Macerich Co (MAC) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Macerich Company Fourth Quarter 2010 Earnings Conference Call.

Today's call is being recorded.

At this time, all participants are in 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 would now like to turn the conference over to Jean Wood, Vice President of Investor Relations.

Please go ahead.

Hi.

Thank you everyone for joining us today on our fourth 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 VP, Real Estate, and Tom O'Hern, Senior Executive VP and Chief Financial Officer.

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

Thank you, Jean.

Today we're going to be discussing the fourth quarter results, our recent capital activity, and our outlook for 2011.

During the quarter, our fundamentals continued to improve significantly, occupancy levels were up, retail sales had a very solid increase for the quarter, and same center NOI was positive for the fourth quarter in a row.

The re-leasing spreads were also positive again this quarter.

Looking at leasing, we did 238 deals in the quarter, that's 295,000 square feet.

The average new rent was $42.74.

The average re-leasing spread versus the expiring rent was a positive 13.7%.

Mall occupancy was 180 basis points higher than a year ago.

Year-end was 93.1%, compared to 91.3% at the end of 2009.

The average rent per foot in the portfolio was up to $42.50 a foot, that compared to $41.98 at year end 2009.

Occupancy costs as a percentage of sales was down significantly for the year at 13.5%, compared to 14.2% for 2009.

Looking at FFO, FFO diluted per share for the quarter was $0.77 and that was $2.66 for the year.

That was $0.01 ahead of the midpoint of our guidance range.

Same center NOI for the fourth quarter was up 1.82% and for the year, same center NOI growth was 2.04%.

That positive comparison was largely driven by occupancy gains, CPI increases, and positive re-leasing spreads.

We had a significant drop in straight-lining of rents in the quarter.

They were down $1.9 million, compared to the fourth quarter of last year, and SFAS 141 income also dropped to $2.4 million compared to $3.3 million in the fourth quarter of '09.

Lease termination revenue also dropped significantly during the quarter at $2.9 million, compared to $7.5 million during the fourth quarter of 2009.

The expense recovery rate during the quarter improved to 92.3%, and that compared to 91.5% in the fourth quarter of last year.

That improvement was driven primarily by the positive impact of moving to fixed CAM versus triple net.

About 70% of our portfolio today is on fixed CAM.

We saw a significant decrease in bad debt expense.

It was at $1.5 million for the quarter, that was down $2 million compared to the fourth quarter of last year and this is another sign of renewed tenant health.

Looking now at the balance sheet, we closed a significant financing on December 30, a $232 million loan on Freehold Raceway.

That was a seven-year fixed rate deal with an all in rate of 4.15%.

That paid off the former loan which had an interest rate of 7%, although a slightly lower GAAP rate of 4.7%.

The pay rate was a 7% pay rate.

We also negotiated the payoff early of the $50 million loan on Chesterfield Town Center.

That was paid off in early February.

The loan had an interest rate of 9.1% and had a 2024 loan maturity.

It also had a participation feature that would have allowed the lender 35% of any sale proceeds in excess of the loan amount if the asset were sold prior to the 2024 loan maturity date.

There was a $9 million fee that was paid to the lender as a result of terminating this debt early and that $9 million charge will flow through the first quarter results for 2011.

At year end, we had $445 million of unrestricted cash on the balance sheet.

Our current intention is to use some of that cash to pay off some high coupon debt that matures in 2011.

That includes Capitola Mall which is $33 million at 7.1%, Pacific View Mall which is $84 million at 7.2%, Rimrock Mall, $41 million at 7.6%, and as I just mentioned, the payoff of Chesterfield.

That's a debt of over $200 million that we either have or plan to pay off during 2011.

That will provide us, once those payoffs have happened, with an unencumbered asset pool that throws off over $92 million of NOI.

So, that's a significant source of liquidity, should we need it at some point in the future.

Today our debt to market capitalization is 44.7%.

Our average interest rate, 5.65%.

And our unhedged floating rate debt is only 7.6% of our total market capitalization.

Our interest coverage ratio during the fourth quarter was 2.33.

In this morning's release, we gave initial FFO per share guidance for the year of $2.78 to $2.94.

That guidance is based on same center NOI with a range of 1.5% to 2.5% and it also reflects the debt payoffs I just mentioned a few moments ago, including the fee we paid on Chesterfield.

In terms of tenant sales, tenant sales for the year, per foot, came in at $435.

That was up 6.6% compared to 2009.

Total tenant sales were also up 5% for the quarter, and looking at the total sales improvement by region, our biggest improvement was in Arizona which was up 6.7% for the quarter, 6.2% for the year.

Central region was up 5.5%, the Eastern Region, up 2.8%, Northern California combined with the Pacific Northwest was up 4.9%, and Southern California was up 5.3% for the quarter.

At this point, I'd like to turn it over to Art.

Thank you, Tom.

This time of year with the year-end, it's normal for us to reflect back upon the returns that we've been able to generate for our shareholders.

And certainly, 2010 was an outstanding year in terms of our total shareholder return and coming on top of 2009 where we were ranked in the top five percentile in total shareholder return.

Certainly over the last couple of years, the total shareholder return has been very good.

As I look back over the last 10 years, the total shareholder return that we've been able to generate is in the top 20th percentile.

So, while we've had our rocky moments in late 2008, we, on an overall basis, if you take a look at over the life of our Company as a public Company, and more particularly, over the last 10 years, over the last two years and over the last one year, we've had outstanding returns.

And coming off of two years of really very significant outpaced market returns, it can be normal for some folks to sit back and say well, it's going to be hard to replicate that.

But at this point in time, I'm very bullish on how I see our future for this upcoming year.

When I look at the people and the properties that we own and the dry powder that we have and the passion that we have for our business, I have every reason to be extremely bullish on my view going forward.

From a people viewpoint, we have a very well-organized and seasoned management team that's been together for a long time.

It's a tried and proven market-tested, tough time-tested team that's been able to produce great results year in and year out.

From a properties and a portfolio viewpoint, we're at a great size on a relative basis.

We're big enough to matter and small enough to make a difference.

I'm very pleased with the performance of our properties and the concentrations that we've been able to develop in great urban markets like New York and Washington, DC and LA and San Francisco and then, of course, the great presence that we have in Arizona which is now beginning to lead the way in terms of recovery in terms of our sales and rent and even NOI production.

We've got the dry powder to drive the future growth of our Company.

We took a look recently for our Board of Directors over what our balance sheet looks like for the next five years.

In particular, we were taking note of how we had utilized the proceeds from our large equity offering last April.

And if you look back on what we really did with that equity offering, and with the guidance that Tom just gave you, we essentially took a little over $200 million, or approximately $200 million, last year and finished off the completion of Santa Monica Place and unencumbered it to create a huge unencumbered asset for us.

And the balance of the capital that we've utilized primarily has really been a cash management exercise to date where we've been creating a larger and large unencumbered pool of assets by paying off some debt opportunistically -- Tom mentioned the payoff of the Chesterfield debt.

And then our plan for 2011 is to pay off debt on certain assets as they come due to create a very large unencumbered pool.

A pool that will be well in excess of $1.5 billion, which puts us into a position that we've really never been in before with low -- modestly low debt to total market cap ratios, good liquidity, nothing outstanding on our line of credit, and a lot of dry powder through this unencumbered pool which puts us into a very good position.

As we look at all of the development activity, the redevelopment activity, the possible acquisition activity, and every single loan that we have come due, coming due over the next five years, we are in a very good position to maintain those kind of ratios and to maintain that kind of powder over the foreseeable future.

So I'm very pleased with that.

More importantly, we've got a real passion for our business that I think was, to a great extent, driven by the grand opening that we celebrated with Santa Monica Place four months ago.

At that opening we -- a lot of the retailers said gee, it's nice to have something to celebrate.

That's really reinvigorated our entire Company and it's given us a new passion for the way that we see our business.

We look at our properties and we say where is the next Santa Monica Place, where else can we create something like this and I'll be talking about that later.

But we do see opportunities, either in the large scale format through a major redevelopment or simply by repositioning a property to better suit the trade area in which we are located.

I want to talk briefly about the three growth platforms that I see for us going forward here.

In the near term, on the operating side, I see strong opportunities for us.

Over the mid to long term, on the development and the redevelopment front, there are excellent opportunities that we got specific about on our last earnings call.

And then finally, on the external growth and acquisition viewpoint, we are beginning to see some opportunities and to take advantage of some opportunities there that I'll talk about in a minute.

On the operating side, when you look at the sales that our tenants are generating, the outlook for leasing, the occupancies we have, the properties that we have, all of the trends are pointing in the right direction.

And while we have not been able to, as of yet, put up what I would consider to be day by day robust strong leasing spreads, although the leasing spreads that we achieved in 2010 were significantly higher than what we had given guidance for early in 2010.

Early in 2010 we said we would be flat on our leasing spreads in 2010 and I believe that the actual spreads for the year were up around 6.8%.

But as I look at the future, there's going to be, I think, a significant opportunity for us to begin to drive leasing growth and that's not a function of occupancy cost as a percentage of sales.

Frankly, I kind of wish that we all would forget that statistic.

Because it's not that relevant when you take into effect the law of large numbers.

What's relevant is the operating margins of our retailers on each and every space that we are leasing.

And there is a tug of war that's out there today between the landlord and the tenant.

But I will tell you that today the tug of war is clearly in the favor of the landlord.

Where the tenants created the impression for all of you two years ago that the tug of war was in favor of the tenants and that they were getting major rent relief and they probably were in the lifestyle centers that shouldn't have been built in 2005, 2006, 2007 and 2008.

They weren't getting that rent relief in the regional malls that are owned by strong, established operators.

They did get some short-term leases where they didn't pay a lot of rent increases.

But now that we are seeing sales rebound in 2011 to levels that they were at in 2008, and we see the fact that from a viewpoint of the supply viewpoint, there just isn't any supply of great new regional centers coming online.

And the alternatives for other growth alternatives such as the lifestyle centers that some of the mall-based tenants were pursuing in 2008, 2007 and 2006 have gone away and they realize that the regional mall is the place to be.

That tug of war, I will tell you, is going to come -- is going to land in the favor over the near term of the next three, four, five years in favor of the landlords unless something unanticipated happens again.

And with that, I am convinced that there will be moments of pain for the landlords and the tenants.

There will be times that we will actually have occupancy cost slippage at individual properties.

So, don't pay too much attention to that number.

We're not going to sit here and preach to you that each 100 basis point increase in occupancy levels generates X dollars in FFO or each 100 basis points in cost of occupancy as a percentage of sales generates the other.

But I will tell you all of the fundamentals are pointed in the right direction and with that I'm very bullish on the leasing side.

From a development and a re-development viewpoint, which is our second major leg of growth here, we even have more clarity as we begin to think these through day by day.

We have a lot of reasons to be very optimistic about the development and the re-development pipeline.

The re-development pipeline remains as strong as we had been talking about and specifically outlined for you in the last earnings call.

Tysons is marching along extremely well with the office market in DC rebounding, the apartment market rebounding and even hotel players coming to us now.

We're beginning -- we are in the process over the next couple years of finishing off Santa Monica Place.

That's still a work in progress.

It's doing great, but there are still new, exciting anchors that we are going to be bringing to the property in the form of marketing anchors, or in the form of our new marketplace that opens May 20, which is going to open the third level and is going to further enhance Santa Monica Place as a destination.

And I mentioned earlier that we're out there looking for the next Santa Monica Place throughout the United States and we've got one of them identified that we own today and we have one of them identified that we don't own today.

And I'm convinced that we're going to be able to convert each of those into exciting, dramatic re-developments.

On the development side, I can tell you that today that after carefully reviewing our prospects on the ground-up development side, that I feel very confident in getting a little bit more specific -- well, that was a hedge, confident getting a little bit more specific.

All right.

So, I feel very confident in telling you that I believe that we will, in fact, be developing in that Arizona marketplace because the time will be right for us to do it.

My strong suspicion is that by the end of this year, we will pull the trigger on our Goodyear development and that, that new regional mall will open up in 2014.

As I look at the development landscape, I also alluded to you in previous calls that while we have monitored the outlet space and particularly the premium outlet space, that we could anticipate taking some land that we own today and converting it and developing that out to be a premium outlet center.

With all of the attention that has been paid to the Phoenix and Scottsdale marketplace recently and the outlet arena, we've carefully looked at the sites and the developments that are being planned in that marketplace and the impact that it would have on our existing portfolio.

And have come to the conclusion that the Scottsdale, Phoenix marketplace may be the single most underserved premium outlet metropolitan area in the United States.

We've come to the conclusion that we should have a say in where that outlet center gets built.

And while we're not here to announce today where or when it's going to be built, I'm very confident that we're going to be a part of that process and that we will very profitably participate in the outlet and the location and timing in the Phoenix marketplace, both to minimize its impact on our existing portfolio, but also to participate in the profit opportunities that are available there.

I alluded to the fact that the third leg of growth that I'm now ready to talk about is in the external acquisition arena.

Some of you may have seen blurbs or blogs about the fact that we recently showed up at an auction on Friday, February 4, I believe, in New York in the Queens marketplace.

And we did in fact -- we were, in fact, the successful bidder on a 400,000 square foot retail project in Queens and Glendale, known as Atlas Park.

This is a project that, together with a partner, we bought for roughly 54 -- we put a deposit down and will be closing later this month for $54 million.

We're buying it at roughly $130 a square foot.

Project today is losing money due to lack of occupancy and due to operating expenses.

But it's got one of the best theaters in the entire Regal chain and we're very confident that under our management and given our relations in the community there that we're going to be able to recycle that property, re-brand that property, reflag that property and to make a lot of money off of it.

We've taken a look at the retail landscape from an acquisition viewpoint and have obviously come to the conclusion that the opportunity to buy no-brainer Class A premium regional malls is pretty much nonexistent today.

It's just not out there.

On the other hand, the opportunity to buy Class A retail regional real estate that's located in major metropolitan markets where we have a significant presence and have a history of making a lot of money like New York City, Washington, DC, Los Angeles, the Bay area, those opportunities are out there and Atlas Park is one of them.

And we've kind of rethought the way that we are looking at the future there and have defined our growth opportunities to include Class A regional retail real estate that doesn't fit the mold of being anchored by Macy's and Nordstrom and Neiman's and Bloomingdales, et cetera, but does fit the mold of being a property and an asset group that we can make a lot of money off of.

I have every reason to believe that having bought Atlas at roughly $130 a square foot of GLA, there's no reason to believe that we shouldn't be able to generate $30, $40 a square foot in rents or more as we lease that up.

So, I think the opportunity there to make money is very significant.

It's a little bit one-off in terms of the fact that it's not anchored by the traditional department stores that we normally have in our core portfolio.

But it's right down the middle in terms of the fact that it's Class A regional retail real estate that we know how to make money off of because we know the tenants, we know the communities, and we can see the opportunities.

So, I'm very bullish for all of those reasons about where we stand today and with that we'd invite you to participate in the Q&A.

Great.

Thank you very much.

(Operator Instructions) And we will take our first question from Michael Mueller with JPMorgan.

Yes, hi.

A couple questions, first of all going to 2011 guidance, just want to confirm that the Atlas acquisition is in there?

Not really, because we put our guidance numbers together really, really before that.

And at this point in time, it's probably a breakeven deal.

We're only putting in $26 million or $27 million of cash.

So, even if we had pumped it through the numbers, it would be less than $0.01 a share plus or minus.

So yes, it's factored in, but I will tell you that the auction was, I think February 4, and the closing isn't even for another month or so.

Got it.

Okay.

And also sticking with guidance again, Tom, can you talk a little bit about what's in 2011 for lease term, land sale gains and also maybe just touch on income tax benefit?

Yes.

Mike, in terms of lease termination revenue, that's part of the reason we have a range.

If you look over the last five years, we've gone from a low of $6 million to a high of $22 million and so that's kind of encompassed by the range.

I think the midpoint of what we're thinking is $12 million, but it could move either way and that's all within the range.

In terms of land sales, we have not factored in any land sales into the guidance number as of now.

And just as a frame of reference, if you look at gain on land sales, the last few years in '08, it was $5.6 million, in '09 it was $5.1 million, in 2010 it was $1.4 million and we have not factored any of that in for this year.

Yes.

Okay.

And then what about the -- can you give us a little more color on the income tax benefit?

That's a function of NOL usage and it depends on what else is going on.

I think if for the year, you put in a $5 million number, that would probably cover it.

Okay.

Great.

Okay.

Great.

And then last question, looking at the same store NOI guidance up 1.5% to 2.5% for a good chunk of the year this year, your occupancy's been up over 100, 180 basis points.

You're looking for occupancy to go up next year.

Your spreads have been double-digit the last couple of quarters.

Can you walk us through the math to get to that 1.5% to 2.5% growth next year?

Sure, Mike.

We've had a lot of occupancy gain already this year.

And we factored in -- when you factor in all the leasing activity, I think we're, on average, going to be up 50 basis points in our guidance versus this year.

But keep in mind at this point, at 93.1%, we're not too far off the highs of 2006, 2007.

Although I will tell you the quality of that occupancy can go up because included in that is some short-term leasing that we did in 2008, 2009 and as those leases roll, we'll take those to long-term.

That really doesn't move the occupancy number, but it improves the quality of the occupancy.

In terms of re-leasing spreads, we're going to average high single digits and, again, that's looking forward and that's an estimate and we certainly hope to do better than that, but that's what's in the guidance.

Okay.

Great.

Thank you.

Thanks, Mike.

And I actually, Mike, I have a follow-on answer on Atlas, just to clarify.

That auction actually was January 28.

I've got my days confused.

So, it was January 28.

We normally wouldn't talk about something like that, but given the public nature of the auction process and given that Ed Coppola was spotted as the mysterious bidder in the courthouse, we did have to comment on it.

But it was January 28, was the auction, I think the closing is February 28.

And I also want to clarify, on the numbers, it's pretty much a breakeven or a little bit of a loss this year, but that's really a huge NAV play for us.

I don't see it as being accretive or dilutive to speak of for the first year or two.

But I think from an NAV viewpoint, we're going to make a lot of money over the next three to five years.

Next question?

All right.

Well, thank you very much.

Moving on, we'll now take a question from Rich Moore with RBC Capital Markets.

Hello, good morning, guys.

Hi, Rich.

The Chesterfield Town Center, is the plan going forward to sell that?

Is that what we should take away from this?

No, no.

I think Tom was -- hi, this is Art, Rich.

Hi.

Tom was really pointing out, I think, that when you look at the premium that we paid on the debt, part of the premium was really the defeasing an old kicker.

It was an old kicker that was built into a mortgage that was done 20 some years ago and had we sold it, the kicker actually would have been in the nature of the premium that we paid.

It is of the quality type that we would consider pruning at the right price going forward, but we've actually done a great job of recycling Chesterfield as we've had a couple of anchors that have been recycled and have been able to maintain and even increase the income in a market that is extremely, in Richmond, Virginia, way over-retailed.

And so at this point in time, no, there is no current plan to sell it, but it's of the quality type that we would consider selling going forward.

Okay.

So, Art is there -- what was the reason for the timing on that asset in particular doing this transaction?

Paying off the debt?

Yes, paying off the debt.

The reason was that after 16.5 years of trying to pay off the debt, we finally were able to do it.

I hate kickers in mortgages because there's no capital credit built in for CapEx that's there to increase the NOI.

It was one of those old, old mortgages from the mid-80s that certain insurance companies were doing.

And the alignment of interest between the lender and the owner is completely misaligned because the lender doesn't participate in the CapEx, but they do participate in the increase in NOI and NAV.

So it's just something that -- the only one we had in our portfolio.

We've been wanting to pay it off literally since we bought that property 16 years ago.

Okay.

I got you.

Good, thank you.

And then, when you guys think about Dillard's and you know that Dillard's has obviously been out seeking to monetize their real estate and yet, it doesn't sound like they can really start a REIT.

Is this something that you would go to them, you think, and perhaps talk to them about purchasing some of the Dillard's that they may own in your portfolio, some of the stores they may own?

Well, we're always interested in owning our anchor stores and land parcels in all of our shopping malls.

We think that's a good way to do business.

But the answer to that question would be no.

Okay.

All right.

Good.

Thank you.

And then, given that this is the time of year when retailers start thinking about whether they're going to make it or not or whether it's a good time to shut down some stores, is there anybody in the portfolio, any retailers in the portfolio that concern you guys at this point?

Just the obvious one that's been in the news for 100 years.

That book store.

Okay.

Nothing else besides those guys?

No.

Some one-offs.

But no, we're -- Tom may have mentioned it, but our bad debt in the fourth quarter was very modest.

Our bad debt prognosis for 2011 is very modest.

Ultimate Electronics looks to be at issue.

We've got a couple of stores with them.

So that could be an issue and -- but we believe we've got a good opportunity there to recycle that.

But the retailer health, as you've heard on other calls, and in particular, in the regional malls, it's just as strong as it has ever been in my being in this business and that's 36 years.

Okay.

Great.

Thank you guys.

Thank you.

Thank you very much.

We'll now move on to Quentin Velleley with Citi.

Hi there.

Going back to guidance, in terms of the -- and you ran through, I think, $200 million of mortgages that you're going to pay down which obviously makes a big difference, but then I think you've got two fixed swaps burning off, 8% on Westside Pavilion and almost 7% on Victor Valley.

What are you building in there in terms of refinancing or extending?

Quentin, those swaps burn off in April and it's a derivative.

It's not specifically tied to the mortgage.

You have to attach it to the mortgage for accounting purposes.

So, that'll burn off and we'll have a lower interest rate on those two properties by about 400 basis points when those burn off in mid-April.

Okay.

And then, in terms of Mervyn's, and I think there were about 12 vacant Mervyn's boxes left which you hadn't yet dealt with, just wondering how many you may have leased now and what you're factoring into guidance for 2011?

This is Randy Brant.

Hi, Quentin.

We have 11 that are currently not leased.

Of the 11, only three of those are we in a position where we don't have anything active.

The remaining we have very active negotiations going and expect to close those in the next three or four months.

Quentin, on those, none of those have been factored into guidance, so to the extent we do a lease deal on one of those Mervyn's spaces, that will be upside to the guidance.

Okay.

Perfect.

Thanks.

And then just lastly, I know you've spoken about selling some of your B grade assets in the past.

Just wondering if you've made any progress or whether you've changed how you're thinking about that at the moment?

Hi, Quentin, it's Art.

Look, that's a situation that we intend to be opportunistic about.

We're very cognizant of the fact that you're selling something at a cap rate that's above your multiple, it's theoretically dilutive, but we've been willing to do that in the past.

It's not NAV dilutive.

It's simply mathematic dilutive.

But it's the right thing to do.

We did it in 2006 and 2007 when people were able to borrow 90%, 95% loan-to-values and we sold a bunch of stuff that was C stuff at seven cap rates.

I probably have been pretty vocal over the last year about the fact that we are very willing to prune our portfolio.

We've shown it in the past.

We clearly are again going to be willing to do that in the future.

It is our goal to take our premium, our Class A NOI from just north of 80% to well north of 90%.

But you don't control the buying side of the market and that's just -- it's improving and it may happen, but I wouldn't -- it's not in any of our numbers and it's certainly not something where we can say all right, we own 75 properties and we're going to prune the bottom 20 of the 75 properties.

There is not a market that I know of to go and do that.

Okay.

Thank you.

Thanks, Quentin.

Thank you very much.

Now moving on, we'll take a question from Craig Schmidt with Bank of America-Merrill Lynch.

Good afternoon.

Hi, Craig.

Hi, Craig.

Hi.

The joint venture that was used to bid on Atlas Park, is that a one-off opportunity or do you think you may be using that JV partnership to pursue other acquisitions?

Well, it's with an existing partner who we've bought a couple of deals with historically and who I could see us doing more deals with in the future.

So, it's an existing partner.

It was really just formed as a special purpose entity for that particular auction.

There was nothing to read into that.

But there is something to read into the fact that the people that we do partnerships with and that we do business with, those are organic relationships that grow over time.

And this is just another example of us and a partner getting involved in a situation that clearly is one-off, but we got involved in it and we're very optimistic about where it's going to go.

Cool.

And the Goodyear development, do you -- how many -- you must be talking to traditional department stores.

How many traditional department stores do you think would be anchoring that project?

We'll announce that when we're ready to, but it likely will be three plus another couple of large format users.

But let us go ahead and put some flesh on the bone on that.

Okay.

But I mean, it's clear that you're getting some positive feedback for you to be pursuing that, I'm taking that.

Oh, we were ready to break ground on Goodyear in 2008.

But then what happened in 2008.

This is a market that is the most underserved market in all of Arizona.

There is over 600,000 or 700,000 people in our immediate trade area that don't have a quality regional mall to go to.

We don't need any growth for this to make sense.

We just want the people that live in our trade area to feel a little bit wealthier and they're beginning to -- their plight and the situations there, it's a very good sub-market.

But we want the rents to be robust.

Look, you have very limited opportunities to build these regional malls and there's no sense in building one before its time.

Our sense of it is that the time is going to be right by the end of this year from a pre-leasing viewpoint and everything else.

The stars will align that now I feel confident instead of saying in the next three to seven years we're going to build one or two malls in Phoenix.

We're pretty much, I think, focused on the fact that we can tell you it's going to be Goodyear and it's going to be late -- it's going to be fall of 2014.

Thanks.

That's helpful.

Thank you.

Thank you.

And moving on, we'll now take a question from Paul Morgan with Morgan Stanley.

Hello, Paul.

Hi, good morning.

Art, you mentioned toward the end of your comments about looking at non-mall retail and does that -- Atlas Park is obviously an example of that, but are you thinking power centers or neighborhood centers in your core markets?

No.

I'm thinking regional retail that is Class A retail.

The Class A real estate that's in our core market.

So, Atlas is 400,000 square feet.

I mean, there are more small shop -- there's almost as many small shop spaces at Atlas as there are at Queens Center Mall.

That's unbelievable.

And we think there's a great opportunity there to make some money.

We're looking at other markets where you have, let's say, a traditional department store and a discount store in a Class A location in the Bay Area that is ripe for redevelopment.

We're looking at something in the DC marketplace where there's a couple of traditional anchors and there's an opportunity to redevelop it.

So, we're clearly not breaking into a sub-category of community or a price change in terms of power centers.

We are going after regional retail, but it may not have the normal names associated with it as department stores that are in our core portfolio with the properties like Tysons and Santa Monica and Broadway Plaza, et cetera.

North Bridge.

Great.

And some of these opportunities have mixed use components with them, meaning California or elsewhere.

Absolutely.

Are you looking to take sort of the Tysons approach there and partner or would any of these -- would you ever kind of do a multi-family or anything like that?

We're not opposed to owning multi-family as part of a retail project, but it's really an ornament to the retail project, not the driving force.

Yes.

Okay.

Thanks.

And last question, on the short-term leases, have you had much experience yet of rolling over short-term deals that you did in '08, '09 or is that mostly going to be something you address this year?

And then, if you had some of that, kind of what's the -- I mean, what's the result been?

Have there been a mix of just people just closing their stores or are people doing long-term deals for a lot higher or long-term deals at flat?

Is there any color you have there?

Well, I'll give you the bunny clip version of that.

Again with the bunny clip.

I couldn't hold back on that.

Well, as you know.

That's the tug of war that's going on right now, the short-term renewals that were given to folks in '08 and '09 -- well, late '08, '09 and 2010.

Now as you're rolling over, those folks would like to continue to enjoy not facing an increase in rent and now it's time to have the big conversation of, okay, it's time to either step up or step out.

And that's where I say, we will be having conversations I'm sure with tenants where we're going to be saying to them, look, you either pay the rent or we've got plenty of other folks that will pay the rent.

And with that we could suffer occupancy losses in some of our powerful centers in order to get NAV and rent gains for the long term.

So that's the tug of war that's going on right now and it's not going to resolve itself this day, this week, this month, this quarter.

It'll take a full year or two to play out.

But it's definitely -- I like the odds of the landlord at this point.

And by the way, these tenants can afford to pay the rent.

When I said that cost of occupancy as a percentage of sales is an overrated metric, it's because of the fact that we're very keenly aware of the operating margins that our retailers have.

And at the rents that we are seeking, these are fair rents, very fair rents and they're really using cost of occupancy as a percentage of sales as a weapon against us to mask the fact of their operating margins and we're seeing through that.

It's a tough conversation, but I'm confident it's going to result and play out in very good operating results for the owners of well-located, strong regional retail.

Great.

Thanks.

Thanks.

Thank you.

Moving on, we'll now take a question from Cedric Lachance with Green Street Advisors.

Thank you.

Just going back to Atlas Park a little bit, my understanding is that it's an asset that is probably too upscale for the market at this point, and also is probably physically not always perfect from a layout perspective.

What kind of CapEx do you think you'll have to spend into that asset over time to change the tenancy to what you desire?

I can't tell you what the exact number is going to be.

I hope it's a lot, because if it's a lot, that means we're going to make even more money that I thought we were going to make, because we don't put money into properties without seeing outsized returns.

We bought the property for roughly $54 million.

I'd say our total CapEx budget was another 50% on top of that.

But it could be more than that.

We'll just have to play it out.

Atlas Park, you correctly categorized it as being a little too upscale for the market.

It really fits into the profile of a busted lifestyle center, but it's in a market where you've got 1.5 million people within five minutes.

That's a pretty good demographic.

We made a lot of money in that demographic by catering to the masses and eating with the classes and that's what I see at Atlas Park.

Okay.

How can you make that asset relevant in relationship with Queen Center?

Where are the overlaps with tenants and what can you do there that complements Queen Center?

There's no overlap and it's a completely different market.

The only common denominator is 1.5 million people within five minutes.

Looking at the balance sheet, you have the converts coming due in a little over a year from now.

What is the game plan there?

Cedric, something that happens before that is the line of credit which is currently not utilized.

We've got a $1.5 billion line of credit.

We've been in active conversations with our investment banks about moving forward with that.

There's a pretty strong bank market right now, so our expectation is we would continue to have that type of capacity which gives us, obviously, the latitude to deal with the converts without having to be in a big hurry to deal with the converts.

Those converts, although they have a GAAP interest rate of 5.5%, the pay rate is only 3.25%.

So, they're still pretty attractive.

They would be expensive to prepay early, probably at a premium.

So, as long as we have the capacity through our line or elsewhere, we're pretty comfortable in addressing those as we get closer to maturity.

Okay.

And in terms of Granite Run, your JV with Simon, I think the debt there has been in some form of default for a few months.

What do you intend to do?

Are the keys going back to the lenders?

Our partner really is handling that matter.

But I would tell you that it most likely will not be owned by that joint venture a year from now.

Okay.

Final question, going back to your outlet comment in the Scottsdale area, is it fair to understand, based on your comments, that you believe you have the right sites already and that you would be seeking a joint venture partner to develop outlets?

We know we have the right real estate and how we pursue the opportunity will be something that we will determine based upon what's best for our Company, our portfolio, and the execution.

Okay.

In terms of time frame, when would you think you'll have a decision there?

I would say that if we do something, that the property will be opened in 2013.

Okay.

Thank you.

Thank you very much.

And moving on, we'll now take a question from Alex Goldfarb with Sandler O'Neill.

Good morning.

Just going to Atlas, just your initial take, Art, do you think this would be sort of a, you keep the garages, keep the theater, scrape rebuild or do you think you can work with the existing layout?

I think we'll work with the existing layout, but we'll see.

Okay.

And then as far as --

You make a very good point in that, look, we're buying this real estate at $130 a square foot which includes the garages.

When we bought Westside Pavilion a number of years ago, one of the big assets we were buying was this garage underneath Westside Two, west of Nordstrom, which we ultimately put a state-of-the-art theater on top of.

So, look, having garages with a lot of parking spaces in a market where you've got a 1.5 people who drive to your property because there is no subway, that's a real asset.

So, we'll see how it plays out.

But I don't -- no, I don't see it as a scrape.

I see it as just a fill it up.

And then the -- my understanding is the original owner still owns the dark boxes next door.

I'm sure he's still a little upset about losing this center.

Any sense that he may be willing to talk with you guys or is that not even in the realm of possibilities?

I'd say everything is in the realm.

I can't tell you the outpouring of communication that we received from the community, how robust and positive it was.

I suppose I could have anticipated it, but when people finally figured out, look, my brother Eddie has a saying that spouting whales get harpooned and he didn't exactly show up at the auction with a big name tag on himself.

But when people figured out who it was, the community, the governmental elected officials, community leaders, retailers, I mean, people were coming out of the woodwork, contacting us saying wow, that's terrific, that's great.

We'd love to get involved.

Just incredible amount of positive support on Main Street.

Okay.

And then, just the final question is with Walton Street being as part of it, if you think about value creation, it seems like sometimes you want to create the value and then JV it after you created the value.

In this case, it looks like you're going to do it concurrent with your partner.

What's your thought process?

What do you think about what type of JV partner to bring in on an NAV creation versus when you have a stabilized asset that's more long-term growth bringing a JV partner then?

We match up the property to the partner and in this case, the partner and we looked at the opportunity and we both saw great opportunity and we decided to go ahead and understand the risk and to do it together.

And they've been a great partner of ours, as all of our partners are great partners and again, I want to emphasize that all of our partnerships are very organic.

None of them are intended to be one-off.

They're not dispositions.

They're true relationships.

This is just another expression of that relationship.

Okay.

So, it wasn't like one of you guys showed up first at the auction, both of you guys came together and worked on this jointly?

We clearly had talked about it way before the auction and each of us scratched our heads and said there's really an opportunity here, even though it's not very obvious what it is.

And by the way, it's not very obvious what it is because if it was, somebody -- there would have been a ton of people in there buying that property at a lot of money.

So, it's not real obvious except for one thing.

What's obvious to me, it's great real estate.

It's in a market that we know intimately and I'm absolutely positive that we're going to do terrific with it.

Okay.

How we're going to do it, I don't know.

But we'll let you know and we'll play it out.

The only reason I say I don't know is because if we told you what one plan would be today that might minimize the real opportunity which I think is terrific.

Okay.

Thank you.

Thank you.

Thank you very much.

And moving on we have a question from Samit Parikh with International Strategy and Investments.

Hi.

Good afternoon.

The question on Valley View, just wanted to see if I need to make any adjustment in 2011 for that.

I wasn't sure if the operations from that were in your numbers this quarter?

No, there's no impact from Valley View.

That's being operated by the servicer.

We do expect at some point they will dispose of it in 2011 and at which point it will officially come off our books.

We have not factored in the gain from that in our FFO guidance numbers but there will, ultimately when that comes off our books, there will be a gain because the debt is in excess of our book basis.

But it's not in the numbers.

Okay.

Thanks.

And then, just one last thing.

Is there anything in Q1 in terms of incremental revenue that maybe hasn't been realized that will come on from Santa Monica or something else that we should be thinking about?

Not in Q1.

Okay.

All right.

Thanks.

Thank you.

Thank you.

All right.

Thank you.

And moving on, we'll now take a question from Tayo Okusanya with Jeffries & Company.

Yes, good afternoon.

Just another follow-up question on Atlas, if you don't mind.

Could you give us a sense of what the current occupancy and NOI of that asset is and where you think it could ultimately go once you have put in the action time?

It's way over 50% vacant.

It loses money today and we think we can make a lot of money on it.

I threw out some numbers earlier that we bought it at $130 a foot for 400,000 feet, give or take.

I don't think it's out of the question to get rents of $30, $40, $50 a foot on that asset over time.

If we can generate those kind of numbers, the income generation could be massive and the value generation could be terrific.

It's yet to be done.

It's not obvious.

Otherwise, a lot of people would have jumped into this opportunity.

But I am absolutely convinced that three years from now we're going to look back and say wow, what a great acquisition.

Great.

That's helpful.

And then second question in regards to just tenants and the portfolio that are receiving temporary rents or rent breaks.

Is there a way you could quantify just how much of your portfolio that is and what the potential rent could be if you do get those tenants back to market rent?

Well, during the period of '08, '09, we were signing about almost half of our deals with short-term deals.

So, that means that today if you look at that, there's probably 15% of our portfolio is shorter term than what we consider normal and those tenants will be rolling over the next couple years.

And a lot of those deals, if our average rent is $44 a foot, a lot of those deals were signed in the ballpark of $22 to $25 a foot.

So, there's some significant upside embedded in those lease expirations that come rolling through in 2011 and 2012.

Okay.

That's helpful.

And then last question.

The whole tug of war issue between the landlords and the retailers, just wondering of late and recent negotiations, how much tenants are talking about sourcing costs being an issue and whether they're really trying to use that as a negotiation point in their new lease renewals?

There's always something, but I can tell you that it comes down to supply and demand.

And when you look at all the factors that are in play, it's in the landlord's favor today and that's fair.

It's not extracting profit from them.

It is simply a fair rent that they should be paying and they'll come to the realization that it's fair.

Just as it was fair for us to be very empathetic to their needs a couple of years ago by giving them short-term renewals without significant rent increases or even modest rent increases or decreases.

Now it's fair for them to pay some increase in rents as low rents mature and they're sitting there making a lot of money off of real estate that can't be replicated anywhere.

Got it.

Thank you.

Thanks.

All right.

Thank you very much.

And moving on, we'll now take a question from Ben Yang with Keefe, Bruyette and Woods.

Yes, hi.

Good morning.

Given that you guys brought in a partner on Atlas Park and are basically willing to share in the value creation upside there, do you intend to pursue this new Class A retail real estate strategy with partners?

Is that kind of the stated or the planned goal for you guys?

It's possible that it could happen that way.

There is no prototype, but I just don't want you all to be shocked by us getting involved with Atlas, because it is part of a comprehensive new mindset that we have that we're going to look at great markets like LA, San Francisco, New York, Washington, DC, and others and if we see opportunities that don't fit the perfect mold of a three anchor, Nordstrom, Neiman, Macy's type of whatever center, that there are other regional retail opportunities.

Not power centers, not community centers, per se, not grocery-anchored drug centers, per se, but regional retail centers that we can make money off of based upon our tenant relationships that we have and more importantly, based upon our reputation and our relationships in the communities.

We've already had folks from the governmental agencies in the zoning areas that govern Atlas Park reach out to us and talk to us about how they can help us make that property better.

So it's really part of playing off of the power that we have in these markets and not limiting ourselves to traditional regional malls with traditional department stores.

I guess I'm trying to understand how you guys decide whether and when to bring in a partner.

I mean, obviously there's an element of de-risking but why Atlas Park and why the next project or why not the next project in terms of having a partner versus going solo?

Each case is going to be determined on its own.

There was risk in Atlas Park.

There is risk in Atlas Park.

There's no obvious answer, and we both decided to do it together with our partner and we both feel good about it.

Okay.

And then just final question.

I think you commented that you had -- or there were two other Santa Monica Place type opportunities, one of which was in your portfolio.

Could you tell us which one is in your portfolio?

I'd love to except for the fact that in order to perfect the opportunity, we have to get entitlements in that community and we need to get the entitlements and then we can talk about it.

Okay.

Thank you.

Thanks, Ben.

Great.

And moving on, we'll now take a question from Todd Thomas of KeyBanc Capital Markets.

Hi.

Good morning.

I'm on with Jordan Sadler as well.

Just back to guidance, can you give us an update on sponsorship opportunities within the portfolio?

It looks like other income came in a little bit higher this quarter and I was wondering if we should expect a higher run rate in 2011?

And how much of an increase in sponsorship income might be built into your 2011 forecast?

It's relatively flat.

Okay.

And then just a quick clarification on the Victor Valley Mall and Westside Pavilion, do you plan on exercising the extension option there when the swaps burn off or do you plan to refinance those mortgages?

The swap is totally independent of the underlying debt and the swap will burn off just naturally in April.

In the underlying debt we have extension options and we'll evaluate at the time whether it makes sense to extend the existing debt or to put new debt in place.

But that is relatively low coupon debt once the swap expires.

Okay.

And what type of underwriting terms are you seeing in the market today?

Well, I mean, you saw the financing we did on Freehold and we were not pushing the leverage much there.

That was about a 50% LTV transaction, but it was very attractive pricing and we're seeing quotes at really under 200 basis points over the Treasury.

It's a very, very competitive market and a borrower's market.

Even though rates have gone up a little bit, it's still attractive.

And just augmenting that, looking at debt yields on Class A properties going back not that long ago, they were 15% give or take and today they're closer to 10%.

Okay.

All right.

Thank you.

Thanks.

All right.

Thank you very much.

We have time for one last question.

That final question will come from Quentin Velleley with Citi.

Yes, thanks.

Just in terms of the construction in progress, I'm wondering how much or how many Mervyn's were included in that balance as of 31 December?

I think there's only two or three of the Mervyn's in there, Quentin.

There's a variety of projects in there but there's only one or two of the Mervyn's locations are in.

And it sounds like about $10 million or $15 million of Mervyn's in there, is it?

Tops.

Sorry?

That's it at the most, it wouldn't be any more.

Okay.

And then, just lastly, in terms of your operating expense growth in 2011 guidance, what's your expectation there?

Again, we like to think we can operate pretty effectively from a forecasting standpoint, I think we assumed a growth of 3%, although I honestly expect us to do better than that, certainly on the controllable expenses.

Okay.

Got you.

Thank you.

Thanks.

All right.

Thank you all and we appreciate your involvement and look forward to reporting our results for this upcoming year.

Thanks again.

All right.

Great.

Thank you very much.

Again, ladies and gentlemen, that does conclude today's conference.