Macerich Co (MAC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to The Macerich Company fourth-quarter 2013 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.

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

Please go ahead.

Good morning.

Thank you, everyone, for joining us on our fourth-quarter 2013 earnings call.

During the course of this call, management will be making forward-looking statements, which are subject to uncertainty and risk 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.

During this call, we will discuss certain non-GAAP financial measures as defined by the SEC 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; 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 O'Hern.

Thank you, Jean and welcome, everyone.

Today, we will be limiting this call to one hour.

If we run out of time and you still have questions, please do not hesitate to call me or John Perry or Jean Wood.

It was another great quarter.

We executed on our plan to dispose of non-core assets.

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

Looking at the operating metrics, the leasing volume and spreads were both good.

We signed leases on specialty tenants totaling 330,000 square feet and we had positive releasing spreads for the trailing 12 months of 17.2%.

The occupancy level was at 94.6% at the end of the year.

That was up 80 basis points from year-end 2012.

It is also important to note when looking at the year-over-year occupancy gain that we reduced our temporary occupancy that is included in that statistic.

Temporary occupancy at year-end stood at 5.8% and that is down from 6.9% a year ago.

That is an area we will continue to focus on converting temporary tenants to permanent occupancy.

Average base rents increased to $48.16.

That is up 8.7% from $44.29 at the end of 2012.

Looking at FFO, the adjusted FFO for the quarter was $0.94 per share.

That is up from $0.90 in the fourth quarter of 2012.

The full-year FFO was up over 10% at $3.53 compared to $3.18 for 2012.

Same center NOI was strong.

Growth was strong in the quarter; it increased by 4.9% compared to the fourth quarter of last year.

This increase was driven by increased occupancy positive releasings [such as] annual CPI increases on leases.

Year to date, same center NOI was up 4.1%.

Also, on a same center basis looking at expense recoveries for the quarter, they were up to 96% and that compared to 92% in the fourth quarter of 2012.

We had a very modest amount of lease termination revenue in the fourth quarter.

That was $600,000.

That was down from $2.3 million in the fourth quarter of 2012.

Bad debt expense was also down for the quarter a relatively modest level of $1.1 million, down from $1.5 million in the fourth quarter of 2012.

Throughout the year, we had significant savings on interest expense due to the significant refinancing we have done over the last two years.

Most of that benefit flowed through the first three quarters.

During the fourth quarter, the average interest rate was at 4.22%, down slightly from the 4.29% at the end of last year.

We also made great progress on our balance sheet.

Looking at the balance sheet stats at the end of this year compared to 12/31/12 factoring in the acquisition of Green Acres, which happened in January, debt to market cap went down from 45% to 40.5%.

Interest coverage ratio improved from 2.8 times to 3.2 times.

Debt to EBITDA improved significantly down from 8.1 times to 7.2 times on a forward basis.

Average debt maturity improved from 5.3 years to 5.9 years and floating rate debt as a percentage of total debt decreased from 23% at the beginning of the year to 10% today.

In addition, as we look at our maturity schedule, we have very little interest rate sensitivity in our upcoming maturities.

We have only $119 million of debt maturing in 2014 and that is at 4.1%.

We have $640 million of debt maturing in 2015 with an average interest rate of 5.5%.

And 2016 has $710 million of maturities at 5.8% average interest rate.

This morning, we also gave FFO guidance for 2014 in the range of $3.50 to $3.60 per share.

That guidance assumes asset sales in the range of $225 million to $275 million and that those sales will occur in the first half of 2014.

The 2014 guidance also includes the dilution of $0.08 a share from those asset sales plus another $0.16 of dilution from the assets that we sold in 2013.

The above guidance range reflects same center NOI growth of 3.75% to 4.25% and there is no acquisitions factored into that guidance.

Looking at the quarterly split, we'd expect the first quarter to be approximately 23% of the total; second quarter also about 23% of the total; third quarter, about 25%; and the remaining 29% in the fourth quarter of 2014.

We saw a nice increase in tenant sales in the portfolio mall.

Tenant sales per foot were at $562.

That is up 8.7% from $517 at the end of 2012.

The strongest regions for us in terms of sales for the year were Arizona and California.

Now I'd like to turn it over to Art.

Thank you, Tom and welcome to this call.

First of all, I'd like to go through and kind of recap the major accomplishments that we had in 2013 and then address some general industry issues that I know all of you are interested in and then we will open it up for Q&A.

2013 was truly a transformational year for Macerich.

We gave guidance in the beginning of last year that we had an intent to significantly recycle out of some of our lower productivity, lower growing assets and to take that capital and ultimately redeploy it into proven winners and great development and redevelopment opportunities that we had within our portfolio.

We ended up having a terrific year with the disposition of 10 malls and one office-related property.

The malls averaged about $340 a square foot and the sales generated almost $900 million of proceeds.

We are currently in the process of various stages of talks to dispose of another four or five assets, weaker assets than the ones that we sold in 2013.

As Tom mentioned, the range of sales proceeds that we would anticipate from that disposition process, which we would expect to be completed in the early part of this year, would be $225 million to $275 million, give or take, and the productivity of these centers that are currently in discussions are lower than the ones that we sold in 2013.

Generally somewhere between $250 and $300 a square foot with one possible one in the mid-$300 a square foot.

It was a major accomplishment during the year to accomplish a delevering of the balance sheet through the dispositions and through the use of an equity offering at about $70 a share as part of our S&P 500 inclusion that helped us to delever the balance sheet by over $1 billion.

As mentioned, it was a great honor and accomplishment for the Company to be admitted to the S&P 500 during the year.

On the development front, we had huge winners across the board.

At Tysons Corner, we were successful in pre-leasing the office tower to a 70% level so that we were able to move forward with the development.

That development is moving along very well.

I will suggest that weather has been quite an issue as you all know on the East Coast both at Tysons and at Niagara Falls.

But that development is moving along terrifically and again, the densification of that property is going to have a terrific impact on the retail center.

During the course of the year, we completed the total recycling of the department store lineup at our Victor Valley Center in the Inland Empire.

JCPenney moved from a small 50,000 square foot store to a new 100,000 foot store late 2012.

Macy's came as a new to market fashion anchor for that market in March of 2013 and Dick's, which we are finding to be a great anchor for midmarket malls, opened in November of 2013.

As a result of that, that particular center is one of our highest performing centers in terms of sales per square foot growth.

Most of you, a lot of you visited before or after the grand opening of the tremendously successful Fashion Outlets of Chicago, which opened in August of 2013.

Staying in Chicago, we also had a terrific new anchor open up at our North Bridge center, Eataly.

They opened in December of 2013 and by all accounts, that particular Eataly could even be more successful than the New York one.

In any event, it has been tremendously well-received in the city of Chicago and it is already generating significant new tenant interest for the North Bridge Mall, which is what we anticipated.

During the course of the year, we continued to clear the land for the expansion, the 175,000 expansion of our very successful Fashion Outlets of Niagara Falls.

We were able to complete that and we have started the work on the expansion.

Again, weather has been quite an issue there as you can imagine.

We are currently 55% leased on the expansion and 81% committed.

The grand opening of the expansion itself is still a little bit up in the air, so, in the supplement, you will see that it is in there, the fourth quarter or early the first quarter of 2015, either fourth quarter of 2014, first quarter of 2015, all weather permitting.

Had we not had the weather issues, which I don't have to tell you all about, it would have been likely November and we will see where we go with that.

We had a terrific year in terms of obtaining numerous entitlements and consents, governmental, as well as other consents that were required for us to go ahead and move forward on the breaking of ground for Broadway Plaza in Walnut Creek.

This is one of our great properties.

It is anchored by Neiman Marcus, a terrific Nordstrom store, a top 20 Macy's store in the United States and we think it is going to go from being a very, very nice boutique street-oriented type of retail center to a true super regional center and one of the three dominant centers in the Bay Area.

So it is going to be a fabulous property.

We also, as you can see in our supplement, have been refining our returns there and have even a more optimistic viewpoint on our views there.

In Santa Monica, we announced, after many years of negotiations with the city, just a couple of weeks ago that we are going to be adding ArcLight Theater to the third level of Santa Monica Place.

ArcLight is the premier movie experience in Southern California and we think that they will help to generate at least 2,000 to 3,000 additional traffic bodies per year to that third level.

During the course of the year, we were fortunate to be able to buy 20 acres of contiguous land to Green Acres Mall, one of the acquired centers during the year and we are currently underway with pre-leasing of that center and we anticipate very nice returns, north of 10%, when that is fully entitled and then gets opened in about two years.

We have announced the addition of two additional anchors at both Scottsdale Fashion Square and Cerritos.

At Scottsdale Fashion Square targeted for a spring 2015 opening will be a Dick's Sporting Goods, plus a mega cinema complex, which will be operated by Harkins Theatre, who is the current dominant theater operator in that market.

At Cerritos, we also announced two additional new anchors.

One is the re-merchandising of the old Nordstrom store that had been relocated a couple of years ago to a brand new store.

That will be a theater, Harkins and also, we announced that Dick's will be also occupying space there.

That is targeted for a fall of 2015 opening.

We are proceeding very well on our planning with the complete re-merchandising of Kings Plaza, so we are very, very pleased with the development accomplishments, as well as the development pipeline.

We are very, very bullish on the opportunity to essentially take the $1 billion of proceeds, when you add up this year's disposition proceeds roughly of $1.3 billion to $1.4 billion of proceeds that will be generated through dispositions and redeploy it into a proven winning development pipeline here this year, next year and the year after and the returns are going to be very, very significant for the Company for the foreseeable future.

Tom mentioned the operational achievements, but just to summarize, same center NOIs came in at 4.1%, which was an improvement of 110 basis points over the guidance that we gave at the beginning of the year.

Releasing spreads were extremely strong.

FFO came in during 2013 $0.17 above our original guidance for the year and 11% over the previous year, which we are very pleased to have been able to accomplish that, primarily driven by the increases in same center NOI growth to be able to accomplish that even though we ended up at the high end of dilution based upon going to the high end of dispositions during the course of the year.

So in summary, if you would have asked me in January 2013 how I would feel about increasing our FFO that we achieved in 2012, which was $3.18 a share, up to $3.55 a share for 2014 and along the way to delever and reload the balance sheet by over $1 billion, to have disposed of 14 or 15 of our lower quality assets averaging just over between $320 and $330 a square foot, thereby increase the average sales per foot in that portfolio to something in excess of $570 a square foot and enable us to focus on proven winners, fewer bigger assets in dense trade areas, I would've said, wow, that would be a terrific year.

And that is what we accomplished and we are very proud of that.

I am not unaware though of the negative sentiment that weighs on the retail sector in general and that weighs on retailers, as well as retail landlords.

So I do want to address a couple of issues on that point.

First of all, as it relates to a lot of the talk over Black Friday, Cyber Monday about the impact of online sales on brick-and-mortar sales, I just want to remind you all that the online merchandising channel that retailers are using today is essentially the catalog channels that they used 10, 15, 20 years ago.

So hurrah for all the trees that we are saving and hurrah for a new channel being developed that allows retailers to globally expand their businesses through e-commerce and to expand and improve their profitability and to really create a seamless transition across all channels.

The dotcom world and the catalog world has been a source of great new retailers for our shopping centers both in the past as well as the future.

There are a number of retailers that were born in the catalog world that now are some of our best brick-and-mortar retailers.

There are Internet retailers that were born digitally that now have great retail stores with us.

There are digital pure-play retailers that never intended to have brick-and-mortar stores that have recently figured out that they need to have brick-and-mortar stores in order to really maximize their brand.

And then you have the manufacturer direct type of folks that really didn't have to have a brick-and-mortar presence, but elected to do so in order to create an opportunity for discovery, for entertainment, to create relationships with their shoppers and to actually seal the deal and make transactions.

So the retailers that really never needed brick-and-mortar locations like Apple, Microsoft, Samsung, Sony, and even now Tesla and other car dealerships that want to use showrooms in our malls is an emerging category that just proves the strength of the brick-and-mortar locations.

The best e-tailers are also the best retailers and for a retailer to have solely a brick-and-mortar platform, they would not be strong.

And likewise, retailers realize that they need the multichannel platforms, both full-price stores, off-price channels, their e-commerce channels and now social media, which they use tremendously to increase their brand.

A second issue that I know is each time there is a hiccup at JCPenney and Sears, obviously we catch a cold.

Over the past year we are very pleased that through the dispositions that we've accomplished and the ones that are currently underway that we've gone from 78 to about 56 JCPenney and/or Sears stores in our portfolio.

The stores that they occupy within our portfolio, we have 18 centers in our portfolio that have both a JCPenney and a Sears.

Most of those centers by the way have two or three other anchors in many other cases.

Those centers average $557 a square foot, so those centers are very, very strong centers.

We have 10 centers in our portfolio that have only a JCPenney.

Those centers average about $500 a square foot and include centers like Queen Center, Fresno Fashion Fair, The Oaks and Valley River and others where there would be no issue replacing the merchant if you had to.

We have 10 centers where we have only a Sears store and not a JCPenney store.

Those centers also average in excess of $490 a square foot and they include centers like Kings Plaza, Cerritos, Chandler Center, La Cumbre Plaza in Santa Barbara, all centers that we would have zero problem replacing that merchant if and when something were to happen there.

I would also note that we have 20 assets in the portfolio that have neither JCPenney or Sears and those assets in our portfolio generate 34% of our net operating income.

The third industry issue that I wanted to just touch upon and then we will open it up for Q&A is sales.

Sales is something that I know you all are focused on and sales are very important because rent is absolutely a function of sales.

But when you are operating at a very high sales level, and when the merchants -- when they want to come into a market really don't have any other opportunities to enter the market other than with you, then you are able to capture your marketshare and you are able to do that at rents that are appropriate.

I pointed out I think in our last earnings call that even in 2008 and 2009 when we had major sales decreases, we still generated very significant positive releasing spreads.

From 2009, year-end 2009, we had a $407 a square foot average portfolio sales per foot.

At the end of 2013, we are at $562 a square foot, almost a 40% increase.

But when I look at that and obviously, I work with our leasing teams, we know that we have great demand for our spaces.

I would also point out that roughly two-thirds of our new leasing activity are renewals anyway and we only generally renew with merchants that are proven winners.

We took a look at our portfolio about a month ago and we said if you took a look at each of our top 20 centers, and we have not run this for our bottom 30 centers, but I think it will prove out the same, and if you start with the premise that two-thirds of the stores that are there belong there and probably a third of them over time probably belong to be replaced over a period of time.

And you take a look at the top two-third performers in each of our centers and you eliminate the bottom one-third, the sales per foot of the top two-thirds in the top 20 centers that we own goes up 40%.

So for example, in number 11 through 20 of our portfolio, sales per foot would go from $632 a foot to almost $900 a foot for the top two-thirds of the merchants.

In the top 10 centers that we own, sales per foot would go from just over $850 a square foot to something around $1160 a foot if you eliminate the bottom third.

And that is what we do day by day.

So when we look at leasing strength and opportunities, leasing is obviously a function of supply and demand.

There is no new supply coming into our markets.

There is increasing demand and the productivity of our centers gives us the opportunity to remerchandise them with new emerging concepts at higher sales per foot than the slower sales tenants that we tend to replace and then the two-thirds of the tenants that we renew every year, they are able to pay us ever-increasing rents because of the ever-increasing quality of the portfolio.

So with that, I'd like to open it up for Q&A.

(Operator Instructions).

Craig Schmidt, Bank of America.

Thank you, good morning or afternoon.

After the disposition of the four to five assets in the first half of the year, is this sort of focused disposition over with or do you have more assets that you'd like to cull following those sales?

It will be over with for this year.

We will be a -- when I look at what we did in 2012 and 2013 and into the beginning of 2014, I look at this as portfolio management and where we have the opportunity to recycle out of lower growing assets into higher growth and higher productivity centers, we are going to do it.

But after we complete the transactions that are currently underway, we will time any future dispositions to coincide more coincidently and directly with a reinvestment opportunity.

Okay.

And is it possible to get a geographical breakout of sales for the fourth quarter?

We don't have that at our fingertips here, Craig.

I can circle back to you, but, as I mentioned, the strongest locations were California, Arizona.

The East was relatively flat by comparison.

Obviously weather had something to do with that and the central was okay, but certainly not at the same level as Arizona and California.

And then if you had to guess, what would you think the percentage difference from a weather-related cause is impacting the East when you look at California?

That's hard to say, Craig.

Everybody blames the weather.

We just know it was certainly one of the worst winters in a long, long time and that had an impact on a lot of people.

Okay, thanks.

Thank you.

Rich Moore, RBC Capital.

Yes, hi, good morning, guys.

Any more thoughts -- you obviously already have a couple of expansions going in the outlet centers.

Any more thoughts on maybe a new groundup project in outlets?

Obviously, they are still very popular, much like online sales are popular too.

I am just curious where you guys are with that.

We have nothing to discuss on that at this point in time.

Okay.

But we are open to it.

Nothing to discuss.

Okay, got you, got you.

Thank you.

And then, Tom, a couple items.

The higher recovery ratio for the quarter, the rationale behind or what was going on behind that?

Rich, I mean on that, we just continue our move to convert every new lease we do to fixed CAM and that has the added benefit of improving our overall recovery rate.

Additionally, as we are selling some of our lower quality assets, they typically have a lower recovery rate as well.

So overall, I know I gave you the same center calculation, but overall you are going to see our recovery rate go up.

If you looked at just the consolidated assets, for example, it is at about 100% for the fourth quarter.

So we expect that to gradually continue as we continue to convert more leases from triple net to fixed CAM.

Okay, good.

Thank you.

And then management company expense was also higher than fourth quarter last year as was G&A.

So thoughts on those maybe?

Yes, Rich, the run rate for the management company has been running $23 million to $24 million a year, the full year each quarter.

So that is a good run rate going forward.

I know it is more than we saw last year in the fourth quarter, which was unusually low.

But if you look at the first through the third quarter this year, we were running $23 million to $24 million.

On the REIT G&A, it was slightly higher in the fourth quarter because we had accruals for professional fees comp and a few other things that fell through the fourth quarter.

Okay, great.

Thanks, guys.

Thank you.

Christy McElroy, Citi.

Hi, good morning, guys.

Art, I appreciate your comments on e-commerce, but just so you know we are not saving any trees yet.

I still get like 10 catalogs in my mailbox every day.

Just say no.

It's hard to stand (multiple speakers), isn't it?

Regarding the four to five malls that you are selling, what would you pin a cap rate on for the mid-$300 mall and then where do you see cap rates for the $250 to $300 range malls?

And then just regarding that $250 to $300 centers, where those among the assets that you put on the market a year ago?

I'm just trying to figure out if there is a market for those type of assets now where there wasn't before.

Well, we will see.

There is one asset in the grouping that most people would think of it as a B mall and it may or may not trade.

It's in the mid-$350s and that's consistent with the cap rates that we were able to achieve on most of our transactions in 2013, which was generally low 7's to maybe mid-7's, but more towards the low 7's.

The stuff that is -- the other three or four centers tend to be more in the $250 per square foot ZIP Code, $250 to $275.

It remains to be seen whether they will trade.

I do think they may and we will see.

If they do trade, we will certainly be able to address the cap rates.

If I had to guess what the blended cap rate of the four or five assets would be this year, and let's assume there was the $250 million of dispositions, they would blend out to be around 9% and that is a function of one of them being a B mall in the low to mid-7's and the others being C malls.

And they are more double-digit type of cap rates.

Okay, that's helpful.

And then in looking at your same-store NOI, there is a big chunk of sort of EBITDA from non-comparable centers.

Can you remind us what is in that non-comparable bucket and what centers should potentially be added to the same-store pool in 2014?

Yes, the non-comp, Christy, would include things like Fashion Outlets of Chicago, any asset that wasn't in both periods for the full period.

So FOC would not be in there, Green Acres would not be in there.

Those are two of the bigger assets.

And then anything, obviously, that was disposed of during the year would come out of both periods for that calculation as well.

And what enters the pool next quarter, just Green Acres then?

What new goes in next quarter?

I don't know that there will be anything new going in next quarter.

Okay.

FOC will not go in until the fourth quarter.

Green Acres will go in starting in the second quarter.

I don't think there is anything new that will go in in the first quarter.

And then did you disclose your growth in your sales per square foot, the year-over-year growth on a same center basis?

Well, as luck would have it, I'm sure you can ascertain that from the supplement.

I think if you look at the pages that break out the sales per foot, page 14 would give you the portfolio totals there, $562 versus $541.

I think it's roughly 3.9%.

Right, okay.

And you have one asset there, Christy, Paradise Valley, that when into redevelopment that is not included.

If that were pulled out, it would be about 3%.

Okay, got you.

Thank you.

Thanks.

Thank you.

Vincent Chao, Deutsche Bank.

Yes, hey, guys.

Just going back through dispositions for a second.

I know that it sounds like you are pretty set on the $250 million and would tie future dispositions more specifically to some investment activity, but I'm just curious how many assets you are actually marketing to get to that four to five and if the demand proves out to be better than you expect, would you consider just selling more?

No, we would not likely consider selling more and anything that is in our guidance is already in the market and may even be under contract.

Various stages of conversations, but there may be one other joint venture asset that a joint venture partner -- it's not that big -- may ask us to market in the middle part of the year, but anything that is in the band of the $225 to $275 they have already been identified and they are either under contract already or they are very close to being under contract.

It is an identified pool of assets.

Okay, thank you.

And just on the development side, how much do you guys expect to spend this year on the development pipeline?

It will probably be between $200 and $300 in total, including everything, pipeline projects, shadow pipeline projects and then miscellaneous projects that are smaller than that and not listed on the schedule.

Okay.

And just one last question, just in terms of just the sales environment, which you addressed pretty thoroughly, there does seem to be some mismatch between sort of what the companies were expecting to sell versus what they did, whether it is weather or other reasons given the amount of pre-announcements we've heard from folks, I'm just curious if you think first-quarter occupancy -- typically there is a dip.

I mean do you think it will be a little bit worse than it has been in the past few years?

Are you talking about retail sales?

Is that what you are talking about when you say pre-announcements?

Well, retailers pre-announcing negatively and seemingly a little bit surprised by the sales environment.

I don't see that impacting our occupancy at all.

Okay.

I mean these folks don't make decisions to sign new leases based upon last week's or last month's or last quarter's sales or even what they think next week or next month's sales are going to be and likewise they are all generally on long-term leases and they don't have the option of leaving if they had a bad month.

No, no, no, it was more a question about profitability maybe being down worse than expected and possibly leading to some additional closures and that kind of thing, maybe not even from the public guys, but from the guys that -- the other players out there.

But it sounds like you are not really expecting any significant difference from the past few years.

No, I'm not.

And this is going to be a joke.

It is my understanding though that their profitability is up because of how well they are doing online.

Okay.

That was a joke, an attempt.

Thank you, next question.

Alexander Goldfarb, Sandler O'Neill.

Good morning out there.

Hi, Alex.

Hey, I trust Santa Monica is a warm 80 degrees or so or are you guys having a chill as well?

Yes, it's down to 75 today.

Okay.

The violins are out.

First up, Art, if you take a look at your portfolio, the top malls clearly were driving the sales growth and the bottom -- the top 10 were.

The bottom 44 were basically flat.

So you talked about if you went through the portfolio and culled the bottom third of tenants and replaced those that it would certainly enhance the mall growth.

What should we expect?

Should we expect that the top 10 malls are going to continue to deliver growth and the bottom 40 are just going to be as is or do you envision a way to sort of accelerate the growth?

Basically is it easier to cull -- how easy is it to cull the bottom third of the tenants at the bottom 40 malls versus at the top 10?

Okay, well, thank you.

That is a good question; I appreciate it.

If I take a look at -- so I am going to take out the top 10 centers, they are not in the pool anymore.

I am going to take out the bottom 10 centers, they are not in the pool anymore.

And I just go from 11 through 40.

So from the 11th best center that we have to the 40th best center, so that is a pool of 30 malls, those malls average $525 a square foot and centers that are doing $525 a square foot that are of a nature such as Kings Plaza, Danbury, you can go through any part of the list from 11 through 40 and we have the demand for space in those centers.

So I can't predict what sales are going to be in these centers.

I know that a lot of these centers were going up against tough years.

Last year, sales increases were relatively decent in 2012 fairly much across the board.

But I can tell you that leasing demand in each of these categories has been very good and that we have had positive releasing spreads in every category.

And then, again, as I mentioned, when you slice and dice it a little bit more and you go into any one of these centers and you take out the bottom third of the tenants and think about what the top two-thirds are doing, that is generally 35% to 40% more than the stated number, and these centers, we have got very strong demand, we have got good occupancy.

The occupancies are sitting right there in the supplement; they speak for themselves.

And I anticipate continuing to have good demand in these centers.

The other thing, and this is a nuance, and I am going to consider either talking about it or disclosing it, is that sometimes these numbers in here are anomalies because they are comp sale tenants.

So you can have new tenants that come in and they have only been there for six months and they are tearing the cover off the ball.

They don't show up in any of our comp sales for almost 18 months to two years.

So when I look at our comp sales and then I look at our total center sales for our mall tenants, a lot of times it's -- well, it is almost always two different numbers and the total sales are always much more positive than the comps sales.

And that's strictly a logistical reporting system that we have and I'm going to consider beginning to talk about that because the comp sales that you see in these schedules and likely that you may see at other companies too, they are very trailing in terms of picking up new tenants that we are adding and the new tenants that we add generally are doing a lot more than the tenants that we replaced..

Right.

But presumably the same impact is to all the malls.

So, at the end of the day, you still have the top centers that are driving the growth, whereas the bottom, the other 40 are --.

You're right.

Second question is the assets, the four to five that you have that you are marketing, what was the comp sales for those assets?

Flat to down a little bit.

Okay.

So from -- okay, if we look at one of your peers today who is obviously getting hurt because of their lackluster sales productivity, do you think at some point buyers of B malls, the flat sales of some of these malls starts to impact their appeal or their view is that they can provide more attention, more focus and therefore it's sort of irrelevant what the current sales trends are at the B malls that they are looking to buy?

I think it's irrelevant.

I think that there is a couple of groups of B mall buyers.

There is the private buying groups and that is a substantial group.

Honestly, they could care less about sales growth from what I can see.

They don't look at numbers like that.

They look at what can my levered return be and what kind of remerchandising can I do and a lot of the B mall buyers do have expertise in the big-box arena and they are able to think about things a little bit differently and think about the opportunities that can be created adding some nontraditional to a mall owner, big boxes to a B mall center.

But I have not seen one buyer of any center that we have sold get preoccupied with sales growth one way or another.

Okay, thank you.

Nathan Isbee, Stifel.

Hi, good morning.

Hey, Nate.

Art, from your perspective, you've elaborated on the whole e-commerce issue.

I am just curious how you see the omnichannel retailing will impact the outlet-only retailers, not those that have both full-price and off-price strategies.

I'd have to go through and do a survey of how many outlet-only tenants there are.

I mean those are more just the pure manufacturers and I'm sure they have online distribution channels also.

But the vast majority of the retailers that we have been exposed to that are in the outlet centers that we are involved with or that we would seek to be involved with are pure omnichannel retailers that are in all, I'll say, four channels -- full-price, off-price, online and social media.

Okay, thanks.

And then on the Tysons development, as the leasing there progressively gets closer to opening, Can you just talk a little bit more in more detail what impact it will have on the retail, how much growth, incremental growth you think you can drive from the mall there?

Sure.

We expect that the three towers when they are open will bring between 3000 and 5000 people per day to Tysons Corner that are not there today.

And our experience is that when you -- the closest analogy that I have to bringing 3000 people a day to a site that formerly would be there would be when we added a theater to Tysons Corner and it is one of the most successful theaters in the United States, the AMC there.

And when we added that, it brought tremendous new traffic and sales per foot in the center went up about $150 a foot.

Probably the more -- when you have a center that is already doing $700, $800 a square foot and doing almost $1 billion, honestly, does it matter necessarily if the center goes up $100 a foot?

I doubt it.

But I do know, and Bobby may want to elaborate on it, that even before the densification is open for business and even before the rail is open for business, the retailers have begun to pick up on the dramatic change that they expect as a consequence of the densification.

Do you want to talk to that, Bobby?

Sure.

Obviously, Tysons is one of the most productive centers and most important locations for retailers in the Washington DC market.

So demand for space is always strong at the center.

Probably the most important addition from the mixed-use development that we are seeing is greater demand from retailers to do these flagship stores.

We have two tenants who are signed and underway for flagship stores right at the entry and there are two more that we are working on.

So probably the biggest nuance that we are seeing at Tysons is the demand for retailers to put in stores that are more than their average stores, but are really flagship stores.

And interestingly willing to step up and pay the rents required to accommodate those stores.

So it used to be that the larger tenants would seek lower rents and the opposite is really happening at Tysons.

In addition, we are adding to the food venue with the mixed-use and obviously the additional traffic.

So it is really a very logical next step.

When you look at the location within the center, it's where we have spaces that are coming due over the next couple years.

So it gives us the chance to really generate above-average growth at the asset in the near term.

All right, thank you.

And then just finally on Santa Monica, aside from the new theater deal, any other changes coming down the pike at that asset?

Santa Monica, probably the theater is clearly the most important element, as well as the rail, which is coming to the property and the surrounding peripheral development, which continues to get stronger.

What we are seeing at Santa Monica is the luxury and designer tenants have very, very strong performance on the ground floor, so we are actually going through and adding additional designer and luxury brands to the ground floor.

Already replacing tenants that are good tenants, but not necessarily doing the productivity needed on the ground floor.

So we are sort of settling those tenants in on the second floor.

So you are going to see the ground floor luxury and brands further develop.

The traditional mall and better specialty stores will be on the second level and the theater will not only support the existing restaurants on the third floor, but allow us to bring in additional restaurants and continue to make it a destination, which, as we look to distinguish ourselves from other retail venues, clearly the entertainment, restaurants, outdoor environment are very important.

All right, thanks.

Thank you.

I know we still have several folks in the queue, so I would request maybe that you try and limit your question to one question, maybe two if you need to and I will try and keep my answers a little shorter.

Next question.

Tayo Okusanya, Jefferies.

Yes, good morning.

Just one quick question, I mean everything we have kind of seen out of the portfolio, all your plans, everything just seems to be going really, really well right now.

Just curious one or two things that you may be concerned about over the next 6 to 12 months.

Taxes.

Okay.

No, actually I'm joking a little, but I'm not joking.

I mean taxes are real, right?

So when we think about the retail sales in 2013 across the board and you look at the incremental federal income tax brackets that the world got exposed to, add to that the California income tax increases that got hit on the people out here and the tax bite is pretty significant.

So that is kind of an issue.

I guess the biggest thing that concerns me is that I think retail landlords are being viewed more negatively than they deserve to be for an issue that I thought we had put to bed 15 years ago and that is the interrelationship of online shopping and brick-and-mortar shopping.

You know what?

Over the next six months, we are going to address that as an industry.

Got it.

Thank you.

Daniel Busch, Green Street Advisors.

Thank you.

Art, just going back to some of your comments on the two-thirds or the top tenants and the bottom one-third, when I look at the top 10 centers and think about the 8% sales productivity growth, do you have an idea on how much of that is true same-store growth by those two-thirds and then how much is from moving from a lower productivity tenant and bringing in a higher productivity tenant?

I don't have an exact number for you, but intuitively I know that the good get better and the average get worse.

So, typically, the tenants that are producing they continue to produce and the ones that just have missed the market -- they might be a good tenant, but they may just be in the wrong -- it may not be right for that market and so that could be the reason that they are not performing.

They tend to just kind of drag it down.

And that is why when it comes -- when the opportunity presents itself, you recycle them with somebody that is more appropriate.

Okay.

It is an interesting way to slice and dice these numbers.

I started doing it a couple of months ago because we intuitively said, look, we are only interested in renewing two-thirds of the tenants anyway and they are the top two-thirds, so what is the occupancy cost and what is the sales productivity of those guys?

When we went through it we looked at just our top 20 centers and it took ourselves up by 40% and it took our average cost of occupancy for the guys that we would renew anyway from 13.5% to 10%.

And it just further validated that, hey, we have still got plenty of runway here for growth.

The real challenge is to make sure that you have good replacement tenants for the guys that you know don't belong there anymore.

Their concept is dead or maybe they are in the wrong location, maybe they've overexpanded, maybe they are in the wrong sector; any number of different things.

So when you slice it like that, going forward, would you expect most of your releasing spread growth to come from signing new leases with these underperformers going away as opposed to the renewals from your better tenants?

I don't think so.

I think it's both.

I mean the renewals are strong is my point because those tenants, when you really look at them, their cost of occupancy isn't the mall cost of occupancy, it is less because they are outperforming them all.

So they can afford to pay more.

They don't love to pay more, but they can and they do.

Okay, thank you.

It's both, it's both, but thank you.

Thanks, guys.

Linda Tsai, Barclays.

Good afternoon.

I am looking at your sales per square foot property ranking and for the lowest group, group 5, it's a nominal contributor of NOI, but it looks like it's the only group that saw a decline in occupancy at the end of 2013 versus the prior year.

I'm just wondering what do you attribute this to.

Is this a timing issue or is it reflective of leasing efforts because it is not a big NOI contributor or do you think it says something about the consumer macro challenges facing these lower productivity malls?

I think it is a function maybe of all of the above, but most importantly it is a function that when leases roll over in centers like this, sometimes you are not able to renew the leases with existing tenants because retailers have tended to try and concentrate their efforts on the A and the B mall locations of the world and kind of gravitate away from the lower productivity locations.

Thanks.

Thank you.

(Operator Instructions).

Ki Bin Kim, SunTrust.

Thank you.

So I think the most interesting thing you have said today was that two-thirds of retailers or the top 20 centers, their sales are up 40%, which that kind of surprised me.

No, I said their sales are -- wait a minute.

I said if you look at the top two-thirds of the tenants in our top 20 centers, their sales per foot are 40% more than the sales per foot that we publish for the entire mall.

That's what I said.

Okay, got it.

Okay, that makes much more sense.

Yes, yes, yes.

I could see where that would be confusing.

Okay.

Maybe along similar lines, which types of tenants are actually putting up, from an apples-to-apple standpoint much stronger same-store sales growth than kind of your average portfolio tenant?

And tied to that, are you doing any kind of reverse inquiries into online retailers?

Like I think it was Brandy Melville that you have at Santa Monica Place that are really highly successful and maybe trying to have them expand more into the brick-and-mortar.

Sure.

Bob Perlmutter, you want to address that?

Sure.

This is Bob Perlmutter.

Brandy Melville we actually opened in Corte Madera, Village of Corte Madera, but is a great example of that.

In terms of categories that performed the best in 2013, probably the two best categories were home furnishings and jewelry.

Jewelry has had a very, very strong year after going through some fairly significant consolidation.

The third bucket that really does well is really brand-specific and those are retailers that understand their customer and are doing a good job selling their product and differentiating their product and marketing to their customer.

And you see some familiar names like lululemon and Michael Kors in particular, kate spade, but we also see names like Victoria's Secret's having very, very good success with Pink and expanding their store base.

So in terms of categories, I would probably identify jewelry and home furnishing and beyond that, it is more brand-specific as opposed to category.

And the part on Brandy Melville.

Sorry for taking a little more time.

I'm sorry, what was the question about Brandy Melville in terms of will they expand?

Well, I mean have you guys started targeting more proactively very successful online retailers and having them maybe try out store concepts they haven't pursued in the past?

Yes, I mean, again, those retailers are thinking about it.

I think earlier it was mentioned Microsoft is an example of someone who is moving.

Athleta has been very aggressive starting as an online retailer.

Gap has other concepts, Piperlime that they are looking at.

So more --.

Is it Warby Parker, the eyewear person, they swore they would never open a brick-and-mortar store --

And we are close with them.

-- and now they are going to be opening them.

Yes.

So we think you are going to see more of that.

It's definitely fertile ground.

Boston Proper is another group that we have been able to do a couple of deals with that are new to the brick-and-mortar.

Okay, thank you.

Michael Mueller, JPMorgan.

Hey, Art.

I know this isn't exactly what you said, but going back to the idea that the bottom third of tenants could cycle out over time.

If we are thinking about the normal $500, $550 a foot mall, how big is the pool of tenants that usually draw from or draw from for a mall?

So, for example, if you have 100, 200 tenants in there, how big is the pool that that draws from?

Is it 400 deep, 300 deep, 500?

Well, this is Bob Perlmutter.

A lot depends on the particular market.

For example, in our portfolio, we have two centers, one in Fresno and one in Modesto, that are sort of in that range ,but have a very large trade area because there is no alternatives in that market.

So even though they are larger and productive centers, they are truly the only game in town.

Other markets can be more fragmented or more deeply developed that the trade becomes more limited or more specialized in terms of who they are drawing.

So a lot depends on the competitive situation.

Okay.

But not talking about the shoppers coming in; if we are just thinking about the pool of tenants.

Well, they are sort of related though.

I mean depending on what shoppers we are pulling and how many will also dictate how deep the tenant demand is and if the tenants don't have alternative locations within a market and Queens is the classic example.

One of the reasons we are able to drive very high rents and very high occupancy cost at Queens, well in excess of the portfolio average, is not only the productivity, which is the measure that most people look at, but a retailer has very few alternatives to cover the market if they are not in Queens.

In good centers, the pool of tenants is virtually unlimited and that is proven out -- you take a look at our occupancies, which we publish by center and you are going to see numbers above 90% for virtually every center that we have until you get down into the bottom 10 or 12 centers that we own.

What can happen, and this particularly can happen and tend to be more the B malls, is that as you are cycling out of -- maybe a B mall was built to be too big and so you have got some unproductive tenants and maybe the pool in that town, maybe it is a smaller town, has gotten to the point to where you have to think about other uses and that is kind of what I was saying earlier is that I found that some of the B mall buyers have been really successful at introducing junior anchors into these malls that will pay decent rents and generate a lot of traffic.

And we have even begun to do that ourselves.

So people like T.J. Maxx and Marshalls and folks like that that take up a lot of space and Home Goods, T.J. Maxx Home Goods that we didn't use to lease space to in the malls, usually in the B malls, that is where we will take and as we assimilate a group of unproductive tenants, we will accumulate a block of space and re-merchandise it with a junior anchor.

So the occupancies are all there to read by property, but if it is a good property, it is relatively unlimited.

The only thing that I would say is that, over time, you constantly have to reimagine what you are doing in the way of a use.

So the theater that we are adding to Cerritos, for example, part of the space that the theater is going to occupy is an old Nordstrom store that was functionally obsolete that we replaced, as well as some mall shops that we always historically had trouble leasing.

We will demolish all that, create a new megaplex theater and it will become a new anchor for the center.

So you are introducing new uses, so the new uses really begin -- the number and the opportunities are unlimited.

Okay.

And just one other quick one.

Is Estrella close to kicking off?

No.

We will kick it off when it is ready.

Okay, thanks.

Thank you.

Todd Thomas, KeyBanc Capital.

Thanks, good morning.

Just two quick ones.

First, circling back to Tysons, Art, I think you mentioned that pre-leasing for the office remained at 70% at the end of the year.

I was just wondering what the leasing pipeline is like for the remaining space and maybe where you think you will be at opening and sort of curious about Lerner's office development across the road there.

Any concern that it will be a little bit more difficult to get the remainder of that space in your tower leased?

No, no, no.

We are very far along in the negotiations.

We are basically leasing full floors right now.

We have one tenant that is either going to take two or three of the remaining six floors.

We have got another guy that is going to take one of the remaining six floors.

So I fully anticipate that we will be way over 80% leased on the opening.

Okay, got it.

That's helpful.

And then just one last question on investments.

I know you mentioned that guidance doesn't include any acquisitions and there has certainly been a lot of focus on dispositions, but I was just curious if you could maybe talk about the pipeline today for investments, if there is anything out there that you are looking at and maybe any opportunities to buy out joint venture partners in 2014?

No, we have no guidance on any new acquisitions or buyouts of partners for 2014.

We find that, at this point in time, these assets are so precious, the ones that we want to own.

I mean, look, right now, there is probably 50 malls on the market and we have got four or five of them on there, but they are not malls that we want to buy.

We made a conscious decision that we want to focus on fewer, bigger assets in the select dense markets that we know really well and we find that that portfolio has got a huge reinvestment opportunity.

So when I think about the Sears stores or the Penneys stores and I'm not throwing either one of them under the bus because the rest of the world already did that for all of us, and if I am going to make the assumption that one or either of them are going to either shrink or something else or consolidate or something else happened, that creates massive opportunities for expansion within our existing portfolio.

I mean there are cases here where Sears may own a 20-acre parcel of land and a 300,000 foot building at Washington Square in Portland, Oregon, for example.

I mean that is an unbelievable opportunity for reinvestment.

So we can't find anywhere better frankly than our existing portfolio to put our money.

Should an opportunity arise, we have always been opportunistically there to acquire.

We were very fortunate to be able to buy Kings and Green Acres 15 months ago and we have had great success with the centers that we have acquired, but they are really precious and they are generally in very strong hands and I don't expect them to be coming to the market.

So on a risk-adjusted basis, I can't think of anywhere that is safer and more profitable than plowing money into proven winning locations like Tysons Corner, Broadway Plaza, Walnut Creek, the expansion of Chicago, the expansion of Scottsdale Fashion Square, the expansion of Cerritos.

I mean just look at our pipeline, the addition of a theater to Santa Monica Place.

There just isn't a better, smarter place for us to put our money on a risk-adjusted basis.

Okay great, thank you.

Thank you.

Caitlin Burrows, Goldman Sachs.

Hi, we already kind of touched on this, but would you say the interest for your malls that you plan to sell this year is in fact coming from private buyers?

Those are the majority of the buyers, yes.

But the major thing I would say is that the buying pool in general, and I am not talking about necessarily the properties that we are looking at right now because we have dropped down with the exception of one property in terms of quality level probably closer to the C category, so it is a different pool of buyers.

But if I think about the type of assets that we sold last year, the buying -- the number of buyers is greater today than it was a year ago and their appetite seems to be greater today than it was a year ago.

And I think that is really just a function of the fact that they have found out and figured out that they can do really well with this.

Then I guess that sounds like --.

Go ahead.

I was just going to say that the pool for those C properties then is probably not nearly as large.

No, I didn't say that.

I said it is a different pool and it's not as deep, as big, as well-funded.

It is a different pool.

It is a different pool, but there's plenty of capital out there.

Thank you.

Thank you.

And that is all the time we have for questions today.

Mr. Art Coppola, I'll turn the conference back over to you for additional or closing remarks.

Okay, thank you very much for joining us.

We are really looking forward to a great year and looking forward to seeing you all soon.

Thank you very much.

That does conclude our conference today.

Thank you all for your participation.