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Operator
Good day, ladies and gentlemen.
Welcome to the Macerich second-quarter 2011 earnings conference call.
As a reminder, this presentation is being recorded.
At this time, all participants are in a listen-only mode.
After the prepared remarks, we will conduct a question-and-answer session.
(Operator instructions.)
I would now like to turn the call over to your host, Ms.
Jean Wood.
Please go ahead, ma'am.
Jean Wood - VP, IR
Good afternoon.
Thank you for joining us today on our second-quarter 2011 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 Investors 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 Tom O'Hern, Senior Executive Vice President and Chief Financial Officer.
With that, I would like to turn the call over to Tom.
Tom O'Hern - Senior EVP & CFO
Thanks, Jean.
Today we'll be discussing second-quarter results, our recent capital and acquisition activity, and our outlook for the rest of 2011, including our revised guidance.
During the quarter our fundamentals continued to improve.
Occupancy levels improved.
Retail sales had a very solid increase and same-center NOI was positive for the sixth quarter in a row.
The releasing spreads also showed good increases.
We signed leases during the quarter for 247,000 square feet.
That was 161 deals, average new starting rent of $41.60 a foot.
The average releasing versus expiring spreads on the trailing 12-month basis was positive 11.6%.
The occupancy level increased 50 basis points over a year ago.
It rose to 92.3% compared to 91.8% a year ago.
Average rent in the portfolio stands at $43.74.
That's up from $42.31 a year ago.
Occupancy costs as a percentage of sales on a consolidated basis, including JVs at pro rata, was 13.2% for the trailing 12 months.
Looking at FFO for the quarter, FFO per diluted share was $0.47 for the quarter compared to $0.57 for the quarter ended June 30, 2010.
Negatively impacting FFO during the quarter was a $35.7 million impairment charge on Shoppingtown Mall.
Adding that to the FFO gives us an adjusted FFO for the quarter of $0.72 per share.
The operating metrics were good, including same-center NOI, excluding terminations and SFAS 141 being up 2.94% compared to the second quarter of last year.
As key components of that, 90% of our leases have CPI increases built in.
So on January 1st of this year, most of those CPI increases kicked in and they averaged 1.3%.
In addition you've got the positive impact of the releasing spreads that we saw through 2010 rolling through our same-center NOI numbers and that was a pickup of about 0.8%.
Plus you add to that the gain from occupancy pickup of another 0.8% and that covers most of the 2.94% same-center NOI increase.
Lease termination revenues, including the JVs, were $2.5 million compared to $1.5 million during the quarter ended June 30 of 2010.
Looking [for] the balance of the year we still expect to see approximately $12 million of lease terminations revenues for the year.
Bad debt expense for the quarter was up about $700,000, or $2.1 million.
That compared to $1.4 million in 2010.
However, if you take a look at the full year through June, westand at $3 million for the 6 months ended June 30, 2011 versus $4.8 million for that 6-month period a year ago.
Management company expense was down at $21 million compared to $24.4 million in the second quarter of last year.
However, you really need to look at year-to-date management company expense, which stands at $46.7 million compared to $46.6 million a year ago.
The second-quarter difference was primarily due to timing differences, as we noted in our first-quarter call, because of right-sizing.
And with that there were severance payments that happened in the first quarter of 2011 and, conversely, we saw the benefit of the reduced headcount affecting our numbers in the second quarter of 2011.
Also during the quarter we had from a joint venture gain on early extinguishment of debt of approximately $7 million.
That happened on April 1, and we mentioned that in our first-quarter call.
And that offsets the $9 million of loss on early extinguishment of debt we saw from the Chesterfield Towne Center payoff that happened late in the first quarter.
Looking now on the balance sheet, we had additional loan payoffs in the quarter, including the $83 million loan at 7.2% interest rate on Pacific View Mall.
And then again in early July we paid off the $40.2 million loan on Rimrock.
That was at 7.6% interest rate.
Both assets are now unencumbered.
With those payoffs we've got 13 unencumbered assets that throw off about $93 million in NOI, so we could very comfortably in today's market borrow on a nonrecourse basis $750 million to $800 million on those assets.
On May 11, 2011 we had a $39 million nonrecourse loan on Shoppingtown Mall mature.
And it's currently in maturity default.
The Company is negotiating with the servicer.
At this time the ultimate resolution is uncertain.
However, as a result of that maturity default, we recorded a $35.7 million impairment charge on that asset for the quarter ended June 30, 2011.
Today our debt-to-market cap is 43%.
Our average interest rate is 5.13%.
Our interest coverage ratio for the quarter is 2.24 times.
In this morning's earnings release we also issued new guidance on FFO.
And the new range, with adjusted FFO, which excludes the impairment, is $2.84 to $2.92, with a midpoint of $2.88.
That's up from $2.78 to $2.94.
The reason we tightened the range is some of the uncertainties, like lease termination payments, which are an educated assumption at the beginning of the year become more clear as the year goes on.
And also we factored in the accretion from the recently acquired Fashion Outlets of Niagara Falls, which Art will talk about in a minute or two.
Shifting now to tenant sales, mall tenant sales per square foot were $458 for the 12 months ended June 30, 2011.
That's up 9% compared to a year ago when the trailing 12 sales per foot was at $420.
Looking at it by region, based on total sales the Arizona region for the quarter was up 6.4%; Central region was up 5.6%; the Eastern region was up 7.6%; the Pacific Northwest 5.4%; and the Southern California region up 6.5%.
At this point I'd like to turn it over to Art.
Art Coppola - Chairman & CEO
Thank you, Tom.
Welcome to the call.
As you can see from the results that we've reported, we continued to have a very strong year.
As Tom has outlined our balance sheet is continuing to improve with its capacity, which is enhanced by the recently revised new 5-year line of credit revolver that we have.
And we've been building up a significant amount of an unencumbered asset pool that will give us fire power to take advantages of opportunities in the future.
Certainly one of the opportunities that we were able to take advantage of was our acquisition of the Fashion Outlets of Niagara Falls, which I'll talk about in a few minutes.
In looking at the portfolio itself, leasing continues to be strong.
The environment is very good.
Sales are good.
Our retailers are making a lot of money.
As you look at where our portfolio stands today compared to 2 years ago, about 2 years ago in September of 2009 the sales of our tenants had pretty much bottomed out from the significant decline that all retailers suffered starting in September of 2008.
And we basically -- we feel that by the end of this year we will be back at sales levels that will approximate the sales levels that we were at before we entered into that depression that we entered into in fall of 2008.
As Tom outlined, our regional malls average $458 a square foot today, with strong comp sales increases.
If you slice that up into pieces, our top 20 malls in our portfolio average $630 -- $631 per square foot.
Dropping down to our top 50 malls in our portfolio, those top 50, if those were the only malls we owned, average $502 a square foot.
And then putting all of our malls together, they average $458 per square foot.
Our top 20 malls, which average $631 a foot generate just under half of our total NOI in our company, at 46%.
Our top 50 malls, which average $502 a square foot, generate a little over 82% of our NOI.
And this is indicative of where we stand in our portfolio.
And I share these numbers with you because, as you remember, about a year ago I shared with you the fact that our portfolio currently was generating a little over 80% of its NOI from what we consider to be fortress assets, and that our goal over time is to increase that percentage of NOI that comes from fortress assets, or A-quality assets, to something well into the mid-to-high 90s.
And we intend to do that through a combination of acquiring powerful centers; expanding existing centers of ours that are already powerful centers and making them even bigger and more powerful; developing Class A properties; and then, as time goes on, disposing of assets or pruning our portfolio.
While we have not done a significant amount of pruning in the last year, it is still very much on our radar screen.
We're watching carefully what's happening in the B mall marketplace, and even the C mall marketplace.
And it's clear to us that capital is taking a look and recognizing that, given the scarcity of product on a risk-adjusted basis, that there are significant rewards to be achieved from investing in B-quality malls.
And that when you add to that the fact that the debt markets have improved to the point to where these properties are able to support relatively high loan-to-value debt levels, either through traditional loans or CMBS loans, it creates an environment where I am convinced we will have the opportunity to monetize some of our B and C malls and achieve the long-term goal that we announced a little over a year ago, which is to take our portfolio to a point to where something in the mid-90% of our total income is coming from Class A fortress, high-barrier-to-entry real estate.
And that's our goal.
That's one of the lessons that we learned from the recession -- the depression -- of 2009 is that those type of assets perform the best in downturns.
We've also learned, when we look at our NOIs, that our strongest NOI performers over a long history of time are the powerhouse properties that we own.
We can take a property that is generating a significant amount of NOI and generate huge increases in it, like a Scottsdale Fashion Square, a Tyson's Corner, a Washington Square, a Cerritos, properties like that.
And on the other hand, we've found over time that the B and the C malls that generate lesser amounts of income and are in secondary markets, while they're very safe and secure investments from many different angles, we just can't generate the same double-digit growth, because you just don't have the dynamics available to you in the marketplace.
And when you do have the dynamics available to you, competition can tend to occur in any number of different formats.
So that's our strategy at a portfolio level.
In terms of how we've been implementing that strategy, as you saw in this quarter we were able to enhance our ownership of Class A high quality, high productive malls in a couple of ways.
One is that we were able to increase our ownership at Arrowhead and Superstition Mall by executing a trade with General Growth Properties where we traded 5 Mervyn's stores plus some cash for a one-third interest that they had owned historically in Arrowhead Mall and Superstition Mall.
They were a passive investor in those two malls.
And while they're great regional malls that -- and Arrowhead in particular is a very, very strong center and Superstition is probably more of B type of property from a sales per foot or any other viewpoint, or any other viewpoint -- it wasn't a core investment for them because they had inherited that investment.
So it made sense for them to liquefy it.
It made sense for us to increase our ownership.
We did it and now it's part of our goal and method of getting to that long-term goal that I've enunciated.
The other really key event that happened that we announced a couple of days ago is that, consistent with the guidance that we have carefully been giving to you over the course of the last one year, where we started one year ago today and said -- we are going to carefully look at the outlet business.
And if you take a look at all of the tea leaves that we asked you to read, we gave you strong indications to believe that we had decided last quarter that it was definitely an arena that we were going to move into.
And that we were going to move into it, and we predicted for you that, look, at the end of five years from now my guess is we will own somewhere between 5 and 10 very strong fashion outlet malls.
We think it's a natural progression for us.
We've had great reception from retailers as we've looked at this.
And we were able to capitalize on a relationship to acquire one of the top-tier outlet malls located in Niagara Falls.
We can get into the characteristics of the property, I'm sure, on the call.
But it's Fashion Outlets of Niagara Falls.
It's a property that generates over $650 a square foot.
It's enjoyed dramatic sales increases over the last 5 years due to a combination of enhanced marketing, as well as the relationship of the Canadian and the US dollars.
But we also see an opportunity, because of the tenant demand that we know that we have today, for an increased enhancement to the productivity of the center and an increase in the NOI from the center, with significant NOI increases available to us, given the fact that our cost of occupancy as a percentage of sales at this center is something in the neighborhood of 7% for the mall tenants and a little bit over 8% to 9%, basically, for the non-mall tenants that we have here.
We think there's a great opportunity at this level of productivity to generate good rent bumps going forward.
We have retained AWE Talisman to stay on board with us.
They had owned the property over the last five years and done the leasing marketing management of it.
This is the same group that we retained to join us in the development of the Fashion Outlets of Scottsdale.
And they'll be working with us here as we take Niagara on to the next level.
And we built in earn-out incentives into the economics of the transaction, where if they're able to generate significant increases in NOI over the next 3 years from Niagara Falls, they're able to generate an earn-out of another $18 million, give or take, over the $200 million of consideration that we paid at the closing itself.
The cap rate on the -- if I had to characterize a cap rate on the earn-out, which I know you'll be interested in asking, it probably is in the area of 7.5 on the earn-out itself.
But we see significant increases available here.
We've elected to align our interests with AWE Talisman.
They're a recognized name in the outlet industry, not a big name, but a quality name who the retailers know well and they trust.
And we're going to be using them here as well as we've got them working with us in Scottsdale.
We announced in Scottsdale that we were going to develop a Fashion Outlet center at Scottsdale, about a week before ICSC.
And that was extremely well received at ICSC.
We're currently in the process of discussing the project with numerous tenants.
We're taking inventory of the interest.
We've been developing a leasing plan and sizing parameters based upon the demand that we have.
And this is a center that, as we've said in previous calls, we have very high hopes for.
We think it has the opportunity to be a really high performer in the fashion outlet world.
And we are very excited about pursuing that.
On the development side, we see great prospects over the next 5 years and we've made very good progress over the last quarter.
As we've indicated to you, we see about a $1 billion pipeline of development and redevelopment opportunities available on our pro rata share to us in the Company over the next 5 years.
The most visible of that right now would be Tyson's Corner where we are proceeding with our office and residential expansion.
The reception we have in the market there -- we've engaged the Heinz organization as our fee developer on the office.
And we're engaging a local, very strong, residential developer to lead the way for us on the residential.
We're in the process of picking a flag on the hotel that's [going to be the] owner for the hotel.
And we're very bullish on that.
And of course the Fashion Outlets of Scottsdale is in our pipeline, which will be something that will definitely occur over that 5-year period.
Beyond that within the pipeline you have Estrella Falls, as well as a couple of other projects that we're looking at, both in the expansion arena within our existing portfolio, as well as the possibility of one or two projects that we're looking at where we may buy a project from another entity and take an existing center and expand it.
So we feel very good about where we stand.
We're exactly where we want to be.
And at this point in time we'd like to open it up for your questions.
Operator?
Operator
Yes, sir.
(Operator instructions.) Craig Schmidt; Bank of America/Merrill Lynch.
Craig Schmidt - Analyst
I just wanted to focus a little bit on Niagara Falls, the outlet center.
I guess when I look at the size and the occupancy and the productivity, I'm coming up with a pretty high cap rate.
And I guess there's two things obviously I don't know.
Is the occupancy cost very low on this asset?
Or is the sales per square foot somehow not include all the properties in the 526,000 square feet?
Art Coppola - Chairman & CEO
Well, the cap rate I can share with you is -- if you were going to use one I would tell you it's got a 7 handle on it on the initial purchase.
And I mentioned to you that on the earn-out it's more in the mid-7s.
And the occupancy cost as a percentage of sales range is between 7% for mall tenants to 9% for some of our non-mall tenants.
But it is a low occupancy cost as a percentage of sales.
It's high sales level.
Those are for likely tenants under 10,000 feet.
But we see good upside there.
But the cap rate on the purchase I will tell you flat out is around 7%.
Craig Schmidt - Analyst
Okay, thanks a lot.
Operator
Michael Mueller; JPMorgan.
Michael Mueller - Analyst
Two questions -- one, to get to the 5 to 10 outlet centers over the next 5 years, what do you think the split's going to be between purchasing or developing?
Because it looks like -- well, basically you've done one of each so far.
Art Coppola - Chairman & CEO
Yes.
You know, let's see how it goes.
Let's see how it goes.
I feel very confident in those numbers.
And one thing that I would add is another category, would be an adaptive reuse of one of the properties that Macerich owns today, so one or more of the properties that Macerich owns today to be converted to either a partial or even a full outlet center.
Let's let it play out.
Clearly I think there is, beyond Scottsdale, there is another development opportunity that's imminent in the pipeline.
But we need to finalize some conversations related to that.
And there are, in fact, a couple of other, I would say, little bit longer-term development opportunities that we're looking at, as well as some potential acquisition opportunities.
But at this point in time, we have -- we announced Niagara Falls.
We've announced the Fashion Outlets of Scottsdale.
I've indicated that there's a development opportunity that is imminent, that we should be announcing hopefully before the end of the year.
And I feel comfortable that at the end of 5 years we'll be in that zip code of 5 to 10 properties.
We're not going to -- the major message is we're cautiously going to be in the business, very carefully, in really a small way compared to our overall asset base.
At most I would guess that the outlet business will be 10% to 15%, I don't know, in that region of our asset base.
But it's something we should enter into and when it's 10% to 15% over what we have today you're adding 5, maybe even as many as more than 5, centers in some of those development -- through the pipeline over and above what we have in the traditional regional mall area.
On our small base that's real growth.
Michael Mueller - Analyst
Yes.
You mentioned the going-in cap rate on this is about 7% on Niagara.
I mean, for a regional mall and an outlet center hypothetically that have comparable sales, what do you think the cap rate differential should be?
Art Coppola - Chairman & CEO
I'm not going to comment on that.
You guys know how you treat -- I mean, you know what the reported cap rates are on the outlet centers that recently traded.
And there's very few -- well, there hasn't been a Class A regional mall that's traded anytime recently.
Look, we're very happy with the deal that we made at Niagara.
We think it's a fair price from both sides.
But you know how the Street values outlets versus regional malls.
They tend to value some of the outlet owners at higher multiples than the regional mall owners.
Michael Mueller - Analyst
Okay.
And last question -- Tom, your comment on about $12 million of lease term, was that for the balance of the year or $12 million for the full year?
And then, considering that you've only gotten, I think, about $4 million so far year to date, can you just talk about where you're generally seeing the back half of the year lease term coming from, types of tenants?
Tom O'Hern - Senior EVP & CFO
Yes.
Mike, the $12 million was our assumption for the full year.
And there was a range.
That was part of the reason we had a wide guidance range.
And we've got a lot more clarity today.
And, you're right, year to date we're at about $4.5 million.
We've got a couple deals out there that we're working on right now, so we've got a little bit of clarity.
And we're comfortable that the balance to get us to $12 million will come through in the next two quarters.
Michael Mueller - Analyst
Okay, great.
Thank you.
Operator
Paul Morgan; Morgan Stanley.
Paul Morgan - Analyst
You mentioned pruning the portfolio and how that's still a priority and you're watching what everyone else is doing.
You also then broke out top 20, top 50.
Should we assume that what's not in the top 50, or a big chunk of that, is up for pruning?
Or have you quantified the number of assets that you think might qualify?
Are they geographically disbursed and not in your top markets?
Or how should we think about that?
Art Coppola - Chairman & CEO
Sure.
There are 20 properties in our top 70 that are not in the top 50, right?
So the top 50 do $500 a square foot.
There's another 20 properties that are sub-$400-a-foot type centers and sub-$300-a-foot centers.
I'd say over time as many as half of those, or 10 or so, would be candidates for pruning.
Paul Morgan - Analyst
Okay, great.
And then just could you give an update on the --
Art Coppola - Chairman & CEO
I do want to emphasize that from a timetable viewpoint, that would be pruning only on an opportunistic and strategic -- in a strategic way for us.
We don't feel compelled to do any of that pruning.
But as we look at where we want to be 5 years from now in terms of the overall quality of our portfolio, the guidance we've given is that, look, with the size of our company we can get to almost 100% of our income coming from fortress assets, because we don't own that many assets that would need to be pruned.
And between a combination of pruning and then addition, you can get to a place that is a very unique place in the marketplace and end up with a portfolio that is extremely high barrier to entry, that should perform very well in tough times and extremely well -- should perform satisfactorily in tough times and extremely well in good times.
Go ahead.
I cut you off.
Paul Morgan - Analyst
Just thinking on that.
So you do or you sort of don't envision doing like a Westfield type thing where you try to market a portfolio of them?
Art Coppola - Chairman & CEO
Let's see how it goes.
We need to -- look, it's -- I think it's going to be instructive to all of us, the process that Westfield is going through.
And I'm agnostic as to what that result will be.
I'm a big believer that the B malls of the world are still very good investments and that there are very good returns to be had there.
But as I look at our portfolio management, we've elected to go a little different route here, because we have the opportunity to do it.
If we were at 40% of our income coming from A malls I probably wouldn't be sitting here saying our goal is to have 95% be A malls.
But when we're sitting in the low 80s, it's an attainable goal.
And we don't need to get there -- and I'm not saying Westfield does either, because they've got a very nice and strong platform -- we don't need to get there through a mass marketing, but who knows?
I mean, we'll do whatever is best and attracts the most interest.
We're hearing there's very good interest on those 17 properties, so we'll see.
We're monitoring it.
I think it's great that they're out in the market because it will give us all some transparency on it.
Paul Morgan - Analyst
Okay, great.
And my other question is on the redevelopment pipeline.
Has there been any movement over the past kind of 3 to 6 months in terms of things moving forward or popping up in your conversations at ICSC maybe that something over the next 18 months might start that you hadn't otherwise thought, or anything like that?
Art Coppola - Chairman & CEO
Well, the major project that we've got under a careful -- and, Randy, help me if I miss something.
But the major one that we're looking at right now is Broadway Plaza in Walnut Creek.
We think there's an opportunity to add some GLA there.
May involve tearing down some small store space and then rebuilding in a more densified manner.
We're adding Neiman Marcus there to an already well anchored location.
We think there's great opportunities there.
The other center that I would say has got great opportunities is Cerritos mall.
We just recently worked with Nordstrom for them to relocate to a new store from an old store that they had at the mall.
And they're doing fabulous.
Our expansion tenants that we've added are doing terrific.
Mall sales and traffic is just on fire and we've got the capacity there to recycle a fair amount of square footage.
So I'd say those are probably our top 2 candidates that we're focused on.
But we're looking at every property all the time, just in the ordinary course of business.
Paul Morgan - Analyst
Great, thanks.
Operator
Christy McElroy; UBS.
Christy McElroy - Analyst
Tom, can you give us an early sense for how you plan to refinance the converts maturing next year?
Tom O'Hern - Senior EVP & CFO
Well, Christy, we've got a variety of possibilities.
As you know, the converts come up in March.
And today they're trading at a premium, so there's no real incentive to go tender early for them.
You saw us announce a line of credit at $1.5 billion, but we've also got the ability to expand that to $2 billion.
And today as we speak we've got maybe 200 or 240 outstanding on the line.
So there's not -- there's a lot of capacity in that line if we needed to do the line.
There's also a very strong market for unsecured bank notes right now.
We've got multiple indications from banks that would be eager to put a 5-to-7 year financing in place for us.
So there's a variety of ways we can do it.
As we mentioned before, we also have a fairly large unencumbered pool and could do some financing there on some of those assets.
So we're not at the point of making a decision, but there's a number of buckets of liquidity that we could go to or combine to take the converts out.
Christy McElroy - Analyst
And then, on Superstition and Arrowhead coming due later this year, are these assets that you would potentially unencumber?
Or would you refinance them?
And if you did refi them, how much in assets proceeds do you think you could generate?
Tom O'Hern - Senior EVP & CFO
Well, we're going through that decision now.
And it's a partnership, so we'll get input from our partners.
But just as an indication, we're getting proposals now on Arrowhead.
And Arrowhead has a relatively modest amount of debt, I think less than $70 million.
And we've got proposals coming in at $210 million and $240 million at very, very, very attractive pricing.
So there's a lot of capacity.
And both of those assets tend to be very underleveraged today.
Christy McElroy - Analyst
Okay.
And then, Art, just following up on an earlier comment, wondering if you could give us a sense for some of the feedback you received from retailers on the outlet project in Scottsdale?
And have you officially begun preleasing it?
I know there was some talk about proximity of the site to full-price retail and if that's been an issue at all?
Art Coppola - Chairman & CEO
No.
It has been an issue which we think -- which the retailers believe that, given the different projects that have been announced in the marketplace, that the location of the project that we've announced and the timing of the project that we've announced, the sponsorship, is in their mind -- and the proximity to existing retail -- the right project for a fashion outlet center in the Scottsdale marketplace.
The retailers are giving -- are very strongly supportive of it.
And we're really right now just taking inventory of all of the demand that we have so that we can size the first phase of it.
It's traditional in these outlet centers to build them in phases.
The demand has been strong that we may build the first phase at something larger than what would normally be a first phase of an outlet center, which might normally be more in the 350,000 square foot zip code or neighborhood.
But we're assessing the demand, doing layouts there right now and in conversations taking interest from tenants.
Once we've taken interest from all the tenants we'll select from that group and work with that group and find the right locations for them in partnership with our relationship and the fee developer that we've got involved there, AWE Talisman, who's working with us and directly with the tenants.
And we're very bullish on that.
We think it's going to be a real winner.
Christy McElroy - Analyst
Okay, thank you.
Operator
Rich Moore; RBC Capital Markets.
Rich Moore - Analyst
First of all, thank you for the breakout on the mall stats, Art.
I think that's a good thing to do and certainly appreciate that.
On the two outlet centers, I guess, that you guys are working on, they're both with Talisman.
I guess you bought one from Talisman and you're working on the Scottsdale one with Talisman.
Is there a broader Talisman relationship you think that's developing here?
I mean, they have a couple centers that they own and a couple that they're developing as well.
Art Coppola - Chairman & CEO
We have a lot of respect for them.
Otherwise we wouldn't have put them -- we wouldn't have handed the keys to the car to them, both at Niagara over the next couple of years or at Scottsdale for the future.
So we've got a lot of respect for them.
Retailers have got a lot of respect for that group.
Look, they're by no means the powerhouse in size that other groups are.
But they are a quality operation that have produced quality results and developed quality projects and we think they are a perfect partner for us at this point on these projects and potentially others going forward.
So I could see it definitely getting broader.
Rich Moore - Analyst
Are any of those four, Art, of interest to you guys, the two that they currently have operating or those two in Chicago and Miami that they're developing?
Or is that even on the table as a possibility?
Art Coppola - Chairman & CEO
I'd say that at this point in time we definitely see ourselves doing more with them.
I'm not sure it would involve buying something that they currently own.
On the other hand, I could see developing something together with them beyond what we're doing in Scottsdale.
We'll just have to see how things play out.
Rich Moore - Analyst
Okay, good.
Thank you.
Then on -- Tom, a couple questions for you.
The expense recovery ratio seemed to dip this quarter.
Anything unusual in there?
Tom O'Hern - Senior EVP & CFO
Rich, we had 1 settlement of a lawsuit that flowed through expenses for about $2 million.
They were operating of nature, so that flowed through and moved the numbers a little bit.
That was probably the only thing out of the ordinary.
And if you compare that versus -- that's probably the biggest differential in terms of the recovery rate.
Rich Moore - Analyst
Okay.
Good.
Thanks.
And then on the overall debt, there was more floating rate debt this quarter.
It took a pretty good jump.
Does that go back to, you think, typical levels of fixed rate versus floating rate?
Tom O'Hern - Senior EVP & CFO
Rich, the reason that happened was we had $400 million worth of swaps that burned off.
And there are a vintage of loans in our portfolio that came about in '08 and '09, when we were in a tight credit market, that are floating.
That's The Oaks and Westside Pavilion and SanTan and those are natural candidates to go to a long-term fixed-rate financing when they mature over the next couple of years.
So you'll gradually see us move the percentage of floating-rate debt versus the total down below 20%.
I think we're at 25% as a result of that swap burning off.
Rich Moore - Analyst
Okay.
All right, good.
Thank you.
Operator
Samit Parikh; ISI Group.
Samit Parikh - Analyst
My question really was sort of if you guys have done an analysis on looking at the performance divergence in your portfolio?
You talked about so and so 46% of your NOI comes from assets of $631 a foot and the rest below.
Have you looked at how same store has trended maybe over historically between those two and what the divergence is and how you expect it going forward?
Art Coppola - Chairman & CEO
Well, I'll try and give you an answer and hopefully I'm being responsive.
We find that the stronger a center is, the better comp sales growth we get and the better NOI growth that we get.
The more average a center is, the more average the growth is and the weaker the center is the weaker the performance is, both on sales and NOI.
Does that answer your question?
Samit Parikh - Analyst
I was just wondering if you guys have actually looked at it?
Some of the other companies have sort of given us an actual statistic on that.
But if not, that's okay.
Art Coppola - Chairman & CEO
Absolutely.
So we could do that for you.
Why don't we do that maybe on the next call?
We'll address that on these categories and we can talk about how sales have grown, say, in the top 20 over the last year and how same-center growth was in the top 20 over the last year, and maybe the last 5 years even, that type of thing.
And then the top 50 and then -- why don't we do a little slicing and dicing for you then?
We do it granularly, but let's do it for you in the same groupings that we've talked about, both sales breakouts and NOI breakouts.
Is that fair?
Samit Parikh - Analyst
That's definitely fair.
And I guess just last question if you can disclose this -- on the outlet you guys bought, what would the sales per square foot be on the entire center and not just the in-line nonanchor space?
Art Coppola - Chairman & CEO
It's about $600 a square foot on average, because there's some strip center space, too.
But, yes, that's about right.
Samit Parikh - Analyst
Okay, thanks.
Operator
Cedric Lachance; Green Street Advisors.
Cedric Lachance - Analyst
Tom, I just want to go back to some of the numbers you gave earlier when you gave the breakdown in sales per region.
All the numbers were basically between 5.5% and 7.5%.
But when we look at the overall sales [or] activity gains for the last 12 months, the number is about 9%.
Can you help me bridge the gap between the two?
Tom O'Hern - Senior EVP & CFO
Yes, they're two different stats, Cedric.
The first stat at 9% was the mall sales per square foot.
And that's for tenants that have been opened 12 months.
When we look at it regionally we're looking at total tenant sales for the period.
Cedric Lachance - Analyst
Okay.
Tom O'Hern - Senior EVP & CFO
So it's really a different statistic.
Cedric Lachance - Analyst
Okay.
Switching gears back to development, Art, 6, 9 months ago I think you talked about making progress in regards to potentially announcing a development in the Phoenix market, mall development in the Goodyear area.
Are you still on track to make such an announcement in 2011?
Art Coppola - Chairman & CEO
Yes, I think that at this point in time as we evaluate the market the opening of that center looks like 2014, 2015.
But we're looking at it right now and trying to evaluate it.
So we own that land.
It's entitled.
And we're still assessing that.
Cedric Lachance - Analyst
Okay.
Is there anything changing in either direction, whether you open -- or whether you go ahead with the project or not?
Art Coppola - Chairman & CEO
There's nothing changed about whether we're going to go ahead.
We're definitely going ahead.
The only question is when will it open.
And so we're still evaluating that.
We have about a 32-, 33-month build-out from the time that we start the plans, preliminary plans, et cetera, through the finish.
But when we have an opening date we'll announce it.
But I'd say it's in our 5-year pipeline.
It's definitely in those numbers.
Cedric Lachance - Analyst
Okay.
Then final question -- in regards to leasing, are you seeing any changes in trends in terms of demand for short-term leasing from your tenants?
In particular, are you able to start moving more and more tenants effectively to a longer-term lease to an effectively and hopefully at full-market rent?
Art Coppola - Chairman & CEO
I think I'll ask Randy Brant, who's here with us today, to address that, please.
Randy?
Randy Brant - EVP, Real Estate
No trend towards shorter-term leases.
I would say there's a trend more towards longer-term leases as the economy's getting better.
But definitely not a trend to shorter-term leases.
Most of our deals are -- the tenants want to lock in 10 years at market rent.
Cedric Lachance - Analyst
Sure.
And so you're able to convert more -- you're able to convert the short-term tenants to the longer terms?
Or is it something that from a percentage of leases that's on a short-term basis, it's something that's not changing much over the last, let's say, 6 to 12 months?
Randy Brant - EVP, Real Estate
The leases that came up in the end of '08 and during '09 where sales were down, we did short-term leases.
Many of those are converting to long-term permanent leases today.
Cedric Lachance - Analyst
And what kind of rental uplifts are you able to achieve on those?
Randy Brant - EVP, Real Estate
Obviously it varies center to center, but we feel we're getting market rent.
Cedric Lachance - Analyst
Okay.
All right.
Thank you.
Operator
Quentin Velleley; Citibank.
Quentin Velleley - Analyst
Just in terms of the hand-back with Shoppingtown Mall, and you commented that you want to prune sort of the bottom 20 in the portfolio and we've seen 3 malls go, I guess, the route of being handed back to the lender.
Are there any other malls sort of working in that bottom 20 where NOI might be deteriorating and they might be zero or negative equity value in your view that ultimately could be handed back as well?
Tom O'Hern - Senior EVP & CFO
Well, Quentin, fortunately we don't have a lot of those situations.
And even in the case of Shoppingtown, we don't know what the resolution is going to be on that one.
We're negotiating with the servicer and there are a variety of different ways it could go.
It is good real estate.
And we're not certain of the outcome there.
So, no, we don't have a lot of those situations and nothing that's imminent.
But obviously we always reserve the right, given the nonrecourse financing, to evaluate as we get close to a maturity.
Quentin Velleley - Analyst
Okay, and then I think Michael had one as well.
Michael Bilerman - Analyst
No, I was just -- and I apologize.
It's been a long day.
I just wanted to know how the earn-out -- you said $18 million, but I guess how does that -- at what threshold do they earn that $18 million and how will that work?
Ed Coppola - President
Michael, this is Ed Coppola.
Basically we've identified certain spaces that were very much under market, that when this property was in a servicer's hands there were leases done that were very, very generous to the tenants.
And as part of this we identified certain spaces that we identified with them and quantified them and have a realistic outlook as to the rental increases which will occur over the next 3 years, which gives them the ability to earn up to $18 million additional payout, less certain leasing costs that are attributable to those new leases.
So I suspect very strongly that the performance will be high.
The demand from tenants here has severely increased and we're obviously looking at ways to expand our presence in this market.
And we've got lots of different interest from luxury tenants that were not able to get into this center previously.
So it was an arm's length negotiation that we sat down and figured out the earn-out.
Michael Bilerman - Analyst
But I guess the math behind it, obviously, $18 million on a purchase price of $200 million is a lot.
And just thinking about how that -- the upside in NOI is sort of shared.
So that -- let's [throw out] $18 million at a 7% cap effectively is another, like, $1.25 million of NOI.
Is it then they effectively get paid for that first increase in NOI and then after that you'll share in all the upside?
Ed Coppola - President
There's no sharing of that upside.
They get paid a formula up to a certain amount which is -- looks to be much greater than $1.5 million.
And we capped it at $18 million less leasing expenses and it was really capped at about a 7.5% cap on specific spaces, not on the whole center.
Art Coppola - Chairman & CEO
I think actually to add to that a little bit, Michael, there was another question earlier today about what cap rates might a property of this normally go for?
Look, in a privately negotiated transaction there's always a difference between the bid and the asked.
And the seller wanted to get the value paid to them on leases that they knew were way below market, and for leases that we acknowledge were below market.
But we also wanted to say -- all right, so long as those leases are really rolled over at at least the rents that we both anticipate are attainable, we'll give you value for those credits, for those leases, as they roll over.
And in fact, we're going to retain you to do the leasing and management and marketing of this center for a period of time.
So it's really the difference between giving them the value by having paid them, let's say, a purchase price that would have been $218 million, less the cap reserve of, let's say, a few million less, $214 million or $213 million.
It's the difference essentially between having bought the center as a 6.5% cap as is, and with no earn-out, or a 7% cap with an earn-out where they can earn a little bit extra so long as they're able to produce what we both believe certain spaces are worth.
Does that answer your question?
Michael Bilerman - Analyst
Yes, that's perfect.
All right, so you could have owned the center outright at 6.5% with growth, or you're effectively going to own it at a 7% and that 7%'s probably going to be flat as you pay this earn-out over time.
And then after your 3 -- I assume it's a 3-year earn-out?
Art Coppola - Chairman & CEO
Yes.
But again, I want to be very clear.
We see -- the earn-out is only related to certain spaces within the center.
There are other spaces, plenty of other spaces that are going to be rolling over.
There's plenty of other growth coming from percentage rent.
There's opportunities to grow the NOI, in our view, from cost savings from the economies of scale that we have on insurance and things like that.
So we see growth from this center beyond the earn-out locations within the center that is well in excess of the same-center growth that we have in our existing portfolio which is, as you know, in the neighborhood of 3%.
We see very strong same-center growth coming from this asset, which is a function of the fact that we're buying it with current cost of occupancy as a percentage of sales in the zip code of 7%, say 8% overall, including the non-mall spaces.
So there's huge room for growth.
And the earn-out will, after a period of years, give them value 3 years from now on a deferred basis for that growth.
I think in fact the reality is, Tom, we're going to end up booking the purchase price at the full level anyway.
Tom O'Hern - Senior EVP & CFO
Right.
Art Coppola - Chairman & CEO
Most likely.
And so, all of the growth will be attributed to us.
What this really is is a means -- it's really -- the reverse could have easily been done too, where we paid them $218 million and they give us back money if the center doesn't perform at a certain level.
So it does not compress the growth.
It really aligns our interests, in my view.
Michael Bilerman - Analyst
Right.
And I think that's -- your money just goes out the door at a later point on the specific performance of the NOI coming in.
Art Coppola - Chairman & CEO
And the one thing I am cert- -- almost 100% certain, the money's going to go out the door.
We're going to book it as a liability.
Michael Bilerman - Analyst
And the only -- one other question, just on this asset, was, you know, obviously they went through a whole revitalization of what was a dilapidated center.
When you reviewed the leases, is there anything that gives you pause in any of those leases that they negotiated with tenants, that either they have out clauses if things don't go to the way that you see them going?
Art Coppola - Chairman & CEO
We have -- and, Randy, feel free to hop in, but we have a very bullish view on the property.
There's huge demand, in our view, beyond the spaces that we currently have available.
And we think it's going to -- we think it's a great center today, but we think it's going to be an even stronger center 3 to 5 years from now.
Randy, you want to chime in?
Randy Brant - EVP, Real Estate
Yes, I wish some tenants would opt out.
We could probably get a lot more rent.
Art Coppola - Chairman & CEO
Yes.
This is a center that anybody that ever came to you and said, "I'd like to have rent relief or I'll leave," you'd say, "Hand me the keys."
Michael Bilerman - Analyst
Great, thank you.
Operator
Todd Thomas; KeyBanc Capital Markets.
Todd Thomas - Analyst
Question on Tyson's Corner -- outside of Reston Town Center, the Northern Virginia office market remains rather soft, with a good amount of availability.
What type of pre-leasing, if any, would you require in order to move forward on that project?
And what type of rents are you underwriting on the office component?
Art Coppola - Chairman & CEO
We're going to make the decision on -- right now we're doing infrastructure work that will allow us to open up the office building and the residential building in spring of 2014.
We're going to take -- and that work will be done between now and November of this year.
This is utilities work and things of that nature.
The pre-marketing of the building is going extremely well.
We're already in negotiations with a lead tenant on the office space.
On the residential, we could pre-lease that building to virtually -- in a short period of time to 50% leased in a number of ways after doing our due diligence with local residential developers.
So on the office side -- and that's really the key question.
The market -- look, it's a very large CBD, Northern Virginia and Fairfax County.
This will be the premier building, without question, in the entire market, both from a quality viewpoint, a location viewpoint, and the adjacency to Tyson's Corner shopping center.
When you add all of that together, we're absolutely convinced we'll make the decision at the end of this year to continue moving forward and to break ground in the spring of next year that would allow 2014 delivery.
But we'll be making that decision.
We'll report further on this to you at our next earnings call next quarter.
But right now everything is moving along very well.
Todd Thomas - Analyst
Okay.
And you've received the full site plan approvals?
Art Coppola - Chairman & CEO
We have approvals for 3 times the square footage that we're building.
We have approvals from Fairfax County to build 4.5 million square feet of residential and office and hotel on this site.
And we're only adding at this point in time 1.3 million square feet.
Todd Thomas - Analyst
Okay.
Right.
And then at Atlas Park, can you give us an update on your plans to remerchandise that center, bring in new retailers and talk about maybe some progress that you've started to make there?
Ed Coppola - President
Yes.
This is Ed.
We've been in meetings with retailers.
And, again, we just closed on that center a couple, 3 months ago.
We had gone in and our operations team have saved tremendous amounts on operating costs and brought in our experts.
And obviously we've got a huge position there in Queens with our Queens Center Mall and our East Coast operating group.
Randy's team are meeting with tenants.
We have significant interest based upon what we're going to do with the traffic flow and the design, fixing the design, of that center.
I was actually in New York City meeting with the Planning Department of the City of Queens and the City of New York this past week.
And we were welcomed with a very, very open reception on them wanting to help us fix the situation out there and we feel very confident that we're going to.
We do have tenant demand.
We do have interest.
We're sourcing that.
We're probably going to add a food and drug component to it to create more daytrips and more traffic into the center.
Today restaurants are doing quite well.
Randy Brant - EVP, Real Estate
Theater's doing well.
Ed Coppola - President
Theater's doing well, one of the top theaters in the chain.
And it's got a very, very successful health club there.
So, Randy, if you want to expound on that?
We're feeling very -- pretty good about it.
Randy Brant - EVP, Real Estate
We have many tenants interested in pursuing it.
As Ed said, there's a few physical aspects to the center that needs to be fixed, if you will, and we're evaluating those.
But progress is going very well.
Todd Thomas - Analyst
Great.
Thank you.
Operator
Nathan Isbee; Stifel Nicolaus.
Nathan Isbee - Analyst
Just focusing back on the Niagara Center, I don't know if I'm reading this right, but there's some numbers out on the web on Talisman's web site that sales were at $800 bucks at the peak.
Is that correct and if it is, what would have caused that drop?
Art Coppola - Chairman & CEO
There's no drop.
The Talisman website is a private developer's website and they have their own method of defining sales.
And it probably relates to the most recent vintage of outlet tenant sales, but it's certainly not -- we have a certain protocol that we, as well as the other public mall companies, follow.
I don't think there's hardly any private developers that follow that.
Probably it's more of just the pure outlet play tenants in there and the more vintage play tenants of the ones that they put in as opposed to the ones they inherited way back then.
The numbers we've reported are absolutely consistent with verified, validated sales reports, consistent with the way that we report each and every one of our properties.
Nathan Isbee - Analyst
So there was no sales drop-off?
Ed Coppola - President
Oh, no.
No drop-off.
Art Coppola - Chairman & CEO
Go ahead, Randy.
Randy Brant - EVP, Real Estate
We've tracked the sales for each tenant since they've been opened.
And some are over 10 years.
The sales have been going up, not down.
Ed Coppola - President
And, in fact, year to date sales are up just under 11%, and then in May were up over 15%.
So this center is tracking quite well.
Nathan Isbee - Analyst
Okay.
And then --
Art Coppola - Chairman & CEO
I won't tell you that sometimes our leasing people when they're leasing space in a leasing booth at ICSC might say something different from what Tom might put into a 10-K.
Okay?
I'll tell you that that probably is true.
Nathan Isbee - Analyst
Got you.
Ed Coppola - President
Actually, since '09 sales are up over 41% in this center.
Nathan Isbee - Analyst
Okay.
And then, do you have any numbers on how much of the center sales are being pulled from metro Toronto or Canada?
Art Coppola - Chairman & CEO
Yes, 82%.
Nathan Isbee - Analyst
Okay.
So any thoughts on possible impact that the Halton Hills, 1 of the 2 that are going to get built, might have on this asset?
Art Coppola - Chairman & CEO
Yes, we've thought about it.
We feel very comfortable with our position for a lot of reasons.
And some of those reasons you'll be learning about over the next couple of months.
Nathan Isbee - Analyst
Okay.
And then, Tom, I think you had mentioned that bad debt was up.
Was that purely a function of Borders or was there something else in there?
Tom O'Hern - Senior EVP & CFO
No, we really didn't lose much on Borders.
It was just a few tenants and, again, year to date the numbers are down.
So we don't really draw any conclusions from that.
We think the tenant environment continues to get better and we think year over year versus last year we're going to be down significantly, in '11 versus '10.
Nathan Isbee - Analyst
All right, thanks.
Operator
Ben Yang; Keefe Bruyette & Woods.
Ben Yang - Analyst
Just very quickly, building on an earlier question, Art, was there ever any consideration to buying Talisman outright?
Because you guys have shown a willingness to buy a company [in] Westcor to get your hands on good assets and ground-up development capabilities.
So why not buy this company and take a bigger first step in the outlet sector rather than do these piecemeal deals with the same partner?
Art Coppola - Chairman & CEO
Well, we've announced the deals that we've announced with them to date.
And we believe that -- look, not everything that they own or that they're interested in doing on their own fits our platform from a quality perspective.
And some of the things that they would like to do in the future do fit our quality platform.
And some of the things that we would like to do in the future makes sense to bring them into, like we did at Scottsdale.
So let the hand play out.
We are very pleased with our relationship with AWE Talisman.
They're a class group, well received on Main Street.
We think it's a great combination.
We see the opportunity here to do more together.
And let the hand play out.
Ben Yang - Analyst
And as you build your portfolio to 5 or 10 outlets over the next 5 years, will the partner only be Talisman?
Do you have some type of exclusivity with these guys that you'll only do deals with these guys?
Art Coppola - Chairman & CEO
Let the hand play out.
Ben Yang - Analyst
Okay.
Thank you.
Operator
Alex Goldfarb; Sandler O'Neill.
Alex Goldfarb - Analyst
Just going to the B and C malls, as you guys think about pruning your portfolio, how many of those centers are in joint ventures?
I'm just sort of curious how easy it is to sell those centers or how easy it would be for you to sell just your stake in the center as a way of getting towards that mid-90% fortress composition.
Art Coppola - Chairman & CEO
About 13 of them are in joint ventures and 2 of them are going to be actively marketed with our joint venture partner in the near future, the next 3 months or so.
And about another 10 of them or so are with another joint venture partner.
And I think if that joint venture had an opportunity to monetize its investment in that joint venture, it would.
Let's say of the 20, you're looking at 13 of them are in joint venture.
And 2 of them are going to be marketed in the very near future, just on the open market through a broker.
And I think the others we'll see how it plays out.
But there's no mandate, again, that we do all this.
It's, again, just part of the broad goal of getting to a point to where we have well over 90% of our income coming from high-quality fortress, high-barrier-to-entry, A-ranked type of assets.
And we have the ability to get there and we're going to do it.
Alex Goldfarb - Analyst
Okay.
And I could probably guess the answer, but I want to ask you anyway -- as you think about selling these assets, you guys always seem more focused on asset quality versus impact to earnings and dilution.
So I'm going to assume that if you had an opportunity to sell more of these centers before you had a chance to reinvest the dollars on a current income basis, you would certainly do that.
Correct?
Art Coppola - Chairman & CEO
Yes.
We will.
And we have.
We have history of doing that.
And we totally understand and get it that it's going to be earnings dilutive if we do it.
And that will not -- unless you had an immediate redeployment of the capital, which we've had in the past at times --but we're not going to let the redeployment of capital, the immediate redeployment, get in the way of taking advantage of an opportunistic disposition.
Alex Goldfarb - Analyst
Okay.
And then just a final question for Tom.
Tom, in the guidance on the second half of the year, one, just sort of the term fees, if that's ratable or if that's more weighted in one particular quarter.
And then, if there's anything else sort of one-time-ish in the guidance.
Tom O'Hern - Senior EVP & CFO
No.
On the term fees, it's pretty hard to predict exactly when you settle and they write the check.
I'd put it evenly in both quarters.
And then there really is nothing else unusual in that guidance.
Alex Goldfarb - Analyst
Okay.
Thank you.
Operator
Vincent Chao; Deutsche Bank.
Vincent Chao - Analyst
Most of my questions have been answered.
But could you provide the quarterly lease spread, as you previously have?
And is that something you're not planning to provide in the future?
You're moving more towards the trailing 12-month?
Tom O'Hern - Senior EVP & CFO
In terms of the guidance?
Vincent Chao - Analyst
No, just in terms of previously in the press release or in the script you'd quote the quarterly spread?
Tom O'Hern - Senior EVP & CFO
No.
As we've said for quite some time, one quarter alone does not really give you an indicative sample size.
And so we think it's misleading.
It can be misleading on the high side or the low side.
So we think the trailing 12 is a far more meaningful number.
Vincent Chao - Analyst
Okay.
And can you just give us what it was last quarter?
Tom O'Hern - Senior EVP & CFO
Trailing 12 last quarter?
Vincent Chao - Analyst
Right.
Right.
Tom O'Hern - Senior EVP & CFO
9.6.
Vincent Chao - Analyst
Okay.
All right.
Thanks.
Operator
Thank you.
We have no additional questions in the queue at this time.
I will turn things back over to our speakers for any additional or closing remarks.
Art Coppola - Chairman & CEO
All right.
Well, thank you very much.
And we look forward to talking to you again soon.
Thank you for joining us.
Operator
Thank you.
Once again, ladies and gentlemen, that does conclude today's presentation.
Thank you for your participation and have a great day.