base case as being the $150 million if you wanted to say that we're spending $500 million a year on new developments and redevelopments.

We say the properties were 60 to 70% levered and you need 30 to 40% equity and then can you think of it in terms of our assets in our asset dispositions are providing the equity that fuel and construction for the developments or the redevelopment of the balance fuel by property-specific financing As far as any stock buybacks that you asked a question about, we do not have any current buyback plan in place.

Certainly something that is topical today, from an emotional and visceral level.

It feels light and looks like a no brainer, but we want to really take a look very closely at all of our alternative opportunity costs here and weigh all of those that we have made final discrimination about something like the opportunity of buying back urf stock which is very attractive in this market.

It may go a little bit unnoticed but we have talked about the fact that the Rochester seller the Wilmont family has a redemption right.

At the end of the month, we want to see how that plays out also.

It's possible that they will redeem their properties by extending back OP units and that will be tantamount to the stock buyback of almost $250 million right there.

We have to see how that plays out later on this month.

Paul, a couple of things regarding capacity, we have one and a half million dollars line of credit and only about 250 outstanding on that and in addition, you know, some of the big projects like SanTan and Oaks are entirely unencumbered right now and lend themselves to construction financing and plus I'm sure you determine from the yields Art mentioned based on where mall values are today and there is a positive spread there upon completion creates equity.

So, we can do this.

We definitely have the capacity to do it and do it with little stretching in the balance sheet.

The balance sheet is well-poised for the development site.

Thank you.

Thank you.

We'll go next to Matthew Ostrower with Morgan Stanley.

Hi, Matt.

Morning.

Just on the refinancement you talked about, I know it was in July, was it late July?

Early July and if you had to do it again today, would it still be the same, 10 basis points widening?

Matt, it was -- that rate was committed probably in mid-May or so and we closed July 2nd, I believe.

It was early July, we're not in the market rate -- right at the moment.

It may have widened a bit and, of course, rates have moved up and down as well.

Hard to say but we founded a tremendous amount of demands for A-quality asset at that leverage level.

Okay, in terms of the mixed-use stuff, Art that you mentioned that you're still working on for a variety of the projects, can you update us on your thinking about the desirability of doing that, you know, more yourself versus offloading it to others?

I have heard a lot of debate within the mall industry of what kind of economics you effectively leave on the table, if you do hand it off to somebody else, by the same token, your offloading risk.

Seems what has been happening to the condo market, and everything else you're thinking would be to offload things than keep them.

I want to test your thinking on that and if it's changed at all.

Sure.

No, the thinking has clearly been evolving and we've thought, we really tried to go down every path on all three potential offerings that we would add being the office, residential, hotel and in general as we think about monetizing these opportunities, we're coming down with the decision that office densification we would own.

Residential densification, we would sell.

We would work into that both a floor and earnout as the residential component, as part of thinking of the residential opportunity, we have gone through a complete analysis of what the potential profit potential is on the residential component at both Biltmore and Tyson's.

We have an idea of how to build an earnout into the selling price and on hotel, we're basically a seller/ground Lessor of hotel opportunities.

So, it's really office-owned, residential, sell and hotel ground lease.

And the difference between the office and the residential, is that purely a product of current fundamentals?

Or is it an operating angle as well?

I think it's because of the fact that most of the, first of all, we think the office component lends itself well to the shopping center and also the leases are such that they don't go on forever in the context of that if you changed your mind for a use, that could be attractive to recapture it and you would want to own it.

Secondly on the residential component, at least when we were looking at it previously, the for-sale market was where we always derived the highest valuations and we just didn't want to be in the business of building and selling condos.

And that may still be the way we'll go.

That place is looking like more where the market is still strong for that but we would sell the opportunity with some kind of a negotiated earnout.

Okay, great.

Thank you very much.

No problem, man.

We'll go in accordance -- next to Jonathan Litt with Citigroup.

Hi, this is Ann Bico with John.

Hi.

Hi.

Is the sale of the Rochester assets assumed in your current guidance?

It is not.

Okay.

And then are you still assuming a $6 million decline year-over-year in FAS 141 and straight-line rents?

We have not changed our guidance on anything whether it be straight lining 141.

We're still assuming a 2 1/2 to 3 1/2 same-center NOI growth rate.

Lease terminations we're assuming the level of original guidance, $12 million and we're on target for that.

Okay, great.

Thank you.

Thank you.

We'll go next to Jeffrey Spector with UBS.

Good afternoon, guys.

Hey, Jeffrey.

Clearly you're very happy today where you stand.

How does this differ, whether it's positive or negative from the plan that you laid out for '07?

Oh, I'm sorry, Jeff, can you -- in what way?

From an operating viewpoint or from a development viewpoint?

From both.

May be your, initially your thoughts on the consumer heading into '07, your pipeline, Phoenix.

Okay.

You know, from an operating viewpoint -- viewpoint, I feel very good.

One of the reasons I feel very good is the individual that we introduced to you earlier in the call.

Tony Grasse, our now chief operating officer.

With change by definition, you have change.

And Tony's been with us for six months now, one of the primary focuses that Tony's's had with us has been to bring our, is to drive rent and leasing spreads and we're pleased to report that, he's been successful in continuing our tradition of obtaining high releasing spreads while also maintaining a very close eye to the merchandising mix Tony's brings really a retailer respective to our business which is refreshing and unique.

He also brings with his editions here the experience of running the largest real estate and resale portfolio in Canada and clearly understands high barrier to entry markets and pricing power, vis-a-vis retailers and I think that is being exhibited through our performance for the year.

So we're very enthused about our outlook from an operating releasing and merchandising planning viewpoint.

From the development side, you know, we're getting just tremendous clarity on the Federated and May Company recycling, which is even better than we anticipated it to be three, four months ago, I feel very good about that.

I'm pleased with where we are on the pipeline.

I am pleased about the the fact that 30,000 construction jobs have been lost in Phoenix this year.

Which means that construction costs are beginning to moderate, if not come down which, is very good.

We're making great progress, you know, on a number of our developments in particular Presada, for example.

That project is really beginning to get some steam and Estrella Falls.

We're getting very strong leasing activity at the Estrella Falls projects opening up in '09-'10.

We have already got tenants that are complete signed up and ready to open with us in SanTan village tenants rolling over to do the plans and Estrella Falls.

I feel good very good today in picture -- particular to where we felt earlier this year.

Great, a question on the redevelopments.

Obviously there is a large amount coming online in '08 and '09.

What is the drag, I guess, from those developments if can you quantify it that we sort of, that is in '07, in '08 and the of course by the time they come on in '09, the drag will burn off?

Well, I mean, the biggest drag is Santa Monica Place where we take a property from going up $11 million of net operating income three years ago to 0 by the end of this year but that is all baked into our numbers in terms of guidance.

As well as for this year and the good news is that as we're able to bring the properties back online, they're obviously going to be very well-positioned and very accretive.

But obviously as part of any redevelopment, you are going to have disruption to income and the good news is if you have a portfolio of ours, you can handle that type of disruption without complaining about it and still put up good numbers.

Okay, last question on the occupancy costs to sales, I guess, can you quantify -- let's say every 25 bips increase, how much that hits FFO per share?

It's about $30 million of NOI on an annual basis.

So depending on where you have the pick up, some of it could be a JV or whatnot, but a 25% basis point pickup from 12 to 12 and a quarter would equate to $30 million of NOI.

Great, thank you.

Thanks, Jeff.

We'll go next to Lou Taylor with Deutsche Banc.

Thank you.

Good morning.

Hi, Lou.

Hi Tom and Art can yo you talk a little bit about the construction deliveries and what percent of the capital is spent?

The numbers we reported is our prorata share.

Okay, can you give us an update on Santa Monica in terms of when you think you will get all the approvals -- .

We have all the approvals that we feel we need at this point in time and the plan is to shut them all down January, give or take.

And there is always further cooperation that we'll need to do with the city but we feel we're in a very good position with that project and everything is pointed towards a fall of '09 unveiling of a brand-new project.

I see nothing to get in the way of that.

There is plenty of work to be done with the city and the community between now and then, but retail demand is spectacular and everything is pointing towards just a fabulous project there.

Okay, super.

Second as it pertains to Tom, on terms of the G&A, on you had a sequential drop from Q1 to Q2.

Anything related to anything else unusual.

The first quarter, we had -- about 1.5 of non-cash expense related in the comp plan year-to-date, year to date we're at close to $10 million for G&A and that is probably going to hold true for the second half of the year.

So, it gets a little lumpy quarter-to-quarter but on average, you know, we should be around $20 million factoring in roughly $6 million of non-cash GAAP expense in that number.

Okay.

And then lastly, you had given the earnings breakdown between quarters 3 and 4.

Could you go over that again?

Again, it's rounding second quarter ending up being higher, third quarter guidance is 25% of that total and then the balance of whatever you got in your model would be falling through the fourth quarter.

Great, thank you.

Thanks, Lou.

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

Hi, good morning guys you do more breakout in terms of the '09 deliveries, you put Santa Monica in there.

Can you break out the remainder?

Sure.

Specific projects.

I mean in '09, Santa Monica is the big redevelopment delivery that happens in '09.

In addition to that, we would anticipate that Scottsdale Fashion Square, we have a $130 million project there to add Barney's and 100,000 square feet of new shop space.

That will open up in fall of '09.

Very excited about that.

Another major redevelopment and repositioning on the redevelopment front would include the mall at North Gate in San Rafael and would also involve the expansion of Cerritos Mall with the expansion of one of our existing anchors.

We also anticipate repositioning and remerchandising of the department store space that we took back at Fiesta Mall and on the new development front we anticipate the first phase of Estrella Falls opening in '09 and the early phases of the power centers at Persada in Surprise opening -- opening up in '09.

Okay, I guess, Art in terms of ramp -- .

having said that, it adds up to $694 million, $824 thousand exactly.

In terms of just the ramp-up in redevelopment, you're going from $120 million this year to $525 in '09, is that -- I know it's hard to forecast beyond 2009, you expect the development to maintain that kind of pace?

Is there enough in the pipeline?

There is only what you make of it.

There is nothing in the pipeline at any point in time until you make something of it and our view of redevelopment, that is that every property is an opportunity to redevelop every day of the week.

So, you know, I think as our imagination grows, as cities become more receptive to in-fill and densification opportunities the redevelopment pipeline grows and grows as time goes on.

And the new development pipeline, I think, speaks for itself but, the redevelopment pipeline I think is a very reliable one.

And one that has been very consistent for us year-in, year-out our entire history over 30 years.

Okay, may be a question for Tom.

Obviously NOI growth picked up this quarter but sales are soft.

Was that again due to the tough comps?

I mean the N NOI was no surprise, we talked about that if the first quarter where we had a lot of leasing activity.

Those leases were signed and they haven't taken occupancy and started paying rent yet, we're expecting a pickup and as you know, there is not a direct immediate correlation between retailer sales in any one quarter in our economics, you know, we had a small amount of percentage and specifically that flows through in the fourth quarter, so in terms of the sales, think it did have a tough comp second quarter of last year was up 4% and I think you really need to look at the full year-to-date numbers.

You can't draw too many conclusions from one quarter of retail sales in my opinion.

Okay, and Southern California, you said was flat.

Is that anything specific going there?

Obviously you have a large concentration.

No, again, it's up 2.4% year-to-date which, is fairly consistent with the rest of the country, the exception of the eastern region which was up stronger than that.

On a year-to-date basis.

In my view, no.

Nothing unusual going on there.

I mean we did have some, probably a disproportionate number of dark anchors in Southern California from the May Company and the recapture of what we do.

We have a disproportionate number sitting in Northern California compared to the rest of the U.S.

Is will it continue?

The trend?

I'm not going to say -- no, before this quarter, sales were up in the first quarter in Southern California and those stores have been dark now for well over a year and a half.

I can't predict it.

The one thing I would say about sales, which is an important nuance that in the retail world is that if we were a retailer ourselves and our sales were flat, that would be an ugly word.

If the sales were off 1%, we would call it soft.

As a landlord, when sales maintain their levels at high-strung levels, we feel good.

Okay, thank you.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Eden Levinson with (inaudible)

Hi, I have a follow-up question on occupancy costs.

You mentioned a target of 12% today for the consolidated centers, and I'm looking on page 9 of the supplemental.

With regard to the unconsolidated centers which include eight of your 10 most productive assets, should we expect the 10.9 occupancy costs of the JV centers to grow for a faster rate than for consolidated and how quickly can you narrow the GAAP of 10.9 to 12.2 for consolidated.

1.0.

to clarify I think our target is a lot higher than 12.

We tend to use 12 as our generic average.

Yes.

If we blend them out.

They have more consolidated and joint ventures, what it would be if you look at the year-end '06 numbers, maybe slightly less than that, you know, 6/11 -- 6, 11, seven.

Part of the reason those numbers are lower we have a lot of our Midwestern properties there with sales growth as we have and as a result, you know, not quite as much rental increase going forward.

I think we can probably be able to move both sides of that equation up with some of the initiatives that we're putting in place now to drive occupancy costs higher.

Do you think you can close the GAAP between 10.9 and 12.2 or is that never going to happen?

It's function of the portfolio.

Some of the assets in the joint venture portfolio may change hands, in which case that number would go up to the function of the quality that is in there.

We have high-quality joint ventures and some others.

I would expect it to go up as a result of selling the non-core joint venture assets and then I would expect the same center-type movement to be comparable between the two.

Okay.

I don't know that they ever match but they're both going to move up.

Okay.

Thank you.

Thanks.

We'll go next to Michael Mueller with J.P.

Morgan.

Hi, a couple of questions.

First in terms of the non-revenue generating CapEx, if we look at your share over the past few years, it's bounced around from 30 million bucks to 80 million bucks.

How should we think about that over the next few years?

It's been a -- going to vary a bit, Mike and generally if you look at the categories like tenant allowance, renovations, leasing cost I assume is what you're looking at.

I was looking at -- .

we may have situations where we have revenue-producing stuff in there.

If we go out and get a new restaurant for somebody, that is going to be in the numbers and we're going to pay a tenant allowance a little bit out of the ordinary but it's going to be revenue-generating.

I guess you look at the numbers with a little bit of caution because there could be revenue-generating items in there.

Even in the renovation centers?

It would tend to be more in the allowance category when you're giving somebody basically enough money to build their new box.

Okay.

It's still going to show up there.

Again, those tend to be situations that are tough to predict.

You got 4 1/2 years worth of history there to use as a guide.

You -- thank you.

Okay, it's going to be situational and move around a little bit.

No reason to be based on what you know at this point outside of the band one way or another?

No, if you take your six month numbers, you know, realizing to the extent that we do a redevelopment that, you know, leasing costs and tenant allowances in the redevelopment which is revenue generating will be in the revenue itinerary, I think you're probably fine using what you have there year-to-date.

Okay.

Looking at the numbers that you put out, Art, in terms of project openings over the next few years, is that number, for example, the $300 -- $330 million for '07, the $490 for '08 is that the entire project that opens up just a phase of the project that is a base projectile that open up and come immediately?

Exactly.

It's the portion that opens up during the year.

So, if SanTan is opening up in two phases which it is, for example, we have part of SanTan in '07 and part in '08, part of Estrella Falls in '09, part in '10.

It's the dollars.

I felt the most helpful, we felt the most helpful way to present it to you would be dollars placed into service which means that you're not capitalizing interest anymore and we're taking in income and it begins to affect our FFO numbers that we thought would be helpful.

I think that is helpful.

The other thing I would point out, by the way, just FYI, THE NUMBERS I PUT OUT THERE INCLUDE ALL capital expenditures related to new developments, redevelopments, whether they would be immediately revenue producing or what you even call non-revenue producing in the way of something that might be a remodel that you can't, you know, directly identify the revenue that is associated with it.

Okay, is there a rule of thumb we should think of?

Most of these are yielding on a stabilized number, 8, 8 1/2%, between 8 and 9%.

If something's opening up, what do you think the initial yield is and how long do you hit that stabilized number?

At the opening for a new development, should -- you should think of our range generally being between 9 and 11% going in returns and on redevelopment, the range is between approximately 6 and 10% on redevelopment and then the numbers that I have shared with you, they have tended to average 8% on the redevelopment and 10% on the new developments.

Okay.

Okay.

And last question, I mentioned Santa Monica Place earlier in terms of the NOI dropoff.

Is that NOI reflected in the same store numbers or does the same store exclude Santa Monica?

Same store excludes redevelopments in Santa Monica Place, clearly a redevelopment.

Okay.

Thanks.

Thanks Mike.

We'll go next to Craig Schmidt with Merrill Lynch.

Thank you.

Hi, Craig.

Hey, Art, how would you address concerns about the retailing in Phoenix given the current housing market troubles?

The best way I can address it is I feel good about the fact that we don't have home builders raiding our construction people to work for them and secondly, our construction people are telling us that prices are beginning to come down which, is good.

Because we're building in that environment in terms of the places that we're building, the homes are already there.

Gilbert is there.

Goodyear is there.

TWe'renot building based upon any future growth that is not already in place.

So, you know, I frankly am taking some solace by the sobriety that has come into the marketplace from some cutbacks with the home builders, because they were beginning to really put in artificial economics into the job market as well as the materials market and the land market.

And so even as we begin to look at, for example, land opportunities that we'll be look at trying to get control of in the marketplace, individuals and/or the state, we're beginning to see a vastly shrunk bidders of property because the home builders are retreating.

That is great.

So it sounds like you're thinking it's a necessary correction.

Yes.

By definition what goes up must come back down sometime.

Yes.

You would be surprised if sales turned negative in Phoenix.

They have not.

I know they haven't, looking at the next five, six months, you would not expect that.

Not at all.

Works.

It's all a function of where we're positioned and we're extremely well-positioned.

Not at all.

I see nothing happening.

Okay, thank you.

Thanks, Craig.

(OPERATOR INSTRUCTIONS)

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

Hi, guys.

Hi, Rich.

Do you think all of this craziness in the debt markets might bring some mall product back to the market at some point?

No.

You still see a pretty tight, nobody's selling anything, I guess?

There's properties and I think that are always on the market and we don't see a huge pipeline of acquisition opportunities for us at this point in time.

The most publicized, you know, properties that are being talked about in the market right now is the Pyramid portfolio in the northeast and I am sure we and many others are looking at.

No, I don't see debt markets.

Now look, owners of shopping malls are generally shopping malls are in stable hands and owners very rarely do anything based upon the debt markets.

Okay, so you don't see, Art, any big influx of opportunity on the acquisition side?

No, I do not.

Okay.

And Tom, when you -- have you looked at the implications of what FAS is considering for the convertible debt that you have?

You know, Rich, we knew that it -- .

Yes.

-- being considered when we did our transaction in March.

You mentioned it before.

We structured it conservatively and in fact if you look at the FFO calculation, they were -- those converts were very, very slightly dilutive so that were factored in the share count and our approach had always been that we were going to use the conservative accounting, which is growth share settlement rather than net share.

They haven't come to any conclusions yet but given the direction they heading, it looks like there might be a change for the way people account for net share settled securities.

We don't believe that is going to impact on how we've structured ours.

You wouldn't have to add additional interest expense?

To bring that up to a mark-to-market kind of level?

Well, until the regulations are issued, we won't know, Rich.

Again, our security was structured to be settled in securities in total, not just the net difference over the par value.

So really the FAS (inaudible) was really trying to address net share securities and that's not what we have.

I got you.

That's a good point, Tom.

Okay.

And then on the operating expense line for the management company, that seems to be staying higher.

It was higher in the first quarter, higher in the second quarter.

What, I thought it might be coming back down, actually.

Is there a reason that that is higher?

Obviously we have talked about the pipeline and the activity and, you know, it takes personnel to get that done We're consistent with the first quarter, what we would expect to see for the balance of the year, Rich.

Okay, and then same thing on the DNA and the real estate ventures, why was that significantly lower.

Any reason for that?

I'm sorry?

What was lower?

Depreciation in the joint ventures that you had back for FFO.

Don't know offhand, Rich.

Okay.

I can't answer that one for you.

I can get back with you, Tom.

Thanks, guys.

Okay.

Thank you.

And having no further questions, I would like to turn the conference over to Arthur Coppola for addition or -- additional or closing comments.

Again, thank you for participating with us on the call to the extent we can entice you to joining us for the grand opening of SanTan Village October 24th and 25th.

Please be in touch with Suzanne Karpick on that, and thanks to Jeff for the question about how do we feel today versus the beginning of the year because we feel terrific.

Everything looks wonderful for the quarter coming up.

Prospects are great and for the years coming up and we look forward to talking to you again and hopefully seeing all of you at the grand opening and talking to you again in three months.

Thank you very much.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.