Macerich Co (MAC) 2014 Q1 法說會逐字稿

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

Welcome to The Macerich Company first-quarter 2014 earnings conference call.

Today's call is being recorded.

(Operator Instructions).

I would like to remind everyone that this conference is being recorded and would like to turn the conference over to Jean Wood, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, everyone, for joining us today on our first-quarter 2014 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 filings and SEC filings.

During this quarter, we will discuss certain non-GAAP financial measures as defined by the SEC's Regulation G. Reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the press release and the supplemental 8-K filings for the quarter, which are posted in the Investors section at the Company's website at www.macerich.com.

Joining us today are Art Coppola, CEO and Chairman; Tom O'Hern, Senior Executive Vice President and Chief Financial Officer; and Robert 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.

Consistent with our past practice, we will be limiting today's 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.

It was another strong quarter for us.

We executed on our plan to dispose of non-core assets and we had a very good operating performance during the quarter.

Looking at the operating metrics, we continue to see good fundamentals, including leasing spreads, which came in at 14.8% for the quarter and just to point out on that stat, those are cash basis rents for us.

They do not include straight-lining of rent, which would have the effect of widening that spread to something significantly greater than 14.8%.

Occupancy came in very high at 95.1%.

That was up significantly from the 93.4% reported a year ago.

It is also important to note that we reduced our temporary occupancy that's part of that statistic.

It is down to 5.5% and that compared to 6.3% at March 31 of last year.

At year-end, it was 5.8%, so down 20 basis points from year-end and we will continue to focus on converting the temporary tenants to permanent occupancy as we typically see a $20 to $25 a foot pickup when we do that.

Average base rents are getting very close to $50 a foot.

They came in at $49.21.

That is up 7.7% from a year ago and more importantly up 2.2% from 12/31/13.

FFO for the quarter was $0.81 per share.

That compared to $0.86 per share in the first quarter of last year.

We were within our guidance range, which for the first quarter was $0.81 to $0.83.

Same center NOI was at 3.5% growth compared to a year ago.

That increase was driven by occupancy gains, positive releasing spreads and the annual CPI increases.

As mentioned in the earnings release this morning, during the quarter, we had higher-than-expected costs for snow removal and utilities as a result of the harsh winter weather conditions throughout much of the East and the Midwest.

We have got about 45% of our portfolio that is in cold weather parts of the country.

Total incremental cost was $2.7 million or $0.02 a share in terms of the FFO impact and about $1.7 million of those incremental costs negatively impacted the same center pool.

So excluding those costs, same center NOI would have been closer to 4.5% growth.

As a result of those costs, operating margin also declined to 64.9%, including JVs at pro rata and that was down from about 66% a year ago.

Comparing to the first quarter of 2013, we had dilution from asset sales during the quarter of about $0.06 per share.

Most of that related to assets sold in the second half of 2013.

Bad debt expense for the quarter was a modest $800,000 and that is compared to $700,000 in the first quarter of last year.

During the quarter, the average interest rate was up slightly at 4.2% compared to 4.13% in the first quarter of 2013.

The balance sheet continues to be in great shape.

At quarter-end, our balance sheet metrics included debt to market cap of 39%.

Interest coverage ratio of 3.1 times debt to EBITDA on a forward basis of 7.2 times.

Average debt maturities at 5.6 years and a floating rate debt percentage of about 10%.

Also in this morning's press release, we reaffirmed our FFO guidance.

That range continues to be $3.50 to $3.60 a share and also I wanted to point out that our quarterly split remains unchanged.

We do give quarterly guidance and we break that FFO out -- first quarter 23%; second quarter 23% of the total; third quarter 25%; and the fourth quarter 29%.

Looking at tenant sales, the total portfolio mall tenant sales per foot came in at $565 for the year.

That is based on the portfolio we have at the end of the quarter and that compared to the portfolio we owned at March 31 of 2013, which had sales per foot of $535.

Looking on a same center basis, excluding the impact of disposition sales per foot at March 31 of 2014 were $565 and that compared to $560 for that same pool of assets at March 31 of 2013, that same group of assets was $565 at year-end, so essentially flat compared to year-end.

Looking at the regions, Arizona and Northern California were up slightly and the East and Central regions were down slightly for the quarter.

And at this point, I would like to turn it over to Art.

Thanks, Tom and welcome to our call.

I am very pleased with our operating results for the quarter and very pleased with our continued pruning of our portfolio.

As I look at our disposition program over the last year, we've successfully brought ourselves to a position where over 90% of our EBITDA is coming from centers that are doing over $600 a square foot.

If we didn't sell one more property in our bottom 10 of our portfolio, just simply executing on our redevelopment pipeline over the next two or three years is going to bring our proportion of NOI coming from centers that are doing over $600 a foot to something over 95%.

And obviously if we use future dispositions as a source of funding our redevelopment program, we can get to our goal of getting to virtually 100% of our NOI coming from A quality centers.

We are going to be very opportunistic on any future dispositions.

I want to make one correction.

On our last call, I indicated that I felt that the average cap rate on the centers that we would be selling this year would be something close to 9%.

Having sold a couple of centers that were sold in the first quarter and now when I look at what is likely in the possible disposition pot that we are looking at right now, I would say the average cap rate in terms of combined cap rate on these group of assets will likely be closer to 8% than 9%.

On the redevelopment pipeline itself, we are very pleased at some recent developments that have taken place.

Tysons Corner continues to come online.

You can take a look at photographs I believe of Tysons Corner on the Tysons Corner website within the Macerich.com website and the Plaza, you can really begin to see the integration of the Plaza that we are building and how it is going to connect to the Metrorail and how it is going to tie all of the towers together and really create a new 50 yard line at Tysons Corner.

And as I have mentioned on previous calls, we are finally beginning to see great leasing momentum inside of the mall as the retailers are beginning to realize what a game-changer this is.

Just last week, I was up at Broadway Plaza and it is really quite impressive.

Again, I would encourage you to go to the Broadway Plaza Property website and you can see that we have already demolished a 600-car parking deck that is located between Nordstrom and Macy's and we demolished about 85,000 square feet of shop space so that the entire area that sits between Nordstrom and Macy's is now pretty much demolished and we will have the parking deck that will be servicing Nordstrom primarily, a new five-level deck, we hope to have that opened by the end of November.

And it is really impressive to see the amount of land area that we are recapturing by taking these old one-level decks and replacing them with multilevel decks.

And of course, that is the way that we are able to take the gross leasable area and demolish 85,000 feet, but bring back a new 320,000 feet or so for a net increase of just over 230,000 feet.

So I'm very bullish on that and again, if you can visit the area or just take a look at the photos on our website, you can see how dramatic this is.

I mean we are literally tearing down 60% of the GLA of this center and 80% of the parking at the center and when we bring it back online over the next couple of years, it is going to be a super powerhouse.

We had a milestone at Santa Monica Place in that we obtained City Council approval for the addition of the ArcLight theater that is going to go on top of Bloomingdale's and service the third level of Santa Monica Place.

We were also selected as the exclusive developer to have exclusive negotiations with the city to potentially build another ArcLight theater about a block away from Santa Monica Place and we would have ownership of that and we would see, we believe, very good returns and we think that bringing new theaters back to the city of Santa Monica and predominantly at Santa Monica Place is going to drive a lot of traffic back to the hub of Santa Monica, which is Santa Monica Place.

Over the past five years, the city of Santa Monica has lost over 1.1 million theatergoers per year due to the poor quality of the theater offerings that are currently in Santa Monica and bringing those theatergoers back to Santa Monica Place primarily with the opening of our new theater there next year, we expect a great addition to our foot traffic and retention of customer at this stellar center.

As we look at our redevelopment pipeline, we anticipate that over the next quarter or two, we will be moving several of the shadow pipeline assets up into the in-progress group and we are very pleased with all of our efforts there.

Two other items that I want to talk about before we open up the call for questions.

One relates to the interrelationship of our retailers.com efforts and their omnichannel strategies and their brick-and-mortar strategies.

And I know this has been on the mind of many investors over the past six months.

All of us as landlords have been convinced that the omnichannel approach makes each of the channels more productive for our retailers.

And for this purpose, we will define omnichannel as being full-price, outlet and catalog and/or dotcom.

So we have been talking to a lot of retailers about how we can assist them in their omnichannel efforts and also just getting a better understanding so that we can give you more clarity in terms of what does their emphasis on their catalogs or their dotcom sites mean to their brick-and-mortar strategies.

And we were meeting the other day with one retailer who is upsizing their stores dramatically, taking their stores from say 7,000 feet up to 40,000 or 50,000 square feet.

And this particular retailer said that one of the reasons that they did that is that their websites are really very two-dimensional and it really doesn't give the customer the opportunity to get a full appreciation for the product that they are offering.

And they found that when they build these bigger stores and they can put more SKUs into the stores that that actually increases the sales of the items that they are able to put into the brick-and-mortar stores by 50% to 150% on their dotcom or their catalog site.

So that gives you further insight into the interrelationships of the brick-and-mortar stores and the dotcom strategy.

They feed each other, they supplement each other and it is one of the things that is driving many of our better retailers to seek out flagship stores as we see people like H&M, Forever 21, Zara, Restoration Hardware, just to name a few, as they are Top Shop -- as they are building out their flagship stores, a lot of this -- and they are building them predominantly in either A malls or A street locations.

It is really to further their brand recognition, as well as to just make their entire omnichannel strategy drive more retail sales.

The final thing I want to talk about before we open it up for questions is releasing spreads and why it is that we are so confident that we can maintain strong releasing spreads even in a flat sales environment.

On the last call, I made reference to the fact that we had taken a look at our top 20 centers and within our top 20 centers, if we take a look at only the top two-thirds of our tenants within our top 20 centers, that we found that those tenants tended to do about 40% more than the mall average.

So I mentioned for example in our top 10 centers that currently average $855 a square foot, if you take the top two-thirds and that is just by headcount, if you have nine shoe stores, you take the top six, if you have three jewelry stores, you take the top two, if you have 12 apparel stores, you take the top eight, that type of thing.

If you take a look at the top 10 centers, you find that the top two-thirds of our tenants do 38% more than the average.

They tend to do about 3 times as much business as the bottom one-third and we found as we went through our entire listing of 52 malls that we currently own that that really holds true in every single center that we own.

On average, the top two-thirds of our tenants do 41% more than the mall average.

So currently, we have mall average of $565 a square foot for our 52 malls.

The top two-thirds of our tenants within that group, within all of our malls average almost $800 a square foot.

And so the challenge for us is to -- and the business that we are in -- is to take advantage of the creation of new retail concepts and to target those tenants that are not doing the average mall sales per square foot and to replace them with new concepts, whether the new concept be a new retailer or it could be the expansion of an existing retailer that is looking for a flagship store.

It was fascinating, as I looked at our bottom 10 centers that average $295 a square foot, within that grouping, the top two-thirds of the tenants within that grouping do over $422 a square foot.

So again, the opportunity there is to take the unproductive tenants and to replace them either with new retail concepts or in those type of centers maybe even to introduce junior anchors such as T.J. Maxx, Marshalls, Ross, people like that.

So we have great confidence that with the quality of our portfolio and the strength of the locations that we have and when you look at the density that we have in each of our submarkets, the high barriers to entry that we have in each of our submarkets, the strength of the law of supply and demand where we have basically the only choice that the tenant wants to be in our market and you have increasing demand from the tenants that we are going to be able to continue to put up strong releasing spreads as we have over our entire 20-year public history and even stronger spreads in the future when we move to a position where well over 95% of our income will be coming from centers that are clearly A or A plus malls.

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

(Operator Instructions).

Alexander Goldfarb, Sandler O'Neill.

Hey, good morning out there.

Just a few questions here.

First of all, Art, you guys have outlined the dispositions and the impact that it has had on sales productivity, but can you sort of give some framework around how it has improved cash flow or releasing spreads, just something quantifiable that we would see over the next few quarters or next year or two where we would see it come into the numbers, the improvements that you guys have made to the portfolio by selling the lesser productive assets?

Well, it is going to come in two forms and look, this is a marathon, not a sprint.

So it is not going to show up necessarily in this quarter or next.

But, look, the long-term goal was to take and recycle well over $1 billion of assets that were doing $300, $320, $330 a foot and to recycle that cash into proven winners.

And that is currently being done in our redevelopment pipeline, which is identified in our supplement.

So that will show up as we bring those projects online.

We also talked about the fact that in previous calls that a year ago if you looked at our top 40 malls and you compared that to the 25 malls that were behind them that the growth rates over the last five years, the same center growth rates in the top 40 malls was significantly higher than the bottom 25.

Now we have already disposed of let's say 15 of those bottom 25 and we think that that is going to definitely -- we are going to have addition by subtraction, by taking away some of the centers that had either slower or flat or negative growth rates, which was the profile of the bottom 25 and having more focus for our management team to focus on our better centers and really having a better and a stronger landlord/tenant conversation or when you are sitting down with a tenant, virtually every store that they have with you is a winner, it just puts you in a stronger position.

So look, at this point, I could say we are just going to have to let time prove out the thesis, but we know that there is zero question that recycling over $1 billion of capital that was sitting in centers doing $320 a foot and pushing it into centers that are doing $700, $800, $900 a square foot that by itself is going to lead to pretty powerful results and time will prove the thesis and we are just going to have to -- we are certain that it was the right thing to do, but we will have to prove it out over time.

Okay.

And then as far as further dispositions, I mean it seems like everyone is now jumping into the fashionable trend of disposing the lower tier malls.

But it doesn't sound like from your comments that pricing has been impacted.

So are you seeing more buyers coming out of the woodwork or are you seeing the existing usual suspects just increasing their appetite to just buy more of the malls that are on the market?

There is definitely more buyers today than a year ago.

There is more buyers today than three months ago.

And their appetites, I believe, are much bigger than they were three months ago or a year ago.

And I think -- look, a part of that is a function of the fact that they realize that just because you call it a B mall doesn't mean that it doesn't have a reason to be, to live and they realize that if they are focused on that type of product that they can obtain good results.

There are some proven operators out there that have done pretty well in terms of their leasing of B mall type of portfolios.

Look, the appetite as I see it is much bigger than it was three months or even six months ago of the existing pool of buyers and hypothetically, there are at least one or two new buyers that are going to be coming out here soon that may end up wanting to add to their portfolios.

I think the market is only going to warm up over the next year, but we had already decided when we gave guidance this year that we had pretty much accomplished what we wanted to accomplish with our disposition program and then we sold off a couple of more centers here in this quarter.

This year's disposition target guidance is pretty modest at $250 million and we are going to be -- we have heard from investors that they would prefer to see us try and time our dispositions with reinvestment opportunities.

And so I think we are going to be listening to that, but the market is clearly warmer today than it was three months ago and hotter than a year ago.

I mean a year ago, it was more of a hypothetical as to what -- how deep the market was.

But there are clearly platforms that are trying to be formed or have already been formed.

Okay.

And just finally, Tom, did you mention Victor Valley, are you going to refi that or pay it off when it comes due later this year?

I mean that is open, but certainly it is a refi candidate and the center has done well and so we will probably be refinancing it.

Floating or fixed?

Our preference is fixed, long-term fixed and the rates are still extremely attractive and the 10-year has hung in there.

It bounces between 2.60% and 2.80% and there is certainly a fair amount of both life company and CMBS debt out there.

So it is still a great time to be a borrower.

So we'd go long, fixed and long.

Yes, I have heard talk about turning B malls into A malls.

If you just look at the two-dimensional number of sales per square foot, you could argue that that is what we did in Victor Valley over the past several years.

We have two brand-new department stores.

We have one of them being a brand-new expanded JCPenney, which is doing very well.

We have a brand-new Macy's that had replaced the vacant department store and then we have a brand-new Dick's Sporting Goods that replaced the old smaller 50,000 foot JCPenney.

And as a consequence of that, our sales per foot at that center are now in excess of $500 a square foot and we are showing strong sales growth trends there and strong income growth.

The center looks and feels great.

So that is an example of what was probably -- it's a small market, tertiary market or secondary market, but it is within the greater Southern California area and you can argue that was an example of taking a B mall and turning it into an A mall.

Thank you.

Christy McElroy, Citi.

Hi, good morning to you guys.

Art, I just wanted to follow up on your comment about the average cap rate of the sales being closer to 8% than 9%.

I think you talked about selling four to five malls; you've sold three so far.

I'm sure you can appreciate sort of our willingness or desire to get a sense for the valuation split between B and C. I think you talked about one of those four to five being a B mall.

So I am -- can you disclose the cap rate on the assets that you've sold or maybe an average of the three and talk about maybe the split there in that 8%?

Well, the ones that have been sold to date were clearly C malls.

And frankly, at this point in time, I could argue that we have no more C malls.

So anything that would be sold from this point forward in my view I would consider it to be a B mall.

And the cap rates on C malls, you can't really peg them.

They are really hard to peg.

On going forward 2014 numbers, look, they were clearly double digits, in the low teens, but they were small centers that were going in the wrong direction and they were bought by opportunistic people who have a plan to turn them around.

The remaining one or two or three, and I don't know how many it will be, centers that we will sell that would get us within that guidance range will likely command cap rates that are closer to the cap rates on the centers that we sold last year, which is closer to the low 7s, to the mid-7s.

So that is why I was modifying our guidance here to say that the combined cap rates for the dispositions this year is probably going to be closer to 8% than the 9% that I indicated in our last call.

The C malls, it is really hard to peg -- Tom, what was the average sales per foot on the centers that we sold?

It was in the low $200s and we have kind of broken it out in the supplement on page 14 and the three that we sold this year averaged $244 a foot.

And they were all C malls.

They were all over 10% type of cap rates and they all had income that was declining, so it is hard to say what that number is.

But we think that the B mall markets, the north of $300 a foot, mid-$300s, that type of thing, that there's still strong appetites for those type of centers.

And that strong appetite that you mentioned is what caused you to revise that number down from 8% to 9%; it is not a function of the mix of assets that you are selling?

It is really just a recalculation frankly of looking at what got sold and looking at what we are talking about doing now and it is just looking at the reality of what I now see.

And then on Kings Plaza, your sales are down about 7% year over year.

How much of that decline was weather-related versus the major remerchandising effort that you have got going on there?

This is Bob Perlmutter.

It was probably a combination of all those things.

Clearly, if you look at the detail, the East Coast centers were impacted by the weather, but we also, like you say, have a lot of moving pieces, including a lot of new leases that are getting signed and a renovation in process.

So that asset is probably likely to be impacted a little bit by all those items and fluctuate a little bit more over the next 12 to 24 months.

And those new leases, are those lower productivity, which is impacting the average?

No, the new leases won't go into the comp sales until they have been open for a year and actually many of the tenants will have the opportunity to significantly improve their productivity, people like Michael Kors and Fossil and some of the higher productivity tenants that are coming into the center.

Thank you so much, guys.

Paul Morgan, MLV.

Hi, good morning.

Art, you mentioned kind of upsizing stores, view it as strategic to have bigger stores.

What has your experience been in terms of the rents per foot you can get because you might think the opposite, that it is better to have smaller stores because smaller stores usually pay higher rents, since you'd rather have 10 small stores paying higher rents, unless you are getting the same types of big rents from bigger boxes?

What has your experience been when you have had those upsized stores?

It depends on the center.

So if it is a center that is $300 a foot and you are adding a junior anchor, chances are your rents are going to go down a little bit, but you pick it up with the occupancy gains.

Given that that is not really what we own anymore and given that our top 40 centers now are producing over $600 a square foot and we consider them all to be A centers, what happens in those centers and particularly as you go up the quality spectrum and you get up into the top 20 centers, when a tenant comes to us -- part of the strong omnichannel retailer strategies is to have kind of hub-and-spoke type of retail brick-and-mortar locations.

So they like to have sometimes a big store in a great location and then maybe a few other smaller stores in other locations in a market.

So if you happen to own the best location in any given market, which we do in quite a few markets, and they come to us and they say, look, we are interested in taking and building a flagship store.

What the answer is is that, from a supply viewpoint, that is very hard to create and you have to assemble spaces to create that and we have actually had experiences that when tenants come to us who they would normally be a 10,000 to 12,000 foot tenant and they say that they want a 20,000 foot flagship store, we have had experiences that we can get more rent per foot for the bigger store than for the more typical store.

It is just because of the law of supply and demand.

We cannot create in a center 20 20,000 foot stores.

That would take away from the comparison shopping and the experience that shoppers expect.

So when retailers ask us to do something or to create a space that is highly unusual, and it happens to be in a great center, which is exactly where these flagship stores want to be located, we found that from a pricing discussion that we actually can get more rent per foot than for their more typical stores.

Paul, this is Bob Perlmutter.

One of the other effects of doing these flagship stores is very often it allows us to move the retailers that are there and the areas who are doing well into lesser areas of the center.

So there is sort of a related effect that we are accumulating the space, we are able in many cases to get a premium for the accumulation, but we are also retaining the tenants that are there albeit at lesser locations in the center, which also helps drive rents.

It all goes to supply and demand.

Yes, sure.

And then my other question is just on the bankruptcies and the state of your tenant watchlist.

We've had obviously a little bit of a tickup year to date off a very low level and I am just wondering your thinking -- given what you said about the disparity between productivity within the mall, I mean could it maybe be beneficial that you are weeding out some of the underperformers that you normally see more of than we have in the past couple of years?

What is your view on the net-net from the store closings year to date?

Well, I think your comment is right in the sense that it is a little bit more active than it has been in past years, albeit past years have been extremely low levels.

So we are probably getting closer to a normalized level.

I think the second thought is this is something that goes on in the retail business and the mall business for the last 20 years in terms of tenants growing and expanding and then contracting.

So there is a constant rollover, which provides us opportunities to bring in more productive tenants.

I think the other point is we've been -- many of these bankruptcies like a Coldwater Creek have been evident for a number of years and so we look at Coldwater as a potential opportunity.

They are generally better locations in our best centers with moderate rents.

I think their average fixed minimum rent with us is $36.

So that presents an opportunity.

My only point here is we have been thinking about this for the last two years.

This really isn't new news and we have been both reducing our count with them, as well as trying to line up deals on the belief that they would eventually go bankrupt.

So the closings year to date hasn't had any impact on kind of what you think you are going to do from a same-store and occupancy perspective in the year?

I think it has all been factored into our guidance.

No, again, these aren't surprises, when you look at Brookstone and Coldwater Creek and Sbarro and some of the others, certainly not unexpected.

We have been planning for it and even counting on it frankly.

Thanks.

Jim Sullivan, Cowen Group.

Thank you.

Art, you talked about the lower cap rate on the dispositions.

Is there any change in your timing?

I recall in the fourth-quarter call you talked about the dispositions being front-end loaded.

Is it still front-end loaded or will they be spread a little bit more over the balance of the year?

At this point in time, we've obviously had some front-end loaded dispositions on the two that were sold, but those were small deals.

It's hard to predict exactly when the balance of the dispositions will happen.

Frankly, we had a deal under contract that fell out of contract and that was what was causing us to talk about it being front-end loaded.

So now it is hard to predict buyers' behavior and we can't control our buyers' behavior.

I am convinced that we will sell $250 million or so of assets this year, but it would be hard for it to be front-end loaded now given that there is nothing under contract at this point in time.

So it is going to be more loaded towards the mid to the latter part of the year at this point in time.

Okay.

You had -- in your development schedule also this quarter, you raised the yield -- increased the yield on the Niagara outlet expansion.

I just wonder if you could talk about what was driving that.

I think the costs actually were increased a little bit, so presumably it reflects demand in pricing.

I wonder if you could talk about that, as well as the prospects for other expansions at any of the other outlet center projects in the portfolio?

It was just a recalculation of what we saw the return to be based upon the rents that we are getting.

And when we sit down and do a pro forma, we think that we are going to get -- it is going to cost us X dollars to build it and we are going to get Y dollars in rent.

So weather did drive up the cost a little bit, but the rents that we are getting are better than what we had put into our original pro forma, so it was just a simple recalculation.

As far as Fashion Outlets of Chicago, it is doing great.

If we could expand it, we would have demand to expand it, but, at this point in time, there are no plans or even obvious opportunities to do any expansions there.

We are looking at potential other outlet opportunities around the country that are similar in nature to Fashion Outlets of Chicago in terms of their urbanity and density of population.

And it is possible that during the course of this year that we will be making an announcement that we've identified an opportunity or two.

Okay.

And then final question from me, in terms of Santa Monica Place, sales productivity there has been increasing nicely over the last several quarters and you have the theater coming.

Can you just remind us -- I know that the occupancy has declined from year-end 2012 I think by about 400 basis points or so and there has been a little more turnover in the upper levels of that center.

Can you just remind us, the theater will be cutting in at the third level I understand and is that where the vacancy is and how optimistic -- well, not how optimistic, but when you think about the tenant mix on the third level, do you expect it to change in any material way from how you originally conceived it when you open this theater?

Where the theater is going we never included it as vacant space.

It was the third level of an old Macy's building and it was roughly 50,000 feet.

So when we redid the center, we convinced Macy's to convert their three-level Macy's building to a two-level Bloomingdale's building and the theater is simply going into what used to be the third level of Macy's.

And it is really space that if you walked the center, you really wouldn't know it was even there.

Whatever occupancy changes or reductions that you would see in our disclosures, that would be likely the result of the fact that we are in a second generation of releasing Santa Monica Place now, which is extremely early.

Usually when you build a new center, it takes us 7 to 10 years to be able to move into a second-generation releasing opportunity.

But when we leased Santa Monica Place, it was spring of 2009.

It was the worst time possible to be leasing it.

And we weren't able to get as many upscale or branded or luxury retailers as the market deserves.

And so what we are doing right now is we are recycling tenants that probably shouldn't have been there long term anyway with more appropriate tenants.

Do you want to talk a little bit further about the reletting of that and the impact of the theater on the third level, Bob?

Yes, Jim, to your question about the third level, the third level has obviously been designed and merchandised for food uses and so having the theater up on the third level is obviously going to have a materially beneficial impact in bringing traffic to that third level.

It really allows us to do two things.

It allows us to generate more business for the existing food users that are there, but it also allows us to bring in new food users and upgrade the quality and bring in what we believe will be some high-volume users.

So I would say before the end of the year, you're going to hear a couple of announcements with some new restaurants up there whose interest is directly related to the fact that there is going to be a state-of-the-art theater in a market that is desperately in need of a quality theater operation.

And you are going to see continued announcements of new upscale branded retailers that are going to be coming into the center.

Yes, probably the best example, we recently signed a lease with DVF to come into the center, which will be new to the market and you will continue to see the luxury build on the lower level and the traditional specialty mall tenants on the second level.

Okay.

Thank you.

Haendel St.

Juste, Morgan Stanley.

Good morning to you.

Thanks for taking my question.

Art, as you consider the projects you are moving from your shadow pipeline to the in-progress, can you provide an update on Green Acres?

Where you are looking at a big box center and as part of that, can you talk about how you are thinking about traditional versus fast fashion retailers when you think about filling the big-box space?

I see the preleasing of the 20 acres of land that we have at Green Acres is coming along extremely well.

We are really in the entitlement phase there right now.

We do have a retailer -- are we expanding H&M there, Bob?

No.

And that is not on the 20 acres; that is in the mall.

So there are two things that are happening.

One, we are taking the 20 acres that we bought and we are in the middle of getting entitlements to populate it with traditional big-box uses, including potentially a new theater.

Green Acres is an interesting center.

If you look at simply the sales per square foot, which again can be a two-dimensional number, it does $541 a foot.

If you look at the top two-thirds of the tenants at Green Acres Mall, they do $750 a square foot.

So there is an opportunity there to recycle within the mall out some of the lower productive tenants and bring in some more productive tenants.

So right now, we are in the entitlement phase.

If we had the entitlements at Green Acres to build out the 20-acre expansion site, we'd be under construction today.

We are getting those entitlements and the other thing that we are working on, the remerchandising of the mall itself.

Again, one thing I'd point out about Green Acres is that it does $541 a foot, which is an impressive number, but the more impressive number to me is the fact that the retail that sits on the site that we own today does over $800 million.

When we finish this expansion that we are going to do, it is not inconceivable that this property will generate $1 billion of sales.

That would put it on par with Tysons Corner in terms of the sales that are being generated from the property.

So we see it as a great opportunity for us and the only thing that is holding back the big-box buildout on the 20 acres right now is the entitlements.

Do you want to add anything to that?

Yes, just a comment about that you asked about inside the mall, the fast fashion.

As an example, we recently signed a lease with H&M who is an existing tenant to almost double the size of their space, to go up from about 12,000 to 22,000 feet and we see additional opportunities like that within the mall.

One of the interesting things about the H&M deal is they are actually going to do an interior and an exterior entrance, which has been one of our goals to have more exterior-facing retail and take advantage of the traffic not only within the mall, but on the entire site.

And then secondly the demand on the 20 acres from the big-box tenants has been very strong and the rental levels are very strong, which is being reflected in the returns on the development.

Okay.

So you certainly sound pretty enthusiastic and optimistic for the outlook.

Is it conceivable to think that this could be a top 10, maybe top 20, but maybe a top 10 mall in terms of productivity in your portfolio?

It's hard to imagine that, but again that is kind of what I was touching upon.

It will clearly be a top 10 center in terms of the retail sales that are generated from that site.

It is hard to imagine that it would be a top 10 center in terms of sales per square foot, which really is something that I need to point out to you is that these sales per square foot numbers that you hear from landlords are really a little bit two-dimensional.

You have to drill down further to really understand what it all means.

And at $541 a square foot, that is a good solid number, but when we looked at it as we were buying it and we said, wait a minute, this thing is doing over $800 million of business, that is a massive retail complex.

And when we get done with the expansion here and the remerchandising of the center, it is not inconceivable that it will be doing $1 billion of business, which clearly would be one of our top 10 centers in terms of total dollars that are generated.

And that plays into the leasing.

When retailers realize the volumes that are being done by other retailers, it creates interest and they don't really look at the sales per square foot in the center itself when we are leasing space to them.

They look at examples of other peer retailers or just opportunities that they think that they can fill.

Again, the preleasing that we have got on the 20 acres is coming along very, very strong.

We have got home goods users, sporting goods users, furniture users, several restaurant users and we think it is a hidden opportunity.

We were able to buy the 20 acres while we were under contract to buy the mall and as you can see from the returns in the shadow pipeline, it is going to be a very attractive addition.

And we think it is going to just bring traffic to the site and it will make the mall better also.

A couple more quick ones here.

Just curious, you talked a bit about your temp tenant percentage.

Did you guys ever discuss or can you discuss what your target tenant percentage is and assuming the elevated levels go down once Broadway Plaza is completed?

The historical number was closer to 2% to 3%, so say 2.5% that got elevated as we went through the recession and we are just pushing occupancy rather than rate or the quality of the occupancy.

So we think we can get down to that level.

At 5.5%, that gives us another 300 basis points over the next few years to convert that to the higher-quality occupancy and pick up the incremental rent, which, as I said, we think on average can be as much as $20 to $25 a foot.

Okay.

And then on Estrella Falls, the completion timing slipped a bit.

Can you talk about that?

Look, the Phoenix market is clearly recovering.

I read a blurb this morning that it was the number one city in the United States for job creation in the finance category last year.

Population growth is coming, but, look, there is going to be one more full price regional mall built in the Phoenix Metroplex over the next five to eight years.

It is going to be in west Phoenix.

It is our belief.

We own the site and there is just no reason to build it before we feel that we have a strong tailwind.

And at this point in time, we don't feel a strong tailwind at that particular location.

There are -- Phoenix is coming back significantly in different areas in different submarkets.

That particular submarket has not come back with enough strength to give us the rent levels that we would like to get.

And so we are in no rush to do anything there.

Great.

Thank you, guys.

Todd Thomas, KeyBanc Capital Markets.

Hi, thanks.

Good morning out there.

Just a first question on guidance.

Apologies if I missed it.

So you maintained FFO guidance for the year, but I was just wondering if you mentioned or maintained your same-store NOI growth forecast of 3.75% to 4.25% just given the 100 basis point drag on the same store from the weather and if so, what is the offset to that?

Well, again, it is one quarter.

We don't expect the polar vortex to affect us negatively as we move forward through the rest of the year, so we view that as kind of a one-time bump.

So I mean absent that, we were running closer to the mid-4%s, which is at or above our guidance rate.

So we are still comfortable at that same center NOI guidance for the year.

Okay.

And then how do you think about these costs going forward with new leases that you sign?

I know it is, like you said, just one quarter.

I guess the fourth quarter last year was also a bit elevated, but how are those elevated costs overall factored into the CAM pool that you will build into new leases?

Are they considered abnormal at all or one-time in nature?

Do you sort of smooth them out using a two or three-year figure?

How does that work?

Well, typically, on a CAM quote, we will give ourselves a couple of dollars of margin for error.

I think that is consistent within the industry as we as an industry shifted away from triple net leases to fixed CAM.

We believe we can control costs, but obviously some costs such as utilities and snow removal as proved out this winter aren't 100% controllable.

So there's always a little bit of cushion in that CAM quote and it is considered as you quote CAM numbers to tenants as we go forward.

There is still a healthy recovery rate.

Our recovery rate is still in excess of 100% and that is because we do quote a little cushion in the CAM number.

Okay.

And then just last question, Art, I think I heard you mention that there may be two new entrants into the B mall segment of the market that might emerge.

Are these buyers that are, as you say, that are planning to own and operate portfolios or are they financial buyers that might look to partner up with an operator?

Well, one of the obvious ones, and I can't predict what they are going to do, is the spinco off of Simon Property Group.

I mean who knows what they are going to do.

With an investment grade rating, they would have the ability to be a very aggressive consolidator if they wanted to be once they get up and running.

So I can't predict what they are going to do.

I don't know what they are going to do, but they could clearly be a new player and there are other private new players that are forming platforms that are new platforms that don't currently exist that are seeking to buy some B malls.

So it's just the depth and the breadth of the pool and the appetite of the pool is just much greater than it was a year ago and it is really for good reasons.

I mean there is money to be made here in this category of asset.

And particularly if you have a management team that has got folks on it that have deep relationships in the big-box category killer power center type of backgrounds or community center backgrounds because one of the opportunities in these B malls is to introduce elements that you would normally find in a community center or a power center.

Remember, that number that I put out there, our bottom 10 properties average say $295 a foot, but embedded within that $295 a foot, top two-thirds of the tenants within the bottom 10 properties that we own that average $295 a foot, the top two-thirds do over $422 a foot.

So one of the opportunities for a B mall buyer of some of those properties, and we've seen this happen, might be to eat up some of the vacancy and bring in new junior anchors to those types of properties.

I mean many of them are very viable properties.

Okay, thank you.

Looks like we've got time for one more question.

DJ Busch, Green Street Advisors.

Thank you.

Just one quick question for Tom.

I was hoping you could provide a little more color on the current financing environment with regards to the appetite from Lenders and pricing spreads between some of the top centers and perhaps the lower productivity centers and some of those that you are trying to dispose of.

Well, I can certainly comment on the top quality centers.

We recently were out and evaluating, getting bids on Biltmore, which is a good A quality center and there was a pretty competitive bidding process and interestingly, it was the life companies very, very competitive for A quality space with the CMBS lenders and in fact, the life companies were 10 to 20 basis point sharper than the CMBS shops.

And very competitive at rates for 10-year money in the low 4s.

Although we haven't been out financing any lower quality assets, what I am hearing from the CMBS shops is they are all active, they are putting pools together.

They are aggressive and they are definitely financing B quality assets and there doesn't seem to be any shortage of capacity right now from what we are seeing.

And just to add onto that, we tend to keep the properties that we are going to sell.

We try and keep them unencumbered so that a buyer who may have an appetite for high leverage, which that is generally the profile of the private equity type of buyers that are out there, that they can have an opportunity to take the unencumbered asset and to leverage it up to the max, which generates better pricing for us.

So over half of our bottom 10 assets are unencumbered and we have found that buyers prefer to put their own financing on properties than to inherit some other financing that you might have.

So I am sure that we will tend to keep assets that we think are future disposition candidates unencumbered.

Okay, thank you.

All right.

Well, thank you, everybody.

We look forward to continuing to report to you during the balance of the year and seeing you at upcoming events.

Thank you very much.

This concludes today's conference call today.

Thank you for your participation and have a great day.