Macerich Co (MAC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Macerich Company second quarter 2014 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 given at that time for you to queue up for questions.

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

Please go ahead.

Hi, thank you, everyone for joining us today on our second quarter 2014 earnings call.

During the course of this call management will be making forward-looking statements which are subject to uncertainties and risks associated with our business and industry.

For a more detailed description of these risks, please refer to the Company's press release and SEC filings.

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

Joining us today are Art Coppola, CEO and Chairman of the Board, Tom O'Hern, Senior Executive Vice President and Chief Financial Officer, and Robert Perlmutter, Executive Vice President, Leasing.

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

Thank you, Jean.

Consistent with past practice, we'll be limiting this call to one hour.

If we run out of time and you still have questions, please don't hesitate to call me, Art, John Perry, or Jean.

It was another strong quarter, we had very good operating performance.

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

We signed 336,000 square feet, especially tenant leases.

The average releasing spread on a trailing 12 month basis was a positive 18.1%.

The occupancy level rose to 95.4%.

That was up by 160 basis points over the portfolio average at June 30, 2013, another strong gain for the quarter.

Looking at occupancy on a same-center basis, the occupancy level was 95.4% compared to 94.8%, again, a very healthy 60 basis point improvement there.

In addition to the increased occupancy level overall, we reduced our temporary occupancy down to 5.2%, that compared to 6.1% at June 30, 2013.

It is also down from 5.8% reported at year-end.

It is an area we will continue to focus on, converting temporary tenants to permanent occupancy, and believe we can continue this trend.

Average base rents are very close to $50 a foot, they increased to $49.14 a foot and that's up 5.5% from a year ago.

Looking now at operating results for the quarter, FFO is $0.86 per share, that compared to $0.87 a share in the quarter ended June 30, 2013.

This exceeded our guidance range of $0.81 to $0.83 per share.

In the quarter we had same-center NOI of 3.6%, compared to the second quarter of 2013 which was also a strong quarter for us.

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

The gross margin for the quarter, including JVs, improved to 67.2%, up from 66.6% in the second quarter of 2013.

Also, keep in mind that the second quarter of 2014 includes dilution from asset sales primarily as sold in 2013, of about $0.05 per share.

Bad debt expense for the quarter was $2.5 million as compared to $2 million in the second quarter last year.

Over the past three years, we've averaged about a million per quarter in bad debt expense, so this is --this quarter was unusually high.

Most of it came from local tenants, plus the impact of the Sbarro's bankruptcy.

During the quarter, we bought our partner out of a very small joint venture, it was a 50% interest in Cascade Mall, and we bought them out for $15 million.

This resulted in a recognizing a tax benefit for book purposes of $2.8 million during the quarter.

This was largely an accommodation to our partner, and this is a small non-core asset for us that we likely will consider selling in the future.

During the fourth quarter, the average interest rate was down slightly to 4.11% compared to 4.14% in the second quarter of last year.

The balance sheet continues to be in great shape with debt-to-market cap at 39%, and interest coverage ratio of 3.2 times, debt-to- EBITDA on a forward basis of 7.2 times, and average debt maturity of 5.4 years, with a low amount of floating rate debt, only 12% of our total debt is floating.

In addition, the financing market remains very strong.

We have one financing in process right now.

We arranged $115 million refinancing of Victor Valley Mall.

The new debt is fixed for 10 years at a rate of 150 basis points over the 10-year Treasury to where rates are today, we expect to lock in a rate close to 4% and this will close in early September.

In the press release this morning we reaffirmed our FFO guidance of 2014 in the range of $3.50 to $3.60.

We also confirm our quarterly splits with 25% or so in the third quarter and the remainder of 29% in the fourth quarter.

There's a lot of moving pieces there but we're still very comfortable with the range.

In terms of tenant sales, portfolio mall tenant sales were up 4% to $567 for the year-ended June 30, 2014.

That compared to $545 for the portfolio during the period ended June 30, 2013.

Taking a look at that stat on just the same-center basis, sales per foot were $567, compared to $564 at June 30, 2013.

Further, taking an additional look at it, and including total sales, that's for all tenants on a same-center basis, which gives us the benefit of the pick-up in occupancy, this excludes anchor tenants, but all other tenants, our sales increase for the 12 months ended June 30, 2014 was 4.5%.

Arizona and Northern California continue to be top regions for us in terms of sales growth.

Before I turn it over to Art I would like to mention one last thing.

We just completed the Macerich sustainability report that's on our website, and there's a button on the front page of the website for it.

We've been very active in this area and this report does a good job of summarizing our efforts, and I encourage you to take a look at that.

Okay, thanks, Tom.

As you can see from our earnings release as well as Tom's comments, our fundamentals remain fundamentally extremely strong.

In fact, obviously our fundamentals are even stronger for us on a relative basis given the substantial pruning of our portfolio that we've done over the last 18 months.

One of the most relevant numbers I think, that Tom pointed out, was the total center sales, essentially in terms of the properties that we own today versus the property, the same properties one year ago, that those are up over 4% in the last year, and to us, that is at least as important of a number as the comp sales number that we also report to you, which is limited by two factors.

One, it's tenants under 10,000 square feet, and it's two, we have a protocol that the tenants have to have been in place, I think for the full 12 months in order to be counted.

But total sales that are generated from the retail campus, we look at that as being a very relevant number, and when we see the business that's being generated from, and again Tom's number was non-department store spaces, that when we see that number going up, it's a sign that our properties are extremely healthy.

To the extent that even on a comp center basis, sales have been flat and have held their own.

Look, we would clearly like to see sales be up 5% or 6%, but the fact of the matter is that sales are relatively flat for reasons that are pretty much beyond our control, and that has to do somewhat with the weather, but also have to do with broader economic issues.

Let's not forget, that only 47% of the people employed in the United States have full time jobs, and there are over 24 million people in the United States, workers that have either left the job force, are looking for jobs, or are involuntarily part time employed.

So look, we still have never had a recovery from 2009, we still continue to muddle through.

Obviously, our belief is that changes over time, but the fact that sales have been flat in our portfolio, as well as others, as long as you're maintaining sales at a highly productive level of $580 a foot, give or take, and as long as you have must-have real estate, and as long as the tenants really have no choice within your sub market, or that you are the best choice within your sub market for them to take locations, then the demand for your space remains very strong.

And given, again, the reality of no new supply in terms of comparable space, in terms of shopping mall space in the United States, it continues to drive our re-leasing spreads which we have demonstrated through charts that we've shared with you, but also just through looking at the quarterly results that we've given you, double-digit re-leasing spreads over the last 10 years in good times and bad, and we see that continuing for the foreseeable future.

We are very pleased in terms of where we stand from a portfolio viewpoint.

We're very pleased to have our dispositions largely behind us.

We're pretty much out of the disposition business.

From a guidance viewpoint, we'll maintain our guidance to you that we'll sell, give or take, on a net basis $250 million of assets for the year.

We've sold the modest amount that's been sold to date, we don't currently have anything under contract, we are talking on an opportunistic basis about one or two assets with one or two groups.

We'll see where that goes and for now leave the guidance untouched, net $250 million of dispositions, weighted towards the fourth quarter of this year.

But what we're very pleased about is to have completed our disposition program, and to have that $1.5 billion give or take of proceeds available to us to redeploy into our proven winners, and we're finally reaping the harvest.

Tyson's Corner is entering into a three-day celebration today of the opening of our Plaza at Tyson's Corner, with a big concert series starting tomorrow, we're celebrating the occupancy of the office building by Intelsat, and we're celebrating the first rider of the Silver Line arriving at Tyson's Corner at the Tyson sub-station on Saturday at 12 PM, so that's huge to see that finally happen.

We're very much looking forward to continuing our progress on Broadway Plaza.

In our supplement, we decided to give you some renderings and also some photographs of before and after renderings on Broadway Plaza for example, to give you a better idea of what we're doing there.

So maybe after the call you can take note on Page 36 of our supplement, you'll see a photograph of the center as it existed in April of this year.

That area between Macy's is Nordstrom on that photograph has now been demolished which you'll see on Page 37, and then you'll see a rendering there on those pages also of where the new shops are going to be, and that's a very powerful expansion of a very powerful location that we are very much looking forward to building out, and opening up in phases again starting next year.

Our Niagara project remains on time and on budget, and we are also as we mentioned in the last call, doing fairly significant add-ons to proven winners at Cerritos, Scottsdale Fashion Square and Santa Monica Place.

You will see one project has dropped off of our supplement this quarter, which is Estrella Falls in the West Valley in Phoenix, and we dropped it off of the supplement just because we like to have only on the supplement projects that we think are going to happen in the next three years, and currently we just don't see that new mall as something we're going to want to deliver in the next three years.

We think it's something that will happen over the next five years or seven years.

It's just not going to in the next three years.

Phoenix has had a nice strong run in 2012 and through the middle of 2013, and continues to have decent employment growth, but the housing demand for new housing units has begun to flatten out a little bit, so we're going to be a little bit cautious there.

We own the land for not a huge investment, and we'll be very judicious in terms of when we bring that new product online.

There's no rush to bring it online.

We'll bring it online when it's ready to be brought.

In terms of the other possibilities of projects that may find them, their way on to the supplement, outside of our existing portfolio, we continue to work very selectively on some dominant, high barrier to entry urban locations for outlet centers, and I'm fairly confident in the near future we'll be able to announce the addition of one or two of those projects to our pipeline of opportunities.

With that I'd like to open it up for questions, and Operator, if you could take over from here I'd appreciate it.

Certainly.

(Operator Instructions)

We do ask that you limit your questions to one, and then if you have more questions, queue up again.

That way, everyone has an opportunity to ask a question.

(Operator Instructions)

We'll take our first question from Christy McElroy of Citibank.

Hi, good afternoon, everyone.

Hi, Christy.

When you guys reported results in -- Q4 results in February, your guidance at that point was $3.50 to $3.60 and I think that included $0.08 of dilution from the $225 million to $275 million of sales that you had expected in the year.

You've sold $34 million at this point it sounds like, you still expect somewhere in that $250 million range, but weighted towards the back end of the year.

I'm wondering how much of dilution is embedded in that $3.50 to $3.60 today, and what's sort of offsetting that from a positive standpoint or from a negative standpoint?

I'm sorry.

Christy a large part of the dilution were assets that we sold last year.

We sold far more last year than our guidance for this year, and most was mid-year and still rolling through.

So first quarter for example, had about $0.06, second quarter $0.05, and then it tapers down to about $0.03 or $0.04 a quarter in the last two.

There's a lot of things in that guidance range, things like, we certainly hadn't predicted the additional energy costs of the harsh winter, had cuts the other way.

We've got two numbers that are frankly estimates based on history, and that's bad debt expense and that's lease termination revenues.

And obviously second quarter, as I mentioned, was active in terms of bad debt expense and wider than normal.

On the other hand, we could see more leasing termination revenues coming in as a result of some things we're in the midst of.

So we're still very comfortable in that range.

There's a lot of pieces to it, dilution is one of them.

Yes, there's a little bit less dilution because of timing than we thought, but again, the vast majority of the dilution we had factored into the 2014 guidance was as a result of the 2013 dispositions, not the 2014.

Okay and just quickly, what was the cap rate on the buy-in of Cascade?

We generally don't get into the cap rate conversation but I can say it was double digits.

Thank you, guys.

We'll take our next question from Alexander Goldfarb of Sandler O'Neill.

Good afternoon.

Just a question on NOI.

You guys have been speaking about converting the temp-to-perm and how that would boost NOI, and just general, -- getting the -- working the portfolio, and I could have sworn that you guys talked about being north of 4%.

So just sort of curious, I think you're about 3.5% year to date.

What are the things that are going to get the portfolio up into the north of 4% range?

Well our guidance range was 3.75% to 4.25%, and obviously there's things that are hard to predict along the way, but we typically see more momentum in the second half of the year, obviously, the leasing in the occupancy pick-up that happened in the second quarter doesn't really benefit us until the third and fourth quarters, so we certainly expect to see that.

The conversion of temp to perm, most of that benefit is going to be in the third and fourth quarter.

So we see all of those things and, at this point, we see no reason to change that guidance range of 3.75% to 4.25%.

It was artificially low in the first quarter because of some of the expenses I mentioned on that call.

Also keep in mind we had a big quarter in the second quarter last year, so we were comping against a quarter that was up 4.6%.

So at this point, we aren't going to change the range.

Okay, and Tom, just obviously you've not giving 2015 guidance, but sort of on a run-rate basis after we get through the changes to the portfolio this year, should we expect a 4% plus type as a good run-rate?

Yes, I think over time.

I mean, again from our standpoint, a big factor in same-center growth is going to be CPI index because that's how we increase our lease every year, most leases have a two-time CPI formula not to exceed a certain number, and in this year in particular, we had a relatively low CPI.

The CPI had gone up 1.1%, we had a 2 -- in most cases, 2 times the factor on that, typically in the past we've seen a much higher inflation rate than 1.1%.

But that's --based on the way it's trending this year, it looks like CPI is, on a trailing 12-month basis I think, is running about 2.1%, and of course we have the 2 times escalator, so we should be fine, in fact, in better shape next year.

Okay, thank you.

Our next question comes from Craig Schmidt of Bank of America Merrill Lynch.

Thank you.

Cascade Mall aside, is there any interest in buying out some of your JV partner share, particularly at some of your larger more dominant malls?

Yes, but they aren't sellers and we're happy to --we're thrilled with them as partners, so that's not an opportunity at this point in time.

Thank you.

We'll take our next question from DJ Busch of Green Street Advisors.

Thank you.

Street retail seems to be a property type and focus right now, we've seen some REITs acquire some properties recently.

It seems like that would be the natural owner of street retail could be mall owners given the overlap in tenancy.

When we think about your guys strategy of owning the dense urban centers, seems like controlling some of these street retail corridors, outside of your better malls, and I'm particularly thinking of North Bridge and Santa Monica Place.

It seems like that would be a natural progression of solidifying or fortifying your position.

How do you guys think about some street retail opportunity in addition to some of the things you've already done in Chicago?

I'll start and maybe Bob Perlmutter will also chime in on this.

But first of all, you may have noticed, I certainly noted yesterday walking the streets of Chicago, that the street retail resurgence and merchandising that we've accomplished on Ohio and Grand and Rush has been really remarkable here at North Bridge.

We're actually in Chicago today conducting this call.

It's been unbelievable.

Eataly was a huge addition, we added some great restaurants, and it's just a real reactivation of the street.

And of course, we also popped a new entrance up into the mall off of Rush and Ohio, up into the mall, and we're also beginning to remerchandise some of the frontage that we have on Michigan Avenue.

So, yes, that's -- when we bought North Bridge Mall, it had a great amount of street retail, so we've done a great job of remerchandising a lot of that, and creating activated store fronts where we used to have office users, health club users, an ESPN Zone and things like that.

And we've done really well with that.

Santa Monica, it's a logical extension of Santa Monica Place to think about some surrounding real estate in that vein.

We were very happy as a part of getting our entitlement to add a theatre to the third level of the Bloomingdale's building at Santa Monica Place.

We entered into a exclusive negotiating agreement with the City of Santa Monica to enter into long term lease of a parcel of land at 4th and Arizona, which is one block away from Bloomingdale's and Santa Monica, and there's currently an obsolete parking garage there.

We would tear down the parking garage and we would add a second theatre location, so that we would basically control all of the first-run theatres in Santa Monica, as well as some incremental retail on the ground floor, which would be street retail.

You picked the two cities correctly that are the logical ones that we might consider it.

Having said all of that, I do, I would be pretty reluctant to enter into the acquisition of street retail in markets where the retail is not absolutely contiguous or adjacent to an existing regional center, because it is really a business for sharp shooters and not the timid.

There's a lot of profits but when you're buying assets at two cap rates, you better be pretty certain about your remerchandising plan over a long period of time.

I feel better about, kind of, what we're doing, where we're --we bought the street retail as part of the acquisition of North Bridge, and we made a lot of money on the rollover of the various leases, and we've really increased the productivity here in Chicago, and I feel really good about the opportunity that we've got that we're working on in Santa Monica because it's a proven winning neighborhood for us.

It supplements our mall in terms of the use because we'll be co-branding the ArcLight that we would put at 4th and Arizona with the ArcLight going into Santa Monica Place.

We'll drive the traffic back and forth between the two properties, so it's synergistic, and we fully expect to see a high single-digit return on our investment on that street retail investment that we're looking at 4th and Arizona, which probably, it could range from $30 million to $75 million, our investment there, depending whether we just do a theatre or also a little bit of street retail as part of it.

Bobby do you want to add to that?

The only items I'd add, is the other center we own that could fit into those characteristics is Walnut Creek, Broadway Plaza and Walnut Creek, which has a very developed street district.

Clearly there's retailer demand, and in particular there's certain retailers that prefer the street and often prefer the street around a larger shopping center, a larger shopping district.

So there is definite tenant demand.

But as Art said, it's not inexpensive real estate to purchase, and it's a very fragmented ownership.

Great, thank you.

Our next question comes from Rich Moore of RBC Capital Markets.

Good afternoon, Rich.

Thanks, good afternoon.

The big drop this quarter in operating expense, I realize there was obviously some change from the first quarter in terms of snow and weather and that kind of thing, but was the big drop in the second quarter strictly that, or is there something else in that operating expense number that's better than usual?

Rich, there was also some dispositions in the first quarter, full effect is felt in the second quarter and they were small assets, but nonetheless they had that impact on some of those operating lines.

Okay, so going forward then Tom, this is a pretty good run-rate or a pretty good starting point?

Yes, I'd say this is a good run-rate and you'll just have to factor in the acquisition or disposition activity.

Okay, great.

Thanks guys.

Obviously, things like utility expense were much higher in the first quarter because of the severity of winter.

Right, I've got you.

Good, yes, thank you.

We'll take our next question from Paul Morgan of MLV.

Hi, good afternoon.

Just on the outlets, the comments you made about new developments and also you're about to anniversary Chicago, and maybe, just do you have any takeaways from the first year there?

And if I read you supp right, it looks like you might come in around $700 a foot.

How is that relative to where your pro forma is, occupancy dipped a bit and where is the sweet spot of retail demand?

And as you think about other urban centers, is Chicago a template in terms of where you'd market, in terms of the upscale versus mass market?

I mean so you're interpolating our expectation of the sales per foot at $700 give or take for that first year, that's about right.

And we don't have all 12 months yet, so when we have them, we'll publish that number or at least talk about it.

That exceeds the expectations that most had.

It's pretty much in the mid-point of the market research that we had done in terms of estimating it.

To build an outlet center of 500,000-some thousand square feet and have it produce $700 a square foot the first year, is pretty amazing.

It's very rare that any center would start at that kind of number, so it's a really impressive number, especially given the skepticism that many had about the viability of Fashion Outlets of Chicago outside of Macerich.

It validates our belief in high barrier to entry infill urban Markets for a very select number of these types of developments.

I don't think there's more than a handful of these available to us in the United States, but I do think there's a handful available, and I think there's one or two hopefully that we'll be able to talk about in the relatively near future.

The productivity that we're achieving at Chicago again, is really unusual, and yet it also represents the target base case that we're shooting for when we think about other opportunities.

And so you're comfortable that the retailers, based on their experience here, are kind of ready to go up against other full price malls in major markets if that's where the location is?

Oh, the retailers that are here universally are asking us, okay, now where else can we do this.

Okay, thanks.

Thank you.

We'll take our next question from Michael Mueller of JPMorgan.

Hi, Michael.

Hi.

I was wondering, do you see any activity at Atlas Park any time soon, and just sticking with outlets, could that be one of the areas that you were talking about for urban outlets?

Sure, this is Bob Perlmutter, Michael.

Atlas Park had a pretty good amount of activity, some of the key tenants that we've added have included Forever 21, recently Ulta opened, and TJ Maxx is under construction.

So we're making a lot of progress, we've done physical improvements to the green area, and we're building some really good momentum from a leasing standpoint.

And no we're not thinking outlet there.

We did think about it 1.5 years ago, but it doesn't work.

Got it.

Okay that was it, thanks.

Thanks.

Our next question comes from Vincent Chao of Deutsche Bank.

Hi, good afternoon, everyone.

Just wanted to go back to the guidance again real quick.

Just in thinking about the quarterly number was ahead of your expectation, or at least your guidance there, and then you talked about a little bit less dilution from some of the asset sales, so I was just curious beyond the income tax benefit that you booked in the quarter, was there anything else sort of one-time in nature here in the quarter that would have boosted the result, that maybe comes off the run-rates going forward?

That was about it.

That was roughly $0.02 a share, net benefit.

Okay.

The rest of it was --it got pretty close to where our guidance was if you take that out, certainly was pretty much right on top of where the street was.

Okay I guess just it does seem to imply a little bit higher level than the guidance range would suggest, so it's kind of what I'm trying to get alt a little bit more.

Well, as Art indicated, we're still expecting to finish off the year with some dispositions to get to that $250 million number.

So the dilution from those would be back-end weighted.

Okay, thanks.

Our next question comes from Haendel St.

Juste of Morgan Stanley.

Hi, good afternoon.

Good afternoon.

Hi, Haendel.

So your comments earlier on the remaining contemplated mall sales to $250 million-ish, sounded like you could be comfortable holding on to the assets for some time.

Is that a function of the pricing demand for the assets, or is there perhaps something within that comment that we're not fully appreciating?

The major message you should take away from it is that, we are formally out of the disposition business, and we're done.

That doesn't mean we're not going to continue, as we have in years past, to opportunistically sell assets on a one-off basis and this year, our guesstimate, in terms of giving guidance, is that we would have $250 million of net dispositions, which remains our guesstimate for the year, but there's nothing more to read into it.

One more if I may.

Your comment on bad debt expense being unusually high this quarter due to Sbarro and local retailers.

Just a look ahead, where do you think, expect that bad debt expense to be near-term going forward?

And do you expect it to remain elevated near-term as a result of local retailers?

I don't think so.

I don't think we can extrapolate from this quarter, it was a relatively unusual quarter.

Obviously we've had some bankruptcies this year, Sbarro and more recently we had a few small ones, Hot Dog on a Stick and Love Culture, but they don't take a lot of space, nor do they pay a lot of rent.

So we may see some of that ripple through.

But it's hard to predict that one, that and lease terminations are the two hardest to predict.

But I think we'll be less than $2.5 million, but we could be more than the $1 million we've been running on the last three or four years on average per quarter.

Thank you.

Our next question comes from Todd Thomas of KeyBanc Capital Markets.

Yes, hi good afternoon.

Just following up on the dispositions a bit.

Last quarter, Art, you seemed to make some comments around the environment saying it was a little bit better than expected and you commented that cap rates on the sales would be closer to 8% versus 9%.

Is that consistent with what you're still seeing today?

And maybe if you could just comment on sort of, the market and the buyer pool today?

I'm not the best person to ask anymore because we are officially out of the disposition business.

However, I can make an observation as an interested bystander.

I thought the pool was getting bigger, I now am not so sure.

In terms of any dispositions that we would do throughout the balance of the year, my guess is that they would tend to be, on average, in the 8% maybe 7.5% type of cap rate, but given there are no properties under contract at this point in time, that's still speculative.

It seems that the buying pool is a little more confident, well way more confident than it was a year ago.

Three months ago, I may have gotten a little ahead of myself in terms of guessing about the growing size of the buying pool.

But again, since we're really not in the disposition business right now, we're really just a one-off opportunistic seller, if something is attractive to us.

I'm probably not the best person to ask.

Okay that's fair and then just one other question.

Curious about the comments around Cascade Mall.

Tom, I think you characterized it as an accommodation for your partner.

I was just curious what that means and whether you can elaborate on the go-forward strategy with that center since it would seem like that's not a core holding for Macerich long term?

Todd you're right.

It's not a core holding.

It's a very small asset.

Our price to purchase that was unencumbered was $15 million so, not a significant transaction.

Our partner was motivated to move out of that particular asset, and frankly, we felt it was an asset if we owned 100% it gave us more flexibility to perhaps package with other assets in the future, and be part of a group of assets that were sold.

So nothing more than that.

Small transaction and it's with a good partner, a partner that we have other assets with and we were happy to accommodate them.

Okay, thank you.

We'll take our next question from Jim Sullivan of Cowen and Company.

Thank you, good afternoon guys.

Art, I've got a quick question for you regarding the direction of occupancy costs.

Obviously you've got a couple of cross currents in the portfolio here, as a result of all of the asset sales, the average productivity is moving higher, and I guess it's kind of axiomatic where we tend to believe the higher the productivity, the higher the occupancy cost you can generally get.

Maybe that's true, maybe that isn't.

On the other hand, the outlet center business historically has been a sector where the occupancy cost, as a percentage of sales, has been a little bit lower.

So help us understand where you think that's going to go as you continue to improve your winners as you describe them, and at the same time, look to continue to grow your outlet center business?

Well, Jim, we're still at a relatively low level.

If you take the unconsolidated, I think our blended rate is 13.5%.

And you're absolutely correct, that percentage can be much higher the higher quality of the assets are.

And we think, given the fact we've disposed of the slower growing assets, we've got a lot more leasing momentum, and I think the evidence of that is what we're seeing, we're releasing spreads, as well as our occupancy pick up, and we think we can continue to push that.

And you know as well as anybody that number moves very slowly.

The only time it moves quickly it moves the wrong direction when sales plummet, but when you're re-leasing space and you get your hands on maybe 8% to 10% of that space, it takes awhile to push that number up.

But we think there's a lot of upside room in that occupancy cost number.

This is a terrible generalization, so please don't hang me on it.

But if our overall occupancy cost is a percentage of sales is in the 13% neighborhood, 13.5%, and our total sales per foot is in the high $500s, okay, what I would suggest to you is that 13% on a $500 a foot center, maybe feels about right overall, and yet 20% on $1000 a foot center feels about right overall.

And you can kind of do a straight line bar chart along the way, and find yourself getting comfortable at 15% and 16% cost of occupancies for centers that are doing $700 and $800 a foot.

And, again, those are terrible generalizations, and I'd certainly don't want to be hung to dry with them.

But if I had to answer your question, it's very clear to us that these centers that we own that do $1000 a foot, and we've got several of them in that zip code right now or headed that way, that tenants can afford to pay you very high double digit 18%, 19%, 20% cost of occupancy.

We've run Queen Center at a 20% cost of occupancy from the day we owned it, and we did that when the center was doing $600 a foot, and we're doing it, we're leasing space today, at times, at 30% of the $1000 a foot average.

We're leasing space at Queen Center at $300 plus rents on some deals, and yet the center averages $1000 a foot.

Going to the outlet side, I'm not the best person to ask about that.

Obviously there are others that have a lot more experience in this arena.

But we do have some experience that, at Fashion Outlets of Chicago where we've had some spaces come back to us.

Which is very normal in a brand new development for the winners to emerge, and those that don't belong there also to find they don't belong there early on.

And we've had tenants where we remerchandised space already where we're getting rents over $100 a square foot for a center that averages about the $700 a foot, so far run-rate today.

Which would imply 15% cost of occupancy on today's average sales per foot at that center, which again makes sense to me that you can charge those kinds of rents.

So it's clear that the higher the sales per foot, especially as you get over $500 a foot, that the tenants basic cost of doing business, once it's covered, the incremental cost of doing business, allows them to pay a higher rent charge and still make money.

So should we assume a $700 per foot urban outlet center would justify a comparable occupancy cost to a $700 per foot regional mall?

I doubt it.

A little bit lower?

I'm the one that has said to you, even though we have an anecdotal experience that we've seen that happen, we're not experts in this arena.

We only have a couple of data sources to measure against, but we're not bashful in terms of asking for those kinds of rents, and so far we've gotten them.

But the pundits would tell you there is a little difference, and I suppose there is.

But once it's a proven winner, especially a $700 a foot center, I'm not sure there's that much difference between full price and off-price.

Okay, good thanks.

Bob Perlmutter may want to add to that.

This is Bob Perlmutter.

The only thing I would add is, I would tend to agree with Art in terms of, it may not be exactly the same, but clearly the spread is going to narrow, especially for, as we believe there's a distinction between the real premium must-have outlet locations and the more traditional outlet locations.

Okay, very good.

Thanks guys.

Thanks.

We'll take our next question from Ben Yang of Evercore.

Hi good afternoon, thanks.

Art, I understand you recently hired some executives from AWE Talisman recently.

So curious if you could talk about their roles at Macerich and if the plan is to eventually build an in-house outlet team so that you can do these projects solo going forward?

Okay, so we have internalized the leasing function by adding two senior leasing people to our staff in the last couple months.

We've also internalized the marketing function by adding a very senior national marketing person to our staff, and marketing in the outlet world is as important at times, at least as important, as the leasing, so that's a very important job.

And we've taken over the day-to-day management of Fashion Outlets of Chicago and Fashion Outlets of Niagara.

So, as of today, we are vertically integrated in all functions in the outlet world.

I mean given obvious to -- you're hiring people for this particular platform you mentioned one or two new projects, I guess that you might announce in the near term.

Is there any vision or goal in terms of how big the outlet platform will be, or maybe 2 to 3 years from now?

I would say that five years from now we have five really good outlet malls, and today we have two, that that would be a really good days work.

Great, thank you.

Thank you.

We'll take our next question from Linda Tsai of Barclays.

Hi, thanks for taking my question.

With respect to the five groups within your property rankings, how do you think about the opportunity to become more productive?

For example, how much more productive can group one or two be, versus say group four and five?

Philosophically, I would tell you that group one and two can always be more, --the better a center is, the better you can make it.

The idea that you kind of top-out just is not true.

Because even within these centers, what you have to do is dig within the numbers and I talked about this in a previous call, and I don't have the numbers exactly handy to me right this second.

But of the top 10 centers that average $860 a square foot in our portfolio, within those 10 centers, the top 2/3 of the tenants within each category average around $1150 or $1200 a square foot, and the bottom 33% of each category at those centers, averages, and I've talked about it in a previous call, but I think it's $400 a foot give or take.

It's about 1/3.

So there's a huge opportunity to take and essentially take the underperformers within these highly productive centers, and to recapture those spaces and to re-let them at higher rents.

So we talked about a bankruptcy situation earlier with Love Culture.

We have 88,000 square feet with Love Culture today.

There at some really good centers with us.

We have 10 stores with them.

They average $188 a square foot in those 10 stores.

They pay us mid $50 rents in those 10 stores.

The centers that they happen to be in are all in our top 20, and those centers average $585 a square foot.

And the average rents that are in place for those 10 Love Culture locations are around $92 a square foot for the centers in question.

There's a big opportunity there, over time, to remerchandise that space at a substantial profit.

You know intuitively when we look at the bottom 10 assets that we own, there's a reason that they're doing $300 a square foot.

And a lot of times it's because they are in a secondary or tertiary market, and the opportunity to make a center like that, to grow it dramatically, is just not the same as it is to take a great center and make it greater, or a really good center and make it great.

And that's why we did all of the pruning that we did, and we're taking all that money, that $1.5 billion and plowing it into our best centers, because those are the most elastic in terms of the upside.

Thanks and then I just had a follow-up.

Tom, I think you made a comment earlier about tenant reimbursements and there being some moving parts.

Are you expecting tenant reimbursements to increase over the next couple quarters?

No it wasn't tenant reimbursements it was lease termination payments that we expect, --we are at some conversations today that could lead to accelerating some of those rents.

So that's always an estimate, and I think our guidance initially had $8 million or so estimated for that this year.

And we could see more of that activity accelerating in the third and fourth quarter.

Thanks.

We'll take our next question from Tayo Okusanya of Jefferies.

Hi, Tayo.

And Tayo has disconnected.

We'll take our next question from Ki Bin Kim.

Thanks, just an accounting follow-up.

Is there any drag from your redevelopment activities on same-store NOI?

Or the [3.6%] that you reported this quarter?

I'm sorry, the same center NOI is there any redevelopment drag?

Yes.

There's a little bit.

The major redevelopment properties are not in there, Broadway Plaza is not in there, for example.

Fashion Outlets in Niagara is not in the number.

Fashion Outlets of Chicago is not because it hasn't been around for a full year.

So there may be a little frictional vacancy at Tyson's, for example, that's hitting that number, that should reverse itself actually in the next quarter or two.

And other than that, Bobby?

No there's just some major remerchandise projects going on at Queens and Kings as part of the 10-year cycle.

Okay, and kind of related to that.

As your projects come on-line over the next 12 months or so, how do you guys categorize these activities, or these projects within your same-store NOI definition?

They've got to be in, they have to be completed and in for the full period, full quarter, in this case before they're included.

So, for example, a project that finishes --Fashion Outlets in Niagara if it's finished and leased up in the fourth quarter of 2014, it would not become a comp center until the first quarter of 2016.

But the money you make incrementally improving an existing center, if there's major capital involved, does not hit the same-center NOI, the return on that investment.

Correct.

That's what we're talking about.

If you're adding space it's not included.

Okay, thank you.

We'll take our next question from Ross Nussbaum of UBS Financial.

Hi, good afternoon, Jeremy on with Ross.

Just one quick one, sorry if I missed this.

But can you talk about the increasing cost at your Niagara development.

It seemed like they were up a little over 10%, no change in yield.

So is this just some extra build-out that tenants will compensate you for in the rents?

It's a combination of things, we're actually achieving better than budget rents, we expanded the scope of the project a little bit to include some renovation of the existing center, and there's some shifting of the TI.

But just some minor additions and improvements.

And that was a strong budget, and we had the room to do it so we expanded the scope a little bit.

Similar with Los Cerritos, seems like it came in a little below what you were thinking, any changes to the plans there, just better than expected pricing?

No just finalizing of the negotiations on the two big deals, so we now have, instead of estimated numbers, we've got hard numbers.

Great, thank you.

Thank you.

We'll take our next question from Tayo Okusanya of Jefferies.

Yes, good afternoon apologies for that.

I was just hoping you could make some comments about what you're seeing in regards to the retail outlook, specifically traffic at your malls and what that could be indicative of going forward?

I think the most telling number is our total sales numbers that we've shared with you today over the past 12 months, which are up 4%.

Traffic in our centers is pretty much flat to down 1%, which is pretty substantially different than the numbers than a certain Company that claims to be an expert in measuring traffic has published about shopping malls.

And, look, we know that at the centers that we own today are extremely attractive places to be, and then retailers want to be there and customers want to shop there.

Great.

That's helpful, thank you.

Thanks, Tayo.

It appears there are no further questions at this time.

I'd like to turn the conference back over to today's speakers for any additional or closing remarks.

Thank you very much for joining us today.

Again, I would encourage you to look at some of the photos and renderings that you'll find that are new to the supplement that might give you a little better feeling for some of our development projects, so that's new to our supplement.

Feel free to do that.

And if you're in the Tyson's area, please stop by and take a look at the new plaza.

It's really pretty spectacular, and really appreciate your support, and look forward to speaking with you, and meeting with you over the balance of the year.

Thank you very much.

Bye.

This concludes today's conference.

Thank you for your participation.