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Operator
Good afternoon, ladies and gentlemen.
Thank you for standing by.
Welcome to the Macerich Company fourth quarter 2008 earnings conference call.
Today's call is being recorded.
At this time, all participants are in a listen-only mode.
Following the presentation we will conduct a question and answer session.
Instructions will be provided at that time for you to queue up for questions.
I would like to remind everyone that this conference is being recorded.
I'd now like to turn the conference over to Jean Wood, Vice President of Investor Relations.
Please go ahead.
Jean Wood - VP IR
Thank you, everyone, for joining us today on our fourth quarter 2008 earnings call.
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 filing.
As this call will be webcast for some time to come, we believe it is important to note that the passage of time can render information stale and you should not rely on the continued accuracy of this material.
During this call we will discuss certain non-GAAP financial measures as defined by the SEC's 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 the supplemental 8(K) filings for the quarter,which are posted in the investor section of the Company's website at www.macerich.com.
Joining us today are Art Coppola, CEO and Chairman of the Board of Directors, Ed Coppola, President, Tony Grossi, Senior Executive VP and Chief Operating Officer, and Tom O'Hern, Senior Executive VP and Chief Financial Officer.
With that I would like to turn the call over to Tom.
Tom O'Hern - Sr EVP & CFO
Thanks, Jean Today we will be discussing fourth quarter results and full year results, recent financing activity, our plan for 2009, 2010 as it relates to financing, as well as our outlook for earnings in 2009 and the reduction in our development pipeline.
The operating metrics generally remained solid in the fourth quarter with continued high occupancy levels and strong re-leasing spreads.
We did see a decline in mall sales per square foot.
For the past 12 months ended December 31, 2008 sales were down 5.9% to 441 per foot.
We did see good re-leasing activity.
We signed 231,000 square feet of leases during the quarter and the re-leasing spreads continue to be strong with a 23% positive spread, the new rent versus the expiring rent, and for the full year 2008 that positive spread was 24%.
Taking a look now at sales and spreads by region.
The central region declined 1.2% in sales, but had a strong 23.4% re-leasing spread.
The eastern region declined 2.4%, but had a very strong 41.4% positive re-leasing spread.
The northern California Pacific northwest region declined 5.3% and had re-leasing spreads of 14% positive.
Southern California had a decline of 5.8% in terms of sales and re-leasing spreads of 20.1%.
Arizona had sales declines of 15%, but continued to have very strong re-leasing spreads of 25% positive.
Occupancy levels remained high, albeit down from last year and with mall occupancy at 92.3% down about 80 basis points versus 93.1% a year ago.
Overall occupancy, including non-mall properties, was 92.3% down from 93.5%.
Most of the reduction in the non-mall properties was related to big box spaces with Linens N Things accounting for about 40 basis points of the decline, CompUSA accounting for about 20 basis points of the decline.
Neither one of those tenants are very big rent payers, with Linens N Things having an average rent of about $12 a foot, CompUSA having an average rent of about $11 a foot, both well below the Macerich average of $41 a foot.
The average rent went up 8% to 41.68 -- excuse me, $41.68, compared to $38.58 a year ago.
Looking now at FFO.
FFO per diluted share was $2.08 for the quarter compared to $1.45 for the quarter ended December 31, 2007.
Consensus was $1.92 and our guidance was $1.94, with the primary difference being on the last call when we raised guidance we factored in about $55 million of gain on early extinguishment of debt.
We continued to buyback our debt in late December and we retired an additional, an additional $80 million or so of convertible debt at a $40 million gain.
Offsetting the additional gain was about $8.6 million of write-offs on projects, predevelopment projects that we are no longer pursuing and also an impairment charge of about $19 million on land held for future development.
Same store, same center NOI for the quarter, excluding termination revenue and SFAS 141, was down about 2.5% compared to the fourth quarter of last year.
The negative comparison was mainly driven by a $7.3 million decline in fourth quarter percentage rent and a $2 million increase in bad debt expense.
That combined with the occupancy decline previously discussed drove the negative same center comparison.
Year-to-date same center NOI was up 1.4%.
Lease termination revenue, including JVs at pro rata, was $3.6 million up from $1.2 million in the fourth quarter of last year.
The expense recovery rate, including JVs, for the quarter was down to 83% compared to 92% in the fourth quarter of last year.
This reduction was due primarily to high nonrecoverable expenses, including bad debt expense and legal fees related to the Mervyns bankruptcy.
If we take a look at recoveries as a percentage of just recoverable expenses, they came in at 98.4% and that compared to 99.7% a year ago.
CPI rent increases were $1.7 million higher than in the fourth quarter of last year.
Straight-line rents during the quarter were down $3.7 million to $0.9 million compared to $4.6 million in the fourth quarter of last year.
SFAS 141 income was up $13 million from $4 million -- excuse me, was at $13 million, up from $4 million in the fourth quarter of last year.
Both the decline in straight-lining of rents and the increase in SFAS 141 were largely driven by the Mervyns transaction.
Gain on sale of undepreciated assets during the quarter was $1.7 million.
That was down from the $10 million gain recorded in the fourth quarter of last year.
Now taking a look at the balance sheet, we continue to have a significant amount of financing activity.
Our average interest rate is 5.19% and our average rate on fixed rate debt is 5.95%.
The interest coverage ratio for the quarter was a healthy 2.11 times.
At quarter end we had a total $7.9 billion of debt outstanding, including JVs at pro rata.
We have over $400 million of capacity on our line of credit today, plus over $150 million of cash on the balance sheet.
During 2008 we financed 13 projects with our pro rata share of the loan proceeds being $1.3 billion.
In the fourth quarter we were able to take advantage of market conditions and retire $220 million of our convertible notes at a cost of $127 million.
That was a 45% discount to the face amount and we recorded a $95 million gain on early extinguishment of debt.
It was a very effective step in reducing our overall leverage.
Included in today's 8(K) supplement on page 14 and 15 are schedules that show our 2009 and 2010 financing plans.
We've already made great progress on the 2009 maturities with over $289 million of new loans done already and those generated in excess of $100 million in excess loan proceeds.
In addition we've obtained a commitment for a $62 million loan on our Redmond Town Center office buildings.
If you take a look at page 14, which shows the 2009 maturities, excluding the deals that are already done or have been extended or have extension options, we have $406 million remaining.
And if you look down that list there's some of our top performing assets, such as Biltmore Fashion Park, Paradise Valley Mall, Northridge Center, and the Village at Corte Madera in the San Francisco Bay area.
These centers with loan maturities in 2009 are top quality assets and they average over $565 per square foot in annual sales.
Those assets are also lightly leveraged with average maturing loans at under 40% loan to value.
The financing plan we have here for 2009 shows us generating in excess of $300 million of excess proceeds.
And this is our best estimate today based on what we are seeing in the market and we are very, very active in the market with daily conversations taking place with banks and life companies.
If you take a look now at the 2010 maturities, which show up in the supplement on page 15, excluding the loans with extension options we have $766 million in maturities.
These are nine property specific loans, none of which are over $78 million.
And if we look at the financing expectation for those, we expect to generate over $373 million of excess proceeds.
Also maturing in 2010 is a $450 million term note.
It's difficult to determine the bank capacity for an unsecured REIT loan in 2010, so we are assuming that it will need to be reduced.
We have assumed a $100 million reduction in that loan at refinance.
We expect that there will be ample cash generated from the other financings in 2009 and 2010 to accommodate that reduction or even a complete repayment.
In addition, we do expect other liquidity events to occur in the next two years, which will allow us to deliver and potentially pay the term notes off early.
In summary we continue to make good strides on our balance sheet.
We've had a very busy and successful year in the financing front in 2008 and we expect that to continue this year.
We are fortunate we have many long-term relationships with our bank group and many life companies and pension funds whom we've been doing business with for many years.
Shifting now to earnings' guidance for '09, we put it in our press release this morning, our guidance range is $4.50 to $4.75 per share.
The main assumptions included in that guidance are same center NOI growth of 0.5% to 1%.
Breaking that down into the key components, it is driven by strong re-leasing spreads in '08 and the expectation for strong re-leasing spreads in '09, as well as our built in CPI increases on about 60% of our leases.
This is offset in our forecast by a decrease in occupancy, which we are expecting to reach 91% as of year-end 2009.
So we are forecasting throughout the year to drop from 92.3% to 91% by year-end.
We have assumed that the empty Mervyns locations that were not leased by Forever 21 or Kohl's will remain vacant all year and cost us about $0.25 per share.
That is a combination of lost minimum rent, as well as common area expenses and tax expenses that we are going to need to pick up, as well as some primary leases to landlords.
We have assumed no lease up or sale of those stores during 2009.
That's a conservative assumption and we certainly hope we can do better than that.
We have assumed two major noncash items in our guidance.
First we forecast noncash interest expense for the new accounting rules on convertible debt to increase our interest expense by about $25 million and then offsetting that to some extent we've assumed net gains from early retirement of debt in 2009 of $20 million.
So again, those are two noncash items that do hit FFO and would have a negative impact of about $5 million based on our forecasts.
We have not assumed any asset dispositions or new joint ventures on existing assets in our guidance.
To the extent those liquidity events happen, we will modify guidance accordingly.
At this point I would like to turn it over to Art.
Art Coppola - CEO & Chairman
Thank you, Tom, and welcome to the call.
We are obviously facing a very challenging retail environment and in particular a tough fourth quarter, as Tom had indicated.
In spite of that though, as Tom outlined, we had extremely good operating results for 2008.
As Tom pointed out, our re-leasing spreads in 2008 were very strong at 24% and as we look to 2009 we are currently projecting continued double-digit increases in leasing spreads based upon early indications of our re-leasing and we have got a significant amount of the portfolio already re-leased in 2009.
As we looked at sales and occupancy trends, in particular luxury has been hit hard and that shows up in terms of the sales impact that has happened in particular in Arizona with the presence of Biltmore and Scottsdale Fashions were occupying a big piece of our Phoenix portfolio and with the luxury component that these two centers have, they both were hit hard in the fourth quarter, particular you take a look at luxury retailers such as Neiman Marcus and in particular you can see that they were hit hard.
But in spite of that, rent spreads for us in Arizona during 2008 remain strong at 25%.
So our Arizona portfolio, while it has been hit by tourism on the one side, tourism decreases, as well as luxury being hit hard in particular, rent and occupancy levels have performed in balance basically with the rest of the portfolio.
As Tom mentioned, Mervyns is a big piece of our 2009 guidance.
We were very pleased to have the opportunity to recycle 22 of our Mervyns stores in the fourth quarter of last year to Kohl's and to Forever 21.
Kohl's took ten locations, Forever 21 took 12 locations.
We had originally forecast in our last conference call that we had anticipated that we would be able to recycle roughly two-thirds of our locations and in particular we had in mind that these would go to Kohl's and Forever 21 and Kohl's and Forever 21 scaled back their appetite in general a little bit, so we ended up recycling half of the locations to Kohl's and Forever 21.
We are pleased with that.
We've got work to do on the balance of the Mervyns locations.
There are a number of retailers that we are looking at, including the possibility of Kohl's and Forever 21 taking additional locations to lease up the balance of the space.
That will be a challenge for 2009.
We do not have any income assumed in our 2009 numbers there.
But there is activity that is taking place and there will be upside as we are able to merchandise those locations.
As we look to our development pipeline, we have scaled back significantly on our development pipeline so that we are only pursuing developments at this point in time that are mission critical to us.
In 2009 we have remaining to spend $94 million of projects to be placed into service in 2009 and another $250 million approximately to be placed into service in 2010.
Our ground up projects in Arizona have been deferred at this point in time and moved out of our previous opening date of late 2010, in particular Estrella Falls has moved out of the 2010 opening date and currently is under review as we are thinking about remerchandising, adding an additional anchor to that center and thinking about the new opening date, but currently it has been moved out past 2010.
We are looking at 2011, 2012, basically, as market and financing conditions dictate.
We had very strong re-leasing -- new leasing activity in that center, but in today's capital environments and just overall environments we felt it prudent to move that development out.
Looking at the developments that are going to be coming online, they are all infill and great centers.
The majority of the spend is located in Santa Monica Place, Scottsdale Fashion Square and the Oaks.
Santa Monica Place, you will notice on our 8(K) that we've moved the grand opening and placing of service of Santa Monica Place from late 2009 into 2010.
We had indicated and given you a heads up on that in the last conference call that due to Macy's making a decision to convert their store from a Macy's to a Bloomingdale's SoHo concept, which means that they would be closing down by the end of this year and recycling that store and reopening it in the late spring to mid-part of next year, that we have determined to delay the opening of the mall itself to coincide with the opening of the Bloomingdale's SoHo, as well as a Nordstrom.
Nordstrom is scheduled to open up in August of next year.
So that was a big move in terms of the -- of coinciding our opening with the anchors at Santa Monica place.
At the Oaks we are in the process.
We opened up the first major phase of that expansion, a very successful opening for Nordstrom in November of 2008.
And the second phase of that expansion will be opening up here later on in the first quarter, as Muvico Theater is scheduled to open it's first West Coast location as the entertainment anchor of the 130,000 square foot lifestyle expansion of the Oaks.
Finally, at Scottsdale Fashion Square, the other major project that we have underway, that continues on schedule towards a fall 2009 opening.
This is anchored by a 60,000 foot Barneys New York, which is an Arizona exclusive.
Today we announced that new fashion retailers Ed Hardy, French luxury retailer, homewear retailer Arthur, Forever 21 will join previously announced True Religion, restaurants Marcella and Modern Steak in the new wing.
Recent additions to the center's interior merchandise mix include Cartier and Bvlgari.
Scottsdale Fashion Square's expansion is coming along online and will open up in fall of this year.
As Tom mentioned, now looking at liquidity events from a financing viewpoint, we had a very good year in terms of the recycling of the properties that we had in terms of property financings for 2008.
We are off to a very good start for 2009, as we look at what's left to be financed in 2009.
These are very, very strong centers that we have currently negotiations well underway on.
And then we look at the two major properties that are coming up in 2010, great centers with Santa Monica Place, as well as Vintage Faire up in Modesto, each of which we anticipate will be very strong refinancing candidates.
Looking at acquisitions and dispositions, we are obviously not in the acquisition market at this point in time.
And we are looking at a number of different disposition opportunities.
We've been approached by a number of our existing partners, as well as new potential partners that have shown interest in pursuing new joint ventures with us.
Between non-core dispositions and potential new joint ventures over the next 12 months, we expect that we could easily generate in excess of $500 million of new proceeds from these two potential sources.
And we think that this is a great source of equity capital for us to deleverage, since this equity would be coming in at roughly 12 to 15 times cash flow, when at the present time we are trading at just over three times FFO.
So in summary, we are very pleased with our operating results for '08.
We are looking forward to '09.
Again, our re-leasing activity and our refinancing activity is already well underway in 2009.
And at this point in time I would like to open it up for questions.
Thank you.
Operator
(Operator Instructions).
We will go first to Michael Mueller with JPMorgan.
Art Coppola - CEO & Chairman
Hi, Michael.
Michael Mueller - Analyst
Hi.
A couple things here, first of all the $20 million gain on debt extinguishment that's in guidance.
I'm assuming that relates to the converts.
Is that correct?
Tom O'Hern - Sr EVP & CFO
Yes, it does, Michael.
Michael Mueller - Analyst
And that's done already?
Tom O'Hern - Sr EVP & CFO
No, no, but we are in constant contact with the holders and it's something we feel is very achievable.
Michael Mueller - Analyst
Okay.
Secondly, I guess on the prior call the guidance for the Mervyns hit was about $0.10, now it's $0.25.
Is there anything else that's in there, because you mentioned had you two-thirds of the locations lease before.
Now that's down to about a half.
So it's -- am I looking at that correctly where is the $0.15 difference on that extra portion of boxes coming off.
Tom O'Hern - Sr EVP & CFO
It's a combination of that.
It's a combination of that and then picking up the extra operating expenses on the vacant stores that we are not receiving, as well as third party rent expenses on the vacant stores that we are currently paying out and then factoring in the final rent that was received from Kohl's and Forever 21 on the new leases.
So it's a combination of all three of those.
Michael Mueller - Analyst
Okay.
Can you give us some sort of sense as to how much NOI -- what the NOI trend has been, for example, for Q3, how much of it was booked, how much of the drop off we saw in Q4 and how much subsequent drop off there will be in Q1 going forward to get to that $0.25.
Tom O'Hern - Sr EVP & CFO
Mervyns was in place through year-end.
Those leases were rejected, I believe, at the very end of December.
So Mervyns was in place and paying rent in all locations through year-end.
So really the drop off starts 1/1/09.
Michael Mueller - Analyst
Okay and that's about 20 -- .
Tom O'Hern - Sr EVP & CFO
That $0.25 cents would be ratable through the year.
Michael Mueller - Analyst
Okay, so that's $22 million of NOI that comes out effectively.
Tom O'Hern - Sr EVP & CFO
Right.
And again, that assumes that we do nothing with those locations.
So if my colleague here to my left, Tony Grossi, and his group does their job we will do better than that.
Michael Mueller - Analyst
You brought up Tony, can you provide any color -- you talked about the Q4 leasing spreads being 23%.
What are you seeing in early '09?
Tony Grossi - Sr EVP & COO
For our portfolio we are over 70% committed on the leasing we have to do in '09.
And what we are seeing, we are seeing good spread.
We are seeing a little bit of softening over the 24% we see this year, but if I was to peg the range for the balance of the year, it will be between 18% and 20%.
Michael Mueller - Analyst
Okay.
Last question, Tom, what's the game plan.
You've seen proceeds, the excess proceed expectation come in some, what if that comes in materially more for 2009, 2010, what's the game plan if you don't want to run up the credit line balance?
Tom O'Hern - Sr EVP & CFO
These are based on some pretty conservative assumptions, Mike.
One reason they came in is we decided to take a bird in hand in December when we had a chance to refinance Queens, albeit for less than we thought we could have gotten.
We decided not to wait and we took a $130 million loan when we thought we probably could have perhaps done more like $160 million or $170 million had we waited, but we were conservative.
We took the loan that was in hand and that moved our numbers down a little bit.
We think these are pretty conservative assumptions and we've got no, no reason to think there's going to be major changes.
Obviously, we are in the market daily and quarter by quarter we are going to make some adjustments.
We may pull some loans off, we may put some on, but as you can see there's more than ample liquidity there to not only take out the maturing debts, but also fund the development pipeline.
But as Art said, we are exploring other liquidity events and they could happen, although we're not, at this point, going to count on them and put them in our financing plan.
But to the extent they do and we find ourself with excess liquidity from an asset sale or a joint venture, then we are going to be using that to de-lever and pay down more of this debt.
Michael Mueller - Analyst
Okay.
And last question, on the Mervyns boxes is there a goal or a target of which you think you could reasonably re-lease by the time you get to 2010?
Tony Grossi - Sr EVP & COO
Michael, it's Tony here, we are looking at an additional four to six boxes being dealt with in '09.
But given the lead time of big boxes, we can transact this year, but any impact to NOI will be realized in 2010.
Michael Mueller - Analyst
Okay, thank you.
Art Coppola - CEO & Chairman
Thanks.
Operator
And we will go next to Jeff Spector with UBS.
Jeff Spector - Analyst
Good afternoon, guys.
Tom O'Hern - Sr EVP & CFO
Hi, Jeff.
Jeff Spector - Analyst
Art, you talked about luxury and clearly luxury is struggling.
I guess, can you answer the question, is luxury dead for the foreseeable future?
Art Coppola - CEO & Chairman
I wouldn't say that.
I think it's very cyclical and in particular the last six months luxury has been hit hard, but that's still a relatively thin market.
Luxury is as cyclical as any other form of retail and in particular it got hit hard in the fourth quarter.
Neiman Marcus is a very good litmus test for how luxury is doing and they got hit hard, as well as all of the other luxury retailers that had been standing up, quite frankly, very well all the way through the middle part of 2008.
But towards the third quarter of '08 and then in particular in the fourth quarter of '08, luxury got hit hard.
Tony Grossi - Sr EVP & COO
Just to add to that, Jeff, on the luxury side of things, first of all you are dealing with fairly healthy margins, perhaps the healthiest in the business, so the decline in sales you'd have to really look at the margin picture to see the decline in EBITDA.
But we are talking to a lot of our luxury clients right now and they are going through what they call a transitional period to deal with the realities in the marketplace that the consumer wants lower priced goods.
So their entry level pricing most likely would be much lower during this transitional period.
Jeff Spector - Analyst
Thanks.
And then just talking about the recession cycle indicators are signaling a deep recession here and can you just talk about, I guess, you're budgeting and planning and what you're thinking about here for a rebound or expecting a rebound?
Tom O'Hern - Sr EVP & CFO
It's hard to predict that.
There's economists all over the world trying to do the very same thing.
One thing we do when we go through and do our guidance, it's based on our detailed budget for 2009 and we look at every tenant space by space and take a conservative view of what we think they are going to do in terms of sales, what's going to happen with occupancy, and I think we've tried to factor in that into our own thinking as we put together our forecast for 2009.
And as I mentioned before, we are assuming a reduction in occupancy the likes of which we have never seen, Jeff, I mean even going back to the late 80s, early 90s, we never saw 130 basis point drop in occupancy in any one year.
So we are assuming it's going to continue to be a pretty tough year and we've considered that in both the occupancy levels as well as tenant sales expectations for purposes of estimating percentage rent.
Jeff Spector - Analyst
So in your leasing strategy I guess are you preparing that this could -- this will continue into 2010?
Tony Grossi - Sr EVP & COO
It's Tony here.
We forecast two years out.
And in our 2009 mindset from a qualitative perspective, the marching orders are re-new and retain.
We are not doing anything dramatic with respect to merchandising or maximizing retention.
We are keeping leases on a short-term basis.
If we don't feel the rate or the tenant is not proper for the space or the shopping center, we are saving our opportunities for the future and the future will start after 2009 at some point.
And whenever you do any kind of planning you hope for the best.
And 2009 could -- 2009 is what it is on a conservative re-lease and retain mindset, 2010 we hope to get to some of our remerchandising goals and create a more dramatic growth.
But that will be reviewed later this year as we get a clearer picture of 2010.
Jeff Spector - Analyst
Thank you.
Operator
Next we will go to Jay Habermann with Goldman Sachs.
Art Coppola - CEO & Chairman
Hi, Jay.
Jay Habermann - Analyst
Hi, Art, how are you?
I just want to start off with the comments you made, Art, with regard to JV partners and looking at some asset sales and I know it's something you're considering down the road, but you mentioned, I think, 12, 13 times cash flow, which would indicate maybe 8% cap rates and I'm just trying to get a sense of maybe the types of centers you would consider whether sales per square foot, Class A, Class B, or occupancy and looking at geography.
Art Coppola - CEO & Chairman
I believe I said 12 to 15 times cash flow.
So that would be sub-eights.
We are looking at some non-core dispositions, some strip centers.
We are looking at selling off some single asset net leases, some of the Kohl stores that are in free-standing locations, of which there's still a very good 1031 market for that type of thing.
When you add into that the level of interest that we've got from both our existing as well as new partners to come in and do some joint ventures on some of our core assets, then it's very conceivable that we would be generating new proceeds over the next 12 months of roughly $500 million give or take from all of those sources.
Jay Habermann - Analyst
And as well, just following on the logic of capital, have you given any thought to the dividend change, the stock versus cash.
Art Coppola - CEO & Chairman
Yes, dividend is something that we look at quarterly, obviously, in -- as far as stock dividends at this point in time, stock dividends would be very dilutive and a very expensive source of equity, liquidity for us at three times FFO and we think that there's a number of different ways to raise equity.
That's one way and another way is to sell some of our core as well as to bring in some joint venture partners into some of our core assets and we think that is, at this point in time, is a very attractive thing for us to be pursuing.
Jay Habermann - Analyst
And then also a question for Tom.
Was specifically on the debt refinancing, what rate are you assuming, I guess, as you build your '09 guidance?
Tom O'Hern - Sr EVP & CFO
The rates we've seen in the last 30 days, Jay, have typically had a floor in there on long-term fixed rate deals of seven.
So we really factor in the 7.5 interest rate on anything that we are assuming on a long-term basis.
Any short-term transactions are going to be LIBOR plus something on the neighborhood of 300 to 350.
Jay Habermann - Analyst
And the expense recovery, are you expecting that to rebound a bit with the, I guess, the occupancy on Mervyns really doesn't pick up until 2010.
Tom O'Hern - Sr EVP & CFO
It will be hard a little bit there.
We had a high level of nonrecoverable expenses in the fourth quarter that I don't expect to be recurring and so I think we would see it trend back more towards historical level, maybe off 100 basis points but not much more than that.
Jay Habermann - Analyst
Okay.
Thank you.
Art Coppola - CEO & Chairman
Thanks.
Operator
And next we will go to Craig Schmidt with Banc of America.
Tom O'Hern - Sr EVP & CFO
Hi, Craig.
Craig Schmidt - Analyst
Hi, thanks.
On the FASB 141, would '07 be a better run rate than the numbers that were generated in '08?
Tom O'Hern - Sr EVP & CFO
Yes.
You saw a big fluctuation.
There again, part of that was Mervyns and also the decline in straight-lining of rent was also Mervyns.
So they went opposite directions but those big changes were as a result of Mervyns.
So a better rate would be what we saw for 2007 on both straight-lining and 141.
Craig Schmidt - Analyst
And if Tony was active this year, would that number possibly go up from that lower rate then?
Tom O'Hern - Sr EVP & CFO
That's hard to say.
It depends on which transactions, how much straight-lining rent was in there but that could go up a little bit.
141 could go up a little bit.
Craig Schmidt - Analyst
Okay, and then on the page 16 on the development page, I'm looking at the difference between pro rata, total project cost and the pro rata spent to date and I'm getting about $511 million.
But when I look at the bottom-line on the report and I add the 94 with the 247 million I'm getting 341.
I'm just wondering what that difference is.
If it's maybe money spent in 2011 and I guess that's surprising just given that most of these projects look like they are going to be done in 2010.
Tom O'Hern - Sr EVP & CFO
I think some of the money was spent in 2008, Craig.
Craig Schmidt - Analyst
Wouldn't that show up in the pro rata spent to date then.
Tom O'Hern - Sr EVP & CFO
It probably would, it probably would.
I will have to circle back with you on that one, Craig.
So you are saying when you do your calculation of the pro rata cost you are not tying out to the.
Craig Schmidt - Analyst
Out lying years.
Tom O'Hern - Sr EVP & CFO
Outlying years.
Craig Schmidt - Analyst
I'm curious what that number is if it's five, ten, or say more like 340.
Tom O'Hern - Sr EVP & CFO
I mean on the surface it looks like it's about right there.
I mean the total there of the two projects is about 580 compared to the estimated total project cost of 757.
So it's -- and some of those are 50/50 JVs.
I will have to get back to you on the exact.
Craig Schmidt - Analyst
Okay, thanks.
Operator
And next we will go to Vincent Chao with Deutsche Bank.
Vincent Chao - Analyst
Yes, sticking with the development pipeline, can you guys just remind us what kind of yield you are expecting on the remaining projects and how that may have changed given the current circumstances, sort of where we are at with the lease-up of the projects.
I know you've given specific companies, but just maybe on the square footage basis or occupancy percent.
Art Coppola - CEO & Chairman
Are you talking about returns on investment?
Vincent Chao - Analyst
Yes.
Art Coppola - CEO & Chairman
On Santa Monica Place, on the new investment, we are looking at an incremental return there of just over 9%.
Vincent Chao Okay.
Art Coppola - CEO & Chairman
And on the Scottsdale Fashion Square as well as The Oaks and the others, generally in the 6% to 9% range.
Vincent Chao - Analyst
Okay.
Tom O'Hern - Sr EVP & CFO
Craig, Tom O'Hern getting back to you.
Again, I think the difference in the way you're looking at this, Craig, is on The Oaks and we placed 170 million of The Oaks in service in 2008.
So that's not on the schedule and I think that's what's causing the difference in your calculation .
Craig Schmidt - Analyst
That was all I had.
Jean Wood - VP IR
Vincent Chao.
Vincent Chao - Analyst
And just on sort of the lease up of the projects and can you give us a sense of on a percentage basis where we are at?
Tony Grossi - Sr EVP & COO
Sure, at The Oaks we've opened it in phases.
We opened our Nordstrom phase and the Lifestyle phase.
The Muvico is opening in a weeks time and the project is over 85% leased at this point.
Scottsdale Fashion we are 80% committed in the expansion and Santa Monica Place is coming on nicely and it is also 80% committed.
Vincent Chao - Analyst
Okay.
Thank you.
Operator
Next we will go to Ben Yang with Green Street Advisors.
Ben Yang - Analyst
Hi, good morning.
Just going back to the financing plans.
I know, Tom, you mentioned the bird in the hand argument for getting the lower proceeds at Queens Center, but it's also the case that you reduced your outlook for nearly all your '09 and '10 mortgage financings.
Can you comment on what changed?
You threw out a 7.5% cap rate earlier in the call.
Were you assuming something lower or are you assuming lower LTVs at this point, just trying to -- .
Tom O'Hern - Sr EVP & CFO
No, I didn't throw out a 7.5% cap rate.
I think that was a 7.5% interest rate.
Ben Yang - Analyst
I'm sorry, but can you tell us what you are seeing differently this time around?
Tom O'Hern - Sr EVP & CFO
Well, I think clearly in the last 90 days the life company underwriting and bank underwriting has gotten more conservative.
We are just staying current with where their underwriting is.
I think pound for pound we have probably been the most active in the market.
Certainly in '08 was that way and we are really in the midst of underwriting six or seven deals right now.
So we are fairly current on how they are looking at things and underwriting.
And without a lot of trades out there it's tough for these guys to peg a value.
So they are going to err on the conservative side.
Ben Yang - Analyst
How are those life companies underwriting today.
Tom O'Hern - Sr EVP & CFO
They are looking at coverage.
They are looking at coverage.
They are looking at the quality of the asset.
I think they are doing their -- taking their best estimate of what a value is.
They are getting appraisals, but that's pretty tough to do when there's not a lot of comps, but they are getting appraisals and coming up with a value.
It's a combination of healthy coverage and something on the neighborhood of a 50% or 55% LTV based on their conservative underwriting.
Ben Yang - Analyst
Okay, thanks.
And then, Art, you comment that you're expecting a 9% incremental return on Santa Monica Place, but in the past I believe the number you guys have thrown out there was more in the 8% range.
Are you defining it differently this time around?
Art Coppola - CEO & Chairman
No, Santa Monica has always been in the 9% range.
I think I may have in the past talked about new developments being 8% to 10%, but Santa Monica, in particular, has always been just north of nine.
Ben Yang - Analyst
And that number hasn't changed given the fact that you've essentially delayed the project for six to eight months and it sound like lease-up is slower than you might have expected?
Art Coppola - CEO & Chairman
No, no.
Tony Grossi - Sr EVP & COO
The lease-up is not slower.
The delay in opening is really to coincide with the Bloomingdale's opportunity with the Nordstrom opening and the small shop opening.
Art Coppola - CEO & Chairman
We are delaying the spend also.
So I mean, so the interest carry gets delayed a little bit also.
Ben Yang - Analyst
And then just finally going back to the Mervyns that you talked about earlier, what type of rent are you getting from Kohl's and Forever 21 compared to what you were getting from Mervyns?
Tony Grossi - Sr EVP & COO
In our negotiations with both Forever 21 and Kohl's it was a give and take, a plus, minus on each and for the most part we were materially the same on what we had in place and what we have in contract with both Forever 21 and Kohl's.
Ben Yang - Analyst
You didn't have to reduce the rents for those spaces?
Tony Grossi - Sr EVP & COO
On some we did and on others we increased the rent.
Ben Yang - Analyst
And on the spaces that you had reduced rents on, were you able to get maybe longer terms in exchange for that?
Tony Grossi - Sr EVP & COO
We got other terms.
For example, on a few we got percentage rent and that was not in Mervyns -- that percentage rent was not on any of the Mervyns leases.
So -- .
Ben Yang - Analyst
Thank you.
Tony Grossi - Sr EVP & COO
It was a negotiation.
Thank you.
Operator
We will take our next question from Rich Moore with RBC Capital Markets.
Art Coppola - CEO & Chairman
Hi, Rich.
Rich Moore - Analyst
Good afternoon, guys.
On the percentage rents, Tom, was that drop strictly a result of the lower sales volume?
Tom O'Hern - Sr EVP & CFO
Yes, it was, Rich.
I mean, we took a look at that and that was part of our guidance in the fourth quarter.
We reduced percentage rent by about 3 million but it wasn't enough.
Rich Moore - Analyst
Okay.
So none of that moved into base rents or anything.
It wasn't conversion of some leases or anything.
Tom O'Hern - Sr EVP & CFO
Well, there's always some of that, Rich, but I'm talking about in terms of where it went versus where we thought it was going to be at the beginning of the year.
And it was primarily a result of the sales decline, a large part of which was in the fourth quarter.
Rich Moore - Analyst
Okay.
Okay.
Good.
Thanks.
And then going back for just a second, Tom, to the pages you have here in the supplemental.
When I look at like South Plains, for example, South Plains, I think you guys got done for an amount that was roughly the amount of the previous loan where you had estimated $30 million or $40 million higher.
Tom O'Hern - Sr EVP & CFO
That's actually that's not true, Rich, on South Plains that actually is open to prepay this year but it's got a loan maturity that's down the road.
So it inappropriately was probably on that schedule.
We may go ahead and proactively refinance that early, before maturity.
But, no, that was just a correction.
Rich Moore - Analyst
Okay.
So, in other words, you could still, you still think you could get $90 million to $100 million in proceeds possibly for that.
Tom O'Hern - Sr EVP & CFO
Hard to say on that one.
We won't put it on there until we actually get it done, but it's something we are considering.
It is prepayable, the center is doing well and it's possible, but we are not going to put it on the schedule just yet.
Rich Moore - Analyst
Okay, I got you.
And then are you seeing the strength, if there is any, in the credit markets with the life guys, is there any hope for the bank guys, is anything at all getting better there?
Tom O'Hern - Sr EVP & CFO
I mean I would say things are significantly better than they were in December, when by and large that market seemed to be shut and there just wasn't a lot of activity.
We've got seven loans right now that are actively being underwritten and this is not -- and eagerly underwritten.
So the attitude of most of the lenders we are dealing with is, they are out there to do business with good sponsors on good assets and this is a great time for them to pick up some quality business on their terms, conservative terms, low loan to value.
Obviously, with Treasuries as low as they are we are not even really getting a quote over spread.
They are getting a very healthy return and realize it is a good time for them to do business on good assets with good sponsors.
So they are pretty active.
Rich Moore - Analyst
Okay.
That sound good.
Thank you.
And then Tony, on the same sort of thing on the tenant side, I mean is there any, any strength, any pockets of strength with certain tenants that you are seeing, any hopeful signs of new openings for any in particular.
Tony Grossi - Sr EVP & COO
As a trend, as a point of strength is that right now the consumer wants value and price and we are doing more business with Forever 21, H&M, Zara, Aeropostale, these are all lower priced merchants.
On the big box side we are doing a couple of Nordstrom Rack deals and a couple of Costco's and these are merchants right now as given their pricing and their retail strategy is flourishing in this environment.
Rich Moore - Analyst
Okay, very good.
Thank you guys.
Thanks, Rich.
Operator
And we will take our next question from Michael Bilerman with Citi.
Michael Bilerman - Analyst
Good morning out there and Quentin Velleley's on with me as well.
Art Coppola - CEO & Chairman
Hi, Michael.
Jean Wood - VP IR
Hi, Quentin.
Michael Bilerman - Analyst
I want to search on occupancy costs for a second.
It's obviously something that you guys have been pretty active in trying to push over the years, both moving to fixed cam but also just increase in base rent and with a decline in sales productivity, obviously, the ratio has gone up a little bit more relative to last year, probably half due to sales decline and half due to increase in rents.
And I'm just wondering how on the tenant side that they are -- if they are still in a difficult sales environment, how they are sort of looking at that ratio today and how you are sort of pencilling out deals in this sort of environment?
Tony Grossi - Sr EVP & COO
We are still seeing the positive spreads from rents in place.
We've realized $3 a square foot in our average rent and our sales per square foot went down 26%.
That was what you alluded to.
As a target as a portfolio as a whole it's -- we think 15% is reasonable.
So there's still a little bit of headroom from where we are today.
And at some point sales will turn around and take that headroom a little higher.
Michael Bilerman - Analyst
So there's no concern that the -- that at this sort of level that they are pushing back at all?
Tony Grossi - Sr EVP & COO
It's always a negotiation.
And at this point in time negotiations are tougher and spreads are softening somewhat from 24% as I said to between 18% and 20%.
That will be reflected in the cost of occupancy.
Michael Bilerman - Analyst
Tom, just on the recovery rate, you talked a little bit about the bad debt and the legal and just using the numbers that you threw out, I back into it about a $10 million shift year-over-year in totality about $18 million of unrecoverable in this quarter versus $8 million in the prior quarter.
Does that sound about right or do you have the actual numbers that you can sort of breakout?
Tom O'Hern - Sr EVP & CFO
It was $11 million this quarter versus $6 million last -- fourth quarter last year.
And up about $12 million for the year.
Michael Bilerman - Analyst
And the majority of that increase was due to the bad debt, the $2 million bad debt and the rest is this -- the legal cost.
Tom O'Hern - Sr EVP & CFO
A combination of things including the higher legal fees as a result of the Mervyns bankruptcy.
Michael Bilerman - Analyst
Then on Mervyns specifically, you talked in response to Mueller's question that it would be ratable.
So is this a larger hit in the first quarter than towards the end of the year?
Tom O'Hern - Sr EVP & CFO
No, I think the $0.25 is going to be ratable through the year.
Because they gave that back it stays right at year-end and we haven't assumed any lease-up of that vacant space.
Michael Bilerman - Analyst
And Kohl's and Forever 1 starts day one.
Tom O'Hern - Sr EVP & CFO
Right.
And to the extent that there was a change there to straight-lining of rent would mitigate any difference.
So really it's going to be felt throughout the year unless we were able to mitigate by filling up some of that space or selling some of those buildings.
Michael Bilerman - Analyst
What exactly happened on the accounting of FAS 141 and straight-line with Mervyns.
I was just trying to understand.
Tom O'Hern - Sr EVP & CFO
When they leave you have got to write it off and in some cases it's a reduction, which is what happened in straight-lining rents, and in some cases it is an increase, which is the case in SFAS 141.
Michael Bilerman - Analyst
Because you had booked a premium on the rents and you have to affectively amortize that all into earnings right away.
Tom O'Hern - Sr EVP & CFO
When you build up a straight-lining rent receivable from a tenant, when they leave you have got to write that off.
Michael Bilerman - Analyst
Versus the FAS 141 where you have the liability -- .
Tom O'Hern - Sr EVP & CFO
You have a liability to write-off the income, which is revenue.
Michael Bilerman - Analyst
And then on - just a couple other things on guidance.
Is there anything for G&A, just levels of G&A?
Tom O'Hern - Sr EVP & CFO
We expect it to be about the same level it was this year.
Michael Bilerman - Analyst
And then anything other onetime items like land sales or lease term fees that would be different from 2008?
Tom O'Hern - Sr EVP & CFO
No, we are using -- we typically use historical levels there, so I think we are using the average we've had over the last two or three years.
I think we have 10 million in there for land sales and 12 million to 15 million on lease terms.
Michael Bilerman - Analyst
Right.
Thank you very much.
Tom O'Hern - Sr EVP & CFO
Thanks, Michael.
Operator
We will now take a follow-up from Michael Mueller with JPMorgan.
Michael Mueller - Analyst
Tom, in the past you've talked about a quarterly split in terms of guidance.
Anything we should be thinking of this year with respect to the timing of the bond gains?
Tom O'Hern - Sr EVP & CFO
I would assume ratable through the year on that, Michael.
And so I think we are going to see a similar split to what we've seen in the past, where the first two quarters are 21% or 22% of the total, third quarter is in the 24% range, with the balance in the fourth quarter.
Michael Mueller - Analyst
Okay.
Thanks.
Tom O'Hern - Sr EVP & CFO
Thank you.
Operator
And we will go next to David Wigginson with Macquarie Capital.
Morning, guys.
Art Coppola - CEO & Chairman
Hi, David.
David Wigginson - Analyst
With respect to the dividend, I am just struggling back to that again.
You guys obviously announced the cash dividend last Friday.
Have you given any thoughts to maybe cutting the dividend at this point?
Art Coppola - CEO & Chairman
Yes, it's something that we look at every quarter.
In 2008 that was not a possibility because 100% of our dividend was taxable in 2008 and it's something that we look at every quarter, but at this point in time we feel comfortable with where the dividend is.
But it is something that we reserve the right to look at on a quarterly basis going forward.
David Wigginson - Analyst
So even in spite of the fact that the stock isn't really gaining any traction with a 20% plus yield that's well covered, you haven't, it's not really a higher probability right now than say it was six months ago.
Tom O'Hern - Sr EVP & CFO
If you look at it there's not a lot to be gained from a liquidity standpoint by a cut.
In a year where there's no gain on asset sale and there's no gain on early extinguishment of debt, there might be of the 320 annual dividend a dollar of that might be return of capital that could be cut and still maintain REIT status.
That's at the most.
So in the event you cut $1 on an annual basis, that's a quarter on a quarterly basis, we would only save about $20 million in cash a quarter and, of course, the obvious problem with that is if you make that kind of cut and then later in the year you're successful selling an asset at a gain and you create more taxable income, then you have got to turn around and pay that back out.
So from our standpoint looking at the tax implications of the dividend, it just doesn't make sense to make a cut.
There's really not much to be gained.
David Wigginson - Analyst
Okay.
And I apologize if you mentioned this earlier, Tom, but with respect to buying the debt back, are you still actively buying back that on the marketplace?
Tom O'Hern - Sr EVP & CFO
We will opportunistically and quietly do that from time to time.
David Wigginson - Analyst
Okay.
Tom O'Hern - Sr EVP & CFO
As liquidity permits.
David Wigginson - Analyst
So does the 25 million related to the, I guess, the increase in interest expense related to the new accounting pronouncement for converts, is that net of any plans or already bought back a debt so far this year?
Tom O'Hern - Sr EVP & CFO
That's what we think the net increase is going to be for us in the year.
David Wigginson - Analyst
And then this one last question, the $0.25 reduction in the NOI on the revenues, the rental revenues and expense recoveries from Mervyns, is that net of the letter of credit that you guys had mentioned on your last call?
Tom O'Hern - Sr EVP & CFO
Yes.
David Wigginson - Analyst
It is.
Okay, great.
Thank you.
Tom O'Hern - Sr EVP & CFO
Thanks.
Operator
We will go next to [Anar Ismailov] with GEM Realty].
Anar Ismailov - Analyst
Hi, I just want to confirm what is the amount outstanding on your convertible senior notes right now?
Tom O'Hern - Sr EVP & CFO
The converts.
I think the face amount was $950 million and we bought back $222 million less what may have been allocated to deal costs.
It's about a $725 million.
Anar Ismailov - Analyst
So similar to what was outstanding as of December 31, about $725 million?
Tom O'Hern - Sr EVP & CFO
No, I'm sorry, we are not going to give any incremental information.
We are just providing year-end information.
We are not going to provide incremental information.
Anar Ismailov - Analyst
And then -- so you said you budgeting additional $20 million gain on retiring the convert in '09, so that would imply a $40 million to $50 million of face value of the convert.
What's the -- how do you arrive at that $40 million, $50 million, why is it that number, not higher, not lower?
Tom O'Hern - Sr EVP & CFO
We thought that was a number that we could comfortably achieve given our liquidity.
It's more liquidity driven than demand driven.
We think there's plenty of note holders interested in getting liquid.
It's more a function of how much liquidity we thought we could spare towards that cost.
Anar Ismailov - Analyst
Then on your dividend, is the current dividend you are paying is it higher than what you have to pay to maintain REIT status?
Tom O'Hern - Sr EVP & CFO
This goes back to the question we just answered.
In 2008 100% of our dividend was taxable.
So we would virtually gain almost nothing there by a cut.
You've got to pay out 90% of your taxable.
So if 320 was our taxable, the most we could have reduced it to was 290 and stayed within REIT compliance.
2009 it will depend on whether we sell any assets at a gain where there is any other taxable income.
But there is not a lot of room there for a cut and still to maintain REIT compliance.
Got it.
Okay, thank you.
Operator
At this time I would like to turn the conference back over to our speakers for any closing or additional remarks.
Art Coppola - CEO & Chairman
Okay, Well, thank you, very much, for joining us and we look forward to reporting to you as the year goes on.
So, thank you, very much.
Have a good day.
Operator
That does conclude today's teleconference.
Thank you for your participation.
You may now disconnect