Macerich Co (MAC) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by.

Welcome to the Macerich Company Third Quarter 2011 Earnings Conference Call.

Today's call is being recorded.

At this time, all participants are in a listen-only mode.

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

Instructions will be provided at that time for you to queue up for questions.

Again, I'd like to remind everyone that today's conference is being recorded and would now like to turn the conference over to Jean Wood, Vice President of Investor Relations.

Please go ahead.

Thank you for joining us on the third 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 filing.

As this call will be webcast for some time to come, we believe it is important to note that the passage of time can render information stale and you should not rely on the continued accuracy of this material.

During this call, we will discuss certain non-GAAP financial measures, as defined by the SEC's Regulation G.

The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the press release and the supplemental 8-K filings for the quarter, which are posted in the investor section of the Company's website at www.macerich.com.

Joining us today are Art Coppola, CEO and Chairman of the Board of Directors, Tom O'Hern, Senior Executive Vice President and Chief Financial Officer and Randy Brant, Executive VP, Real Estate.

We look forward to seeing many of you at NAREIT convention in Dallas in 2 weeks and with that, I would like to turn the call over to Tom.

Thank you, Jean.

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

During the quarter, our fundamentals continued to improve.

Retail sales had a very solid increase and same-store NOI was positive for the seventh quarter in a row.

The releasing spreads also showed good increases.

We did have a drop in occupancy that was almost exclusively due to 14 Border's stores closing, as well as a large lease termination at ESPN Zone in North Bridge mall in Chicago.

During the quarter, we signed 180,000 square feet of lease deals; that was 121 deals.

The average new rent was $41.11 per square foot.

Our average releasing spread versus expiring on a trailing 12-month basis is up 10.8%.

On occupancy, we did have a 70 basis point decrease to 91.9% versus 92.6% on a same-center basis a year ago.

As I mentioned, much of that was due to closure of Border's stores, as well as ESPN Zone.

On the ESPN Zone space, which is 34,000 square feet, we received a $2.8 million lease termination revenue which is reflected in the third quarter.

Average rent increased to $44.05 per foot, that's up from $42.24 a year ago.

Occupancy costs declined to 13% for the trailing 12 months; that compares to 13.5% at year-end and that was down as a result of leasing activity, as well as tenant sales increases.

Looking at FFO now for the quarter, adjusted FFO, which excludes the impact of Valley View and Shoppingtown to centers in receivership, the number was up 13.6% to $0.75 per share and that compared to $0.66 a year ago.

Other operating results -- same-center NOI, excluding lease termination revenue and SFAS 141, was up 2.82% compared to the third quarter of last year.

I would like to point out that, that increase does not include Santa Monica Place and any impact from Santa Monica Place.

Lease termination revenue increased to $4.7 million compared to $3.5 million in the third quarter of last year.

Most of this was due to the ESPN Zone space at North Bridge I previously mentioned.

Bad debt expense for the quarter continued to trend down and was only $900,000 compared to $1.7 million in the third quarter of last year.

Management company expense was down to $20.2 million compared to $22.1 million for the third quarter of last year.

Looking now at the balance sheet, we continued our recent trend by paying off the Rimrock mortgage.

That loan had a 7.6% interest rate.

It was a $40 million loan.

Rimrock has now been added to our unencumbered pool of assets that includes 14 centers that generates nearly $100 million of NOI.

This gives us a very significant balance sheet flexibility and capacity that we have not had in the past.

On September 29, we closed on a $230 million 7-year fixed rate loan at 4.25%.

That's on Arrowhead Towne Center.

That paid off the prior loan, which was $73 million and had an interest rate of 6.9%.

Subsequent to quarter end, the Company retired at par plus accrued interest $180 million of our convertible notes that have a stated maturity of March of '12.

That leaves us with a balance of $440 million on those debentures.

Looking ahead to the 2012 loan maturities, on the surface, it looks like a total of $1.8 billion.

However, $800 million of those loans have built-in extension options.

Of the remaining $1 billion of maturities, as of September 30, the debentures were [619].

So, excluding those, we have property level mortgages with expirations in 2012 of $380 million, very manageable level given the financing we've done over the past few years.

Today, our debt-to-market cap is 46%, our average interest rate is 5.08% and our interest coverage ratio for the quarter was 2.39 times.

In this morning's earnings release, we reaffirmed our adjusted FFO per share guidance of $2.84 to $2.92 for the year.

This guidance range excludes the impact of Valley View and Shoppingtown; 2 properties under the control of either a receiver or loan servicer.

Based on our very strong balance sheet, our positive outlook for the rest of this year, as well as 2012, we feel very comfortable in increasing our dividend.

In fact, we just announced a 10% increase in the dividend to $0.55 per share per quarter.

That dividend is for shareholders of record on November 11 at the close of business and is payable on December 8.

Looking now at tenant sales, mall tenant sales per square foot were $467 for the 12-months ended September 30, 2011.

That is up 9.6% compared to the year ended September 30, 2010.

Looking at the geographical split, we were fairly strong across the country with Arizona being up 9%, Central Region up 10%, Eastern Region 6% (Company corrected after the conference call), Northern California 7.5% and Southern California 12.5%.

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

Thank you, Tom, and welcome to our call.

In the Q and A section, I will be happy to address questions about our business, but at this point in time, I want to share with you some thoughts on the recent passing of the founder of our Company, Mace Siegel.

Mace Siegel is the Mace in Macerich.

That's where the name came from.

Mace was not well known to a lot of you on this call, but he was extremely well known to the main street of our business, the shopping center business, to the main street of the communities in which he did business, to the main street of his favorite hobby, thoroughbred horse racing, where he was a legend in that business and was one of the leaders in seeking reform and good treatment of the athletes, the horses themselves and the business itself.

He was a giant of a man and I feel compelled to share my thoughts with you about Mace, both because of my personal feelings, but also because it is the vision of Mace that gives me the confidence to look into the future of this Company, that you follow today on this call, in the future.

And have great confidence in the future, because the fingerprints of Mace's vision for our Company are completely embedded in the DNA of our Company.

You know Tom.

You know Ed.

You've known me for the 17 years that we've been public.

But what you don't know is the guidance and the wisdom that we got from our friend and my brother and our founder Mace.

He had simple truisms that he shared with us early in our careers with him -- simple things like be true to your word, treat others as you would want to be treated, do the right thing for the real estate and the real estate will do the right thing for you.

He was a student of life, a student of the game.

He was continually learning and it is the guidance that he has given us that has created our Company to be the different company that we are.

The fact that we value relationships so highly with our investors, with our lenders, with our tenants, with the communities that we do business with, with our people is what makes Macerich different.

It's what gave us the ability to see our way through the tempest of 2009 because we were able to rely upon those relationships that were built by listening to Mace's founding words of -- treat others as you would want to be treated.

That gave us the lender partners and the financial partners that helped us see our way through and gave us our Board of Directors and you're investors that helped us see our way that pass.

He was a great man.

It's been said that the only sadness in life is not to be great and today the day that we will be burying Mace, later today, there is no sadness.

We look forward and we're proud to know him and you see his wisdom in everything that we do.

It is what makes Macerich different and while this is deeply personal for me, it does relate completely to our Company and it is the reason Macerich is different.

So with that, I do welcome you to this call.

I look forward to seeing you in a couple weeks in Dallas and I would like to open it up to Q and A.

(Operator Instructions) Paul Morgan, Morgan Stanley.

My condolences on the passing of Mace to start with.

Thank you.

On the outlet projects and the growth in that, I was interested in just the location of the new Chicago project relative to where outlets have traditionally been developed.

Retailers, at least at one point, were concerned about proximity selling their discount merchandise competing with their full price at regional malls.

And this being sort of inside say Woodfield in Chicago, are they changing that?

What could that mean for new outlet projects around the country if retailers are willing to break that tradition in terms of where outlets are located in metro areas?

That's a big question, so I'm not going to try and get into a long discourse on the future of the business and what the implications are from the past.

It is an evolutionary project.

The Fashion Outlets of Chicago that we're building, it does break all the rules of the outlet business.

I acknowledge that.

I will tell you that the leasing of the center is just fabulous in terms of the pace, the momentum and the merchandise mix.

I'll tell you that the retailers that are coming to our center have locations at each of the other 2 properties through their other channels of distribution, and remind you that retailers think about the world and their businesses as being 3 channels of distribution, full price, off price or outlet and online.

So, in the same context, we could say well, online retailing is going to compete with their full price retailing.

They've factored all of this in and they see it as an opportunity and we see it as an opportunity and we look forward to announcing the names of the tenants.

I acknowledge that it is a departure from what was perceived to be the rules of engagement of the past, but I also will tell you that the retailers see this as being just a massive opportunity.

The location is tremendously unique also, by the way.

You don't get very many locations right next-door to an international transit facility that has 76 million passengers per year.

So, maybe that's the paradigm shift.

Think about it that way, too.

Right.

Yes.

Of course.

Do you have any type of preliminary yield expectations for these?

For Fashion Outlets of Chicago?

Sure.

The total project cost is estimated to be $200 million.

We fully anticipate seeing a 10% to 11% unlevered cash-on-cash return on the total investment.

Okay, great.

My other question is on multi-family -- I saw that you're at least proposing multi-family at Broadway Plaza.

I know you've got that going on at Tysons and you talked about, at one point, at Biltmore having some.

You've got some peers who have done some multi-family themselves and you've got a lot of projects where it makes a lot of sense.

Given how strong the sector has been, have you given any thought about how you might structure these any differently in terms of the amount of risk you'd be willing to take on, how core you think it is to your business and whether you might do more of it yourself?

I think we're definitely going to do more of it ourselves.

I don't think it's going to be even 5% of our total business, but it's going to be a meaningful part of our business.

We're going to do it where we think that we can generate better returns through verticality of adding residential than we could with retail.

At Broadway Plaza, we are looking at adding maybe a third, fourth and fifth level of residential to 1 and 2-level new retail buildings.

But that's because you wouldn't be leasing retail at the third, the fourth and the fifth level and you can get very high rents for the third, the fourth and the fifth level of residential.

I don't see us moving into the residential business separate from our retail business, but in the context of residential development here at Broadway Plaza, at Corte Madera where we're looking at it, possibly Biltmore, definitely Tysons, the amenity package that we have to offer to the residential tenants is great retail and that's a tremendous amenity.

So I liken it to the old days of the golf course community builders, where if you're building a great golf course and in this case we have and build these great retail centers, why wouldn't you also want to participate in the development of the home sites around it for all the people that want to be close to it?

That's the way I look at it.

Okay, great.

Thanks.

Quentin Velleley, Citi.

-- 14 Border stores, I'm just wondering if you can give us an update in terms of the leasing of those stores?

Then also given Gap's recent announcement and I know they've been closing stores over time, just whether or not you've had any additional discussions with Gap and their plans?

Randy's going to address that.

Your question kind of -- you came in halfway.

So we missed the first half of your question.

It sounded like you wanted us to talk about the releasing of Border's and then also what we see as the implications of the Gap's announcements.

Is that what it was?

Yes.

That's perfect.

Okay, thanks.

Randy, do you want to go ahead and address that?

I'll start with the Gap, if you don't mind, first.

We've had many conversations with the Gap since their announcement a couple weeks ago and the bottom line is nothing has changed as it relates to us.

There's a few stores that are on the bubble with them, no more than 3 or 4.

The remainder of the stores that we have in our portfolio with the Gap are stores they want to keep and either expand, reduce or remodel.

As it relates to the Border's, we have 10 Border's remaining to be leased.

Of those 10, 2 are scheduled to open before the end of this year and 4 will open next year and the remainder are scheduled to open in 2013.

Okay, got it.

Maybe one for Tom, just in terms of the balance sheet, floating rate debt hitting above 25% with the buyback of the converts and them maturing in March next year, I'm just curious in terms of potential capital raising.

I would have thought that 25% of floating rate debt would be almost as high as you'd want to go.

So I'm just curious as to what the plans might be there?

We keep an eye on that and obviously, given where swaps are today, there is the opportunity to swap out some of that.

You may see us do a term note and take out some more of those converts and we would certainly consider doing a swap.

The price of swaps today is remarkably low.

In fact, you could probably swap out 7 years for about a 170 swap rate, so depending on what your spread is you could easily get some 7-year money at 4%, 5-year money even less than that.

So that's something we will keep an eye on as we go forward

The other thing I would point out, in addition to that, is that remember 25% of current debt levels amounts to only 10% or 11% of our total capitalization of this Company.

Okay, thank you.

Craig Schmidt, Bank of America.

Condolences regarding Mace Siegel, as well.

Thank you, Craig.

Willets Point seems to be heating up.

I'm just wondering if there's a timetable when the bidders are going to know who's going to be awarded the project?

You probably have read in the press that the people that are rumored to be bidders are bound by confidentiality agreements not to even comment on whether or not they are a bidder.

So what I've heard and I've followed it closely is that they will likely announce a developer in March maybe, 6 months from now is my guess.

I've heard that they're interviewing folks.

I've heard that they're in negotiations with less than a handful of folks.

We've been following it closely, also, because of its competitive influence on Queens Center and our very high degree of interest in expanding our footprint in the greater New York marketplace.

It's an interesting project.

And where are you with regard to preleasing the office tower at Tysons?

Has that moved forward from the second quarter comments?

I'd have to go back and check what we said in the second quarter, because we're so focused on deal negotiations right now with different anchor tenants.

So right now, we're at a very interesting decision point, further along than I would have thought; 1 and actually 2 anchor tenants that could really kick off the leasing and have the building be over 50% leased probably by the midpoint of next year or higher, well, well in advance of the opening and even well in advance likely of the ultimate groundbreaking here.

I have to hedge my prognosis here because when you're dealing with 1 or 2 tenants that could occupy a very high percentage of the building, 30%, 40% of the building, it's a visible transparent process.

But we've got great interest from tenants out there.

We think it's the signature building and I'm pleased with where we are so far.

Okay.

Thank you.

Christy McElroy, UBS.

Just to echo prior comments, my condolences on Mace's passing as well.

Thank you, Christy.

Just with regard to your same-store NOI in the quarter, how much of that was driven by the annual rent bumps?

I know you have CPI escalators in there on a fair amount of leases.

Can you remind us about the process of how that gets reset and as CPI growth keeps rising, when does that start flowing through the rents?

It's flowing through the rents now.

We've got, as of January 1st of '11, I think most of the leases used a 1.3% escalator CPI.

It's based on 12 months ended September of the prior year, Christy, in most of the cases and we've got about 80% of our leases on CPI.

Of the 2.8 increase, there's about 1% to 1.2% of that is CPI increases.

Then the balance is releasing activity and although the occupancy was down quarter-over-quarter you have to look at the quality of the occupancy.

The occupancy was down because of some big spaces, but we've reduced the amount of temporary tenant space that's in our occupancy numbers and for the better part of the year, occupancy has been up over the prior year.

So that's part of it as well.

Okay.

Then I'm just trying to reconcile the difference between reported FFO and adjusted FFO and the timing of the impact from Valley View and Shoppingtown.

I know that you had the $0.25 impairment charge in Q2 and then another $0.02 of FFO drag in Q3.

If I look at your 6-months ended income statement, the difference between reported and adjusted was $0.25, but for the 9-months ended the difference is $0.30.

So I'm wondering when that other --

The difference is really default interest on those 2 loans.

Okay.

We've decided to just break those out separately, those two centers, because we don't control the timing.

They're either under the control of the loan servicer or the receiver.

So in both cases, whatever you recognize as a deduct from FFO now, when the asset ultimately goes back to the lender, it flips around and it becomes an increase to FFO.

So the difference is really we're including the impairment, we're including default interest and we're separating those 2 numbers.

Further complicating the things and this is an industry-wide factor, NAREIT came out yesterday and gave new guidance regarding the treatment of impairments in FFO.

The new guidance is that impairments should not be reduced from FFO and that's a departure of what's been done in the past, so I think you'll see a lot of that changing in the fourth quarter, not just for us, but others.

So with that, I would encourage you to focus on the adjusted FFO numbers and not the base FFO number.

So the default interest had been included in the adjusted FFO number before, but it's not now?

No.

It's in there in both cases.

The adjusted FFO number did not change.

The underlying FFO number changed because we pulled out the default interest and we had not done that in the past.

So is the current guidance range for adjusted FFO apples to apples versus what you had provided last quarter?

Yes and it hasn't changed.

Okay.

So in terms of the additional drag from Valley View and Shoppingtown for the full year, that's primarily driven by default interest?

Right.

For what remains in the year, yes.

Is there any negative NOI there?

No.

It's negligible.

Most of the negative is just the default interest.

Okay.

The NOI is less than the interest if that's (multiple speakers)

Right.

Excluding the default interest is the NOI below the debt service?

Are you talking about operating income, Christy?

Is operating income negative?

Sure.

Right.

Slightly.

Slightly.

It's below the debt service.

It's well below the debt service, otherwise it wouldn't have gone back to the servicer, right, Tom?

No.

The NOI covers operating expenses, but it does not cover debt service.

Okay.

And that accounts for the drag that you've reported?

Right, right.

Thank you.

It's not negative cash flow, but before debt service, but it is definitely less than debt service.

All right, thank you.

Just to reiterate, this is all noncash.

Thanks, guys.

Michael Mueller, JPMorgan.

Our condolences as well on the passing.

Thank you, Michael.

Tom, going back to Valley View and the other asset one more time, so is it safe to say that as long as you have these on the books, you're looking at about $0.02 a quarter of FFO drag?

Is that about right?

That's right.

Okay.

Any idea of the timing?

Do you think it's --

Again we don't control it.

We think, Valley View, it's still possible it could be off our books in the fourth quarter, although I'd have to say it's more likely it will be the first quarter of next year.

Shoppingtown, my best guess at this point, would be second quarter of '12, but, again, since we don't control it we just thought it was a lot easier to follow if we broke those out separately.

Got it.

Okay.

Going back to the Chicago development a second ago, you talked about the economics being about a 10% to 11% return, which is similar to other projects, other developments on the outlet side, but if we're thinking about it, it's next to an airport, it's pretty in fill, it's going to be an enclosed center.

How do the occupancy costs of something like this look like compared to a traditional outdoor center?

They're a little bit higher, but surprisingly enough at the Macerich full price centers, many times our outdoor centers have occupancy costs for common area and maintenance that are not that different than enclosed malls, because you spend money on other things like landscaping and irrigation, a lot of other things.

Each center is different.

Each center is unique.

At this particular center, the charges are not that heavy compared to a normal enclosed center.

So it's very manageable that a lot will allow the retailers to pay us a fair rent and for to us see a good return on our investment and for them to have a great forecast of profitability for their stores.

Okay.

And lastly, any update on Estrella Falls?

Not really other than it's clearly on the radar screen of our anchor tenants and we will proceed with groundbreaking when we see fit.

At this point in time, I think on the last call, I think our best estimate, at this point in time, is 2015.

It'll be a 33-month heads up and that's the process, 33 months from the time that we go thumbs up is when it will open.

So we'll give you a big thumbs up when it's ready.

Okay.

Thank you.

Rich Moore, RBC Capital Markets.

You have 3 centers essentially with AWE Talisman now or some relationship with AWE Talisman.

They have 3 other centers as well, I think it's Miami, Vegas, Santa Fe.

I think the Miami one is a development.

Any interest in those other 3 that they have?

We talked a little bit about this on our last call and we tried to guide you towards the fact that Chicago likely would be the one where the relationship would expand.

So the other names that you mentioned I'd say are fairly unlikely.

Okay, all right, good.

Thank you, Art.

Then could you give us an update to Santa Monica, where you guys are at this point and what you're thinking about the center?

Sure.

We're feeling very good about where we are.

The biggest news is that we're into a second generation of leasing, only 14 or 15 months after the grand opening.

That's really a little bit unusual.

It's not unusual to get the opportunity to start doing some releasing within a year or 2 after a great center opens for business.

For example, when we opened the Queens Center expansion, within a year or 2 after the opening in the expansion area we were already doing some minor recycling, because it becomes really obvious to everybody what works really well and what is not working.

The pressure of success essentially causes the replacement of weaker retailers with stronger ones.

That's going to happen on a much grander scale at Santa Monica.

The reminder here that is we leased that in the worst of times in my recent memory for the type of retail that it is, which was the spring of 2009.

We have 3 or 4 major tenants retailers that I consider major that are in the 10,000 to 25,000 square foot neighborhood that are looking for homes in Santa Monica, that are international global retailers that are not currently here.

Several, if not all of them, want to be at Santa Monica Place and these are tenants that are accustomed to paying high rents for signature iconic locations that help to further their brand.

Names like, Uniqlo for example, and Topshop is looking in the market and people like that.

I'm not saying they're going to end up at Santa Monica Place, but it's the best location in Santa Monica and they want to be in West LA and it's a logical place for them to come.

So right now, the challenge is really assembling space for them.

But again, being a great center, you have some tenants that are doing terrific at Santa Monica Place, some tenants that are not doing the mall average.

So I think that you're going to see 2 years from now, believe it or not, the center is not going to even look like what it looks like today.

That's how dramatic the second generation of leasing is going to be.

I will also tell you anecdotally, that the second generation of leasing that I've taken a look at, generally the rents are anywhere from 50% to 75% higher than the contract rents that are being replaced.

So as we're replacing tenants like Charlotte Russe, which had corporate issues and people that we did original leases with, Skechers, people like that, they're being replaced with much better names like Skechers is being replaced by the Free People, and then there's some of the bigger names that I mentioned.

So the big message is we're into a second generation of leasing already and it's a great second generation of leasing.

Okay, very good.

Thank you, guys.

Todd Thomas, KeyBanc Capital Markets.

First question for Tom is a follow-up on the balance sheet.

As we look ahead to 2012 I think you mentioned $380 million or so of property level debt that does not have extensions.

How are you thinking about handling the consolidated and JV maturities?

Some of those mortgages have fairly high coupons.

I was just wondering if you'll retire a portion of those mortgages, as you have throughout the year, or look to refinance some of those?

We don't have too many of those, Todd.

I think generally speaking, we'll refinance.

The rates are certainly extremely attractive, as evidenced by the Arrowhead Towne Center financing we just closed, 7-year fixed at 4.25%.

If we can get 7-year to 10-year money at 4.5% or less, that's pretty compelling and you'll probably see us go ahead and put mortgages on those.

Okay.

Just to follow-up on Border's, can you talk about what kind of leasing spreads on average you're seeing so far and what you're expecting at those 14 sites overall?

Any progress on the ESPN Zone at [Woodbridge]?

In terms of Border's, we have to look at each location individually.

On average, they only pay us $18 a foot in rent, so it's a pretty low hurdle and I'll defer to Randy on some of the specifics on people we're putting in to replace them and some of the economics.

It's across the board.

In one location in Arizona, we're replacing the upper level of Border's with Pottery Barn and the lower level with Crate and Barrel.

Again, an incredible impact on the merchandising of this particular center, but the types of tenants are across the board and the spreads are across the board.

The good news is all the spreads are positive.

Okay.

Just a quick update on the ESPN Zone at [Woodbridge]?

North Bridge.

North Bridge, sorry.

You want to talk about the bigger plan there, Randy, a little bit or -- so it's an interesting situation through a confluence of events.

We've been able to take that location, as well as I believe, an office location that we had roll over, as well as some other space that we were able to roll over.

The bottom line is, we're able to consolidate now with the ESPN location about 90,000 square feet on 2.5 to 3 levels, so there may be a mezzanine involved here of contiguous space.

So it's actually probably the most interesting retail space sitting in the Michigan Avenue area right now.

We're actually also looking to open up North Bridge to Rush Street, which is emerging as a very powerful street, and the ESPN Zone here is right at that intersection there of Rush where it would enter the enclosed mall area.

So we're looking at some really signature type of people to go there because it's so impossible to gather a 90,000 square foot contiguous space in the vicinity of Michigan Avenue.

It could be cut up, but it could be consolidated into 1, 2, 3 users.

I think it's going to be a great opportunity for us.

We're going to be patient.

We're doing the renderings and the planning and the reconfiguration and some cubical 3-dimensional design, not only of that, but the actual entrance of North Bridge mall.

So we have some pretty good thoughts that have been put together lately on how to make North Bridge a more 3-sided center instead of just having access limited to the entrance that we have off of Michigan Avenue.

We have that Rush Street entrance, also, where Buca di Beppo is right now I think and we're looking at opening up an entrance into the center there.

That could be the most powerful entrance, frankly, that we'll have at the center and the ESPN zone is right in the proximity to that.

I think it's going to be a huge opportunity for us.

We're in the middle of some very intriguing conversations with some retailers that just cannot possibly get their hands on that kind of square footage anywhere.

There's a real premium for scarcity in size that we think we're going to be able to capture there.

We think it's got a great future there and we're very optimistic.

Okay.

Thank you.

Alex Goldfarb, Sandler O'Neill.

I'll take the easier ones first before we get to the detailed ones.

Just quickly, in Queens, Hemmerdinger has his industrial park for sale.

I would have imagined that he would have discussed with you guys initially if you had an interest.

One, were you initially shown that and, two, if you weren't initially shown it before he marketed it, is what he's asking, is that something that the numbers work for you guys?

First of all, we have a relationship there with the family and yes, we met with him and know him and we did have an opportunity to take a look at it.

In terms of the values that they're looking for, I don't know what the market would pay or if they will, in fact, sell it.

But if they get the prices for the land that I've heard that they're asking for it, it means that the parking garage and all of the buildings and all of the rent that we bought at Atlas Park, we got for free because they're asking as much for that land as we paid for a vertical project.

Okay.

That's helpful.

Going to the Chicago outlets, in your comments about the occupancy costs of some of your outdoor centers versus this project, should we think that this outlet would have like 12%, 13% occupancy costs versus -- because I think typically outlets are more like 8% or 9%?

Just trying to get a sense of where we should think about the actual occupancy costs coming out?

I think the retailers and that's the most -- because remember, the denominator to that formula is the sales projection that comes from the retailer.

That doesn't come so much from us, it's the retailer.

I can tell you that, in their minds, they think they're paying mid to mid-high level single-digit occupancy costs, because they have huge expectations of sales productivity from this center.

Definitely well under double-digit cost of occupancy at inception is what most retailers that we're talking to have in their forecasts.

But to get to the returns that you want from a center that costs basically the same as a mall, you'd need mall-like occupancy costs, right?

No.

Because if you're getting sales that are double per foot what we see in the rest of our mall, you don't need to see mall occupancy costs, right?

Yes.

Okay.

So the point is that you're expecting like $800, $900 a foot out of this?

It's really more our retailers' expectation as well as our own.

But we know that our retailers have extremely high expectations that would certainly fit that level of performance and it wouldn't shock the retailers or us if they hit that level of performance or both.

Okay.

Tom, your CapEx expectations, recurring CapEx expectations for the full year and year-to-date, I missed those in the 8-K.

Maybe I have to dig further, but can you just remind us what they are?

Well, if you look at what we've run the last two years, '09 and '10, '09 was a light year at $40 million, '10 was about $60 million.

If you annualize what we have to date it's about $64 million.

So that's a pretty good run rate.

Okay.

That's helpful.

Finally, on the guidance, going back to Christy's question on it, I'm a little confused because in 2Q, you guys included the gain from Granite Run.

It looks like the base guidance, the $2.52, $2.60, changed from the $2.59 to $2.57 and maybe that's because of the addition of both centers now in there.

The delta, the breakout of both centers versus before was just one center, but as we think forward about what's in guidance and what's not, so impairments aren't going to be in there anymore and the debt forgiveness gains, those won't be in there anymore, correct?

Really we're talking about 2 centers here, because we have debt activity that goes back and forth.

Our net debt activity is actually a loss for the year of about $4 million, but if you look at those 2 centers, you've got 2 components in there right now.

You've got the shortfall as it relates to interest and default interest, which is a relatively small amount and then you have the impairment of $0.245 on Shoppingtown that hit in the second quarter.

The rest of the numbers that show up there, both for Valley View and $0.015 or $0.02 for Shoppingtown really relate to the interest and default interest that's a shortfall and that's accrued.

Now when those properties are ultimately off our books, that will reverse.

Rather than having these things that are beyond our control go in and out of FFO, we're taking them out to show an adjusted FFO number.

It's just on those 2 properties and the difference between this and what we had in the second quarter was a default interest.

But on a separate note, unrelated to those 2 assets, we do have new guidance on how to treat impairments, not just on properties that go back to servicers or receivers, but in general, the recommendation from NAREIT as of yesterday that impairments not be a deduction from FFO.

I think you'll see our numbers changing and others to reflect that.

However, that will not change our adjusted FFO guidance or numbers.

Do they make any comments on the debt gains when you hand back the fees and you book the gains?

We would not include the debt gains either.

What if Granite Run was in there?

Granite Run wasn't one of those 2 properties and it was a relatively small number.

We had more than enough going the other way.

We had $9 million of loss on early extinguishment of debt going the other way, Alex.

Okay.

We're trying to limit this to the big items that are lumpy and run multiple quarters.

Okay.

I appreciate it.

Thank you

Ben Yang, with KBW.

Tom, you mentioned the same-store NOI for the quarter excludes Santa Monica Place.

That's right.

But it also looks like you're now including this asset to your sales and occupancy numbers, obviously without making any adjustments to the prior years and when you do that, it kind of distorts the picture a little bit.

Sales are a bit higher than maybe otherwise would have been the case and occupancy is a bit lower when you include the property.

I appreciate some detail that you offered on Santa Monica, but I was wondering if you could comment on where sales and occupancy are today for that asset and what you think the potential is for productivity once the center is stabilized?

I don't want to comment specifically on Santa Monica, but I'll tell you if you exclude Santa Monica from occupancy, it doesn't move the number at all because it's at 91% and our average was 91.9%.

It doesn't move at all and if you were to pull it out of the sales per foot number, it would go down $3.

You'd still have a 9% positive increase rather than 9.6%.

So, its relatively immaterial to those numbers as well.

Okay, great.

That's helpful.

Is it surprising at all that you're already into second generation leasing here after just 1 year?

I mean is this typical for new development or maybe other rents maybe a bit too high for some of the tenants that came in on day one?

It's very atypical to be this far into a second generation of leasing.

It's testimony to the strength of the asset, to the success of the asset.

It's basically evidence of the Darwinian theory of survival, at work on steroids, because you have the concepts that work and the great retailers are obvious and the ones that don't work that likely were a function of leasing into the serious headwinds that we had in January, February, March and April of 2009.

We knew exactly what we were doing when we did that leasing.

We knew we were likely leasing to some retailers that may or may not make it.

We didn't know which ones, necessarily may or may not make it, but we had a pretty good idea what was going to happen and it's really just function to the strength of a center.

The better the center, the more turnover you have.

Now, if you have turnover and you don't have replacement tenants, that's a problem.

If you have turnover, massive turnover opportunities and you have massive interest from great retailers, that's a huge opportunity and it's testimony to the success of the project and what's happening in the trade area.

The story is bigger than Santa Monica Place.

The shift in the gravity of power in the entire community is shifting to point to where, when you look at all of the developments around Santa Monica Place and the public parking garages that are being torn down up on the Third Street Promenade, as well as the developments that are happening to the south of Santa Monica Place, Santa Monica Place is rapidly and every square foot within Santa Monica Place becoming the 50-yard line of the entire community.

So it's really testimony to the asset.

Okay.

Can you just comment on who's leaving?

Is it any particular segment within retail?

It sounds like it was tenants that indeed failed and not necessarily your voluntary choice to kick them out.

Is that fair as well?

I mentioned two names like Charlotte Russe was one name that I mentioned in my comments and I mentioned another name, Skechers.

Charlotte Russe had issues corporately and looked for rent relief from all of their landlords corporately, and so when they asked for relief here, we elected to not give it to them.

Skechers had different issues.

They had double locations on the Promenade in the Santa Monica Place and they experimented with trying to do both and it didn't work for them.

In general luxury and hip SoHo-type international tenants are doing great.

So the AllSaints of the world, the Tiffany's of the world, the Louis Vuitton's, the Nordstroms, the Bloomingdale's SoHo store here, they're doing fabulous.

Your more middle of the road, your juniors and people of that nature, they're not doing so well and then when you look at who wants to be here, it's again the global hip brands.

So you've got Uniqlo wants to be in the trade area.

We think we have the best location for them.

People like Topshop want to be in the trade area.

We think we have the best location for them.

Other folks like Banana Republic are going to likely relocate from where they are on the Promenade and there's another couple of big users.

That's kind of symptomatic of what the demand is.

It's again just wait and see.

It's a very good sign, though.

Okay.

That's helpful.

Final question, I apologize if I missed it, but did you comment on any sites that might compete with the Chicago outlet development that you just announced?

Because, obviously, in other markets we see other developers racing to get preleasing in place to win those markets.

I'm curious if there's anything on the radar in Chicago as well?

It's a very competitive environment.

It's a big market, so yes, there's plenty of other activity in the market.

In terms of outlets?

On all fronts.

Okay.

All right.

Thank you.

Vincent Chao, Deutsche Bank.

Quick question -- going back to the financing side of things, sounds like given where interest rates are you'd be inclined to refinance your 2012 mortgages.

What are your expectations as far as pulling out excess proceeds on those maturities?

Vincent, typically when we do a 10-year financing or 7-year financing, we do up to the investment grade.

So, it tends to be 60%, 65%.

Life Company financing has been extremely attractive over the last couple years and that tends to be a little bit more conservative.

It just depends on the asset how much we'll be pulling out, but it will probably be more than enough to take out the maturity level and maybe a little bit more beyond that.

There was a question earlier about floating rate debt.

If that's the case, obviously, the excess proceeds get used to pay down our line of credit which is floating and will reduce that number.

Okay.

Can you provide the NOI that's coming off those mortgages?

No.

That's not something we normally do.

But if you underwrite these using a pretty conservative 12% debt yield, we can refinance out of all of them quite comfortably.

Okay.

Just another question, it sounds like the adjusted FFO guidance is staying the same, but on the same-store NOI, I think the last guidance provided plus 1.5% to plus 2.5%.

Seems like you're running a little bit ahead of that right now year-to-date, is there anything in fourth quarter that would take the run rate down from where it's been?

No.

Maybe a partial quarter of some of the impact?

No.

I think it's looking more like 2.5% to 3%, based on where we are in fourth quarter.

Okay.

Okay, thanks.

That was it.

Nathan Isbee, Stifel Nicolaus.

My condolences as well.

As you look at the Chicago project, and as you said before, it does change the landscape a bit from the normal positioning between full price and outlets, in your discussions with the retailers, how much sales cannibalization are they willing to live with and are they underwriting here in this process?

I think that I answered that question, but I'll answer it again.

I think they factored in everything that they need to factor in, including the impact that their store here will have on any other store that they have in the world, whether it be 10 miles away or 1,000 miles away or on the Internet.

They factor this into every decision that they make.

They factor in what's the impact going to be on my brand?

Is this going to enhance my brand?

Many times that will influence a retailer's decision to open a store.

The retailers make their own decisions and I'm fairly confident that the idea that they might be hurting Woodfield or Oakbrook is not even on their agenda.

I never heard it even commented upon by any of the retailers that are coming with us, not even suggested.

But that's also very consistent with what I've been saying is that we understand that the retailers have 3 outlet channels, full price, off price, online.

Yes, but when it gets to a certain proximity, granted there will be some tourist dollars in there as well, but it is a fixed (multiple speakers)

It's a very legitimate question.

I get it.

I understand what you're saying.

I totally understand what you're saying.

Let's go ahead and let the hand play out.

I will give you an example, that I've been told that there's a location in Milan where Loro Piano has a full price store and an outlet store literally 100 yards from each other and their view is that one does not hurt the other because it's a different customer.

Okay.

All right.

Now that you have Chicago out of the bag, how many other outlet centers deals, either development or acquisitions would you say you're working on now that are real and could be announced soon?

I wouldn't hold your breath for anything soon.

We've announced another development project a while ago, 6 months ago, and we're proceeding on that in Scottsdale.

We've consistently said that if we could grow this to a business where we own 5, maybe as many as 10 of these centers over the next 5 to 10 years, we think that would be a great accomplishment.

We have extremely high expectations and hurdles of quality and productivity.

We want them to be high barrier-to-entry type of locations.

We want them to be reflective of the top 30 or 40 assets that we have in our full price portfolio in terms of quality, geography and success.

I don't anticipate it's going to be a huge number, certainly 1 hand, maybe 2, but you know what?

We're of a size to where adding that amount can be meaningful.

We're excited about our limited entry into this business and we're open to looking at opportunities in the major markets that we have an interest in -- LA, San Francisco, New York, DC, Chicago.

These are the markets that we have great interest in, Arizona.

If we can expand our footprint in these markets, either full price or outlet, we're going to be really interested in doing it.

The same skills that gave us the ability to operate well within these certain high barrier and core markets for us, those same skills enable us to work through entitlement issues, identification of proper locations and then just niches within markets, also, in these core markets.

Look for us to expand in the markets that we've talked about being important to us in the future.

What's happened in Scottsdale over the last quarter or so?

Ongoing conversations and multiple announcements from multiple people.

It's like any development horse race in the outlet business, there's lots of conversation going on.

Time will tell.

If we don't get to the proper level of leasing that we feel is appropriate, we could easily defer the timing of the opening of that project.

Or if the conversations go better as time goes on here than what we had anticipated, we could accelerate the opening.

Time will tell.

Would you say you're feeling (multiple speakers)

There's nothing new to report on that.

The major news that we have to report is that on our last earnings call, we gave you kind of a tip of the hat that you might look for an announcement that Chicago might be something we might announce.

We've announced that.

We're very bullish on that.

The success that we've got going on Chicago -- the next big announcement that you'll probably see out of us will be an expansion of the Niagara outlet center that we bought and that could be very meaningful.

That could be an expansion of 200,000 to 250,000 feet, which is really almost as significant as opening a new outlet center and frankly, I'd rather open a 200,000 foot or 250,000 foot expansion to a center that's doing $700 or $800 a square foot than open up a brand-new center that's 300,000 feet or 400,000 feet that does $300 or $400 a foot.

So you know what?

Consider that to be your third major real project, the expansion of Niagara Falls.

Great, that's helpful.

Thank you.

Thank you so much and thank you for joining us and thank you for your wishes and look forward to seeing you in 2 weeks.

Thank you.

We have no further questions in the queue.

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

We thank you all for your participation.