Macerich Co (MAC) 2013 Q3 法說會逐字稿

Good day, everyone.

Thank you for standing by.

Welcome to The Macerich Company's third-quarter 2013 earnings call.

As a reminder 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 and instructions will be provided at that time for you to queue up for questions.

Again, this call is being recorded.

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

Please go ahead, ma'am.

Thank you, everyone, for joining us on our third-quarter 2013 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 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 on the call today are Art Coppola, CEO and Chairman of the Board of Directors; Tom O'Hern, Senior Executive Vice President and Chief Financial Officer; Bobby Perlmutter, Executive Vice President Leasing; and John Perry, Senior Vice President, Investor Relations.

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

Thank you, Jean.

Today we will be keeping our introductory comments brief to allow plenty of time for Q&A.

That being said, we will be limiting this call to one hour.

If we run out of time and you are still in need of questions being answered, please do not hesitate to reach out for me, Art, John Perry, or Jean Wood.

It was another great quarter.

We continued to execute on our plan to dispose of noncore assets.

We continued to strengthen our balance sheet and we had a very strong operating performance during the quarter.

Looking at our operating metrics, leasing volumes and spreads were both good.

We signed 306,000 square feet of leases during the quarter with an average positive re-leasing spreads of 14.2% over the trailing 12-month period.

Mall occupancy was at 93.7%.

That was up 90 basis points year-over-year.

Also it is very important to note when looking at the year-over-year occupancy gain, that over the past four quarters, we have had about 250,000 square feet that have been converted from temporary occupancy to permanent leases.

The average rate differential between a permanent lease and a temporary lease is between $20 and $25 per square-foot.

Currently we have 5.6% of our occupancy which comes from tenants we consider temporary.

We will continue to focus on converting those tenants to permanent occupancy in the near future.

In terms of FFO for the quarter, it was up 10% at $0.86 per share compared to $0.78 a year ago.

Included in that was same-center NOI of 3.5% compared to the third quarter of last year.

That increase was driven by increased occupancy, positive re-leasing spreads and annual CPI increases.

Year-to-date same-center NOI was up 3.83% and our guidance for the year remains at 3.75% to 4.25%.

And just to remind you that is up 100 basis points from our initial guidance this year.

Included in FFO for the quarter was a $1.4 million gain on early extinguishment of debt.

There is also significant interest expense savings during the quarter as our average interest rate is down to 4.22% compared to 4.88% in the third quarter of last year.

That is also evidenced by our 2.9 times interest coverage ratio for the quarter.

On our balance sheet we have again made significant progress.

Our debt to market cap at the end of the quarter was 42% and our floating-rate debt has been reduced to 12.7%.

That is about half of what it was a year ago.

Our average debt maturity duration has increased to six years.

That is up from 4.2 years at September 30 of 2012.

We recently committed to a $268 million life insurance company financing on the currently unencumbered FlatIron Crossing mall.

That is a seven-year fixed rate transaction with a rate of 3.85%.

That loan is expected to close in November and the loan proceeds will be used primarily to pay down floating-rate debt.

So that will reduce our floating-rate debt to under 10% of our total debt and it will also stretch out our maturity schedule.

At September 30, the Company's debt to EBITDA was 7.75 times.

That is down from 8.25 at the beginning of the year.

We also have relatively light interest rate sensitivity if you look at the maturities coming up in 2014, 2015, and 2016.

We have only got $119 million of debt maturing in 2014 at an average rate of 4.1%.

We have got $640 million maturing in 2015 with a high coupon rate of 5.5%.

In 2016, we have got $525 million maturing with an average interest rate of 5.8%.

So we have got a lot of room from where we are today to those rates and we would expect that we would have very little, if any, negative impact from interest rate increases.

Also, as I mentioned after the FlatIron financing transaction our floating-rate debt will only represent about 8% of our total debt.

In our press release this morning, we updated our FFO guidance.

We increased the midpoint of our previously issued 200 -- 2013 FFO per share diluted guidance range by $0.06.

The new range is $3.46 to $3.52.

The revised guidance range includes the actual dilutive impact of $0.18 per share relating to the disposition of seven noncore assets as well as selling $171 million worth of equity in May.

Our initial guidance only called for a range of $0.07 to $0.14 of dilution from those capital transactions.

The increase in the guidance results from the third quarter [B] and the balance is primarily driven by strong operations that we have seen throughout the year.

On October 24, we increased our quarterly dividend per share by 6.9%.

It is now $0.62 per share per quarter.

This increased dividend represents a 4.2% annual dividend yield based on today's price.

Looking at tenant sales, portfolio mall tenant sales per square-foot were up 7.4% to $549 a foot for the trailing 12 months compared to $511 for the trailing 12 months ended September 30, 2012.

The impact of the assets that we sold on that number was $10 per foot.

So the sales growth, excluding the impact of those assets, would have been approximately 5.4%.

Now I would like to turn it over to Art.

Thank you, Tom.

And welcome to our call.

I would like to touch upon a few topics that have been very much talked about in the last couple of months with regard to regional mall landlords, and that relates to re-leasing spreads and moderating sales increases from tenants and its impact on same-center NOI.

I also want to discuss a little bit the portfolio management activities that we have had, including recently announced dispositions, our balance sheet and then, finally, our development pipeline and then I will open it up to questions.

It is clear that tenant sales have moderated over the past year.

But releasing spreads today remain extremely strong.

Tenants in our malls are making a lot of money.

They are doing great sales productivity and there is extremely high demand.

The laws of supply and demand work heavily in our favor and if you look at the portfolio that we own, virtually all of the malls that we own are at least 85% of the malls that we own are must-have malls.

So when it comes time for a tenant to renew, it is not a matter of how much rent we are going to get, it is really a matter of just coming to the proper number and then moving forward.

Many times we find tenants in centers like Queens Center where they are paying us already 40 some percent of sales and we tell them, look, it is probably time for you to move on and if you don't, your rent is going to have to go up to this other number.

And they elect to stay.

Because when you are in must-have trophy centers like Queens, Tyson, Santa Monica and many others that we own, the tenants cannot afford to lose these spaces as part of their brand.

Anecdotally, if you look back to the Great Depression of all of 2008 to the end of the third quarter of 2009, tenant sales in our portfolio dropped 15% to 16%.

It was a disaster.

But even in that environment, because we were sitting on sales increases from 2004 through 2008 that had not been mined yet, we had re-leasing spreads of 14% in the year 2009.

If you look at our centers, spreads are better, are higher in our best centers.

Our top 10 centers year-to-date had leasing spreads of a little over 30%.

The next group of 20 centers had leasing spreads of just under 10% and then the balance of the portfolio had leasing spreads of around 5% for an average of 14.2%, which all makes sense.

Regionally, we had leasing spreads in Arizona of 12.5% year-to-date.

In our Central region, 7.8%.

In the Eastern region, 30% spreads; Northern California, Pacific Northwest 6%; and Southern California, 13%.

Our outlook for leasing remains extremely strong.

If you look at our top 40 centers, the sales in the back group of centers averaged just over $606 a square foot.

And I will remind you as you think about sales, that we are one of the only top-tier mall companies that disclose sales on a center by center basis over the last five years.

So any confusion you may have about sales or productivity obviously can be answered by looking at that.

85% of our NOI comes from our top 40 centers.

They average $606 a foot.

Cost of occupancy in those centers is about 13.3%.

It would not at all be out of the question if you were to ask me how much embedded sales growth we have in those centers.

To tell you, we easily have 20% mark to market in those centers and that is without any future sales increases.

So we remain extremely positive about our outlook on leasing spreads.

Moving to same-center NOI.

I am very pleased to remind you that at the beginning of the year, we gave you guidance that our same-center NOI would be in the range of 2.75% to 3.25%.

We upgraded our guidance during the course of the year to 3.75% to 4.25%.

Part of the thing that helped to drive that number is our efforts this year to put more focus on the conversion of temps to perms and that certainly helped to drive our same-center NOI growth.

The guidance levels that we are at right now, 3.75% to 4.25%, those are very strong numbers.

Very few sectors are able to put up those kinds of numbers year in and year out.

And, again, we have a very, very bright outlook for the future here.

Same-center NOI obviously is a function of many things.

In our portfolio, a big piece of our same-center NOI is the fact that 70% of our leases are tied to a multiple of the cost of living increase.

So we automatically every January get a bump of 1.5% to 2%, depending on the inflation rate.

Leasing spreads, obviously, have an impact on same-center NOI and we have been able to put up strong leasing spreads historically even in the toughest of times and we see strong spreads going forward.

Probably the big number that would influence same-center NOI from one portfolio to another is occupancy.

And I will be the first to tell you that we are very stingy in terms of the rent that we get.

We are very frugal in terms of the tenant allowances that we give and we demand high rent.

And at times that means that we do not get rent increases as fast or we suffer turnover in our centers as we are replacing low productivity tenants with high productivity tenants.

I took a look at centers like Queens and Tysons and Broadway Plaza in North Bridge and we don't include any of those centers in our redevelopment or development non-same-center pipeline and yet each of them are going through major re-leasing or are the subject of a major redevelopment that is going on.

Queens has had substantial lease turnover.

And when you have frictional vacancy in a center like Queens and you are going from a tenant that is paying $1.5 million of rent to a new tenant that is paying $3.5 million of rent then that obviously has a big impact on your same-center NOI.

If we are chasing same-center NOI and we wanted to do the -- take the short-term solution and not do the right thing for the real estate, then we could put up better numbers in centers like that, but that is the wrong thing to do when you have those opportunities.

My guess is that between those four centers and a couple of others of that nature, that we do not exclude from our same-center NOI even though we know at centers like Tysons, where we are readying the center for the introduction of the new plaza, Broadway Plaza, where we are re-leasing the center in preparation for its demolition, North Bridge where we have had substantial recycling, my guess is that our same-center NOI has been impacted by 50 to 75 basis points just from holding space off or [de-leasing] space or frictional vacancy in centers of that nature.

Looking to portfolio management.

I think that we are very happy with what we have accomplished over the last year.

It doesn't come without a price to earnings.

Obviously, at the beginning of the year, as Tom mentioned, we gave you guidance that we would -- we forecast $0.07 to $0.14 a share in dilution from disposition.

In fact, that number is going to be about $0.18 a share.

So even though we currently are sitting on FFO growth for this year after all of that dilution of 11%, had we not elected to go through the culling that we went through and to reload our balance sheet for the future, we would have had FFO growth this year of 17% to 18%.

As I think about the portfolio management that we accomplished, I can look at it either one of two ways.

I can look at it and say we essentially paid for the $1.7 billion of real estate that we bought in Kings Plaza, Green Acres, buying the 33% interest in Arrowhead and the 75% interest back in FlatIron in the fall of last year.

We either paid for that with our dispositions or we have essentially pre-funded our $1 billion development pipeline through our dispositions.

Just as -- between dispositions and the equity raise that we have this year, we have delevered the Company by a little over $1.1 billion.

During the quarter, or at the end of the quarter, there was an announcement that two centers are under contract with one of our peers and a couple of analysts have guessed that those two centers are Chesterfield and Salisbury.

Those are pretty good guesses.

And we would anticipate that that transaction in the ordinary course of business after it flows through the rating agencies because both of them have CMBS debt, that could close later on this year.

Looking to our balance sheet.

It amazes me that investors over the last 18 months have forgotten 2008 and 2009, especially as we are moving into a period of tremendous financial uncertainty with government shutdowns and slowing retail sales.

It gives me great comfort that when we said to you two or three years ago that we were going to completely transform both the left side and the right side of our balance sheet, that we have substantially strengthened our asset base, both through the addition of great new assets, the construction of great new assets as well as some selected dispositions.

But we also have tremendously strengthened our balance sheet.

Just this year alone, we have delevered our Company by another $1 billion through our disposition and the equity raise.

So we are extremely pleased with where we find ourselves there.

Tom took a look for you at our maturities over the next three years.

Again, I would remind you, take a close look at how much we have lengthened our maturity schedule.

Tremendous amount of our maturities are now in 2020, 2021, 2022 and beyond.

But even looking at the next three years, our pro rata -- the debt that we have maturing over the next three years is about $1.6 billion.

Treasuries could go to at least 3.75% maybe even 4% and we are not going to go backwards in terms of the interest rate that we pay on that debt.

Looking at those maturities in a different light, our estimate is based upon current underwriting standards of those $1.6 billion of maturities could easily generate $800 million to $900 million of excess refinancing proceeds, which we would then use to go ahead and you could think of that as another source of self-funding our $1 billion development and redevelopment pipeline.

Speaking of which, Fashion Outlets of Chicago obviously opened up to a tremendous reception.

Sales at the center are doing terrific.

Traffic is outstanding.

We are getting incredible reports from all other retailers.

Virtually every retailer talks about it being is one of their best openings if not their best opening ever.

We have had great contributors from tenants such as Coach and Gucci and Kors and Prada and Tory Burch, and True Religion.

Our anchors Forever 21, Bloomingdale's, Saks Off Fifth, Neiman Marcus, Last Call.

They are doing all terrific.

We have great new tenants coming in the fourth quarter with Diane von Furstenberg, Montclair, Trina Turk, Zegna and Burberry and [Metro] coming in the spring of next year.

Based upon current sales estimates, we have moved Fashion Outlets of Chicago in terms of our estimated sales rankings to just in the ballpark of our top 10.

We have actually got it ranked at number 11, you'll see, in our supplement.

We do not know what the sales are going to be obviously and we have sales results for two months, but two months cannot forecast what the first year or two is going to be.

But I can tell you the traffic continues to be terrific.

The tourists are beginning to find us.

We have had over 50% of our foreign shoppers are from China, which makes sense.

And we see tremendous upside from this center.

We see opportunities for some nice surprises on percentage rents which actually is part of the reason for the breadth and the range for the fourth quarter because we won't know until we see those sales.

And my current guesstimate is that at the sales levels that we would expect this center to be at, that we are currently sitting at a cost of occupancy at this center even though we got strong rents going into it, under 10%.

So as tenants roll over and in terrific centers you do have rollover, we find that in the great centers that when they open great the unproductive tenants are exposed and great new tenants that see the opportunity are there to replace them.

With that kind of cost of occupancy that we see as currently being under 10% at this center, we would see great opportunity for growth as we have an opportunity to continue to lease out the balance of this space as well as in the years to come to bring both percentage rents and natural rollover that we will have.

Moving to Tysons Corner.

That project will be coming online next year, on time, on budget.

The office leasing is up to just under 70%.

We expect to open the office well over 90% committed.

As I mentioned, the Retail Center is having tremendous benefits in terms of interest from tenants.

We have got flagship tenants that Bobby may allude to later that have committed to come in occupied retail space at Tysons.

But part of the price of making that space available is that they can see our frictional vacancy that you suffer to create that opportunity for them.

We had announced in previous calls that we see an all-in going-in cash on cash returns on the densification investment of something over 8%.

And that doesn't include any uplift in the retail rents which we believe will be substantial over time.

And looking at our supplement, Fashion Outlets of Niagara, we are now getting ready to break ground.

We are 70% leased.

We have got in our supplement $75 million of cost with a 9% incremental return.

There is also substantial releasing to the existing mall at Fashion Outlets of Niagara that is taking place as we are moving tenants from the existing mall into the expansion mall and then backfilling with new tenants.

If I were to include the increment that we are going to pick up in the existing mall as part of the expansion, which would not be an abnormal way of looking at it, then I would see an all-in return on this expansion investment of 15%.

Looking at North Bridge.

It has been announced in the press that Eataly as well as a couple of great new restaurants are going to be opening up in late November.

We see that as being something that is going to drive tremendous traffic to the South Michigan Corridor, which is anchored by the number one Nordstrom in the world at North Bridge Mall.

In our supplement, you see a couple of new projects mentioned.

We finally have gotten a wink and a nod that appears that we are going to be able to get approvals to add a new movie theatre to the 50,000 square feet of the space that we have been warehousing on the third level of Santa Monica Place.

That would generate tremendous traffic to the third level.

There are no first-class movie theatres west of the 405 or certainly in Santa Monica.

This is going to drive at least 2,500 to 3,000 people a day.

Add to that the new Metrolink, the new Rapid Transit Rail system that opens up in two years across the street from Santa Monica Place, which will coincide with the new theatre opening, and the future there is very bright.

At Scottsdale Fashion Square we are adding a new anchor complex which is a combination of a major new theatre as well as a Dick's Sporting Goods and we think that that is just a natural extension to a great regional mall of that nature.

The highlight of our redevelopment pipeline is Broadway Plaza.

Just last week we finally got approval from the Corps of Engineers for the vacation of an easement, which was necessary, of a drainage easement that was necessary in order to enable us to move forward with the demolition of this center and the building of a brand-new mall in this location.

If you think about what we are doing at Broadway Plaza, it is not that different than what we did at Santa Monica Place five years ago.

At Santa Monica Place five years ago, we completely shut the mall down.

The only difference between what we are doing at Broadway Plaza and Santa Monica Place is that we are not shutting down the anchors and we are not shutting down the entire mall.

But we are going to be tearing down about 175,000 square feet of space.

Currently, one of the weaknesses of Broadway Plaza is we just don't have enough specialty space for the retail tenants.

We only have about 100,000 square feet of specialty space available for the retail tenants.

So, upon completion of this expansion, which involves a demolition of all of the retail space between Nordstrom, which is one of the top 10 Nordstroms in the United States and Macy's which is one of the top 20 Macy's in the United States, we will be tearing down all of the specialty stores between those two department stores most likely next year.

My guess is that in the next supplement this project will move up to the green light category.

And then it will be opening up in phases in late 2015 and early 2016 with the final phase being in 2017.

We see an incremental investment of $250 million with an incremental return of 8% to 9%.

When we think about these incremental returns, we take the current net operating income that we have today and then we say okay, we have to earn a return on investment that is in excess of that current income.

So, today, we have, let's say for example, $15 million of NOI coming from Broadway Plaza.

If we are going to spend $250 million of new investment, and we hope to see at least an 8% incremental return then we have to see at least a $20 million incremental return as well as replace the $15 million that was there in the beginning.

This center is going to be an unbelievable powerhouse.

If it was a brand-new mall, I would tell you it is the most exciting location to be built here in the United States.

Walnut Creek is one of the most sought after locations on the entire West Coast and it is certainly one of the three must-have locations in the Bay Area.

Add to that a top Nordstrom, a brand-new Neiman Marcus and a strong Macy's store, and a proven track record for - (this center opened in 1951) for over 60 years.

This is -- there is probably no other redevelopment or expansion opportunity like this.

We are essentially building a brand-new mall in the middle of an incredible trade area.

With that I would like to open it up to questions, operator.

(Operator Instructions).

Craig Schmidt, Bank of America.

Art, I was wondering if you could spend a little time and talk about how the redevelopment efforts at Kings Plaza and Green Acres are going to differ.

Sure.

The initial development efforts at Green Acres are, currently, we are primarily looking at building a series of power center type tenants as well as entertainment type tenants on the 20 acres of land that we bought next-door to Green Acres.

We are also doing a tremendous amount of leasing at Green Acres which maybe, Bobby, you may want to touch upon.

And long term obviously we will be looking at future of our department stores that are there one of which Penney would love to expand, but obviously they need to get their act together before they can think of such a thing.

So right now, tremendous amount of re-leasing is beginning to happen inside the mall at Green Acres and, now, we are looking at adding new retail space which we are getting tremendous rents from, a lot of the bigger box type users on the 20 acres of land that we thought there.

At Kings, Bob, which you like to comment on what the merchandising plan is and focus is on Kings Plaza?

Sure.

Craig, this is Bob Perlmutter.

I would describe Kings as having two opportunities.

The first one sits within the existing small store set.

We believe we have the opportunity over the next couple of years to really make Kings much closer to Queens in terms of physical improvements in terms of merchandise mix, in terms of the way it is operated and marketed.

And ultimately in terms of sales.

And as we have discussed, if we can get the sales at Kings to a closer level to Queens, there will be significant rent growth over the coming years.

The longer term piece is the potential redevelopment of a Sears box which affords us approximately 300,000 feet of space that we believe over eight longer period of time can be carved up into both specialty stores and restaurants as well as some box tenants.

So there's opportunities within the existing mall stores and then there is the potential to redevelop one of the existing anchors.

Great.

Then on Paradise Valley, I noticed that you have taken away the projected costs.

Are you thinking of enlarging that redevelopment or scaling down?

Scaling it down.

There is uncertainty in terms of getting approvals from certain anchor department stores that have put it a little bit more into a reconsideration category.

(multiple speakers) redevelopment.

So scaling it back.

Thank you.

Michael Bilerman, Citi.

Good morning.

Tom, in your opening remarks you talked about temp to perm about 250,000 square feet over the last four quarters and currently about 560 basis points of temporary that I guess you would seek to eventually move over to permanent category at uplift of $20 to $25 a rent.

So I am just curious, what is the basis that you are using in terms of square footage?

I think it is probably about 1 million square feet is that but I wasn't sure in terms of that 560 basis points.

How much of that do you think you are going to be able to convert, the time to convert it, and the capital that you would need to put in to get the rents that you are looking for?

Michael, I will take the first part of that and then I will defer to Bobby.

His team is the team that has really got to do it.

The 5.6% is roughly 1.3 million square feet in total.

The capital, it is typically not a very capital-intensive effort, at least to date it has not been.

So the capital really isn't a significant part of the equation.

Bob, do you want to comment on timing?

Yes.

In terms of timing, I think we see a long-term stabilized temporary occupancy of 3% to 4%.

One of the things to remember is when we are able to convert the temporary to permanent, it is not that we necessarily exit the temporary tenant out of the mall.

We typically will maintain the temp in a lesser location.

So part of what is occurring is the temp is being converted to permanent.

A full rent is being achieved, yet the permanent -- the temporary tenant is often relocated to another part of the center.

So we will always have some degree of temporary tenants within the centers.

So I guess you are looking at total occupancy moving up in addition to the conversion you sort of get a dual jewel benefit from that?

Right and I think roughly we have over the last year about a 200 basis point increase in permanent occupancy.

Okay and then on the disposition, I want to make sure I get the change in what you are doing.

You've -- including the two assets to Rouse you will have disposed of about $920 million gross of assets, there's about $300 million of debt on those assets, so generating net equity of $622 million.

Your, originally, guidance was $500 million to $1 billion about one third debt so $650 million of proceeds.

So right smack in the middle from an equity perspective, so I'm just curious.

How much of it was timing in terms of I guess now you are saying $0.18 of dilution for the year and I guess how should we think about an annualized dilution impact from these sales activity?

How much was timing, how much was price?

What were the in's and out's relative to your original thought process on the sales?

Well, one point of clarification on the $0.18, $0.05 of that dilution came from the equity issuance in May.

It was not part of our initial guidance.

So $0.13 related to the dispositions that have happened year-to-date.

Obviously if anything happens between now and year end, it is going to have a pretty short period of time in 2013.

So we would not expect much impact their one way or the other.

And as far as the timing of when that transaction materialized it was just the ordinary course of business.

Look we are committed on an ongoing basis to pruning our portfolio and reinvesting proceeds from certain assets into our development pipeline, our redevelopment pipeline and our top-tier assets.

That is going to be ongoing.

In August when we had our last call, we had nothing in the works.

There was nothing under contract.

So this really developed after August and it is what it is.

All right.

Thank you.

(Operator Instructions).

Rich Moore, RBC Capital Markets.

Good morning.

While we are on the disposition topic, do you have anything else currently in the hopper as we look at 2014?

I realize you will be opportunistic as these come along, but is there anything you are actively pushing or engaging at this point?

You know, our policy on acquisitions and dispositions is generally not to comment on individual transactions.

But I will repeat that we are committed on a long-term basis to recycling our capital and to constantly, through portfolio management, which -- that is kind of the word I used for it, instead of dispositions today -- was portfolio management, through portfolio management to recycle out of certain what we consider to be noncore assets into our core assets.

To go for more assets to fewer bigger assets.

And look, I will go back to the assets we are selling.

We didn't dislike any of them.

We liked them all.

But it makes sense for us to prudently recycle our capital and this market is allowing -- the transaction market is allowing that activity to take place.

So I am sure that in our next call if there is anything that's going to be in the works that would affect our 2014 guidance, we will do what we did for you in the January guidance call of this year.

But at this point in time, what is under contract is -- that has been disclosed -- is it.

But long term, we are committed to culling our portfolio.

Okay and the appetite by buyers, is that changing in any way, would you say?

Is it getting better or possibly worse, I guess?

I think that there are more buyers out there today than there were at the beginning of the year.

I think the appetite of the specific buyers is higher today than it was at the beginning of the year.

Good, thank you.

And, then, Tom, on the recovery ratio it is staying -- the expense recovery ratio, it is staying what seems to be unusually high but it has stayed that way now for a couple of quarters.

So I am just curious, is this unusual and we are going to head back down a bit?

Or should we keep the ratio up here?

No.

I think this is what you are going to see, Rich.

Keep in mind that we have CPI increases built in not just for our minimum rents, but also for our fixed cam charges.

And oftentimes we have a better escalator on the cam recoveries than we do on our minimum rents.

In many cases it is two times CPI.

So that is what helps charge the recovery rate.

It should help drive the gross margin as well.

Good.

Thank you.

[Luke McCarthy], Deutsche Bank.

Quickly I will get it out of the way.

If you could just comment on JCPenney and what you guys are hearing from them, post back to school season and as we head into holiday sales.

They seem to be generating more traffic.

We have exits or intercept interviews with their store managers which, frankly, I think is a better source of information than you might get corporately.

And the store managers are pleased with the new management team and they are optimistic about the future.

Beyond that, I am the last person in the world that could prognosticate the future there other than we are long-term supporters of JCPenney as a brand.

And long term, I think, JCPenney is here to stay.

Sure.

And one follow-up on redevelopment.

There were some articles out there are in the year about you guys particularly responding well to your demographics in California and Phoenix with very culturally specific favorable attractions at the sites.

Moving forward as you continue to focus on that effort does that change from a cost perspective how you underwrite the deals or think about redevelopment moving forward?

No.

But it is an interesting question.

The lessons we have learned in terms of focusing on our [Vanguardia] program is that you need to be in touch with your market, whatever that market may be.

And that is the thing that drove us three years ago to come up with the crazy idea of tearing down Broadway Plaza at Walnut Creek.

Walnut Creek is not Hispanic, but the lessons that we learned of being in touch with your community and being in touch with your demographic and realizing what your demographic wants is transferable across the board to all income groups and all ethnic groups.

And Broadway Plaza, as we looked at it, we said, look, it is great.

The anchors are great, but there is so much demand for specialty space and the shoppers warrant so much more and we are just not giving it to them.

And physically we can't give it to them unless we tear down roughly 60% of the center and 70% of the parking deck and rebuild the whole thing.

And it was insane, frankly, in some people's minds for us to think about it.

But as we look at it today, I think it is the best redevelopment opportunity to invest that kind of money to create a center that is going to be worth -- could be worth $1 billion.

It is an incredible opportunity and it is only as a result of really just paying attention to your trade area and not being satisfied with something that is good or even great but always wanting it to be at its highest and best utilization.

That is what drove us to do what we're doing at Walnut Creek.

That is what drove us to do the densification at Tysons Corner.

It was paying attention to the Metro rail coming.

Again that was not a cultural thing.

But it is paying attention to your trade area and always striving to take your real estate to the highest and best use.

Great.

Thanks.

Daniel Busch, Green Street Advisors.

When I look at the different mall groupings and the supplemental package, it looks like there is quite a sizable gap between occupancy in the top 40 malls versus the ones outside of the top 40.

And I know, Art, you mentioned that the retailer demand for space is quite strong.

Is that demand -- does it tend to dry up pretty quickly when you get outside of your top 40 malls?

I am trying to get a better sense of what the demand for space is at those lower productivity centers.

I will let Bob answer that, but our actual numbers year-to-date are that we have had pretty decent results in that group of 41 to 57.

Bob, do you want to talk about that?

Yes.

I think the first point is we have been able to generate positive leasing spreads even in the lowest tier group.

I think the two differences are primarily the nature of your tenant changes a little bit.

Much of it is a more local or regionalized in it as opposed to a national tenant.

We find that we are successful in maintaining tenants at renewals, but again the nature of the tenancy is a little bit different.

And probably our biggest opportunities are less on leasing spreads and more on improving long-term occupancy.

Okay.

One other question.

Looking at the portfolio makeup, I know, obviously, you have been pretty active in disposing of the assets on the lower tier of the portfolio.

But I know you have mentioned in the past that you want to focus on those markets where you have exposure or a great presence, and there are a couple of assets I guess where I am thinking of you have one left in Texas above in the top 40.

Are those malls where you don't really have a presence in the market?

Are those potential assets that you may look to dispose of over the long term?

No.

Not that one in particular.

Look, it is a national business and maybe I have been a little too restraining when I said, look, we want to focus on six or seven major markets.

That is not to the exclusion of everything else.

So we are not going to focus on only six or seven gateway cities.

If a center is a must-have center and we still see great upside in it, which the one in Lubbock we do, then it fits our profile.

Okay, great.

Thank you.

Something down the road, possibly.

Okay, thanks.

Haendel St.

Juste, Morgan Stanley.

Hello.

Couple of quick questions.

If I heard you right earlier on the call you said there is a 20% mark to market on your top 40 malls even if sales stay flat.

So I guess two questions.

Did I hear that right?

And then could you provide the comparable number for your bottom tier malls?

Yes, you heard it right.

I did say that, as I look at it that if you were I am asked constantly what is your mark to market and I took a look at the top 40 centers we have, which generates 85% of our NOI.

And it is not hard for me to see at least a 20% mark to market there and that is without pushing the envelope at all.

That is really very easy to see.

The opportunity, I think, as we move below those centers which are number 41 through 57 which are roughly 12% to 15% of our NOI, the real opportunity there I think is more occupancy gain than it is rent spread.

But -- and there are opportunities to do that.

So but look what drives this ship here is the top 40 centers and those are the flagships that we own and that we are really -- we see huge upsides in, but it's -- I would say occupancy in the lower tier and rent uplift in the upper tier.

Okay, thank you for that.

One more -- I guess maybe one and a half more.

Wanted to clarify the two malls sold a week or so back, it sounds like they were not part of the broader disposition package contemplated earlier this year.

Is that right?

Which two are we talking about?

Chesterfield and Salisbury.

They were part of a group of properties that we had a broker exposing to the market earlier this year.

They were (technical difficulty).

Okay so I guess -- more curious on the genesis.

(multiple speakers) by the way is not that relevant because, again, I will remind you that the fact that we gave a certain number of assets to the broker earlier this year to the intermediary, I had no estimation or contemplation that all 14 of those assets would be sold.

We didn't want to speak for the buyers.

We said, look, these are some assets that fit the profile that we have owned them a long time.

We have a low basis in them.

We are able to do a reverse 1031 tax exchange to increase the basis in these assets to make it possible for us to think about selling them.

And that is what we did.

We didn't poll the market as to what people were interested in or what, frankly, we were interested in in necessarily disposing it other than the fact that they did fit the profile.

They were not in our major markets.

But they were part of a group of assets that were exposed earlier in the year.

And the fact of -- I guess Rouse.

It is a fairly known Rouse right, about those assets.

The fact that they emerged as the winning bidder, is there something there?

Perhaps a lack of a private equity bid?

We have obviously seen them, the private equity guys, very active in acquiring quite a few malls this year.

Is there something there that perhaps turned them off?

Maybe Rouse is perhaps a more strategic, a better buyer given that perhaps operating strategic synergies or some other factor.

Just curious as to with risk of putting words in the mouth of a public peer as to Rouse emerging as a winning bidder over private equity you would think could and should pay a higher price.

I wouldn't want to do that.

We are pleased to be able to transact with them.

Look, we are natural counterparties to each other and, hopefully, this is the first of several transactions that we can do with each other.

Appreciate it.

Thanks.

Alexander Goldfarb, Sandler O'Neill.

Good morning out there.

First question.

Tom, if we look in the packet, the majority of the unencumbered assets are in the lower tier malls which, as you guys prune the portfolio, presumably those are malls that gets sold as you guys have been discussing.

Along those lines, because of the balance sheet discipline, are -- should we think about the top -- the malls in the upper buckets those becoming unencumbered so that you do retain that unencumbered pool or how should we think about that?

No, I think we are clearly -- have moved in the direction of long-term nonrecourse financing.

Once we close on FlatIron there will be no corporate debt outstanding.

We have only got a little bit outstanding in a line and in a $125 million unsecured term note.

We will be completely secured borrower at that point with a $1.5 billion line of credit available to us.

And then Art mentioned a little bit earlier the maturities that we have coming due in 2014, 2015 and 2016.

Those are all for the most part high-quality assets that are unencumbered.

I mean, relatively lightly encumbered.

And so we will be able to put some additional financing on those above and beyond what is maturing.

So we are in good shape and I would not expect to see us unencumbering a lot of assets in the top 30 or 40.

Okay.

So previously where you guys had talked about your unencumbered asset pool, that was more of a temporary nature, not something philosophical that the Company was seeking to maintain then?

That's correct.

I mean if you think about the period of time we have been in the last three years or so, it has been a generational low of interest rates and if you are going to be a nonrecourse long-term fixed-rate borrower there's -- in the last 25 years there has not been a better time to do so and so we took advantage of the market conditions and we put some attractive financing on some of those previously unencumbered assets.

The most recent of which will be FlatIron Crossing.

And you can look at the metrics on our balance sheet, our floating-rate debt is lower than it has been in many, many years.

Our coverage ratios are better than they have been.

Debt to EBITDA is rapidly approaching 7.5 times or lower and our maturity schedule has never looked as good as it does now.

So that kind of speaks to the strategy in what we have done.

It just seemed then, based on prior calls, that you guys were looking to maintain an unencumbered pool.

So just a little surprised that it was more -- that that was more just a reflection of a certain time period rather than a go forward.

If you look at that period of time, you will also see we probably had significant amounts outstanding on our line of credit.

We had some other corporate debt and so -- today we have virtually no corporate debt.

And without completely forecasting what we were doing, we also knew that the assets that were unencumbered were assets that potentially would be disposition candidates in the future.

And we knew that certainly the private equity buyers are much more attracted to being able to put their own debt on these assets when they buy them, so it makes them more saleable.

As of today, I think we also brought that up really just to point out our capacity, our firepower.

It wasn't intended to be a signal that we were headed towards becoming a rated company.

We certainly have a balance sheet today, directionally, that if we wanted to go that route over the next period of time it could be done.

But I am not convinced it is necessarily the right thing.

To me, the most important fact about our balance sheet today is that we have virtually nothing outstanding on a $2 billion line of credit and when we close the upcoming FlatIron's financing we have got substantial cash on the balance sheet.

So we got a tremendous amount of capacity sitting here.

And then on superstition, you guys bought out the rest of your stake there.

It does about $350 a foot.

What are your thoughts -- what your thoughts for that?

Obviously you guys bought in the rest of the stakes so what are your thoughts for that mall?

It was just a transaction that was negotiated with our partner, JCPenney, and at this point in time we like the asset.

It is part of a group of assets there that we own.

And we actually had increases in the occupancy there.

Nothing in particular.

There shouldn't be any great signal.

Look, it was done with a partner.

If I had to really look at it and dissect what we did, it is not the type of property that we would buy if we owned nothing of it, but we already owned two thirds of it.

Buying the other one third when you are investing $20 million of equity to do it was not exactly a big stretch for our capital.

And as I think about it from a portfolio management viewpoint, it gives us the ability to maybe take some of our C malls and dispose of them without having significant dilution from those activities.

It is a little bit of a portfolio management decision.

There shouldn't be any big signal there other than we are not buying $350 a foot centers on their own today, but going from 66% to 100% gives you complete control of the asset, which also gives you the ability to think about monetizing it in the future more easily, Financing it in the future without having to talk to a partner.

There is not a lot to be read into it though.

I didn't know if there was future expansion or something of that sort but it sounds like not.

Thank you.

Josh Patinkin, BMO Capital Markets.

On the temp to permanent occupancy discussion, just wondering if there is a way to characterize the space.

Is it skewed to one anchor in the malls or is it just to spread out to characterize it generally?

No, you shouldn't just view this as end zone or department store wings.

The spaces are really spread throughout the centers and spread throughout the quality of centers.

Sometimes, it is because we are trying to accumulate blocks of space to bring in a larger retailer.

Sometimes, it is lesser locations that as the market has been improving we have been able to get permanent deals on it.

Okay and so, a lot of times it is your decision to hold the space right at the 50-yard line for a couple of years as you wait for better tenants?

Sometimes.

Sometimes it's to fill timing that we need for these tenants.

But the spaces, as a general rule, you shouldn't just view them as lesser spaces within the centers.

And tying that into the specialty leasing business, I am curious how you see that going forward.

What is it as a percentage of revenue today?

And where was it a year ago?

Where do you think it could go and just your general thoughts on it?

Well, in terms of that -- that was a specialty tenant leasing?

Yes, specialty leasing.

Yes.

Today we are tracking at over $50 million a year.

So it is a solid contributor to NOI and NOI growth.

It is a relatively mature category.

When we first rolled this out we were seeing double-digit increases per year.

Stabilized a little bit, but obviously as we move up the quality scale out in Kings Plaza and Green Acres that is going to help a little bit.

For example, in the third quarter of last year it was about $13 million even.

This year it was about $13.9 million.

So we are still seeing growth there and I don't see that changing.

But I don't know if you do.

I would say one of the things we have been trying to do in the common areas is really not only grow the income, but improve the quality especially at the top-tier centers.

And so that has been a big challenge to the mall teams and we are also looking at nontraditional ways to generate revenue within the shopping centers.

So it's a --.

I would almost describe it as a maturing and evolving business within the shopping centers.

Okay.

Thank you.

Yasmine Kamaruddin, JPMorgan.

It is actually Mike Mueller.

Two questions.

First of all I think you mentioned for Broadway, there was about $15 million of NOI.

How do you see that phasing out over what time period?

That's the first one.

Well, I think that our budget -- first of all, that was by illustration, but that is certainly a pretty good ballpark.

We will diminish that by about 35% next year so we will take it down to a low point of $9 or $10 and then we will grow it back up as we bring the space back online.

So there will be at least $5 million or $6 million of NOI will disappear next year.

Look, it is a major project.

You are demolishing almost half of the center.

You are taking well over half of the parking decks out of service and rebuilding them.

There are a lot of people that would say that is crazy to do that, but the value creation opportunities are huge and our team knows how to do this because we take old centers and reposition them.

That is our expertise.

That is our core competency.

And but, yes, to answer your question, $5 million or $6 million of the NOI will go down.

And we do have a partner there.

So we have half of that.

And then we will rebuild it to a level that could easily be in the $35 million to $40 million of NOI.

I am not sure if I actually said it, but I don't think Broadway is even in our top 20 centers in terms of NOI today.

But when we get done with it, it will probably be in our top 10, maybe even our top five.

Who knows?

Got it.

And the other question was, just given the success at Chicago, does it change at all how you are looking at incremental outlet developments?

Well, it certainly gave us a lot of strength in the marketplace and we think Fashion Outlets of Niagara's expansion -- you know, it made us really aggressive in terms of moving forward there on that.

And beyond that, it is a very interesting business that we see ourselves being a player in, as we've said before.

But, again, I will repeat it, we are not going to own a lot of them because we are going to have the same requirement for our outlet investments as we have for our full price investments.

And that is that we want fewer, bigger, stronger assets.

We want them to be dominant.

We want them to be must-have in their trade areas.

Got it.

Thanks.

And that is all the time we have for questions today so I would like to turn it back over to our speakers for any additional remarks.

Again, thank you very much for joining us and we look forward to seeing you in a couple of weeks at NAREIT.

Thank you very much.

And that does conclude today's call.

We thank everyone again for their participation.