Macerich Co (MAC) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Macerich Company third quarter 2007 earnings conference call.

Today's call is being record.

Following the presentation, we will conduct a question-and-answer session.

I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Suzanne Karpick, Vice President of Investor Relations.

Please go ahead.

Thank you, operator, and thank you everyone for joining us today on our third quarter earnings call.

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

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

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

Management will also be discussing certain non-GAAP financial measures as defined by SEC regulation G.

The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the press release and supplemental 8-K filing for the quarter which is posted in the investing section of the company's web site.

Joining me today are Art Coppola, President and CEO; Tom O'Hern, Executive VP and CFO; and Tony Grossi, Executive VP and COO.

Before I turn the call over to Tom, though, I'd like to mention, for those of you with whom I have not yet spoken, that Macerich will be holding an investor tour in our Phoenix market preceding the NAREIT conference.

The tour will take place the evening of Monday, November 12 and conclude Tuesday afternoon, November 13.

If you haven't yet heard about this and would like more information, please feel free to contact me directly after the call.

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

Thank you, Suzanne.

Today we'll be discussing third quarter results, status of our developments and redevelopments, upcoming opportunities and our outlook for the balance of the year.

The operating metrics for the third quarter continue to be strong with high occupancy levels and strong releasing spreads.

Total same center tenant sales increased 1.7% through the portfolio; that's up 3% year-to-date.

Looking at sales by region, southern California was off and down 1.9%.

Northern California and the Pacific northwest, however, was up strong 4.1% positive.

The eastern region was up 3.7%.

The central region was up 1.5%, and Arizona was up 0.1%.

Total mall sales per square foot for the year, the rolling 12 months came in at $460 per square foot.

That was up from 436, a 6% increase from September a year ago.

Occupancy levels remain high with quarter-end occupancy at 93.5%.

On a same center basis that's 93.5% versus 93.4% a year ago.

Leasing activity was robust.

We signed 356,000 square feet of leases during the third quarter.

Average starting new rents were $43.77 per square foot, and that was 27% higher than the expiring rent.

Our average rent in the portfolio grew to $38.40 a foot.

Looking now at FFO for the quarter, again a strong quarter up 17% to $1.15.

That compared to $0.98 per share for the quarter ended September 30, 2006.

This result was within our guidance range.

EPS diluted for the quarter was $0.25 compared to $0.66 for the third quarter of last year.

However, in the third quarter of last year we sold a number of non-core assets and recorded 46 million on gain on asset sales that positively impacted EPS in '06.

Also impacting the quarter same-center NOI growth, excluding lease terminations, up 2.4% compared to the third quarter of last year, year-to-date we're up 2.53.

Lease termination revenue was up significantly to 5.1 million for the quarter.

That compared to 0.9 million during the quarter ended September 30 of last year.

Year-to-date, however, terminations are pretty much even with last year, year-to-date were at 11.6 million, and that compared to 12.2 million during the same period last year.

The expense recovery rate during the quarter, including joint ventures of pro rata, was 94%.

That was up from 93% in the third quarter of last year.

EPI increases during the quarter contributed 1.3 million of incremental revenue compared to the third quarter of last year.

Straight lining of rents, a non-cash item, came in at 4.1 million compared to 3.6 million in the third quarter of last year, and net sales 141, and other non-cash item was essentially the same as a year ago at 4 million.

Gain land sale dropped to 100,000 for this quarter, and that compared to 2.3 million of gain in the third quarter of last year.

Also keep in mind, during 2006 we sold eight non-core centers.

The FFO drag in the third quarter of this year as a result of the sale of those lower quality assets was a penny a share.

Bringing out the balance sheet, in July we refinanced Scottsdale Fashion Square and funded a new $550 million loan, interest rate of 5.66% fixed for 7 years.

Both Macerich and our partner each pulled out 150 million from this financing and our excess proceeds went down to pay down our line of credit.

Current capacity on our line of credit is 1.1 billion.

That gives us a substantial amount of dry powder to address some development pipeline as well as future opportunities.

We currently have a total of 6.9 billion of debt outstanding, including JVs at pro rata, and our interest rate is 5.64% in total, and the fixed rate debt has an average interest rate of 5.89%.

We have an average remaining maturity of 5.03 years on that fixed rate debt.

Taking a look at the impact of the convertible debt transaction we did earlier this year, the convertible ended up having a diluted impact of a penny a share in the quarter because we used the as-is converting method for the accounting of that compared to the net share approach.

So number of you had questions this morning about the share account, and during the quarter the convertible debt was diluted, keeping in mind that we do use the as-is converted method which is the most conservative method for accounting for those types of securities .

Our debt-to-market capitalization at quarter end was 46%.

Our floating rate debt as a percentage of our total debt was only 7%.

We had a strong interest coverage ratio at 2.32 times.

Focusing now on earnings guidance for '07, we are reaffirming our prior FFO guidance of 4.58 to 4.68 per share for the year, and our major assumptions have remain unchanged.

Also, as many of you have noted we had a dividend increase on October 26.

We increased our dividend by 13% to $0.80 per share.

The shareholders of record on November 15.

This is our 13th consecutive year of dividend increases.

At this point, I'd like to turn it

Thank you, Tom.

And welcome to the call.

I'm very excited to be with you today.

We're in the middle of one of the most exciting periods from the viewpoint of creating value for our company that we've ever experienced.

Over the past couple of weeks and over the next couple of weeks, we will have six major grand openings or grand reopenings at centers across the United States.

These are highlighted by Flagstaff Marketplace, which is first phase of the power center and lifestyle expansion of that property opened October 19.

Last week SanTan Village, West Course and Macerich's first Phoenix 2020 regional center opened very successfully last Thursday evening.

On November 8, Freehold Raceway Mall will open up its lifestyle expansion, it's 100,000 square foot lifestyle expansion, and then on November 16 a million square foot Promenade at Casa Grande will open up again on time and on budget.

We're very, very excited about these openings.

We're sitting here on terrific fundamentals on all of our operating measures.

I'm going to be reporting to you today somewhat looking backwards over the year but also looking forward to the five areas that we continue to see significant value that we can create for you, our shareholders, and for us.

And these are really from releasing the embedded growth that is sitting in our strong centers through releasing activity; number two, through creating value through on going redevelopments.

Our third platform is creating value through new developments.

Our fourth platform is creating value through densifications and mixed use additions to our properties; and our fifth platform is creating value through opportunistic acquisitions and dispositions and acquisitions could take the form of either one of properties, groups of properties, recapturing anchor space or acquiring land.

Looking to the releasing and unleashing of embedded value within our portfolio, we had another strong quarter of releasing spreads.

Releasing spreads were up 27% for the quarter, which is consistent with the spreads that we have enjoyed throughout the year.

As I look backwards over the last 6 years, this is consistent with the types of releasing spreads that we have enjoyed year-in and year-out.

This year, we had releasing spreads of 27%; last year, 19%.

'05 was 20%.

2004 was 24%.

2003 was 20%.

2002 was 25%.

I know that there is much concern about the consumer today but, of course, over the past six years, we've been through many business cycles, and the consumer has had many different moods, but our releasing spreads have been able to be delivered year-in, year-out through our entire history to a great extent because of the product that we are selling.

The product that we are selling is in great demand.

It's a product of which there is very little new supply coming online, and this product is sitting within markets that have extremely high growth and/or consumable income.

If you take a look at the quality of our properties, the top 50 centers that we own throughout our company average over $500 per square foot, and these properties generate over 85% of the net operating income of Macerich.

So again, if you look at simply the most productive asset that we own, they generate the vast majority of the income we enjoy and when you have these types of sales per square foot, you're able to keep occupancy levels high, as we have continued to enjoy this year with the quarter ending at 93.5%, and keep sales strong as we've continued to enjoy with our total sales per square foot and our portfolio now up to over $460 per square foot.

It's the strength of this portfolio as well as the disposable income within the sub-markets that each of our properties serve that has been able to give us the opportunity to historically deliver these releasing spreads, and these are very, very important to our future growth.

As Tom pointed out in our last conference call, each 25 basis point increase in our occupancy cost as a percentage of the sales translates to $30 million of net operating income.

Our history shows releasing spreads in the 20 to 25% neighborhood, which is consistent with our belief that our contract rents today are at least 200 to 300 basis points below market rents, based upon the sales that our portfolio are enjoying.

If you take a look at bringing all of our rents to market, there is a huge amount of rent growth and value creation that is going to come from -- that can come from that alone.

Just raising our cost of occupancy up by 250 basis points to closer to market would result in a $300 million increase in net operating income for the company, and using the types of cap rates that people use for the type of product that we have, you're looking at $5 to $6 billion of embedded value growth sitting in our portfolio through releasing a loan.

Our second major platform through continuing to deliver growth to you and value is through our redevelopment pipeline, and this has never been healthier.

As I mentioned, we just are having the grand opening and reopening of the expansion and remodel of Freehold on November 8.

During the past year, we've enjoyed remodel openings at Victor Valley at West Side Pavilion.

We'll be completing our remodel at Danbury Fair later this year and early next year.

Major projects currently underway include The Oaks with the fall of '08 opening, Santa Monica Place with the fall of '09 opening, Scottsdale Fashion Square with a fall of 2009 opening, Modesto with a lifestyle expansion of a 2008 opening, Fiesta with openings scheduled with the power addition center there of 2008 and 2009.

We are currently in the entitlement phase to reposition our mall at North Gate and San Rafael with a 2009 delivery, and looking further down the line on our more significant expansion opportunities and redevelopments.

We have very major opportunities that are being worked on at very powerful centers including Washington Square in Portland, Village of Corte Madera in Marin County, Laredo Mall, Walnut Creek, Broadway Plaza.

Each of these projects have conversations underway for redevelopment and major expansions, including anchor addition or expansions that will be delivered in the 2009 to 2011 timeframe.

Our third platform for creating value for you is through our new development ground-up pipeline.

The highlight of the year, of course, is SanTan Village.

This opened last Thursday.

It's 1.2 million square feet and it's the first regional center that we have delivered to you under our Phoenix 2020 pipeline for growth.

It is not insignificant to note that this project was announced two years ago in terms of the cost and projected returns which is very unusual for most developers to give you cost as well as projected returns two years in advance.

And in spite of the turbulent construction environment that we found ourselves in during the past two years, this project has been delivered on time, on budget as it relates to cost, on budget as it relates to income, and on point and on market, in terms of its reception in the marketplace.

The grand opening was a wild success with probably in excess of 30,000 to 40,000 people attending over the weekend, and many, many retailers reporting record openings.

We're extremely thrilled with that particular opportunity and that delivery, which is the first of many more large regional centers to come.

November 18 marks the opening of our ground-up development at Casa Grande, which is a million square foot project that we have discussed with you on the past.

Again, on time, on cost budget, on revenue budget.

We just opened the first phase of the Village at Flagstaff that I mentioned.

This is a $50 million power center that, again, opened on time and on budget and will continue to open in phases over the course of the next year or two.

We started construction at Estrella Falls on the power center on the 500,000 square foot community and power center will that will be delivered in the timeframe of 2008 and 2009.

Total cost on that is estimated to be around $80 million, and we own a 50% interest in that.

During the quarter, we received unanimous approval of the plans for our regional mall at Goodyear, Estrella Falls.

Projected opening date of the center is in the late 2009 timeframe.

It will have a similar tenant mix to what we have at SanTan Village in Gilbert.

It will also be an open-air center, and retailer demand is already strong for this center based upon the success that they are enjoying at SanTan, and based upon their incurrence with us as to the opportunities that we see in this marketplace.

At Prasada, in terms of a ground-up development, we are underway with over a million square feet of community and power centers in the city of Surprise at our Waddell power center and our cactus power center.

These are a little bit larger, in terms of size and scope, than some of the power and peripheral developments that we have pursued in the past because the total project size that we have under control and under our sponsorship at Prasada over 3,000 acres.

This $150 million of total investment will be delivered over the next two years with the regional mall estimated to be in excess of 1 million square feet with delivery estimated to be 2001- 2011.

Continuing on our ground up pipeline at Mirana just northwest of Tucson, work on the interchange there is underway so we can plan on delivery of a Casa Grande-type of million square foot development that can be delivered in the 2010 to 2012 timeline.

Belmead, plans for this 7-acre project are currently being worked on with the addition of a 750,000 square foot mixed use addition, retail and other mixed uses contiguous to our very successful Freehold Mall for delivery hopefully in the 2009 to 2011 timeframe.

The North Black Canyon north Phoenix, we have under control over a hundred acres there and the state of Arizona is bringing a little over, another hundred acres there, and we have plans for a Scottsdale 101-type of retail facility there for delivery in the 2009 to 2011 timeframe with plans hopefully for more regional draw and regional center to be delivered in the similar toward the latter part of the timeframe, probably 2011 or so should we be successful in the auction.

The Palisene in north Scottsdale.

State of Arizona is planning to bring the first 122 acres of that project to market early next year.

We intend to be bidding at the project.

You may remember that we do have a preferential right, in terms of the bidding there.

Our plans call for a 1.5 million square foot mixed use project, and this is a project that from a retailer's viewpoint fits very well with our Phoenix 2020 vision.

As you know we see the primary entrance for luxury retailers into the Phoenix marketplace to be at the bookends that we deliver on the camelback corridor of Biltmore Fashion Square and Scottsdale Fashion Square, and we're continuing to deliver luxury, in particular at Scottsdale Fashion Square.

All the retailers we bring to market and first to market locations at the Biltmore and Scottsdale camelback bookend corridor agree with us that their second location for luxury should be in north Scottsdale, and our focus on our property that we are going to be bidding on at Scottsdale Road and the 101 early January.

We would anticipate, should we be successful at that auction for delivery of that project in the next three to four-year time period.

The fourth major platform for value creation continues to be densification.

We're proceeding well with the addition of two residential tourist to Biltmore Fashion Square, which will surprise over 180 units and 320,000 square feet for delivery approximately three years from now.

We're proceeding well on our plans for mixed use addition to a 15-acre site that we're going to be creating north of Scottsdale Fashion Square contiguous to the $150 million expansion that we are pursuing in conjunction with the Barney's as well as retail luxury wing expansion that is underway that opens in '09, and finally 1.5 million square foot mixed use addition to Tyson's Corner continues to be under planning and underway for delivery in the next three to four years.

Finally, our fifth major platform for growth and value creation continues to come from opportunistic acquisitions and dispositions.

We see that because of the strength that we have in our balance sheet, because of our relationship pipeline, that we will continue to be able to create value for you through opportunistic acquisitions, dispositions, and these acquisitions could come again in the form of single assets, as we have in the past, recapturing anchor stores as we did last year with the federated group of 11 stores that we acquired, or increasingly going forward, it could come in the form of acquiring land positions in Arizona in the path of growth opportunities where we see opportunities to even add the next ring, the next pipeline of retail centers for the state of Arizona.

So, obviously, we are extremely enthusiastic.

This is buoyed by the confidence that we have in our operating fundamentals, the excitement that we have from the openings that we're enjoying the optimism that we have from our view from the future.

With that, I'd like to open it up for questions.

(OPERATORS INSTRUCTIONS) We'll take our first question from Christy McElroy Banc of America.

Hi, good afternoon.

Hi, Christy.

Art, you spoke quite a bit about the strength of your releasing spreads.

I'm assuming you expect these trends to continue into next year.

In that context, can you give us a sense for what we should be expecting for same-store NOI growth in '08?

Well, as it relates to releasing spreads, I gave you a six-year history which, if history repeats itself, which it tends to repeat itself with us, we would anticipate releasing spreads continuing over the broader period of time in the 20% neighborhood, which is really a function of the fact that our portfolio is 2 to 300 basis points below market and that we'll be capturing that embedded growth through releasing spreads.

From the same center NOI growth viewpoint, I'll really let Tom address that.

Yes, Christy.

We're in the process now of rolling up each of the 73 malls budgets for next year in detail.

There's a lot of factors that go into that same-center NOI, not just releasing spreads.

We'll be giving some direction on our next call on that.

Historically, we've been in the 2 to 3.5% range.

I think we report a little more conservatively than most of our peers, but we'll be giving you more guidance on that in the future.

Do you see any further -- any room for further upside occupancy potentially?

Well the occupancy at 93%-- 93.5% is pretty strong.

I think our emphasis has really been on the quality of the deal rather than the volume of deals.

Really, an emphasis of Tony Grassi, and he is sitting right here with us, has been to increase the terms of the deal, the rent, the provisions, fixed cam, things of that nature.

93%, I think, is a pretty strong occupancy level, but we feel we can make significant progress on the quality of the deal rather than just truly volume, but the quality of the deal.

Okay.

And then just looking at your redevelopment pipeline, are there any bigger projects where you expect there will be a lot of tenant displacement and whether or not that will have any meaning on your earnings in the form of a temporary pullback in occupancy at any point?

Well, again, when something is in redevelopment, it's not in the operating statistics.

It's not in same center NOI or occupancy.

The biggest impact we've had is really historically just where we're taking a mall that's open and deleasing it.

So four, five years ago, that was Crossroads Mall in Boulder which was subsequently named 29th Street.

We took the impact of the deleasing on that at that period of time.

And today it's Santa Monica Place, but most of that has already been through the system.

I think we've got maybe a million dollars of NOI a quarter coming through Santa Monica, and that's been declining over the last three or four years as we've deleased that and gotten close to a base case and ready for redevelopment.

I don't expect to see anything more of that magnitude.

And Christy, just in looking at the -- at the centers I mentioned in the major redevelopment pipeline, there's nothing that would even come close to a Santa Monica Place, in terms of rent displacement, amongst a half a dozen opportunities that are underway.

Great.

Thank you.

Thank you.

Our next question comes from Louis Taylor of Deutsche Bank.

Hi Lou.

Thanks.

Art and Tom, congrats on the quarter and the dividend release.

I'll take the congrats.

Good.

Good.

Don't take it on the dividends.

Can you give us a sense, in terms of the development and redevelopment pipeline, in your share of the dollars, how much comes on in '08 and '09?

Yes, Lou --.

A gross amount.

Last quarter, Lou, we gave some pretty detailed numbers on that, and I don't think things have really moved around too much.

We had a total, including a lot of the ones we talked about, hitting in '07 of 330 million, our pro rata share.

'08 is about 500 million.

'09 is about 700 million, and I don't think we're really in a position to put 2010 and 11 out there.

But that will give you a pretty good feel for the magnitude of what we expect to be coming on line over the next two and a half years.

Okay.

Second question.

Tom, in the fourth quarter and kind of the (inaudible) assets and the potential for them to go back to the family and I know with that convert that's in there, the share count gets funky in the fourth quarter.

Do you expect the Q4 results to be, in terms of that convert and antidilutive impact, any different this fourth quarter than it was last year?

Lou, to address that, I think those assets will be in the portfolio through year end.

I can't speak to next year yet.

That's beyond our control.

And I believe in the fourth quarter of last year, that particular security, those preferred units were dilutive in the fourth quarter, and I would expect that to be the same this year.

Great.

Thank you.

Thanks, Lou.

And we'll go next to Jonathan Litt of City.

Hi, this is [Ambika] with John.

Just focusing back on embedded growth.

There's several -- a lot of discussion on how there's significant upside in the portfolio, and I guess I just want to understand is, is there a catalyst for realizing this embedded growth, and can you give us any guidance on targets that you have internally on where you want to take occupancy costs in the next year?

Yes, sure.

Thank you on that.

I'm going to ask Tony Grassi to go ahead and address that for us.

Tony?

Sure.

Hi [Ambika].

Hi.

If you look at our 10-K, our occupancy cost of the percentage of sales is about 12.1%.

And as Art mentioned, we have an opportunity on a conservative basis to increase that occupancy between 2 and 3%.

And when you look at the top 50 assets generating almost $520 per square foot, these centers are at a volume and at a productivity that can probably support higher than a 3% embedded growth.

So our target as a portfolio for the top 50 assets will be in the 15% range.

And, of course, for the top 25, it could be a little higher.

So we target, on a 12% trailing sales on any renewals anywhere -- on a renewal rent, depending on the use as well.

There are some uses that can't carry a 15% spread.

But, on average, we would target a cost of occupancy for the portfolio, better performing properties at 15%.

I guess -- I mean, so far, you've been -- the rents have been chasing the sales growth.

Is there anything that's going to change that and shift it over to rent growth really ramping up?

Well, [Ambika] I think one thing I mentioned a little while ago is there's really an emphasis today here, and it's largely Tony's doing, to focus on the quality of the deal rather than just purely volume.

So I think today there's a far greater emphasis on pushing the rents, pushing some of the recovery provisions that we've had in the past, and I think that's going to have the impact of driving up that occupancy cost as a percentage of sales.

Keep in mind, even a growth of 25 basis points, which on the surface sounds modest, that's 30 million of NOI gain.

I mean, that's $0.30 a share.

So if we can move that needle even 25 basis point a year, it's going to have a pretty significant impact.

Okay.

And then is there any concern on the weaker sales in Arizona and California?

No, not at all.

So you're expecting that to rebound, say, in the fourth quarter?

Well, when you talk about weaker, you also have to remember what Arizona was up against last year.

Last year, Arizona was up against double digit increases the entire year.

So, a lot of Arizona will stay up 10, 12, 15% last year, and so we're coming up against very strong comps.

But the outlook in the marketplace for all of our properties in Arizona and California are very, very strong.

And a lot of that's a function of the income levels of the consumers that we have and that we serve in these trade areas and that the household incomes that each of the properties that we have primarily in the Phoenix Metro marketplace as well as L.A.

and San Francisco and Oregon, they're much higher than the national average, in terms of income, disposable income levels, and I think our experience is to date that the people with higher disposable incomes are not tending to pull back as much as people with more moderate incomes might be predicted to be cutting back.

So you would call it more tough comps versus any housing impact on sales?

Clearly that's true in Arizona.

In California it's -- I don't think there's a message one way or the other, but clearly in Arizona, we were up against actually not just one year of very high sales growth.

We were running off of four straight years.

You may remember the Arizona portfolio, my recollection was that four or five years ago was at $400 a foot, and then last year, it ended the year at almost $600 a foot.

So we were running double digit increases for three, four years in a row, which is somewhat anecdotally, for example, is Nordstrom.

Two of the top three or four sales stores that they have in the entire United States the last three or four years running are in Phoenix in our portfolio at Scottsdale and Chandler.

So yes, it's been several years of tough comps in Arizona.

All of the current outlook is very, very good, very, very good.

Okay.

And then just turning to guidance.

Previously in guidance, there was a 6 million reduction assumed for the income and also straight-line rents.

It seems to be not really trending down as guidance implied.

Does that catch up in the fourth quarter, or is that no longer a part of guidance?

Well, we haven't changed any of our major assumptions and, again, the fourth quarter is the biggest quarter by a long shot, and straight-lining and net sales 141 can move around a little bit quarter to quarter if there's lease terminations or things like that.

So at this point, we are not -- we're not going to modify that.

Terminations, we pretty much hit our assumption for the year, which was close to 12 million, and we do not expect any terminations coming into the fourth quarter.

Straight lining our rent can bounce around a little bit.

Historically, at least last year third quarter, was highest level and then it dropped a little bit in the fourth quarter, and that's factored into our thinking again as well this year.

So no changes on those assumptions, [Ambika].

And then is the land sale in the fourth quarter, is that already under contract?

Yes, it is.

Okay.

Great.

Thank you.

Our next question comes from Paul Morgan, FDR.

Good morning.

Hey Paul.

Hi.

Speaking with the guidance there, you left it unchanged, and that leaves a pretty wide range for one quarter, in terms of $0.10.

What are the key drivers that would lead you to hit the high or low end at this point with two months left?

Well, there's a lot of factors, Paul, that go into the assumption.

As you know, the fourth quarter is where the bulk of the percentage rent comes in.

Over 50% of our temporary tenant income comes in in the fourth quarter.

And so there's a lot of those factors and the land sales in the fourth quarter.

So there's a wide variety of things that could impact the quarter.

But at this point you're equally comfortable with the high and low end for that range?

Yes, we're very comfortable with our range.

That's why there's no change.

Okay.

The G&A, could you just comment about the movement in G&A quarter to quarter and what a good run rate is?

Yes.

G&A is going to be lumpy.

Typically, the third quarter is the lowest quarter for G&A, because the first couple quarters we have auditing costs, we have tax costs, we've got proxy costs, we have annual report costs that flow through.

And typically in the third quarter there's none of that.

So if you look back over the years, third quarter has been the lowest.

I think, on average, we're going to run about 3.5 to 4 million a quarter, but it's going to be lumpy.

3.5 to 4 million?

Yes.

With the third quarter typically being significantly less than that.

Okay.

First two courts are probably going to be higher than that.

Right.

Thanks.

So my last question on investment volumes, could you just give a rough breakout?

You said the completions for '08 and '09, but maybe of your investment end development, redevelopment, intensification next year and the following year, and then maybe sort of a rough percentage of that that is located in Arizona, and how you -- you have a great pipeline there, but how you manage sort of the asset and development concentration risk in Arizona?

Sure.

I mean, I think that we've given very specific numbers on the cost by project -- or by year, in terms of completion.

In terms of looking at it in Arizona versus California, actually if you look at the dollars that are going to be involved here, moving away from the large delivery of SanTan Village this year, the vast majority of the dollars that we're talking about over the next two years will be delivered through the redevelopment of The Oaks here in southern California; Santa Monica Place, here in Santa Monica; Marin County; the Central Valley of California; Portland, Oregon.

So, the redevelopment dollars tend to be actually outside of Arizona because of the age of the centers and because of the fact that that's really the only way that we can tap into future growth outside of Arizona, whereas we've got horizontal opportunities inside of Arizona where we can acquire large land positions.

Think about it a little bit differently in terms of -- given your history of redevelopment and more recently of development, what would be the impact of a regional recession on development yields in the early stage of extended period of lease, for example?

Very, very small the from the viewpoint of the developments that we are pursuing because the developments we're pursuing are not speculative.

As I mentioned, we're already getting strong leasing demands from tenants at Estrella Falls and Goodyear two years before it would even open which is well in advance of the time we would normally doing do leasing.

How much would you expect to be pre-leased before you start construction on those projects?

That's not a metrics that's relevant to our industry.

If a metrics is relevant to people who that are getting construction loans, from the viewpoint of pre-leased meaning handshakes, meaning commitments in terms of being in the tenants' pipeline, generally well over to 60 to 70% of it you already know the homes that the square footage is going to land in.

Otherwise you don't know your market, and we do know our market.

Great.

Thanks.

Thanks, Paul.

And we'll go next to David (inaudible) with Lehman Brothers.

Hi everybody.

Hi.

You touched on these topics a little bit relative to housing and the regional market, but there seems to be mixed messages in terms of there being very strong job growth in Phoenix.

At the same time, there appears to be a slowdown in the softening of the housing market.

And I'm wondering first if you could provide a little color on those mixed messages and, second, identify anything in your assumptions around the development pipeline both present and future that may be changing based on those perspectives?

Well, as far as where we are pursuing development, we are pursuing development in trade areas that are already populated with adequate population to service the product that we're bringing to market.

So, you know, Gilbert, SanTan Village is sitting there, Gilbert, and we already have the embedded population to make that property successful.

Goodyear that we're planning on opening two years from now, the population is already there, and the lack of supply is so great that bringing on the supply that we're planning on bringing on at Goodyear, we're not relying on any future job growth or any future population growth in that particular trade area to service the retail that we're bringing on the market.

The areas that you're seeing relatively significant cut backs, in terms of housing, is really on the far fringes of the Phoenix metroplex.

To some degree we'll feel some of that at Casa Grande.

I would anticipate that that particular market, the housing market there, has been hit somewhat, and so that particular -- the sales productivity of that center may be a little bit slower than normal.

But absent that particular property, everything that we're working on is already in a mature area.

We feel very comfortable where we're at.

In terms of the job situation in Phoenix, there's -- they have significant cut backs on the construction side of the business, in terms of the number of jobs that are there, which frankly has been a great piece of information for us because it's made the labor pool much more accessible to us and has tended to have construction costs for us on the projects that are underway moderate, and to have the escalations that were, to a great extent, driven by labor costs, moderate or even go down.

Does that answer your question?

Yes.

It's very helpful.

Thank you.

Okay.

Thank you.

Our next question comes from Jay Haberman, Goldman Sachs.

Hey, Jay.

Good morning.

I guess a question for Art or maybe Tom.

I guess of that 200 basis point sort of increase in occupancy costs that you're targeting, sounds like a lot of that is just pushing rents as you continue to do.

Can you give us a sense of how much capital you may have to invest as well?

Is it really just driving rents?

I mean, obviously the rent you achieve bears some relationship to the tenant allowance you're willing to pay, but we don't see a real change in that regard.

We've always been fairly stingy with the tenant allowances.

That part of our approach hasn't really changed much?

Step up?

Yes.

So I think it's an apples-to-apples comparison.

We're going to try to frankly push the top line rent number.

We have some great centers.

We've got an improving portfolio.

We sold some of the low performing centers over the last few years and we think with this emphasis, the relatively scarce supply of space in these high quality malls that we're going to be able to do it again.

We're not going to get 200 basis points in a year, but even to get 25 or 50 can be very, very impactful, and that's what we're shooting for.

I would also point that the releasing spreads that we quote are effective releasing spreads and that of capital, tenant allowances, things of that nature that would go to the tenants.

Okay.

And Art, also sticking with you, you mentioned some projects you're looking at for to 2010 and 11.

Is your goal to maintain the deliveries?

Obviously you're ramping up to 700 million in 2009.

Are you trying to keep that pace going forward?

We're really not targeted by dollar amounts.

We're targeted totally by markets and the dollar amounts are simply a function of the markets in which we see opportunities, and it's really simply that.

We are not a manufacturing company that can decide we're going to build so many widgets a year.

We're an opportunistic developer, and when we see opportunities and we see a market that's right -- this is really an important point.

Our projects, in particular are new projects in Arizona, are all about timing, and it's all about bringing to the market the project when the customer is ready for the property and not when we want to build it.

If we wanted to say well we're going to build $352 million of new products per year for the next 10 years in Arizona, we could do that, but it would be completely unrelated and not correlated to the market.

So we're completely market-driven, but based upon the projects that are in the pipeline, in terms of trying to given transparency to all, we see over 700 million of deliveries in '09, and frankly the bias on that is up from that based upon the opportunities that I see.

Okay.

Great.

And then just a couple of smaller questions.

The lease term fees that picked up there, was there anything that drove that, or is that just going off tenants?

No.

It's pretty much going off tenants.

We had Discovery Zone in there -- Discovery Channel, excuse me, was 2 million of the pickup and the rest was pretty much win-offs.

And then forgive me.

I may have heard this in the past, but have you identified a partner or developer for the residential portion of Biltmore, and I guess is that going to be condo or is that apartment?

It is going to be condo.

We have a development partner that we have identified.

It is a private company, not a public company.

We're not in a position today to release that name because the documents are being finished.

Okay.

Do you have a sense of what sort of price point you're going to be targeting?

The market would dictate at that corridor the highest price per square foot for residential in the entire market and the most recent sales per foot of condos in that intersection have been in the $700 to $800 dollar per square foot neighborhood.

And certainly we think that those types of pricing even as high as a $1,000 a foot going forward could be supportable, but that's the type of pricing that's been achieved to date.

Great.

Thanks.

Look forward to the tour.

Thank you.

Look forward to seeing you.

We'll go next to Matt [Ostrower] of Morgan Stanley.

Good morning.

Good morning Matt.

Looking forward into 2008, I know you're doing your budgeting on the property level stuff, but also on the back of the envelope, modest same-store NOI growth and then, of course, all the projects that you're delivering at the end of the year, it's not hard to understand how people would be forecasting, including ourselves, double digit FFO growth.

Leaving aside stuff that you're still budgeting, are there any things, Tom, that you think people may not be considering appropriately when they're doing that kind of back of the envelope analysis?

Well, I think you have to look at the things that may or may not be recurring, Matt, and come to those conclusions.

Again, we won't be coming out with guidance until next quarter's call, but the things that can move the number and may exist in one year or another is the last couple of years, for example, we've had a significant amount of termination fees the last two years, 2006 it was 20 million, 2007 it's 12 million year-to-date, and that's compared to averages that are more like 6 million.

So to make the assumption that continues at that level could be -- could be incorrect.

The other thing that tends to be less predictable and kind of lumpy is gain on land sales.

We had about 8 million last year.

This year we've got forecast 10 million or something like that, and at this point I don't think we're in a position to give you direction one way or the other.

And obviously that's $0.10 a share in terms of FFO impact.

So those those are a couple of the things just to be -- to keep in mind as you're thinking '08 ahead of our guidance.

Okay.

Great.

And then can you comment at all on North Bridge given all the press that's out there and, if not, can you talk in more generic terms about your appetite for sort of high-end acquisitions in what appears to be in the sort of higher price range, 5% cap rate numbers?

Can you hear the no comment, Matt?

Oh, I didn't.

I'm sorry.

That was the silence you were hearing.

Oh, okay.

Being Halloween eve and night and all, I guess I have a little sense of humor going here.

We do have -- we're under a confidentiality agreement.

So, by definition, I can't really talk about that.

However, I am aware of that property, and we think it's a terrific asset.

I've heard about the pricing that people have written about and it would seem to me that would be fair pricing for an asset like that.

From our viewpoint, we like to buy properties that are in in terrific locations with high barriers of entry that service strong demographics and clearly North Bridge has all of those characteristics.

We have a tremendously successful Nordstrom store there, and should it find its way into our portfolio, it would be with a very welcome other assets that retailers would feel comfortable with, in terms of associating with us.

All our higher end centers or our [Lominaty] Centers, which are primarily our high-end luxury centers and clearly North Bridge would fit in that category.

And would you do -- given the sort of strategic importance of that and probably the long-term growth prospects there, would you do something like that or something similar to it that might be dilutive to begin with and then becomes more accretive over time?

We've never been a spread investor, and so the idea of delusion or accretion, frankly, is irrelevant to me day one.

The only thing that's important to me when we buy something is, does it have the opportunity for us to generate value creation and income growth that is consistent with what we expect in the rest of our portfolio.

So that by itself, the idea of spread investing has never been in our vernacular.

Should we -- should it be true that we were buying an asset like that, it would be my guesstimate if I were to do the math that it would be fairly neutral to our FFO.

Okay.

Great.

A couple of smaller questions.

Tom, I thought the breakpoint for dilution on the diluted treatment of [Wilverite] units $1.12 for FFO.

Am I not remembering that the right way?

I don't think so, Matt.

I'd have to go through the exact calculation on that relatively small number of units, but I don't think they were dilutive this quarter.

Oh, okay.

And then the lease term fees, did you recognize those mainly on an unconsolidated basis?

A little of both.

Okay.

Because --

We had -- we had Summit, Tysons, the Discovery Channel was spread to a number of locations, including JVs at Tysons, [Cordamadera], Scottsdale Fashion, so that was about half and half.

So there was a big slug of those at the joint venture level, probably 60% of that 5 million.

Okay.

And is that -- because the revenues went up, seems like they went up sequentially like $6 million.

And that was part of it.

Okay.

And the other -- it didn't seem like -- at least as I noticed, didn't seem like occupancy changed that much, disproportionately any way.

What else would have driven that up?

Just quarter to quarter rent growth, a lot of the leases that are signed early in the year come online in the third quarter.

Okay.

So there's pickup there, and I don't have it in front of me, Matt, but some of it may be the impact of straight lining of rent, some other things.

Okay.

And finally, unless you addressed it already, the cap interest number.

Should we expect that to be changing materially?

It would seem like as you're ramping up this pipeline we'd be seeing some pretty big increases in that.

Well, you see increases, but then you also got grand openings coming.

The SanTan, that number on SanTan will be going down.

It will be going up on other centers.

So it's a little you have to have a run rate on that one.

I guess my guidance for the moment would be use what we've got for this quarter, because you're going to have some things coming off line, but you're also see us ramping up expenditures on Thousand Oaks, for example.

So as Casa Grande and SanTan Village come off capitalized interest, you've got increasing expenditures, pretty significantly, Thousand Oaks and some of the other locations.

Okay.

Great.

Thank you.

Matt, I just -- it's a followup to make sure that since we're coming up on ski season you don't get too far in front of your skis.

You will want to keep in mind the fact that the Rochester assets could be redeemed and that that could happen by the end of this year, and that those would be significantly diluted next year, not being there.

Excellent.

That's very helpful thank you.

Our next question comes from Michael Mueller, JPMorgan.

Hi.

Most things have been answered but real quick, back to the land sale gains for a second, the prior guidance was $10 million.

We're part of the way through the fourth quarter.

I mean, is there a good visibility on that number happening in the fourth quarter?

Well, I think [Ambika] asked the question is little while ago, Mike, is that -- or maybe it was Paul Morgan -- is that under contract and the answer is yes, it's under contract today.

Okay.

Sorry.

I missed that.

And then going to the supplemental, looking at the occupancy costs, there's about a hundred basis points differential between the consolidated and the JV centers.

I was just wondering what's driving that difference?

Well, again, you have to keep in mind that we buy these -- most of these centers have been acquired, so it depends on the owner and the operator and how the lease was structured when we bought the assets.

To some extent, that's what we inherited.

You also find the sales a little bit higher on the joint ventures.

I wouldn't read anything into it.

Okay.

Yes.

There's nothing there.

It's just -- I think the opportunity to increase them exists equally in both the consolidated centers as well as the joint ventures.

The joint ventures have a little bit lower occupancy cost as a percentage of sales.

I think they both have the potential to move as much as 200 basis points.

Keep in mind that the joint venture centers, we have some very high productive centers, and we also have some centers that are less productive like the IBM portfolio.

Okay.

Got you.

Thank you.

Our next question comes from Jeff Spector, UBS.

Good afternoon.

Just a follow-up on North Bridge.

When you're acquiring properties and you're underwriting, if you were to assume there were redevelopment opportunities, would that be included in your purchase price?

Generally no.

No.

And then a quick question on Palisene.

I know we talked about the competing center CityNorth.

It sounds like you're talking about luxury still for Palisene.

Does that mean that the luxury are favoring the later opening of Palisene for City North?

Absolutely.

The luxury tenants which again are exclusively with us at our properties and Phoenix today exclusively with West Core (inaudible) all agree with our timing in terms of when we believe their next stores should be brought on the line, and that's really in the time frame of 2011 and 2012.

Many of these luxury tenants are either opening their first store in the market or going under very major expansions as we are doing with several tenants like Tiffany and others at Scottsdale Fashion Square geared toward openings that are happening next year and in 2009.

So the idea of opening a second store, for example, at the same time as they're opening up a brand-new flagship really is not what a luxury tenant would want to pursue, and all of the luxury tenants that we're talking to agree with our strategy and are extremely appreciative of the fact that we are not attempting to bring any product to market before its it's time.

Okay.

And then last question, if you could just provide an update on Santa Monica Place specifically leasing?

Sure.

Tony, do you mind addressing that, please?

We've had tremendous demand for Santa Monica Place.

And particularly the luxury segment.

It's our vision there to create a luxury experience on the west side as there is a tremendous amount of high-end resident, a high disposable income day-time population as well as a very, very profitable touristic component, and there's a large segment of retailers that recognize that market and are looking to position themselves in Santa Monica Place.

We have the Third Street Promenade that's skewed to a younger customer.

This is not us.

So we'll be merchandising the lower level of Santa Monica Place with luxury, the second level with bridge contemporary embedder and the third level will be a spectacular food component.

Excellent.

Thanks, guys.

Thank you.

(OPERATORS INSTRUCTIONS) We'll go next to David Harris of Lehman Brothers.

Hi, all.

How are you.

Hi, David.

Excuse me if you've covered this.

It's been a long day with a lot of calls, and I'm getting old and tired.

But did you reference share buy backs or your corporate view on buy backs and your five-point strategy you talked about at the beginning of your prepared remarks?

No, but actually I'm happy to talk about that.

We specifically do not have a share buyback program in place and we did think about it long and hard in August and came to the conclusion that we were far better served to keep our balance sheet as available and our powder as dry as possible for opportunities that we felt would and will become available to us, especially in these times where liquidity is coming at a premium, and we're very glad that we made that decision.

If the stocks were to trade off substantially, how quickly could you agree with your board in putting in place a program?

In a heart beet.

Secondly, again, excuse me if I missed this, but we're obviously concerned about the weakening in the economic environment and the potential inconsequences on that on the consumer.

I mean, is your leasing guy there?

Could he address a little bit more fully what he's seeing in terms of the lease environment?

Is anybody pull back from making commitments now that you would have felt comfortable with making those commitments, say, three, six months ago?

Reflecting on ICSC it was 1 point in 10 of caution, but it was really hardly diminished from many a year that had been previously, and there seems to be a significant deterioration in people's perception on the macro outlook today as we sit here even compared to three or four months ago.

That's a good question.

Our retail customer base, the national retailer, they're growing.

They are projecting growth for their organizations in line with the past and that growth, in terms of number of units opening next year, at least from what we see is about the same.

So we don't see a pullback.

They could have concerns over this year.

They're managing those concerns.

I think they'll hit their numbers.

They'll do what they have to do to promote for the balance of the year to make sure that that happens.

One season does not make the future for a lot of retailers.

So I do not expect that one season, whether it's good or bad, that would change their outlook in terms of the number of store commitments into '08 or '09.

And the way these things pan out, I guess you guys were tested through the last consumer recession in '90, '91 which obviously has put a lot of years on the clock, but we really have to go back that far.

Do we need one weak season and people will readdress the property requirements after that, or do we need a couple?

I mean, what's your sense as to how it plays out on a sort of gloomy scenario here?

Well, David, I'll go back to the early years because it predated Tony's time here, but we did take a look at our performance from '90 through '95, and the retailers didn't really slow down in terms of new openings.

Their sales plateaued during that period of time.

California had a much less diversified economy then, and there was some significant job loss during that period but, nonetheless, the retailers continued do sign new leases.

In fact, during that period of time, our same-center NOI growth was 3.7% compounded annually from '90 through '95.

That was partly because of the structure.

These are 10-year deals with national credit tenants, but they also continue to do deals, because they know if they shut off basically their development pipeline, if they shut it off because they're down a quarter or two, it takes a long time to get caught up.

Okay.

David, also on a more macro basis, the retailers are a very different animal today versus the '90s.

Their debt level is different, their cash flow is different, their margins are different.

They have experienced tremendous amount of cost deflation.

They've gone from a margin in the low 40s to the mid 50s.

So the different beat to that to withstand more negative pressures if they come to bear.

Yes.

Okay.

All right.

Thanks, guys.

Thanks, David.

And we'll go next to Rich Moore RBC Capital Markets.

Hi.

Good morning, guys.

Just to follow up on David's question for a second, any retailer concerns maybe on a regional basis, either hard-hit housing markets or maybe smaller markets or anything you've seen at all that might indicate concern on the retailers' part?.

The only one that we see on our radar screen is one that filed for bankruptcy and that's Bombay.

We have 10 stores in our portfolio, including the one that we manage, 11, and it is a retailer that generally produces about $250 a square foot.

When you layer that into the mall they're in, they're in pretty good malls.

The malls they're in average about $520 per square foot.

If we get this space back in these high-performing malls, we are very confident that we can re-lease those spaces, and I think they come off of rent in the $38 range and based on our $44 number that we reported, there's a considerable spread.

I guess you can point -- you can make an inference that Bombay is in furniture and furniture is tied to housing.

I think the fundamentals for Bombay extend beyond the downturn in the housing market.

I think they've had a tough three years in trying to find themselves and coming to a head now.

Really what I hear you saying, Tony, is no change in the retailer over the past few months for the most part?

There's no retailer we can see on a national basis other than Bombay that that's keeping me up at night.

Okay.

That sounds good.

Now, on land sale gains, I know you guys aren't giving any guidance or anything, but seems like with all the development you're doing there ought to be a lot of potential for land sale gaines.

Is there any reason for us to expect that over the next several years you won't average the kind of big land sale gains you've had before or the kind of average you've had, Tom?

Again, Rick, it's tough to predict.

Obviously it's ramped up the last couple of years.

We do a lot of development in the pipeline.

But timing is always the issue on those.

So keep in mind they're lumpy and less subject to being predicted than most of the other aspects of our revenue cycle.

Okay.

But the inventory is pretty high, I would say, right?

It is, but I want to -- Rich, I'd like to address that, and that is that one of the reasons that -- the inventory is very high, but the question is how do we tap into that inventory?

And given the fact that our preference is to retain ownership of the land and to, for example, do the peripheral out lots through ground leases as opposed to land sales, then we end up with a recurring income stream instead of a lumpy one off land sale out lot pad income stream, which we feel serves us better.

Okay.

Very good.

Thank you, Art, and then it sounded like you're in this opportunistic bucket, you're going to start targeting just outright land ownership in addition.

It seems to me is that new as opposed to using options for the land, or is that just more of what you've done before, we just haven't really paid attention to it?

It's in complement to, but I would say that we're going to keep a very keen focus on the land opportunities in Arizona, probably more so than we have -- we've always had a strong focus there, but I think we're going to be more inclined to potentially pull the trigger on investing in some major land parcels in Arizona over the next two years given the weakness that is being experienced, in terms of values and prices and, therefore, the opportunities that can be created.

On the other hand, we have bought the land in Marana, northwest of Tucson, which we invested a little over 30 million in last year, I believe, as well as the land at North Black Canyon, again, which I think we invested around 17 million into last year.

I think those are the right numbers, but they're close enough.

Okay.

So the new stuff, Art, is more over the long term view, is that right?

Yes.

But I wouldn't -- and I appreciate your bringing it up, because don't be surprised if we do something very significant on the land front.

Okay.

Very good.

And then the last thing I had is the percentage of CPI leases, has that changed much, Tom, or over the past quarter or two?

Well, Rich we keep pushing it up.

I think we're at about 60% now of leases that contain CPI increases rather than straight-line rents.

I would say today 95% of those new leases we get signed have CPI increases rather than fixed bumps, and we're rolling 8 to 10% of our space per year.

So, it's a slow process, but the direction has clearly been we want CPIs in these leases, not fixed bumps.

So I would expect it will continue to gradually have that straight-lining rent number diminish and at the same time the amount of contribution from CPI increases should be going the other way.

Okay.

Great.

Thanks, guys.

Thanks, rich.

And at this time I would like to turn things back over to Art for closing remarks.

Thank you.

Okay.

Thank you very much for joining us.

We look forward to seeing you either at our investor day in Phoenix right before NAREIT.

Again you can be in touch with Suzanne on the details you may not enter on that, and other than that, we look forward to seeing you at the upcoming NAREIT conference in a couple of weeks.

So thank you for joining us and we'll see you again soon.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

You may disconnect at this time.