Macerich Co (MAC) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by, and welcome to Macerich Company third quarter 2010 earnings conference call.

Today's call is being recorded.

(Operator Instructions).

I would like to remind everyone that this conference is being recorded.

And would now like to turn the conference over to Jean Wood, Vice President of Investor Relations.

Please go ahead, ma'am.

Hi, thank you, everyone for joining us today on our third quarter 2010 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 filings.

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, Randy Brant, Executive Vice President, Real Estate, and Thomas O'Hern, Senior Executive Vice President, and Chief Financial Officer.

With that.

I would like to turn the call over to

Thanks, Jean.

Today we're going to be discussing third quarter results, our recent capital activity, and our outlook for the balance of the year.

During the quarter, operating metrics were strong, occupancy levels improved, retail sales increased, and same-center NOI was positive for the third quarter in a row.

The releasing spreads are also positive again this quarter.

We signed leases for about 305,000 square feet.

That was 225 deals, and we had a positive releasing spread of 15.7% on average.

The occupancy level increased 160 basis points compared to year ago.

We're at 92.6% at quarter-end, compared to 91% at the end of the third quarter last year.

The occupancy costs as a percentage of sales continue to trend down at 13.7% for the 12 months -- trailing 12 months ended September 30.

That compared to 14.2% at year-end.

FFO for the quarter came in at $0.66, that was slightly ahead of consensus which was $0.64.

Part of the metrics impacting that FFO number was same-center NOI being up 2.6%.

That positive comparison to last year was largely driven by occupancy gains.

In terms of lease termination revenue, that was down significantly, that was at $3.5 for the quarter, compared to $11 million during the third quarter of last year.

As you recall, during the third quarter last year, we had some significant lease termination payments from Ruehl , they closed five or six stores in some of our better malls, and had a big termination payment.

The expense recovery rate, including JVs was 93%, a significant improvement from year ago when it was 90.4%.

This improvement is due to having 70% our leases now on fixed CAM, as well some significant cost reduction measures we took in the end of 2009, that we are getting a full-year benefit for this year.

Looking at the balance sheet, we continue to have a significant amount of financing activity .

In September, we closed on a new loan on Danbury Fair, was a $250 million loan, fixed at 5.5% for ten years.

That paid off the old loan that had a coupon of 7.51%, and a principal amount of $160.

Earlier this week, we closed on $114 million refinancing of Stonewood Center.

That's a joint venture property.

The new rate is 4.6% for a seven year financing, and that paid off the old loan which was $71 million at 7.41%.

And most recently, we've agreed to a $232 million loan on Freehold Raceway mall, it's a seven-year fixed-rate deal with a coupon of 4.15%.

And that compares to the old loan which 0.had an actual pay rate of 7%, although the GAAP interest rate was lower than that at about 4.7%.

As you can see as we progressed, from the end of the second quarter, the financing environment continued to improve, both in terms of rate, as well as capacity.

Several of the financings we've done were on 2011 maturities.

When you factor in the financings, as well as excluding loans with extension, we have about $466 million of loans maturing in 2011.

The average interest rate on the remaining 2011 fixed-rate maturities is about 7%.

So, we should see some significant interest savings there.

In addition, we have a $400 million swap that expires in April of 2011.

Based on today's LIBOR rate, the expiration of that swap will effectively reduce the interest rate by 4.8% on $400 million of floating rate debt that, that swap has been applied to.

So just looking, not even at a full-year savings, but just at the 2011 savings, that will be almost $13 million in interest savings there.

So again between the refinancing, paying off some higher coupon debt, and the swap burning off, we expect to see some significant interest rate savings next year.

We continued to deleverage the balance sheet, subsequent to the equity offering that we had in April.

We've unencumbered several assets, including in the third quarter, when we paid off a $50 million loan on Panorama Mall, and on October 1st, when we paid off a $76 million loan on Santa Monica Place, that had a 7.8% interest rate.

Those two assets are now unencumbered.

In addition, since April we spent $76 million on the completion of Santa Monica Place.

At quarter-end, we have $486 million of cash on the balance sheet.

We plan to maintain our discipline, and use that cash for capital projects for further deleveraging, or redevelopment, if it makes sense.

Today, our debt to market cap, net of cash is 45%.

The average interest rate is 5.7%, and the floating rate debt is approximately 9% of total market cap.

In this morning's press release, we revised FFO guidance.

We reduced our range to $2.60 to $2.70.

The primary reason for the tightening of the top end of the range, because as we look forward to the balance of the year, tenant health has improved significantly.

There's a significant demand for space, and we see fewer requests for rent relief and early terminations.

As a result, we are cutting our 2010 expectation for lease termination revenue.

For the last four years, we've averaged $17 million.

We had a range of lease termination revenues in our guidance, with the midpoint at around $17 million.

And we realize today, looking forward, that is not going to be recognized this year.

We currently have recognized about $6.6 million, and we cut our expectation for the year to $7 million.

So that's the primary reason for change in guidance.

And at this point, I'd like to turn

Thanks, Tom.

Along the lines of the operating metrics, is the other thing I'd like to point out, is that sales are improving.

Sales for the quarter were up a little over 5.8%.

And notably within the portfolio, the Arizona region, in particular in the third quarter was up roughly 7.3%, giving us year-to-date increase in sales in Arizona at 6%.

Northern California remains strong, the eastern region remains strong, the central region remains stable.

And in addition to that, Southern California began to break a trend, and was up 6.3% for the quarter.

So, that's all positive.

And when we look at the operating metrics and the business, and we look at the fact that sales are improving, leasing is definitely feeling better with more permanent deals, and better spreads, and good concepts.

And our retailers feeling good about their profit margins.

And when you add to that, all of the positive events that we have going on within the portfolio, and within our retailers, as we look forward to our development, and our redevelopment pipeline, we've given particular thought to what all of this means to us, in terms of the dollars that we would want to allocate to our development, and our redevelopment pipeline.

And we talked about this, anecdotally on the last call, and we mentioned Tysons Corner, and we mentioned Broadway Plaza, and we mentioned the possibility of one or two deals in Phoenix .

We mentioned several deals that were in process, such as Danbury, Pacific View.

But we didn't really give you a specific dollar amount of what we thought that pipeline was going to be.

And we said that we were in the middle of thinking that through.

We've thought that through.

And we have very clear visibility that over the next five years, we will profitably reinvest, in redevelopment or developments within our portfolio, between $750 million and $1 billion.

And that's spread over roughly four or five relatively major projects.

Tysons Corner, is clearly the one that we have the most visibility into.

We talked about the dollar figures that are involved in that at the last call.

But we would have as we see it now, it's roughly it's a 550,000 square foot office building, roughly a 500,000 square foot residential building .

We have the opportunity to do a hotel, which we do on a ground lease of some sort, if and when, we would find the right operator.

And obviously, that business is picking up.

We're feeling very good about the integration of this mixed use into Tysons Corner.

The market feels like it improving significantly there.

We've hired a broker, engaged architects, and are talking to fee developers about handling the development of that.

In that particular project, we see just under $400 million of incremental development costs, with returns on those incremental cost of roughly 9%.

If you look at the broader project, that we were to include all of our sunk costs to date, which is roughly $20 million to $25 million.

We also allocated a hypothetical land (value) to that, and add in capitalized interest etc., the total project cost, it approximates roughly $420 million.

And the overall returns, on that total historical, plus new costs, is a little over 8%.

The return on the new money alone, is a little over 9%, and you recall we own 50% of that asset.

Other big projects that we see happening over the next five years, and I would also say to you, that on delivery, we really see this being delivered, over the next three to five year horizon .

Tysons, in particular, seems to feel like it's going to be in early 2014 delivery.

But another big development activity that we've see in that, is that we do feel like there's going to be clear visibility for at least one development in the Scottsdale Phoenix market place, to be delivered in the next five years, give or take within that range.

We said on the last call, that we felt that we had two projects that would be delivered between four and seven years.

So as we think about a time frame of three to five years, I'd say there's relative certainty, that there'll be at least one there.

Looking at a couple of potential acquisitions type joint venture activities, where we would buy an existing asset, and/or joint venture in existing asset with somebody else, a private owner, that could happen in the next five years.

It could be major, and of course, I mentioned a couple of other major projects that we're looking at, where we have anchor addition, that should trigger some tenant recycling, such as Broadway Plaza.

So we have very clear visibility that we'll be profitably investing $750 million to $1 billion, over a handful of projects, over the next three to five years.

We're very optimistic about other opportunities that we're thinking about, in terms of entitlements that we're going to be working on, that are not even in that pipeline of opportunity.

And the returns that we feel we can generate on those projects, will vary between roughly 8% to 10%.

If you made me pick a number, it's probably going to be in the 9% to 10% return on cost.

So with that, we would like to open it up for questions, and thank you for joining us today.

And we obviously look forward to seeing you in a couple weeks at NAREIT.

So, operator, if you could open it

Thank you.

(Operator Instructions).

And our first question comes from Craig Schmidt from Bank of America Merrill Lynch.

Good morning, Craig.

Hi, good afternoon.

Unfortunately, you answered a lot of my questions at the end there.

I guess, in terms of the $750 million to $1 billion investment, would that be about three quarters, redevelopment, and one quarter ground up development?

I would say that's right.

Although as we slide up the range, it could be more 50-50.

Okay.

And then would you be thinking of anything ground-up, outside of Phoenix?

Were looking at a couple of opportunities, that we think might have some legs.

But that's not in our pipeline of thinking, in terms of having clarity in the $750 million to $1 billion.

And but, there's a couple of opportunities in some markets, that were looking at primarily western-oriented, as well as one on the eastern seaboard, so which is consistent with where strengths are.

There is a maybe there, but it's clearly not in our pipeline, but we're always actively looking at everything.

Great.

Thanks for the greater detail on the pipeline.

Thanks.

Our next question is from Cedrik Lachance with Green Street Advisors.

Morning, Cedrik.

Morning.

I -- when we look at California, and we look at what's happening with the state budget, what's happening in general with the economy in California.

And we think about the plans you may have for capital allocation over time, where do you see the state going over the next few years?

And how does that influence where you'd rather invest your money?

I have a very positive views on the state of California.

I think that if you take a look at the last 35 years that I've been doing business here, there's absolutely no correlation between the budget surplus or deficit of California, and the profitability of our shopping malls.

If anything, there's actually a positive correlation between budget deficits and profitability for us, because the worst shape that the state is in, the more approvals we get to do redevelopment of existing assets in communities, that are otherwise difficult to do business in.

This is clearly the melting pot of the world, Los Angeles.

That's not going to change, that's not a bad thing, that's a good thing.

Start-up businesses, if you take a pulse of it, and it doesn't show up in the numbers yet, the southern California region definitely picking up.

Look, we have pockets that are still difficult, if you look at Riverside County, for example, pieces of the Central Valley, there are still issues out there.

The Bay Area, is on fire, in terms of activity.

If you take a look at what's happening in Silicon Valley right now, it's absolutely on fire.

I love this market.

Look, as Randy Newman says, we love LA, and we love the West Coast.

We made a lot of money out here, and we'll continue to make a lot of money out here.

And as I see us allocating our capital, I would not hesitate to devote 100% of our future capital in this state.

It's such a diverse state, and it's such a large state, given that it is the eighth largest economy in the world.

I just participated with Mike Milken at the State of California, State of the State conference ten days ago.

Spent the day with a lot of CEOs in California.

And, look, it doesn't show up in the numbers yet, but the state is going to rebound again.

It does.

It -- look -- it's one of the entrepreneurial capitals of the universe, of the world, forget universe, of the world.

(Laughter).

And it's -- I feel very comfortable here.

I been up and down all around here for 35 years, and it's a great state to do business in.

And by the way, it's 90 degrees today.

I'm looking at the ocean from my window so.

So what's to argue with?

(Laughter).

From that perspective, there's not much argue.

It's very interesting, your comments are helpful.

In terms of balance sheet, just thinking about the unsecured debt maturity in 2012, what's your appetite for unsecured debt financing versus secured debt?

And where do you think you might be getting the best pricing over time, if you chose one avenue versus the other?

Well, part of what we will do over the next six months, is to recast our line of credit, so that will be a certain amount of unsecured capacity there in related pricing, which continues to improve month by month.

In terms of that converts that come up in 2012, we've got open mind as to what we may do there.

I know the pricing on converts has gotten down to record levels in the recent weeks.

So it's obviously something that we would keep an eye on, but we haven't made any decisions at this point yet.

All I can tell you, is that there some very attractive alternatives out there, and they seem to be getting better with each quarter.

In terms of financing on the secured front, and in terms of the maturities you have next year, any indication on pricing at this point, and how spreads are moving in the last few weeks?

Well, it's gotten to be a real borrowers market.

Obviously, if you look at the progression through the quarter for us, the last deal that we announced, the fact that we got a 415 rate, that was a function of there being a floor in the deal at 415.

The spread was -- it was about 50% LTV deal.

The spread was 185 over the treasuries, which would have yielded and natural rate of about 38.

So it's an extremely attractive environment now for doing long-term fixed-rate deals.

And we're taking advantage of it wherever we can.

Okay.

Thank you.

Thanks.

Next from RBC Capital Markets, we have Rich Moore.

Morning, Rich.

Hello guys, good morning.

Just wanted to say by the way, we're almost up to almost 50 degrees here in Cleveland, so it's looking pretty good here too.

I was going to say, seriously, about this whole California thing.

I was thinking, that's a little too hot for me.

So I know --

Yes, my brother Ed is complaining that it's 20 degrees too warm for him, compared to Dallas today.

And Tom, I want to thank you too, by the way, for putting the balance sheet in the supplemental.

That's very helpful.

The first question I have you guys, was there anything special in operating expenses, was there bad debt or something unique in the quarter?

No

It seemed to go higher, Tom, I guess, than I was used to.

Well, Rich, if you are looking sequentially, you have to keep in mind that utilities always go up in the third quarter, because we get hit with the summer billing rates on electric.

So that was the biggest move, utilities were up significantly, compared to the second quarter.

Bad debt expense was actually down, Rich, compared to year ago, down about $700,000, on the bad debt expense.

But the biggest upward move, at least sequentially versus the second quarter, was utilities.

Okay So do we --.

And that's normal.

Okay, so for 4Q, Tom, we kind of go back to more of the 2Q, 2Q kind of levels, does that sound about right?

That's about right.

Okay, good, thanks.

And then in this environment are you guys -- and thank you for the color on the redevelopment as well -- but are you stepping up any thoughts on disposing of assets?

I mean does that make any more sense, than it did say six months ago?

Same as it has been for some time, that we are very interested in pruning the bottom section of our portfolio.

It's not easy to find buyers for that grouping.

If that happens, great.

It's not in any of our guidance numbers.

But it certainly fits within our long-term goal, of growing the percentage of income that we own, that we have from A assets, and reducing the percentage of income that we have from C assets.

So we are always looking at opportunities to do that.

But when you get to the lower quartile of your assets, it's not the type of thing that you just market to market, and put it on the market and send them out the door.

You need to really find the right fit, the right buyer.

But if we look at history, generally the thing that has driven good pricing on B and C assets is cheap debt and high leverage, and we're moving in that direction.

So it may happen.

Okay, very good.

Thanks guys.

Thanks.

Our next question comes from Quentin Velleley with Citi.

Morning, Quentin.

Hi, guys, this is Manny here with Quentin.

Just looking at you leasing, what proportion of leasing you guys did was short-term in nature?

It is consistent with what has been historically.

There really hasn't been any change in terms of the percentages.

Can you just remind us what that is?

Looking at the quarter, it is slightly better than it was a year ago.

I think 30% of the deals are three years or less, and the balance is over three years.

And if you go back into the middle of 2000, in early 2009, we were trending closer to 40% in that range.

Great.

And then looking at your occupancy, I guess you guys are about 100 basis points off of your peak.

And two part question, do you think it's achievable to reach that peak and when?

And then, was there some sort of ceiling almost that you thought you hit then, that you could exceed then, and does that change now?

Yes, there were a couple of periods in time, when we were almost at 94% occupancy, which in our opinion, is full occupancy.

That was the end of 2002.

And the end of 2007.

But if you look over time, we normally have operated in a fairly tight occupancy range on the lowest side, 91%, the high side, 94%.

And I'll defer to Randy, in terms of leasing demand and the quality of leasing we see today, how soon we may get up towards that 94%.

The leasing continues to get better every month, every quarter.

And the volume of deals has increased dramatically.

Year-to-date, we have done 857 deals, totaling 1.3 million square feet.

So I would think that we can hit 94% probably in 18 months or so.

And while I have you on the line, Randy, how much occupancy would temporary tenants add?

Well, within those numbers, just because temporary tenants is really a matter of definition.

We are at pretty much the historical average, which is around 500 basis points of our total occupancy, which is in the shorter-term types of leases of roughly a year or so.

So roughly 5% of the 92% or so, is in that category.

Is that about right ,Tom?

That's right.

And just to clarify, if the term is less than six months, we don't count it in occupancy anywhere.

It's not considered occupied space.

Greater than -- as Art said, greater than six months up to a year, is less than 500 basis points typically.

It's in the 4% to 5% range.

But more importantly, in terms of opportunity, this is something that were constantly challenging ourselves and our leasing people on is, let's not get comfortable with 93% occupancy, if we have 5% of the space, not paying us full fair market rent.

And that is what tends to happen with those shorter-term deals, if you're only committing to a year or two years, you don't tend to get the bigger rents.

So that is a big opportunity is, even as we get to 93% or 94%, which historically is almost deemed to be full occupancy in a regional mall, in the same way that 4% unemployment, or 96% employment is full employment, in the overall economy.

So that's the real opportunity there, is not to go 94% occupancy to 100%.

But it's to take that 500 basis points, give or take, of income that you got in there, that's not at $45 a foot of triple net revs.

And then convert those guys that are at less than those types of rents to the higher rents.

And that's a big opportunity if the economy strengthens, as property strengthens, and as retail dealers strengthen, It's a little hidden secret is under the numbers.

Great.Thank you, guys.

Actually it's a kernel of opportunity.

(Operator Instructions).

And our next question comes from JPMorgan, Michael Mueller.

Yes, hi.

Good afternoon.

First of all, on the leasing spreads, 15.7%.

Just want to confirm that's the Q3 number, and not a full-year number, and that's a cash number, not a GAAP number?

Mike, it is a cash number.

And as we cautioned before, not to use one quarter's worth of statistics on that, you really need a full-year sample size.

Sure.

And for the full-year, it was 4.5% trailing 12 months, so I think we disclosed both.

But the 15.7 was just one quarter.

Okay.

What is your expectation, as you start to think about 2011, and look at the lease roll there?

Well, obviously, as Randy mentioned, the leasing demand and activity is improving.

It's pretty hard to predict what spreads are going to be, but one thing we do know is occupancy costs is dropping.

Sales are up, which is part of that equation, obviously.

Tenant demand is definitely on the rise, and deal volume is up, and the quality of deals are up.

So we would expect to see positive releasing spreads.

I don't think we are ready to predict double digits yet, but on an annual basis, but it's certainly moving that direction.

One thing I would point out on one of those lines, Tom, is that you may remember that we give our guidance in February of this year, we predicted -- we said look, for the year, we're predicting flat leasing spreads.

And in fact, our leasing spreads have turned positive.

Now that doesn't show up in our numbers yet, but those will roll into next year.

So that's positive.

And just thinking about the cash for a second, the cash balance of $500 million.

Just given your commentary on the call, it sounds like you'd consider refinancing the converts, just given how the interest rate environment has been.

The development spend looks like it ratchets up, not necessarily, maybe 2011, but a couple years out, it really starts to pick up.

So, how do you view looking at the cash balance over the next year or two, do you plan on, are we just going to see your run with higher cash levels, up in this range?

Is there -- outside of acquisitions, some other use, because it doesn't necessarily seem like you would go, and pay down mortgages if you're getting pretty good rates on them today?

I mean, it depends, you can look at the 2011 maturity schedule, for example, Mike.

And there are two loans, in particular, that jump out, Capitola which has a coupon of 7.13, and Rimrock which has a coupon of 7.45.

And together, that's $100 million.

We may decide a point in time and un-encumber those.

And you've always got the capacity to go back, and put debt on those the future.

But to put that money to work, it's roughly 7%, is certainly a possibility that we that we'd keep open for next year.

And I like to expand that comment, because this is a question that has legitimately been asked, by several people about, what are you to do with the cash.

Let's do recall, that it's really only been six months and we did our equity raise.

And we have said consistently, that we view this cash as a very precious commodity.

We've taken roughly $200 million of our cash balances over the last six months, and either retired existing mortgages, created unencumbered assets, that are really dry powder for the future, which is a great cash management technique.

Or we plow that money into the finalization of the development of Santa Monica Place.

I would say that over the next six months, the majority of that cash will get deployed, through either some redevelopment activity, or paying off debt.

Or we may get surprised and have some opportunity to invest into something externally.

Even though on the last call, I said there's nothing on the acquisition horizon, and I'll reiterate today, that there's nothing on the acquisition horizon.

But we may get pleasantly surprised over the next six months.

If I had to predict what will happen in the next month, the vast majority of that cash will get deployed, even if it's just retiring some existing debt, which creates dry powder, and is really a cash management technique if you think about it.

So, we are going to weigh it very carefully.

It obviously, there's huge opportunities, as we put that money to work, even if it's just paying off debt to create a spread investment over the -- our most nominal zero cash return that you get on having that in the bank.

But that's long-term equity opportunity venture-capital that we see, and it requires long-term equity types of returns, for us to pull the trigger on it.

We may use some of that money to again, pay down debt, as a cash management technique, and have dry powder for the future.

Hopefully that answers your's, as well as some other questions.

Yes it does, got it.

One last question in case I missed it, did you quantify that shadow redevelopment pipeline outside of the $750 million to $ billion.

I know that you referenced you're looking at a number of other projects, did you put a number to that?

That's embedded within that range.

Okay.

Okay.

There's a couple of opportunities we're looking at external, of which if I had to bet, one of them will probably happen within the next five years.

And maybe more.

Okay.

The one thing that I have that, frankly is pleasant news, look, the company hasn't changed.

But as you all know, development, but more importantly, redevelopment is in our DNA.

And Santa Monica Place, in particular, has caught the attention of so many cities, and even other owners of other shopping centers across United States, in terms of what you can do, if you are courageous, and long-visioned in your thinking on great real estate.

That if you're willing to take the bold and the tough step of, in that case, closing down a very successful regional mall, the value that can be created, can be quite substantial.

And we have other cities around the United States, as well as within our region, that are approaching us, saying, look, we'd love to have you do to Santa Monica Place in our city.

Now, obviously, we can't do that, in terms of replicating the tenant mix of Santa Monica Place.

But what we can do, is we can take the fundamentals success of Santa Monica Place, is that we delivered a project that meets the demographic exactly.

And so all we have to do is to take that knowledge and that business plan, of understanding the trade area, and then meeting the trade area with whatever tenant mix, is appropriate to that trade area.

And it will open up opportunities across the country.

And I do actually think that it will be a platform, and a pivot point, in terms of future redevelopment opportunities, that could be obtained for the Company externally.

Okay, great.

Thank you.

Next we have Omotayo Okusanya, with Jefferies & Company.

Good afternoon.

Just quick, referral back to the quarter leasing spreads of the 15.7%.

Is there a way we could we get a breakout of what piece of that relates to all the JV assets versus the piece that relates to your consolidated assets?

I think that is in the supplement.

I think we break out the split, the 15.7 is a blended number, but the split is , the split is in there, I believe on page eight of the

I must have missed that.

Okay, thank you very much.

Thank you.

Next, we have Ben Yang with Keefe, Bruyette & Woods.

Hi, good morning guys.

Morning, Ben.

I have a question on Tysons Corner.

I recall that when you originally provided details on your plans there several years ago, that it was a four phase buildout, that was going to take place over say, a ten to fifteen year time horizon.

Based on some of the details you provided earlier, is that $400 million specifically for phase one of the project?

It is.

It is only phase one.

Exactly, phase one.

Yes.

And then, have your plans for the latter stages changed at all, in terms of scope or timing?

Do think it's going to maybe now be a 20 year expansion for that center?

It's not anywhere in our pipeline of opportunity, a lot of things would have to happen for phases two, three, and four to trigger.

Let's see how phase one goes.

We're really feeling very confident about the returns we can deliver.

We're feeling very confident about the symbiosis of the introduction of the office and the residential, and maybe the hotel to the retail component.

But we are going to have to see, how that plays out before, we consider going forward.

Phase one could be the only phase that we do.

On the other hand, it could be such a roaring success, and as time progresses, and the Metro Rail is there, and we have the reality we have the rail, and the transportation hub, and the hot lane on the Beltway, and everything else, that we do go ahead, and accelerate phases two, three and four.

It's a great entitlement to be sitting on, but the only thing anybody should put into their thinking cap is phase one.

But phase one is real.

And we are actually breaking ground on it next year, in terms of spending multi-million dollars.

in terms of ring road realignments, and everything else to prepare the building pad for the complete buildout, which would start work late next year, early 2012.

Got it.

And what is the status of that Metro Rail extension at Tyson's Corner?

It's presumably going to land in the neighborhood late 2013, be completed a little bit earlier than that.

And they will do tests for about a year.

But the full usage and such, I think third or fourth quarter of 2013, if they proceed on the plans that they are talking about, which is outside of our control.

Okay.

And just final question, regarding the $10 million less the lease termination fees for the year, can you just maybe give us some details on which retailers, are maybe even which segments of retail are doing better than you had previously expected?

The housewares is doing great.

Most of the Junior fashions are performing extremely well.

Luxury is fantastic, both the in-line and the department stores, Nordstroms, which is what I consider semi-luxury, and Neiman, are all performing very well.

Do you have any idea what next year is going to look like?

Is it kind of going to kind of pick back up to the historical level that you mentioned earlier?

On terminations?

Yes, on lease terminations.

Ben, that's always a big guess.

Over the last four years, excluding 2010, we've averaged $17 million.

The lowest it's been 12.4, the highest been 22.

It's going into a year -- you have some visibility, but it's very difficult to predict.

That's part of the reason we have a wide guidance range, is because that's an uncertain category.

Probably the most uncertain we have, as we forecast.

If I had to take a guess, I would look at the average, and say, that over the last five years of 2010, we're averaging $14 million.

So history is the best, probably the best thing to point to.

But at this point, I don't think we have knowledge of a lot of terminations that are going to come rolling through the next three to six months.

Yes, as Tom mentioned I think in the press release, or his early remarks, the fact that termination income is going to be down here, could be seen as a positive sign, that business failures are at a low level.

And that's probably true.

And as Tom mentioned, termination income is uncertain, in dollar amount, but certain that it's going to occur in our sector.

It has been occurring for 35 years in the sector, in our space.

It's going to continue to occur.

And one of the reasons that it occurs, is that we have very high credit from the retailers that we do business with, and from our tenant base.

So if they have a business concept that ends up failing.

They're big boys, and you sit down with them, and you have a conversation, and you work with them for them to exit.

So, it's certain that it is going to happen every year, it's uncertain as to the amount.

Sure.

I was just wondering if maybe at this point you kind of culled out some of the weaker credits.

And then going forward maybe that historical number is going to be too high, but it just sound like it's early to say.

Yes.

And sometimes it's not just a weak credit, sometimes it's a brand expansion that doesn't work, which was clearly the case with Ruehl last year.

I think we got $6 million or $7 million in termination payments from Ruehl, Abercrombie was a fine credit, they just had a brand that wasn't working.

They expanded, and the Ruehl concept didn't go that well, and that's why they've pulled back.

Great, thanks guys.

Thank you.

Next we have Alexander Goldfarb with Sandler O'Neill.

Hi, good morning.

Hi, Alex.

Hi, Alex.

Just going back, and maybe I missed it in all the back-and-forth commentary on the -- that six to 12 month bucket, that 5% of tenants, can you just give us a sense of what you said that those rents are not the same as full-term rents.

So just sort of curious, what the difference in economics to you is?

And just thinking bigger picture, is it realistic to think, how much of that 5% is realistic to think, that you could lease those spaces to long-term tenants versus sort of structural, short term, because tenants are always coming going.

So you're always going have some sort of short-term leases in the portfolio?

That's a good question.

I would say, as business improves, and things get healthy, 40% of that less than full market rent income could be converted to full market.

And you're right.

There always is going to be in incubation activity, There's the reality that some of the spaces, are not as good as others.

As you move to the ten yard line in the weaker economies, those tend to have less than long-term leases.

So roughly 2% of the 5% in a healthy economy, and in strong properties could be converted to full market rent, even though the headline number, the occupancy doesn't change.

Does that answer your question?

Yes.

And, Art, what's the difference in the rent, between the full fare tenants, and those six to 12 month tenants?

Is it they are paying half the rent?

It's about half, it's about double, really you'd about double the real rent.

And separate question is, you have spoken about investments may be some joint ventures, Westfield had their big announcement, and one of the articles indicate that they may be selling some stakes in the US.

Is it realistic to think of mall REITS co-investing with each other?

Or is it better to think that they're probably targeting institutional capital, that wants just a purely passive role?

I can't speak the Westfield announcement.

But , look, we have a history of investing with mall REITs.

We had a historical, great partnership with Simon Property Group over the years.

We were even partners with General Growth on a couple of properties.

So we've done that.

We frankly, probably have done more of that anybody.

I wouldn't predict that as being any level of activity that's going occur -- there's no real reason for that to happen going forward very often.

But the joint ventures, that I may be was referring to in my comments, is one or two specific opportunities that Macerich has it's eye on, where a private owner comes up, and says, look I got a great property, and you guys have a great organization, let's join forces to take this to the next level.

And those are the, kind of the gleam that I have in my eye, in terms of opportunity, that shouldn't be in our pipeline, but I see it happening sometime in the next five

Okay so it's more that, rather than maybe something with like a Westfield, sounds like?

I wouldn't preclude anything with anybody.

We have a wonderful relationship with those folks at Westfield, and the Lowy family, and would welcome the opportunity to do business with them, just as we have a wonderful relationship with the Simon Property Group and others.

Okay.

Thanks a lot.

Thank you.

(Operator Instructions).

And that does conclude the question-and-answer session at this time.

I like to turn the conference over to Art Coppola for closing comments.

Okay, thank you all.

And we look forward to seeing you at NAREIT in a week and a half.

Thank you very much.

Bye.

And that does conclude today's conference.

We appreciate your participation.